10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2007 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 Street, Columbus, Ohio	43215-3976
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:

(614) 464-5000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Shares, without par value

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or 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.

Large accelerated filer  ¨	Accelerated filer  x
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)	Smaller reporting company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of June 30, 2007, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value (based on the closing sales price on that date) of the voting stock held by non-affiliates of the Registrant was $443,201,023.

On March 7, 2008, the Registrant had 40,167,853 Common Shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement relating to the annual meeting of stockholders to be held May 7, 2008 (the “2008 Proxy Statement”), which will be filed within 120 days of December 31, 2007, are incorporated by reference into Part III of this Form 10-K.

Index to Annual Report on Form 10-K for the year ended December 31, 2007

Form 10-K	Item	Description	Page
Part I	1	Business	2
		Executive Officers of the Registrant	15
	1A	Risk Factors	16
	1B	Unresolved Staff Comments	25
	2	Properties	25
	3	Legal Proceedings	25
	4	Submission of Matters to a Vote of Security Holders	25
Part II	5	Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	26
	6	Selected Consolidated Financial Data	28
	7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	7A	Qualitative and Quantitative Disclosures about Market Risk	76
	8	Financial Statements and Supplementary Data	77
		Report of Independent Registered Public Accounting Firm	77
	9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	121
	9A	Controls and Procedures	121
	9B	Other Information	121
Part III	10	Directors, Executive Officers and Corporate Governance	122
	11	Executive Compensation	122
	12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	122
	13	Certain Relationships and Related Transactions and Director Independence	123
	14	Principal Accountant Fees and Services	123
Part IV	15	Exhibits and Financial Statement Schedules	123
		Signatures	134

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

All statements, other than statements of historical facts, included in this Annual Report on Form 10-K (this “Form 10-K”) of State Auto Financial Corporation (“State Auto Financial” or “STFC”) or incorporated herein by reference, including, without limitation, statements regarding State Auto Financial’s future financial position, business strategy, budgets, projected costs, goals and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 the date the statements were made. Although State Auto Financial believes that the expectations reflected in forward-looking statements have a reasonable basis, it 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. For a discussion of the most significant risks and uncertainties that could cause State Auto Financial’s actual results to differ materially from those projected, see “Risk Factors” in Item 1A of this Form 10-K. Except to the limited extent required by applicable law, State Auto Financial undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

IMPORTANT DEFINED TERMS USED IN THIS FORM 10-K

As used in this Form 10-K, the following terms have the meanings ascribed below:

• “State Auto Financial” or “STFC” refers to State Auto Financial Corporation;

• “We,” “us,” “our” or the “Company” refers to STFC and its consolidated subsidiaries, namely State Auto Property & Casualty Insurance Company (“State Auto P&C”), Milbank Insurance Company (“Milbank”), Farmers Casualty Insurance Company (“Farmers”), State Auto Insurance Company of Ohio (“SA Ohio”), State Auto National Insurance Company (“SA National”), Stateco Financial Services, Inc. (“Stateco”), Strategic Insurance Software, Inc. (“S.I.S.”) and 518 Property Management and Leasing, LLC (“518 PML”);

• “State Auto Mutual” or “our parent company” refers to State Automobile Mutual Insurance Company, which owns approximately 64% of STFC’s outstanding common shares;

• The “Pooled Companies” or “our Pooled Companies” refer to State Auto P&C, Milbank, Farmers, SA Ohio (referred to as the “STFC Pooled Companies”), State Auto Mutual, and certain subsidiaries and affiliates of State Auto Mutual, namely State Auto Florida Insurance Company (“SA Florida”), State Auto Insurance Company of Wisconsin (“SA Wisconsin”), Meridian Security Insurance Company (“Meridian Security”) Meridian Citizens Mutual Insurance Company (“Meridian Citizens Mutual”), Beacon National Insurance Company (“Beacon National”), Patrons Mutual Insurance Company of Connecticut (“Patrons Mutual”), and Litchfield Fire Mutual Insurance Company (“Litchfield”), (State Auto Mutual, SA Florida, SA Wisconsin, Meridian Security, Meridian Citizens Mutual, Beacon National, Patrons Mutual and Litchfield are referred to as the “Mutual Pooled Companies”);

• The “MIGI Insurers” refer to Meridian Security and Meridian Citizens Mutual, and the “MIGI Companies” refer to the MIGI Insurers and Meridian Insurance Group, Inc. (“MIGI”);

• The “Beacon Insurance Group” or “Beacon Group” refers to Beacon National and Beacon Lloyds Insurance Company (“Beacon Lloyds”);

• The “Patrons Insurance Group” or “Patrons Group” refers to Patrons Mutual, Litchfield, Patrons Fire Insurance Company of Rhode Island (“Patrons Fire”) and Provision State Insurance Company (“Provision State”); and

• The “State Auto Group” refers to the Pooled Companies and the non-pooled insurance companies including SA National, Beacon Lloyds, Provision State and Patrons Fire.

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PART I

Item 1. Business

(a) General Development of Business

State Auto Financial is an Ohio domiciled super-regional property and casualty insurance holding company incorporated in 1990. We are primarily engaged in writing both personal and business lines of insurance. State Auto Financial owns 100% of State Auto P&C, Milbank, Farmers, SA Ohio, and SA National, each of which is a property and casualty insurance company. Our operations are headquartered in Columbus, Ohio.

State Auto Financial owns 100% of Stateco, which provides investment management services to affiliated insurance companies. State Auto Financial also owns 100% of S.I.S., a developer and seller of insurance-related software. State Auto P&C and Stateco share ownership of 518 PML, which owns and leases property to affiliated companies. The results of the operations of S.I.S. and 518 PML are not material to our total operations.

Our parent company is State Auto Mutual, an Ohio domiciled super-regional mutual property and casualty insurance company organized in 1921. It owns approximately 64% of State Auto Financial’s outstanding common shares. It also owns 100% of SA Florida and SA Wisconsin, each of which is a property and casualty insurance company. It also owns 100% of MIGI, an insurance holding company. MIGI owns 100% of Meridian Security, a property and casualty insurance company. MIGI is also a party to an affiliation agreement with Meridian Citizens Mutual, a mutual property and casualty insurance company. MIGI also owns 100% of State Auto Holdings, Inc., an insurance holding company, which owns 100% of the Beacon Insurance Group. In March 2007, State Auto Mutual completed its purchase of the Beacon Insurance Group of Wichita Falls, Texas. With this acquisition, Texas became the State Auto Group’s 29^th state of operation. The Beacon Insurance Group is comprised of Beacon National and Beacon Lloyds, which are affiliated through a trust agreement. Beacon National and Beacon Lloyds wrote premiums during 2007 in Texas and Arkansas. In December 2007, State Auto Mutual completed its affiliation with the Patrons Insurance Group. This affiliation expanded the State Auto Group’s operations to 33 states by adding Connecticut, Massachusetts, Rhode Island and Vermont.

State Auto P&C has participated in a quota share reinsurance pooling arrangement with State Auto Mutual since 1987 (the “Pooling Arrangement”). Since January 1, 2005, the participants in the Pooling Arrangement have been State Auto P&C, State Auto Mutual, Milbank, SA Wisconsin, Farmers, SA Ohio, SA Florida, Meridian Security and Meridian Citizens Mutual. On January 1, 2008, Beacon National, Patrons Mutual and Litchfield became participants in the Pooling Arrangement. See “Narrative Description of Business—Pooling Arrangement” in this Item 1 for further information regarding the Pooling Arrangement.

The State Auto Group markets a broad line of property and casualty insurance, such as standard personal and commercial automobile, nonstandard personal automobile, homeowners and farmowners, commercial multi-peril, workers’ compensation, general liability and property insurance, through independent insurance agencies in 33 states. Our Pooled Companies and SA National are rated A+ (Superior) by the A.M. Best Company.

(b) Financial Information about Segments

We have three significant reportable segments: personal insurance and business insurance (the “insurance segments”), and investment operations. The insurance segments are managed separately because of the differences in types of customers served, products provided or services offered. In 2007, the insurance segments distributed their products through the independent agency system in 29 states. The personal insurance segment provides primarily personal auto (standard and nonstandard) and homeowners to the personal insurance market. The business insurance segment provides primarily commercial auto, commercial multi-peril, fire and allied lines, other and product liability and workers’ compensation insurance to small to medium sized businesses within the commercial insurance market, which in 2008 includes middle market business. The investment operations segment, managed by Stateco, provides investment services for our Company’s invested assets.

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Prior to 2007, we reported our financial information in two segments, a standard insurance segment and a nonstandard insurance segment. We believe that our new segments better reflect the manner in which we manage our business and report our results internally to our principal operating decision makers. We established integrated personal and business insurance teams with product and profit responsibilities for their respective areas. We evaluate the performance of our insurance segments using industry financial measurements based on Statutory Accounting Principles (“SAP”), which include loss and loss adjustment expense ratios, underwriting expense ratios, combined ratios, statutory underwriting gain (loss), net premiums earned and net written premiums. Prior reporting periods have been restated to conform to the new segment presentation.

(c) Narrative Description of Business

Property and Casualty Insurance

Pooling Arrangement

Our Pooled Companies are parties to the “Pooling Arrangement.” In general, under the Pooling Arrangement, each of the Pooled Companies cedes premiums, losses and expenses on all of its business to State Auto Mutual, and State Auto Mutual 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 participation percentage for the STFC Pooled Companies has remained at 80% since 2001. Prior to 2008, the Pooling Arrangement covered all property and casualty insurance written by the Pooled Companies except State Auto Mutual’s voluntary assumed reinsurance, middle market business insurance written by State Auto Mutual and Meridian Security and intercompany catastrophe reinsurance written by State Auto P&C.

In 2008, we made the following changes to the Pooling Arrangement:

• Added Beacon National to the pool with a participation percentage of 0.0%;

• Added Patrons Mutual and Litchfield to the pool with participation percentages of 0.4% and 0.1%, respectively;

• Reduced State Auto Mutual’s participation percentage from 19.5% to 19.0% to accommodate the participation percentages allocated to Patrons Mutual and Litchfield;

• Included State Auto middle market business insurance written by State Auto Mutual and Meridian Security.

The following table sets forth a chronology of the participants and their participation percentage changes that have occurred in the Pooling Arrangement since January 1, 1997:

Year(1)	State Auto Mutual	State Auto P&C	Milbank		SA Wisconsin	Farmers	SA Ohio	SA Florida	Meridian Security	Meridian Citizens Mutual	Beacon National	Patrons Mutual	Litchfield Mutual
1997	55.0	35.0	10.0		N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A
1998	52.0	37.0	10.0	(2)	1.0	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A
1999	49.0	37.0	10.0		1.0	3.0	N/A	N/A	N/A	N/A	N/A	N/A	N/A
2000 – 9/30/2001	46.0	39.0	10.0		1.0	3.0	1.0	N/A	N/A	N/A	N/A	N/A	N/A
10/1/2001 – 2002	19.0	59.0	17.0		1.0	3.0	1.0	N/A	N/A	N/A	N/A	N/A	N/A
2003 – 2004	18.3	59.0	17.0		1.0	3.0	1.0	0.7	N/A	N/A	N/A	N/A	N/A
1/1/2005 – 2007	19.5	59.0	17.0		0.0	3.0	1.0	0.0	0.0	0.5	N/A	N/A	N/A
1/1/2008 – current	19.0	59.0	17.0		0.0	3.0	1.0	0.0	0.0	0.5	0.0	0.4	0.1

⁽¹⁾ Time period is for the year ended December 31, unless otherwise noted.

⁽²⁾ In July 1998, Milbank became a 100% owned subsidiary of STFC. Previously, Milbank was a 100% owned subsidiary of State Auto Mutual.

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The following table sets forth a summary of the Pooling Arrangement participation percentages of STFC and State Auto Mutual, aggregating their respective 100% owned subsidiaries:

Year(1)	STFC Pooled Companies	State Auto Mutual Pooled Companies
1997	35	65
1/1/1998 – 6/30/1998	37	63
7/1/1998 – 12/31/1998	47	53
1999	50	50
2000 – 9/30/2001	53	47
10/1/2001 – current	80	20

⁽¹⁾ Time period is for the year ended December 31, unless otherwise noted.

It is not management’s intention to recommend an adjustment to the STFC Pooled Companies’ 80% participation level in the foreseeable future. Under applicable governance procedures, if the Pooling Arrangement were to be amended, management would make recommendations to the independent committees of the Board of Directors of both State Auto Mutual and STFC. The independent committees review and evaluate such factors as they deem relevant and recommend any appropriate pooling change to the Board of Directors of both State Auto Mutual and STFC. The Pooling Arrangement is terminable by any of our Pooled Companies at any time by any party by giving twelve months notice to the other parties and their respective domiciliary insurance departments. None of our Pooled Companies currently intends to terminate the Pooling Arrangement.

Under the terms of the Pooling Arrangement, all subject premiums, incurred losses, loss expenses and other underwriting expenses are prorated among our Pooled Companies on the basis of their participation in the pool. By spreading the underwriting risk among each of our Pooled Companies, the Pooling Arrangement is designed to produce more uniform and stable underwriting results for each of our Pooled Companies than any one company would experience individually. One effect of the Pooling Arrangement is to provide each of our Pooled Companies with an identical mix of pooled property and casualty insurance business on a net basis.

The Pooling Arrangement excludes catastrophic losses and loss adjustment expenses that are reinsured under our Catastrophe Assumption Agreement (defined below), as well as the premium for such exposures. State Auto P&C reinsures each insurer in the State Auto Group for this layer of reinsurance in the amount of $100.0 million in excess of $135.0 million. No losses were paid by State Auto P&C under the Catastrophe Assumption Agreement in 2007, 2006 or 2005. The State Auto Group does not currently intend to renew the Catastrophe Assumption Agreement upon its expiration on July 1, 2008. The State Auto Group is considering other alternatives, such as securing replacement coverage from a third party reinsurer or relying upon the $100 million set aside under the Credit Agreement (defined below) to fund this layer of catastrophe reinsurance, but currently no decision has been reached. See “Narrative Description of Business—Reinsurance” in this Item 1 for further information regarding the Catastrophe Assumption Agreement.

Our nonstandard automobile programs, written through SA National, provide insurance for private passenger automobile risks which do not qualify for the standard or preferred automobile insurance market. Typically, nonstandard risks have higher than average loss experience and an overall higher degree of risk than standard or preferred automobile business. We do not include the business of SA National in the Pooling Arrangement. See “Narrative Description of Business—Marketing” for further information regarding our nonstandard auto insurance business.

Management Agreement

With the exception of the Patrons Group (discussed below), our subsidiary, State Auto P&C, provides the employees to perform all organizational, operational and management functions for the State Auto Group and

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State Auto Mutual provides certain operating facilities, including our corporate headquarters, for the State Auto Group through management and cost sharing agreements. Each of the affiliated management and cost sharing agreements has a ten-year term and renews for an additional ten-year period unless terminated sooner in accordance with their terms. If our primary management agreement, which we refer to as our 2005 Management Agreement, were terminated for any reason, we would have to relocate our facilities to continue our operations. However, we do not currently anticipate the termination of the 2005 Management Agreement. See also Item 2 (Property) of this Form 10-K.

On December 14, 2007, State Auto Mutual and State Auto P&C became parties to various management and/or cost sharing agreements in conjunction with State Auto Mutual’s affiliation with the Patrons Insurance Group. Each of these management and/or cost sharing agreements apportions among the parties the actual costs of the services provided. Employees of the Patrons Group will remain employees of Patrons Mutual until January 1, 2009, at which time it is expected that they will become employees of State Auto P&C. The insurance operations of the Patrons Group will continue to be conducted at facilities owned by Patrons Mutual and Litchfield.

Marketing

As of January 1, 2008, the State Auto Group marketed its products in 33 states through independent insurance agencies. None of the companies in the State Auto Group has any contracts with managing general agencies.

We view our independent insurance agents as our primary customers, because they are in a position to recommend either our insurance products or those of a competitor to their customers. We strongly support the independent agency system and believe its maintenance is essential to our present and future success. As such, we continually develop programs and procedures to enhance our agency relationships, including the following: regular travel by senior management and branch office staff to meet with agents, in person, in their home states; training opportunities; travel incentives related to profit and growth; contingent commissions; and an agent stock purchase plan.

We actively help our agencies develop professional sales skills within their staffs. Our training programs include both products and sales training conducted in our home office. Further, our training programs include disciplined follow-up and coaching for an extended time. Other targeted training sessions are held in our branch office locations from time to time, as well as in our agents’ offices.

We have made continuing efforts to use technology to make it easier for our agents to do business with us. We offer internet-based (i) rating, (ii) policy application submission and (iii) execution of changes to policies for certain products. In addition, we provide our agents with the opportunity to maintain policyholder records electronically, avoiding the expense of preparing and storing paper records. Software developed by S.I.S. also enhances the ability of our agents and us to take advantage of electronic data submission. We believe that, since agents and their customers realize better service and efficiency through automation, they value their relationship with us. Automation can make it easier for an agent to do business with us, which attracts prospective agents and enhances existing agencies’ relationships with us.

We share the cost of approved advertising with selected agencies. We provide our agents with defined travel and cash incentives if they achieve certain sales and underwriting profit levels. Further, we recognize our very top agencies—measured by consistent profitability, achievement of written premium thresholds and growth—as Inner Circle Agencies. Inner Circle Agencies are rewarded with additional trip and financial incentives, including additional contingent commissions and additional contributions to their Inner Circle Agent Stock Purchase Plan, a part of our Agent Stock Purchase Plan described below.

To strengthen agency commitment to producing profitable business and further develop our agency relationships, we make available to our agents a stock purchase plan which provides them with the opportunity to

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use their commission income to purchase our stock. Our transfer agent administers this stock purchase plan using commission dollars assigned by the agents to purchase shares on the open market through a stockbroker. We also make available to our top performing agents a stock option plan which provides them with the opportunity to vest grants of options in our stock if they meet certain performance targets.

During 2007, the State Auto Group, which includes the Beacon and Patrons Groups, received premiums on products marketed in Alabama, Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia and Wisconsin. During 2007, the eight states that contributed the greatest percentage of our direct premiums written were as follows: Ohio (17.1%), Kentucky (10.2%), Indiana (6.9%), Tennessee (6.3%), Pennsylvania (4.6%), Minnesota (4.6%), Maryland (4.4%) and Arkansas (4.1%).

Claims

Our claims division emphasizes timely investigation of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate case reserves for claims, and control of external claims adjustment expenses. Achievement of these goals supports our marketing efforts by providing agents and policyholders with prompt and effective service.

Claim settlement authority levels are established for each adjuster, supervisor and manager based on his or her level of expertise and experience. Our claims division is responsible for reviewing the claim, obtaining necessary documentation and establishing loss and expense reserves of certain claims. Generally, property or casualty claims estimated to reach $150,000 or above are sent to our home office to be supervised by claims division specialists. Branches with low volumes of large claims are assigned a lower dollar threshold for referring claims to the home office. In territories in which there is not sufficient volume to justify having full-time adjusters, we use independent appraisers and adjusters to evaluate and settle claims under the supervision of claims division personnel.

We attempt to minimize claims adjusting costs by settling as many claims as possible through our internal claims staff and, if possible, by settling disputes regarding automobile physical damage and property insurance claims (first party claims) through arbitration. In addition, selected agents have authority to settle small first party claims, which improves claims service.

Our claim representatives use third party, proprietary bodily injury evaluation software to help them value bodily injury claims, except for the most severe injury cases. Our Claims Contact Centers allow us to improve claims efficiency and economy by concentrating the handling of smaller, less complex claims in a centralized environment. We provide claim service 24 hours a day, seven days a week, either through associates in our Claims Contact Centers, which are located in Des Moines, Iowa and Columbus, Ohio, or, for a few overnight hours, through a third party service provider.

Reserves

Loss reserves are management’s best estimates at a given point in time of what we expect to pay in claims, based on facts, circumstances and historical trends then known. During the loss settlement period, additional facts regarding individual claims may become known, and consequently it often becomes necessary to refine and adjust the estimates of liability. The results of our operations and financial condition could be impacted, perhaps significantly, in the future if the ultimate payments required to settle claims vary from the liability currently recorded.

We maintain reserves for the eventual payment of losses and loss expenses for both reported claims and incurred claims that have not yet been reported. Loss expense reserves are intended to cover the ultimate costs of settling all losses, including investigation, litigation and in-house claims processing costs from such losses.

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Reserves for reported losses are initially established on either a case-by-case or formula basis depending on the type and circumstances of the loss. The case-by-case reserve amounts are determined based on our reserving practices, which take into account the type of risk, the circumstances surrounding each claim and policy provisions relating to types of loss. The formula reserves are based on historical paid loss data for similar claims with provisions for trend changes caused by inflation. Loss and loss expense reserves for incurred claims that have not yet been reported are estimated based on many variables including historical and statistical information, changes in exposure units, inflation, legal developments, storm loss estimates and economic conditions. Case and formula basis loss reserves are reviewed on a regular basis. As new data becomes available, estimates are updated resulting in adjustments to loss reserves. Generally, reported losses initially reserved on a formula basis which have not settled after six months, are case reserved at that time. Although our management uses many resources to calculate reserves, there is no precise method for determining the ultimate liability. We do not discount loss reserves for financial statement purposes. For additional information regarding our reserves, see Item 7 of this Form 10-K, “Management, Discussion and Analysis of Financial Condition and Results of Operations—Loss and Loss Expense Reserves.”

The following table presents our one-year development information on changes in the reserve for loss and loss expenses for each of the three years in the period ended December 31:

($ millions)	Year Ended December 31
	2007			2006		2005
Beginning of Year:
Loss and loss expenses payable	$	674.5		728.7		681.8
Less: Reinsurance recoverable on losses and loss expenses payable(1)		13.5		17.4		25.9
Net losses and loss expenses payable(2)		661.0		711.3		655.9
Provision for losses and loss expenses occurring:
Current year		645.5		659.3		657.7
Prior years(3)		(54.7	)	(71.7	)	(44.3	)
Total		590.8		587.6		613.4
Loss and loss expense payments for claims occurring during:
Current year		368.7		389.4		350.5
Prior years		236.0		248.5		242.8
Total		604.7		637.9		593.3
Impact of pooling change, January 1, 2005		—		—		35.3
End of Year:
Net losses and loss expenses payable		647.1		661.0		711.3
Add: Reinsurance recoverable on losses and loss expenses payable(4)		11.2		13.5		17.4
Losses and loss expenses payable(5)	$	658.3		674.5		728.7

⁽¹⁾ Includes amounts due from affiliates of $2.7 million, $5.5 million, and $5.7 million at beginning of year 2007, 2006, and 2005, respectively.

⁽²⁾ Includes net amounts assumed from affiliates of $281.7 million, $302.6 million, and $296.9 million at beginning of year 2007, 2006, and 2005, respectively.

⁽³⁾ This line item shows decreases in the current calendar year in the provision for losses and loss expenses attributable to claims occurring in prior years. See discussion regarding the calendar year developments at Item 7 of this Form 10-K Management’s Discussion and Analysis section at “2007 Compared to 2006—Expenses” and “2006 Compared to 2005—Expenses.”

⁽⁴⁾ Includes amounts due from affiliates of $1.2 million, $2.7 million, and $5.5 million at end of year 2007, 2006, and 2005, respectively.

⁽⁵⁾ Includes net amounts assumed from affiliates of $257.2 million, $281.7 million, and $302.6 million at end of year 2007, 2006, and 2005, respectively.

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The following table sets forth our development of reserves for losses and loss expenses from 1997 through 2007. “Net liability for losses and loss expenses payable” sets forth the estimated liability for unpaid losses and loss expenses recorded at the balance sheet date, net of reinsurance recoverables, for each of the indicated years. This liability represents the estimated amount of losses and loss expenses for claims arising in the current and all prior years that are unpaid at the balance sheet date, including losses incurred but not reported to us.

The upper section of the table shows the cumulative amounts paid with respect to the previously reported reserve as of the end of each succeeding year. For example, through December 31, 2007, we have paid 92.4% of the currently estimated losses and loss expenses that had been incurred, but not paid, as of December 31, 1997.

The lower portion of the table shows the re-estimated amounts of the previously reported reserve based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the claims incurred.

The amounts on the “cumulative redundancy (deficiency)” line represent the aggregate change in the estimates over all prior years. For example, the 1997 calendar year reserve has developed a $28.0 million or 14.4% deficiency through December 31, 2007. This $28.0 million amount has been included in operating results over the ten years and did not have a significant effect on income in any one year.

In evaluating the information in the table, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy related to losses settled in 2000, but incurred in 1997, will be included in the cumulative redundancy or deficiency amounts for years 1997, 1998 and 1999. Conditions and trends that have affected the development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.

In 1998, 1999, 2000 and 2001 the Pooling Arrangement was amended to increase our share of premiums, losses and expenses and in 2005 to add the business of two companies within the State Auto Group, the MIGI Insurers. An amount of assets equal to the increase in net liabilities was transferred to us from our parent company in 1998, 1999, 2000 and 2001 in conjunction with each year’s respective pooling change and in 2005 from the MIGI Insurers. The amount of the assets transferred on the reserve liabilities assumed in 1998, 1999, 2000, 2001 and 2005 has been netted against and has reduced the cumulative amounts paid for years prior to 1998, 1999, 2000, 2001 and 2005, respectively.

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($ millions)	Years Ended December 31
	1997			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
Net liability for losses and loss expenses payable	$	194.2		$	205.0		$	221.7		$	236.7		$	509.9		$	592.1		$	628.8		$	655.9		$	711.3		$	661.0		$	647.1
Paid (cumulative) as of:
One year later		32.7	%		35.4	%		41.8	%		5.9	%		43.4	%		41.2	%		36.7	%		31.6	%		34.9	%		34.9	%		—
Two years later		54.6	%		61.6	%		43.0	%		52.7	%		65.3	%		60.8	%		53.2	%		48.4	%		51.1	%
Three years later		70.1	%		62.1	%		71.9	%		79.9	%		78.4	%		71.4	%		63.3	%		59.6	%
Four years later		69.2	%		78.8	%		86.9	%		95.5	%		84.4	%		77.3	%		70.6	%
Five years later		77.1	%		86.3	%		96.1	%		101.6	%		88.5	%		82.3	%
Six years later		81.8	%		92.5	%		99.0	%		107.0	%		92.3	%
Seven years later		85.8	%		94.9	%		102.4	%		112.2	%
Eight years later		88.2	%		97.4	%		106.0	%
Nine years later		90.0	%		100.3	%
Ten years later		92.4	%
Net liability re-estimate as of:
One year later		93.0	%		96.6	%		97.5	%		125.7	%		102.4	%		99.7	%		96.5	%		93.3	%		89.9	%		91.7	%		—
Two years later		92.0	%		96.7	%		119.1	%		129.1	%		105.1	%		100.6	%		93.2	%		87.6	%		86.4	%
Three years later		91.9	%		111.9	%		120.3	%		133.1	%		106.9	%		98.8	%		91.0	%		86.9	%
Four years later		102.0	%		111.5	%		123.2	%		136.1	%		106.2	%		98.5	%		90.6	%
Five years later		101.4	%		115.6	%		126.7	%		135.6	%		107.1	%		98.8	%
Six years later		106.1	%		118.5	%		127.9	%		138.2	%		107.7	%
Seven years later		108.9	%		120.0	%		128.9	%		140.1	%
Eight years later		110.5	%		121.5	%		131.1	%
Nine years later		111.9	%		123.9	%
Ten years later		114.4	%
Cumulative redundancy (deficiency)	$	(28.0	)	$	(49.0	)	$	(68.8	)	$	(95.0	)	$	(39.0	)	$	7.1		$	59.1		$	86.2		$	96.9		$	54.7			—
Cumulative redundancy (deficiency)		(14.4	)%		(23.9	)%		(31.1	)%		(40.1	)%		(7.7	)%		1.2	%		9.4	%		13.1	%		13.6	%		8.3	%		—
Gross* liability – end of year	$	402.7		$	414.2		$	438.7		$	457.2		$	743.7		$	862.4		$	934.0		$	1,006.4		$	1,111.1		$	1,032.7		$	1,029.9
Reinsurance recoverable	$	208.5		$	209.2		$	217.0		$	220.5		$	233.8		$	270.3		$	305.2		$	350.5		$	399.8		$	371.7		$	382.8
Net liability – end of year	$	194.2		$	205.0		$	221.7		$	236.7		$	509.9		$	592.1		$	628.8		$	655.9		$	711.3		$	661.0		$	647.1
Gross liability re-estimated – latest		107.7	%		118.1	%		119.4	%		125.5	%		107.5	%		99.3	%		93.1	%		90.2	%		89.0	%		93.2	%		—
Reinsurance recoverable re-estimated – latest		101.4	%		112.5	%		107.4	%		109.9	%		107.1	%		100.4	%		98.3	%		96.4	%		93.8	%		95.8	%		—
Net liability re-estimated – latest		114.4	%		123.9	%		131.1	%		140.1	%		107.7	%		98.8	%		90.6	%		86.9	%		86.4	%		91.7	%		—

* Gross liability includes: Direct and assumed losses and loss expenses payable.

As the Pooling Arrangement provides for the right of offset, we have reported losses and loss expenses payable ceded to our parent company as assets only in situations when net amounts ceded to our parent company exceed that assumed. The following table provides a reconciliation of the reinsurance recoverable to the amount reported in our consolidated financial statements at each balance sheet date:

($ millions)	Years Ended December 31
	1997		1998		1999		2000		2001		2002		2003		2004		2005		2006		2007
Reinsurance recoverable	$	208.6	$	209.2	$	217.1	$	220.5	$	233.8	$	270.3	$	305.2	$	350.5	$	399.8	$	371.7	$	382.8
Amount netted against assumed from State Auto Mutual	$	195.3	$	197.7	$	206.3	$	212.6	$	219.9	$	261.5	$	291.0	$	324.6	$	382.4	$	358.2	$	371.6
Net reinsurance recoverable	$	13.3	$	11.5	$	10.8	$	7.9	$	13.9	$	8.8	$	14.2	$	25.9	$	17.4	$	13.5	$	11.2

Reinsurance

Members of the State Auto Group follow the customary industry practice of reinsuring a portion of their exposures and paying to the reinsurers a portion of the premiums received. Insurance is ceded principally to reduce net liability on individual risks or for individual loss occurrences, including catastrophic losses. Although reinsurance does

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not legally discharge the individual members of the State Auto Group from primary liability for the full amount of limits applicable under their policies, it does make the assuming reinsurer liable to the extent of the reinsurance ceded.

During 2007, the Beacon Group was added to the State Auto Group’s reinsurance programs described below and as of January 1, 2008, the Patrons Group was added to these programs.

Each member of the State Auto Group is party to working reinsurance treaties for property, casualty and workers’ compensation lines with several reinsurers arranged through a reinsurance intermediary. Under the property per risk excess of loss treaty, each member is responsible for the first $3.0 million of each covered loss, and the reinsurers are responsible for 100% of the excess over $3.0 million up to $20.0 million of covered loss. The rates for this reinsurance are negotiated annually.

The terms of the casualty excess of loss program provide that each company in the State Auto Group is responsible for the first $2.0 million of a covered loss. The reinsurers are responsible for 100% of the excess over $2.0 million up to $5.0 million of covered loss. Also, certain unusual claim situations involving bodily injury liability, property damage, uninsured motorist and personal injury protection are covered by an arrangement that provides for $10.0 million of coverage in excess of the $5.0 million retention for each loss occurrence. This layer of reinsurance sits above the $3.0 million excess of $2.0 million arrangement. The rates for this reinsurance are negotiated annually.

The terms of the workers’ compensation excess of loss program provide that each company in the State Auto Group is responsible for the first $2.0 million of covered loss. The reinsurers are responsible for 100% of the excess over $2.0 million up to $10.0 million of covered loss. Net retentions under this contract may be submitted to the casualty excess of loss program, subject to a limit of $2.0 million per loss occurrence. The rates for this reinsurance are negotiated annually.

In addition to the workers’ compensation reinsurance program described above, each company in the State Auto Group is party to an agreement which provides an additional layer of excess of loss reinsurance for workers’ compensation losses involving multiple workers. Subject to $10.0 million of retention, reinsurers are responsible for 100% of the excess over $10.0 million up to $20.0 million of covered loss. This coverage is subject to a “Maximum Any One Life” limit of $10.0 million. The rates for this reinsurance are negotiated annually.

In addition, the State Auto Group has secured other reinsurance to limit the net cost of large loss events for certain types of coverage and certain companies. Included are umbrella liability losses which are reinsured up to a limit of $10.0 million with a maximum $0.6 million retention. The State Auto Group also makes use of facultative reinsurance for unique risk situations and participates in involuntary pools and associations in certain states. (Facultative reinsurance provides for a separate reinsurance agreement that is negotiated for a particular risk or insurance policy.)

Members of the State Auto Group maintain property catastrophe reinsurance for catastrophic events affecting at least two risks. On a combined basis, the members of the State Auto Group retain the first $55.0 million of catastrophe loss, each occurrence, with a 5% co-participation on the next $80 million of covered loss, each occurrence. The reinsurers are responsible for 95% of the excess over $55.0 million up to $135.0 million of covered losses, each occurrence. The rates for this reinsurance are negotiated annually.

Excess of the property catastrophe reinsurance described immediately above, the members of the State Auto Group participate in an intercompany catastrophe reinsurance program (the “Catastrophe Assumption Agreement”). Under the terms of the Catastrophe Assumption Agreement our subsidiary, State Auto P&C, acts as the catastrophe reinsurer for the State Auto Group, and is responsible for up to $100.0 million of covered loss, each occurrence in excess of $135.0 million of covered loss, each occurrence. Each reinsured company pays a premium to our subsidiary, State Auto P&C, in exchange for the reinsurance coverage provided. There have been no losses assumed under this agreement. The State Auto Group does not currently intend to renew the Catastrophe Assumption Agreement upon its expiration on July 1, 2008. The State Auto Group is considering

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other alternatives, such as securing replacement coverage from a third party reinsurer or relying upon the $100 million set aside under the Credit Agreement, discussed below, to fund this layer of catastrophe reinsurance, but currently no decision has been reached.

On July 12, 2007, State Auto Financial terminated its then-current credit agreement and entered into a new credit agreement (the “Credit Agreement”) with a syndicate of lenders which provides for a $200.0 million five-year unsecured revolving credit facility (the “Credit Facility”). During the term of the Credit Facility, we have the right to increase the total facility amount by $50.0 million, up to a maximum total facility amount of $250.0 million, provided that no event of default has occurred and is continuing. While the Credit Facility is available for general corporate purposes, including working capital, acquisitions and liquidity purposes, we presently intend to keep $100 million of the Credit Facility available in the event there is a need to fund losses under the catastrophe reinsurance program with State Auto P&C. See Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” for additional information regarding the Credit Facility.

See “Narrative Description of Business—Regulation” of this Item 1 for a discussion of the Terrorism Risk Insurance Act of 2002, and its successor, the Terrorism Risk Insurance Extension Act of 2005.

Regulation

Most states, including all the domiciliary states of the State Auto Group, have enacted legislation that regulates insurance holding company systems. Each insurance company in our holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within our holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Pursuant to these laws, the respective insurance departments may examine any members of the State Auto Group, at any time, require disclosure of material transactions involving insurer members of our holding company system, and require prior notice and an opportunity to disapprove of certain “extraordinary” transactions, including, but not limited to, extraordinary dividends to stockholders. Pursuant to these laws, all transactions within our holding company system affecting any insurance subsidiary within the State Auto Group must be fair and equitable. In addition, approval of the applicable Insurance Commissioner is required prior to the consummation of transactions affecting the control of an insurer. The insurance laws of all the domiciliary states of the State Auto Group provide that no person may acquire direct or indirect control of a domestic insurer without obtaining the prior written approval of the state insurance commissioner for such acquisition.

In addition to being regulated by the insurance department of its state of domicile, each of our insurance companies is subject to supervision and regulation in the states in which we transact business. Such supervision and regulation relate to numerous aspects of an insurance company’s business operations and financial condition. The primary purpose of such supervision and regulation is to ensure financial stability of insurance companies for the protection of policyholders. The laws of the various states establish insurance departments with broad regulatory powers relative to granting and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, setting reserve requirements, determining the form and content of required statutory financial statements, prescribing the types and amount of investments permitted and requiring minimum levels of statutory capital and surplus. Although premium rate regulation varies among states and lines of insurance, such regulations generally require approval of the regulatory authority prior to any changes in rates. In addition, all of the states in which the State Auto Group transacts business have enacted laws which restrict these companies’ underwriting discretion. Examples of these laws include restrictions on policy terminations, restrictions on agency terminations and laws requiring companies to accept any applicant for automobile insurance. These laws may adversely affect the ability of the insurers in the State Auto Group to earn a profit on their underwriting operations.

We are required to file detailed annual reports with the supervisory agencies in each of the states in which we do business, and our business and accounts are subject to examination by such agencies at any time.

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There can be no assurance that such regulatory requirements will not become more stringent in the future and have an adverse effect on the operations of the State Auto Group.

Dividends. Our insurance subsidiaries generally are restricted by the insurance laws of our respective states of domicile as to the amount of dividends we may pay without the prior approval of our respective state regulatory authorities. Generally, the maximum dividend that may be paid by an insurance subsidiary during any year without prior regulatory approval is limited to the greater of a stated percentage of that subsidiary’s statutory surplus as of a certain date, or adjusted net income of the subsidiary for the preceding year. Under current law at December 31, 2007, adjusted for dividend payments made in the previous twelve-month period, a total of $79.6 million is available in 2008 for payment as a dividend from our insurance subsidiaries to STFC without prior approval from our respective domiciliary state insurance departments. STFC received dividends of $50.0 million, $0.0, and $40.5 million in 2007, 2006, and 2005, respectively, from its insurance subsidiaries.

Rates and Related Regulation. Except as discussed below, we are not aware of the adoption of any adverse legislation or regulation in any state in which we conducted business during 2007 which would materially impact our business.

In January 2007, the Florida legislature enacted new legislation which made fundamental changes to the property and casualty insurance business in Florida. This legislation was intended to address the cost of residential property insurance in Florida. After careful analysis of this legislation, we concluded that we could no longer operate our personal lines on a profitable basis in that state. Accordingly, during the second quarter 2007, we filed an application with the Florida Department of Insurance to withdraw from this state’s personal lines insurance market effective January 1, 2008. Non-renewals on our personal lines business are in process. We will continue to write commercial lines business in Florida.

Many of the states in which we operate have passed or are considering legislation restricting or banning the use of “credit scoring” in the rating and risk selection process. In July 2007, the Federal Trade Commission (“FTC”) released a report on credit scoring and its impact on automobile insurance. The FTC concluded that credit-based scoring is an effective predictor of risk with respect to the issuance of automobile insurance policies to consumers, but has little effect as an indicator of racial or ethnic status of consumers. Despite the FTC’s conclusions, some consumer groups and certain regulatory and legislative entities continue to resist the use of credit scoring in the rating and risk selection process. Banning or restricting this practice or data mining would limit our ability, and the ability of other carriers, to take advantage of the predictive value of this information. An FTC study reviewing the impact of credit scoring on homeowners insurance is pending. The homeowners insurance study could affect the future use of credit scoring based upon the findings of the FTC.

In an attempt to make capital and surplus requirements more accurately reflect the underwriting risk of different lines of insurance, as well as investment risks that attend insurers’ operations, the National Association of Insurance Commissioners (“NAIC”) annually tests insurers’ risk-based capital requirements. As of December 31, 2007, each insurer affiliated with us surpassed all standards tested by the formula applying risk-based capital requirements.

The property and casualty insurance industry is also affected by court decisions. In general, premium rates are actuarially determined to enable an insurance company to generate an underwriting profit. These rates contemplate a certain level of risk. The courts may modify, in a number of ways, the level of risk which insurers had expected to assume, including eliminating exclusions, expanding the terms of the contract, multiplying limits of coverage, creating rights for policyholders not intended to be included in the contract and interpreting applicable statutes expansively to create obligations on insurers not originally considered when the statute was passed. Courts have also undone legal reforms passed by legislatures, which reforms were intended to reduce a litigant’s rights of action or amounts recoverable and so reduce the costs borne by the insurance mechanism. These court decisions can adversely affect an insurer’s profitability. They also create pressure on rates charged for coverages adversely affected, and this can cause a legislative response resulting in rate suppression that can unfavorably impact an insurer.

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The Terrorism Risk Insurance Act of 2002 and its successor, the Terrorism Risk Insurance Extension Act of 2005 (collectively, the “Terrorism Acts”) require the federal government and the insurance industry to share in insured losses up to $100 billion per year resulting from future terrorist attacks within the United States. Under the Terrorism Acts, commercial property and casualty insurers must offer their commercial policyholders coverage against certified acts of terrorism, but the policyholders may choose to reject this coverage. If the policyholder rejects coverage for certified acts of terrorism, we intend, subject to the approval of the state regulators, to cover only such acts of terrorism that are not certified acts under the Terrorism Acts and that do not arise out of nuclear, biological or chemical agents. In December 2007, The United States Congress extended the Terrorism Acts through December 31, 2014. At the same time, Congress made modest changes to the Terrorism Acts—for example, deleting the distinction between certified and non-certified (essentially foreign and domestic) acts of terrorism. Lines of business covered, as well as certain important coverage features (such as loss triggers, company deductibles and industry retentions) were not changed. We are evaluating these recent changes to the Terrorism Acts and are taking actions to comply. Our current property reinsurance treaties exclude certified acts of terrorism.

An area of regulatory focus in recent years and which may continue to receive additional attention in 2008 is “producer compensation arrangements.” Beginning in 2006, the New York Attorney General as well as other states’ Attorneys General undertook investigations and initiated lawsuits involving allegations of improper compensation arrangements between brokers and insurance companies. Improper producer compensation arrangements generally involve insurance brokers, who are persons retained and compensated by the insurance customer. We market our insurance products through independent insurance agents who have been appointed to act on our behalf, and we, not the insurance customer, compensate these agents pursuant to contractual arrangements. Under our agency agreements, our compensation arrangements with our agencies consist of commissions paid for the sale of our insurance products, usually based upon a percentage of the premium paid by the insurance customer, and a “contingent commission.” This “contingent commission” is based upon the underwriting profit and production volume generated by that agency’s book of business placed with the State Auto Group. Like many other sales organizations, we also offer sales incentives to our agencies. We believe that our agent compensation arrangements are in compliance with the law and consistent with good business practices.

Investments

Our investment portfolio is managed to provide growth of statutory surplus to facilitate increased premium writings over the long term while maintaining the ability to fund current insurance operations. The primary objectives are to generate income, preserve capital and maintain liquidity. Our investment portfolio is managed separately from that of our parent company and its subsidiaries, and investment results are not shared by our Pooled Companies through the Pooling Arrangement. Stateco performs investment management services for us and our parent company and its subsidiaries, although investment policies implemented by Stateco continue to be set for each company through the Investment Committee of its respective Board of Directors.

Our decision to make a specific investment is influenced primarily by the following factors: (a) investment risks; (b) general market conditions; (c) relative valuations of investment vehicles; (d) general market interest rates; (e) our liquidity requirements at any given time; and (f) our current federal income tax position and relative spread between after tax yields on tax-exempt and taxable fixed maturity investments. 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. Our fixed maturities portfolio is composed of high quality, investment grade issues, comprised almost entirely of debt issues rated AAA or AA. As of December 31, 2007 and 2006, our bond portfolio had a fair value that totaled $1,745.4 million and $1,647.4 million, respectively.

Our fixed maturity investments are classified as available-for-sale and carried at fair value, according to the Financial Accounting Standards Board (“FASB”) Statement 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). Our maximum investment in any single note or bond is limited to 5.0% of statutory assets, other than obligations of the U.S. government or government agencies, for which there is no

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limit. Generally, investments in equity securities are selected based on their potential for appreciation as well as ability to continue paying dividends. See Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—2007 Compared to 2006—Investment Operations Segment—Market Risks,” for a discussion regarding the market risks related to our investment portfolio.

At December 31, 2007 and 2006, our equity portfolio was classified as available-for-sale and carried at fair value totaling $254.2 million and $284.2 million, respectively.

The following table sets forth our investment results for the periods indicated:

($ millions)	Year ended December 31
	2007			2006		2005
Average Invested Assets(1)	$	1,987.1		1,891.6		1,811.6
Net Investment Income(2)		84.7		83.1		78.7
Average Yield		4.3	%	4.4	%	4.3	%

⁽¹⁾ Average of the aggregate invested assets at the beginning and end of each period, including interim quarter ends. Invested assets include fixed maturities at amortized cost, equity securities and other invested assets at cost and cash equivalents.

⁽²⁾ Net investment income is net of investment expenses and does not include realized or unrealized investment gains or losses or provision for income taxes.

For additional discussion regarding our investments, see Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investment Operations Segment.”

Competition

The property and casualty insurance industry is highly competitive. We compete with numerous insurance companies, many of which are substantially larger and have considerably greater financial resources. In addition, because our products are marketed exclusively through independent insurance agencies, most of which represent more than one company, we face competition within each agency. See “Narrative Description of Business—Marketing” in Item 1 and “Distribution System” and “Competition” in Item 1A of this Form 10-K. We compete through underwriting criteria, appropriate pricing, quality service to our policyholders and our agents, and a fully developed agency relations program.

Employees

As of February 28, 2008, we had 2,185 employees. Our employees are not covered by any collective bargaining agreement. We consider the relationship with our employees to be excellent.

Available Information

Our website address is www.stfc.com. Through this website (found by clicking the “Investors” link, then the “All SEC Filings” link), we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy and information statements and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission (the “SEC”). Also available on our website is information pertaining to our corporate governance, including the charters of each of our standing committees of our Board of Directors, our corporate governance guidelines, our employees’ code of business conduct and our directors’ ethical principles.

Any of the materials we file with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, NW, Washington, DC 20549. Information on the operation of the SEC’s Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

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Executive Officers of the Registrant

Name of Executive Officer and Position(s) with Company	Age(1)	Principal Occupation(s) During the Past Five Years	An Executive Officer of the Company Since(2)
Robert P. Restrepo, Jr., Chairman, President and Chief Executive Officer	57	Chairman of the Board and Chief Executive Officer of STFC and State Auto Mutual, 2/06 to present; President of STFC and State Auto Mutual, 3/06 to present; Senior Vice President, Insurance Operations, of Main Street America Group, a property and casualty insurance company, 4/05 – 2/06; President and Chief Executive Officer for two property and casualty insurance subsidiaries of Allmerica Financial Corporation (now known as Hanover Insurance Group), 1998 – 2003.	2006
Mark A. Blackburn, Executive Vice President and Chief Operating Officer	56	Executive Vice President and Chief Operating Officer of STFC and State Auto Mutual, 11/06 to present; Senior Vice President of STFC and State Auto Mutual, 03/01 to 11/06.	1999
Steven E. English, Vice President and Chief Financial Officer	47	Vice President of STFC and State Auto Mutual, 05/06 to present; Chief Financial Officer of STFC and State Auto Mutual, 12/06 to present; Assistant Vice President of State Auto Mutual, 06/01 to 05/06.	2006
James E. Duemey, Vice President and Investment Officer	61	Vice President and Investment Officer of State Auto Mutual, 5/91 to present.	1991
Clyde H. Fitch, Jr. Senior Vice President and Chief Sales Officer	57	Senior Vice President and Chief Sales Officer of STFC and State Auto Mutual, 11/07 to present. Senior Vice President of Travelers Companies, Inc. for more than five years prior to 11/07.	2007
Steven R. Hazelbaker, Vice President and Director of Corporate Enterprise Risk Management	52	Vice President of State Auto Mutual and STFC, 6/01 to present.	2001
Cathy B. Miley, Vice President and Director of Corporate Development	58	Vice President of STFC, 3/98 to present; Vice President of State Auto Mutual, 3/95 to present.	1995
Cynthia A. Powell, Vice President and Treasurer	47	Treasurer of STFC and State Auto Mutual, 06/06 to present; Vice President of State Auto Mutual, 3/00 to present; Vice President of STFC, 5/00 to present.	2000
Lorraine M. Siegworth, Vice President	40	Vice President of STFC and State Auto Mutual, 11/06 to present; Vice President of Nationwide Insurance or its affiliates, 09/00 to 03/06, most recently serving as Vice President of Corporate HR of Nationwide Insurance.	2006
James A. Yano, Vice President, Secretary and General Counsel	56	Vice President, Secretary and General Counsel of STFC and State Auto Mutual 4/07 to present; Senior Vice President, Secretary and General Counsel of Abercrombie & Fitch Co. 5/05 to 3/07; Partner, law firm of Vorys, Sater, Seymour and Pease LLP for more than five years prior.	2007

⁽¹⁾ Age is as of March 5, 2008.

⁽²⁾ Each of the foregoing officers has been designated by our Board of Directors as an executive officer for purposes of Section 16 of the Exchange Act.

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Item 1A. Risk Factors

Statements contained in this Form 10-K may be “forward-looking” within the meaning of the Section 21E of the Exchange Act. Such forward-looking statements are subject to certain risks and uncertainties that could cause our operating results to differ materially from those projected. The following factors, among others, in some cases have affected, and in the future could affect, our actual financial performance.

RESERVES

If our estimated liability for losses and loss expenses is incorrect, our reserves may be inadequate to cover our ultimate liability for losses and loss expenses and may have to be increased.

We establish and carry, as a liability, reserves based on actuarial estimates of how much we will need to pay in the future for claims incurred as of the end of the accounting period. We maintain loss reserves to cover our estimated ultimate unpaid liability for losses and loss expenses with respect to reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability, but instead represent estimates, generally using actuarial projection techniques at a given accounting date. These reserve estimates are expectations of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity and frequency, legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, trends in loss costs, economic inflation, legal trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be a significant reporting lag between the occurrence of an insured event and the time it is actually reported to the insurer. We refine reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. We record adjustments to reserves in the results of operations for the periods in which the estimates are changed. In establishing reserves, we take into account estimated recoveries for reinsurance and salvage and subrogation.

Because estimating reserves is an inherently uncertain process, currently established reserves may not be adequate. If we conclude the estimates are incorrect and our reserves are inadequate, we are obligated to increase our reserves. An increase in reserves results in an increase in losses and a reduction in our net income for the period in which the deficiency in reserves is identified. Accordingly, an increase in reserves could have a material adverse effect on our results of operations, liquidity and financial condition.

CATASTROPHE LOSSES AND GEOGRAPHIC CONCENTRATIONS

The occurrence of catastrophic events could materially reduce our profitability.

Our insurance operations expose us to claims arising out of catastrophic events. We have experienced, and will in the future experience, catastrophe losses that may cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition. Our ability to write new business also could be affected. Catastrophes can be caused by various natural events, including hurricanes, hailstorms, tornadoes, windstorms, earthquakes, severe winter weather and fires, none of which are within our control. Catastrophe losses can vary widely and could significantly impact our results. The frequency and severity of catastrophes are inherently unpredictable.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas. However, hurricanes, earthquakes and other perils may produce significant damage in larger areas, especially those that are heavily populated. Although catastrophes can cause losses in a variety of our property and casualty lines, most of our catastrophe claims in the past have related to homeowners, allied lines and commercial multi-peril coverages. The geographic distribution of our business subjects us to catastrophe exposure from tornadoes,

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hailstorms and earthquakes in the Midwest as well as catastrophe exposure from hurricanes in Florida and the Gulf Coast, southern coastal states and Mid-Atlantic regions. See “Narrative Description of Business—Regulation” in Item 1 of this Form 10-K for a discussion regarding our recent personal lines action with respect to Florida. In the last three years, the largest catastrophe or series of catastrophes to affect STFC’s results of operations in any one year were as follows: 2007 with losses that occurred from hailstorms and windstorms in the Midwest resulting in approximately $10.8 million in pre-tax losses; 2006 with losses that occurred in April from a series of tornadoes, hailstorms and windstorms that caused damage in several of our Midwest operating states resulting in approximately $51.8 million in pre-tax losses; 2005 with losses from hurricanes Katrina and Wilma resulting in approximately $41.7 million in pre-tax losses.

We believe that increases in the value and geographic concentration of insured properties and the effects of inflation could increase the severity of claims from catastrophic events in the future. In addition, states have from time to time passed legislation that has the effect of limiting the ability of insurers to manage catastrophe risk, such as legislation prohibiting insurers from withdrawing from catastrophe-prone areas. Although we attempt to reduce the impact on our business of a catastrophe by controlling concentrations of exposures in catastrophe prone areas and through the purchase of reinsurance covering various categories of catastrophes, reinsurance may prove inadequate if a major catastrophic loss exceeds the reinsurance limit, or an insurance subsidiary incurs a number of smaller catastrophes that, individually, fall below the subsidiary’s retention level.

UNDERWRITING AND PRICING

Our financial results depend primarily on our ability to underwrite risks effectively and to charge adequate rates to policyholders.

Our financial condition, cash flows and results of operations depend on our ability to underwrite and set rates accurately for a full spectrum of risks, across a number of lines of insurance. Rate adequacy is necessary to generate sufficient premium to pay losses, loss adjustment expenses and underwriting expenses and to earn a profit.

Our ability to underwrite and set rates effectively is subject to a number of risks and uncertainties, including, without limitation:

• the availability of sufficient, reliable data;

• our ability to conduct a complete and accurate analysis of available data;

• our ability to timely recognize changes in trends and to project both the severity and frequency of losses with reasonable accuracy;

• uncertainties which are generally inherent in estimates and assumptions;

• our ability to project changes in certain operating expense levels with reasonable certainty;

• the development, selection and application of appropriate rating formulae or other pricing methodologies;

• our use of modeling tools to assist with correctly and consistently achieving the intended results in underwriting and pricing;

• our ability to innovate with new pricing strategies, and the success of those innovations on implementation;

• our ability to secure regulatory approval of premium rates on an adequate and timely basis;

• our ability to predict policyholder retention accurately;

• unanticipated court decisions, legislation or regulatory action;

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• unanticipated changes in our claim settlement practices;

• changing driving patterns for auto exposures; changing weather patterns for property exposures;

• changes in the medical sector of the economy;

• unanticipated changes in auto repair costs, auto parts prices and used car prices;

• impact of inflation and other factors on cost of construction materials and labor;

• our ability to monitor property concentration in catastrophe prone areas, such as hurricane, earthquake and wind/hail regions; and

• the general state of the economy in the states in which we operate.

Such risks may result in our rates being based on inadequate or inaccurate data or inappropriate assumptions or methodologies, and may cause our estimates of future changes in the frequency or severity of claims to be incorrect. As a result, we could under price risks, which would negatively affect our margins, or we could overprice risks, which could reduce our volume and competitiveness. In either event, our operating results, financial condition and cash flows could be materially adversely affected.

REINSURANCE

Reinsurance may not be available or adequate to protect us against losses.

We use reinsurance to help manage our exposure to insurance risks. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity, which can affect our business volume and profitability. Although the reinsurer is liable to us to the extent of the ceded reinsurance, we remain liable as the direct insurer on all risks reinsured. As a result, ceded reinsurance arrangements do not eliminate our obligation to pay claims. We are subject to credit risk with respect to our ability to recover amounts due from reinsurers. Reinsurance may not be adequate to protect us against losses and may not be available to us in the future at commercially reasonable rates. In addition, the magnitude of losses in the reinsurance industry resulting from catastrophes may adversely affect the financial strength of certain reinsurers, which may result in our inability to collect or recover reinsurance. Reinsurers also may reserve their right to dispute coverage with respect to specific claims. With respect to catastrophic or other loss, if we experience difficulty collecting from reinsurers or obtaining additional reinsurance in the future, we will bear a greater portion of the total financial responsibility for such loss, which could materially reduce our profitability or harm our financial condition.

CYCLICAL NATURE OF THE INDUSTRY

The property and casualty insurance industry is highly cyclical, which may cause fluctuations in our operating results.

The property and casualty insurance industry, particularly business insurance, has been historically characterized by periods of intense price competition due to excess underwriting capacity, as well as periods of shortages of underwriting capacity that result in higher prices and more restrictive contract and/or coverage terms. The periods of intense price competition may adversely affect our operating results, and the overall cyclicality of the industry may cause fluctuations in our operating results. While we may adjust prices during periods of intense competition, it remains our strategy to allow for acceptable profit levels and to decline coverage in situations where pricing or risk would not result in acceptable returns. Accordingly, our commercial lines business tends to contract during periods of severe competition and price declines and expand when market pricing allows an acceptable return.

The personal lines businesses are characterized by an auto underwriting cycle of loss cost trends. Driving patterns, inflation in the cost of auto repairs and medical care and increasing litigation of liability claims are

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some of the more important factors that affect loss cost trends. Inflation in the cost of building materials and labor costs and demand caused by weather-related catastrophic events affect personal lines homeowners loss cost trends. Our Company and other personal lines insurers may be unable to increase premiums at the same pace as coverage costs increase. Accordingly, profit margins generally decline in periods of increasing loss costs.

DISTRIBUTION SYSTEM

The independent agency system is the distribution system for our products. Use of this distribution system may constrain our ability to grow at a comparable pace to our competitors that utilize multiple distribution channels. In addition, consumers may prefer to purchase insurance products through alternative channels, such as through the internet, rather than through agents.

We market our insurance products through independent, non-exclusive insurance agents, whereas some of our competitors sell their insurance products through direct marketing techniques, the internet or “captive” insurance agents who sell products exclusively for one insurance company. The State Auto Group has supported the independent agency system as our sole distribution channel for the past 86 years. However, we recognize that although the number of distribution locations has expanded, the number of independent agencies in the industry has dramatically shrunk over the past several years due to agency purchases, consolidations, bankruptcies and agent retirements. We also recognize that it will be progressively more difficult to expand the number of independent agencies representing us. If we are unsuccessful in maintaining and increasing the number of agencies in our independent agency distribution system, our sales and results of operations could be adversely affected.

The agents that market and sell our products also sell products of our competitors. These agents may recommend our competitors’ products over our products or may stop selling our products altogether. Our strategy of not pursuing market share at prices that are not expected to produce an underwriting profit can have the effect of making top line growth more difficult. When price competition is intense, this effect is exaggerated by the fact our independent agent distribution force has products to sell from other carriers that may be more willing to lower prices to grow top line sales. Consequently, we must remain focused on attracting and retaining productive agents to market and sell our products. We compete for productive agents primarily on the basis of our financial position, support services, ease of doing business, compensation and product features. Although we make efforts to ensure we have strong relationships with our independent agents and to persuade them to promote and sell our products, we may not be successful in these efforts. If we are unsuccessful in attracting and retaining these agents, our sales and results of operations could be adversely affected.

In addition, consumers are increasingly using the internet and other alternative channels to purchase insurance products. While our website provides a significant amount of information about our insurance products, consumers cannot purchase insurance through our website. Instead, consumers must contact one of our independent agents in order to purchase any of our insurance products or make changes to their existing policies. This sole distribution system may place us at a disadvantage with consumers who prefer to purchase insurance products online or through other alternative distributions channels.

We also expect there will be consequences from certain of our competitors eliminating contingent commissions to agents as a result of legal actions undertaken by certain states’ Attorneys General. It may be that these or other Attorneys General will pursue other insurers who are continuing to pay contingent commissions or it may be that these insurers will develop alternative compensation structures to replace contingent commissions that could be perceived as more attractive to independent agents, thus driving the marketplace to move in that direction. It may also be that these large insurers will seek to level the playing field for independent agent compensation by lobbying for regulatory or legal changes to prohibit or restrict so-called contingent commissions and other sales incentive compensation.

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REGULATION

Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

We are subject to extensive regulation in the states in which we conduct business. This regulation is generally designed to protect the interests of policyholders, as opposed to stockholders and other investors, and relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, (See “Narrative Description of Business-Regulation-Dividends” in Item 1), changes in control, premium rates and a variety of other financial and non-financial components of an insurance company’s business. The NAIC and state insurance regulators are constantly reexamining existing laws and regulations, generally focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws.

From time to time, some states in which we conduct business have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. In other situations, states in which we conduct business have considered or enacted laws that impact the competitive environment and marketplace for property and casualty insurance. For example, in 2007, Florida enacted legislation that required us to charge rates for homeowners insurance that we believed were inadequate to cover the related underwriting risk. After careful analysis of this legislation, we concluded that we could no longer operate our personal lines on a profitable basis in that state. Accordingly, during the second quarter 2007, we filed an application with the Florida Department of Insurance to withdraw from this state’s personal lines insurance market effective January 1, 2008. Non-renewals on our personal lines business are in process. We will continue to write commercial lines business in Florida.

Nearly all states require licensed insurers to participate in guaranty funds through assessments covering a portion of insurance claims against impaired or insolvent insurers. An increase in the magnitude of impaired companies could result in an increase in our share of such assessments. Residual market or pooling arrangements exist in many states to provide certain types of insurance coverage to those that are otherwise unable to find private insurers willing to insure them. Licensed insurers voluntarily writing such coverage are required to participate in these residual markets or pooling mechanisms. Such participation exposes the Company to possible assessments. The potential availability of recoupments or premium rate increases, if applicable, may not offset such assessments in the financial statements nor do so in the same fiscal periods.

Many of the states in which we operate have passed or are considering legislation restricting or banning the use of credit scoring in rating and/or risk selection in personal lines of business. Similarly, several states are considering restricting insurers’ rights to use loss history information maintained in various databases by insurance support organizations. These tools help us price our products more fairly and enhance our ability to compete for business that we believe will be profitable. Such regulations would limit our ability, as well as the ability of all other insurance carriers operating in any affected jurisdiction, to take advantage of these tools.

Currently the federal government does not directly regulate the insurance business. However, in recent years the state insurance regulatory framework has come under increased federal scrutiny. Congress and some federal agencies from time to time investigate the current condition of insurance regulation in the United States to determine whether to impose federal regulation or to allow an optional federal charter, similar to banks. In addition, changes in federal legislation and administrative policies in several areas, including changes in the Gramm-Leach-Bliley Act, financial services regulation and federal taxation, can significantly impact the insurance industry and us.

We cannot predict with certainty the effect any enacted, proposed or future state or federal legislation or NAIC initiatives may have on the conduct of our business. Furthermore, there can be no assurance that the regulatory requirements applicable to our business will not become more stringent in the future or result in materially higher costs than current requirements. Changes in the regulation of our business may reduce our profitability, limit our growth or otherwise adversely affect our operations.

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CLAIM AND COVERAGE DEVELOPMENTS

Developing claim and coverage issues in our industry are uncertain and may adversely affect our insurance operations.

As industry practices and legislative, judicial and regulatory conditions change, unexpected and unintended issues related to claims and coverage may develop. These issues could have an adverse effect on our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. The premiums we charge for our insurance products are based upon certain risk expectations. When the legislative, judicial or regulatory authorities expand the burden of risk beyond our expectations, the premiums we previously charged or collected may no longer be sufficient to cover the risk, and we do not have the ability to retroactively modify premium amounts. An example would be a trend of plaintiffs targeting property and casualty insurers, including us, in purported class action litigation relating to claim-handling and other practices. Many of these issues are beyond our control. The effects of these and other unforeseen claims and coverage issues are extremely hard to predict and could materially harm our business and results of operations.

TERRORISM

Terrorist attacks, and the threat of terrorist attacks, and ensuing events could have an adverse effect on us.

Terrorism, both within the United States and abroad, and military and other actions and heightened security measures in response to these types of threats, may cause loss of life, property damage, reduced economic activity, and additional disruptions to commerce. Actual terrorist attacks could cause losses from insurance claims related to the property and casualty insurance operations of the State Auto Group, as well as a decrease in our stockholders’ equity, net income and/or revenue. The Terrorism Acts require the federal government and the insurance industry to share in insured losses up to $100 billion per year resulting from certain future terrorist attacks within the United States. Under the Terrorism Acts, we must offer our commercial policyholders coverage against certified acts of terrorism. In December 2007, the United States Congress extended the Terrorism Acts through December 31, 2014, and made some modest changes to the Terrorism Acts. We are evaluating these changes to the Terrorism Act and are taking actions to comply. See “Narrative Description of Business—Regulation” of this Item 1 for a discussion of the Terrorism Acts.

In addition, some of the assets in our investment portfolio may be adversely affected by declines in the equity markets and economic activity caused by the continued threat of terrorism, ongoing military and other actions and heightened security measures. We cannot predict at this time whether and the extent to which industry sectors in which we maintain investments may suffer losses as a result of potentially decreased commercial and economic activity, or how any such decrease might impact the ability of companies within the affected industry sectors to pay interest or principal on their securities, or how the value of any underlying collateral might be affected.

TECHNOLOGY

Our development of business insurance lines automated underwriting tools may not be successful or the benefits may not be realized.

We are developing a business insurance lines automation system that will build upon the success we believe we have achieved through our personal lines netXpress^™ system. Our netXpress^™ allows agents to obtain personal lines rates for applicants on-line in real time and secure consumer reports required for rating or underwriting. This report availability enables our agents to offer a firm quote to a customer in real time at the point of sale. It is our intention to develop similar functionality for business insurance lines as we have in personal lines through netXpress^™.

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While this represents a significant commitment of resources over the next 6 to 24 months, we believe it is vitally important to our ability to maintain our prospects in business lines. Such automation was successfully put into production for businessowners products during the latter part of 2007. We expect to introduce such automation for commercial auto coverage during 2008, to be followed by development of this technology for workers compensation products. We cannot be sure that the development of this technology will be completed within the timeframe projected, or that it will be successful upon implementation. Additionally, because some of our competitors have already implemented or may be implementing similar types of underwriting tools, we may be competitively disadvantaged. A challenge during this development phase will be the utilization of today’s technology in face of a constantly changing technological landscape. There can be no assurance that the development of today’s technology for tomorrow’s use will not result in our being competitively disadvantaged, especially among the larger national carriers that have greater financial and human resources than we.

INVESTMENTS

The performance of our investment portfolios is subject to investment risks.

Like other property and casualty insurance companies, we depend on income from our investment portfolio for a portion of our revenues and earnings and are therefore subject to market risk and the risk that we will incur losses due to adverse changes in equity, interest, commodity or foreign currency exchange rates and prices. Our primary market risk exposures are to changes in interest rates and equity prices. Individual securities in our fixed-income portfolio are subject to credit risk. Downgrades in the credit ratings of fixed maturities can have a significant negative effect of the market valuation of such securities.

If the fixed-income or equity portfolios, or both, were to be impaired by market, sector or issuer-specific conditions to a substantial degree, our liquidity, financial position and financial results could be materially adversely affected. Under these circumstances, our income from these investments could be materially reduced, and declines in the value of certain securities could further reduce our reported earnings and capital levels. A decrease in value of our investment portfolio could also put our insurance subsidiaries at risk of failing to satisfy regulatory minimum capital requirements. If we were not at that time able to supplement our subsidiaries’ capital from STFC or by issuing debt or equity securities on acceptable terms, our business could be materially adversely affected. Also, a decline in market rates could cause the investments in our pension plans to decrease below the accumulated benefit obligation, resulting in additional expense and increasing required contributions to the pension plan.

In addition, our investments are subject to risks inherent in the nation’s and world’s capital markets. The functioning of those markets, the values of the investments held by us and our ability to liquidate investments on favorable terms or short notice may be adversely affected if those markets are disrupted or otherwise affected by local, national or international events, such as power outages, system failures, wars or terrorist attacks or by recessions or depressions, a significant change in inflation expectations, a significant devaluation of governmental or private sector credit, currencies or financial markets and other factors or events.

EMPLOYEES

Our ability to attract, develop and retain talented employees, managers and executives, and to maintain appropriate staffing levels, is critical to our success.

Our success depends on our ability to attract, develop and retain talented employees, including executives and other key managers in a specialized industry. Our loss of certain key officers and employees or the failure to attract and develop talented new executives and managers could have a materially adverse effect on our business.

In addition, we must forecast the changing business environments (for multiple business units and in many geographic markets) with reasonable accuracy and adjust hiring programs and/or employment levels accordingly.

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Our failure to recognize the need for such adjustments, or the failure or inability to react appropriately on a timely basis, could lead either to over-staffing (which would adversely affect our cost structure) or under-staffing (impairing our ability to service our ongoing and new business) in one or more business units or locations. In either event, our financial results could be materially adversely affected.

BUSINESS CONTINUITY

Our business depends on the uninterrupted operation of our facilities, systems and business functions, including our information technology and other business systems.

Our business is highly dependent upon our ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as Internet support and 24-hour claims contact centers, processing new and renewal business, and processing and paying claims. A shut-down of or inability to access one or more of our facilities, a power outage, a pandemic, or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. In addition, because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such service exceeds capacity or a third party system fails or experiences an interruption. If sustained or repeated, such a business interruption, systems failure or service denial could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary corporate functions. This could result in a materially adverse effect on our business results and liquidity.

A security breach of our computer systems could also interrupt or damage our operations or harm our reputation. In addition, we could be subject to liability if confidential customer information is misappropriated from our computer systems. Despite the implementation of security measures, including hiring an independent firm to perform intrusion vulnerability testing of our computer infrastructure, these systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any well-publicized compromise of security could deter people from entering into transactions that involve transmitting confidential information to our systems, which could have a material adverse effect on our business.

We have established a business continuity plan in an effort to ensure the continuation of core business operations in the event that normal business operations could not be performed due to a catastrophic event. While we continue to test and assess our business continuity plan to ensure it meets the needs of our core business operations and addresses multiple business interruption events, there is no assurance that core business operations could be performed upon the occurrence of such an event.

ACQUISITIONS

Acquisitions subject us to a number of financial and operational risks.

Since going public in 1991, we and State Auto Mutual have acquired or affiliated with other insurance companies, such as the MIGI Insurers, Milbank, Farmers, SA Wisconsin, and most recently the Beacon and Patrons Groups. It is anticipated that we and State Auto Mutual will continue to pursue acquisitions or affiliations of other insurance companies in the future.

Acquisitions and affiliations involve numerous risks and uncertainties, such as:

• obtaining necessary regulatory approvals may prove to be more difficult than anticipated;

• integrating the business may prove to be more costly than anticipated;

• integrating the business without material disruption to existing operations may prove to be more difficult than anticipated;

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• anticipated cost savings may not be fully realized (or not realized within the anticipated time frame);

• loss results of the acquired or affiliated company or business may be worse than expected;

• losses may develop differently than what we expected them to; and

• retaining key employees of the acquired company or business may prove to be more difficult than anticipated.

In addition, other companies in the insurance industry have similar acquisition and affiliation strategies. Competition for target companies or businesses may intensify or we may not be able to complete such acquisitions or affiliations on terms and conditions acceptable to us. Additionally, the costs of unsuccessful acquisition and affiliation efforts may adversely affect our financial performance.

FINANCIAL STRENGTH RATINGS

A downgrade in our financial strength ratings may negatively affect our business.

Insurance companies are subject to financial strength ratings produced by external rating agencies. Higher ratings generally indicate financial stability and a strong ability to pay claims. Ratings are assigned by rating agencies to insurers based upon factors that they believe are relevant to policyholders and creditors. Ratings are important to maintaining public confidence in our Company and in our ability to market our products. A downgrade in our financial strength ratings could, among other things, negatively affect our ability to sell certain insurance products, our relationships with agents, new sales and our ability to compete.

Although other agencies cover the property and casualty industry, we believe our ability to write business is most influenced by our rating from A.M. Best. According to A.M. Best, its ratings are designed to assess an insurer’s financial strength and ability to meet ongoing obligations to policyholders. Our Pooled Companies and SA National currently have a rating from A.M. Best Company of A+ (Superior) (the second highest of A.M. Best’s 15 ratings). We may not be able to maintain our current A.M. Best ratings.

CONTROL BY OUR PARENT COMPANY

Our parent company owns a significant interest in us and may exercise its control in a manner detrimental to your interests.

As of December 31, 2007, our parent company owned approximately 64% of the voting power of our Company. Therefore, State Auto Mutual has the power to direct our affairs and is able to determine the outcome of substantially all matters required to be submitted to stockholders for approval, including the election of all our directors. State Auto Mutual could exercise its control over us in a manner detrimental to the interests of other STFC stockholders.

COMPETITION

Our industry is highly competitive, which could adversely affect our sales and profitability.

The property and casualty insurance business is highly competitive, and we compete with a large number of other insurers. Many of our competitors have well-established national reputations, and substantially greater financial, technical and operating resources and market share than we. We may not be able to effectively compete, which could adversely affect our sales or profitability. We believe that competition in our lines of business is based primarily on price, service, commission structure, product features, financial strength ratings, reputation and name or brand recognition. Our competitors sell through various distribution channels, including independent agents, captive agents and directly to the consumer. We compete not only for business insurance customers and personal insurance customers, but also for independent agents to market and sell our products.

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Some of our competitors offer a broader array of products, have more competitive pricing or have higher claims paying ability ratings. In addition, other financial institutions are now able to offer services similar to our own as a result of the Gramm-Leach-Bliley Act.

The increased transparency that arises from information available from the use of tools such as comparative rater software, could work to our disadvantage. We may have difficulty differentiating our products or becoming among the lowest cost providers. Expense efficiencies are important to maintaining and increasing our growth and profitability. If we are unable to realize future expense efficiencies, it could affect our ability to establish competitive pricing and could have a negative effect on new business growth and retention of existing policyholders.

VOLATILITY OF OUR COMMON STOCK

The price of our common stock could be volatile.

The trading price of our common stock may fluctuate substantially due to a variety of factors, certain of which may not be related to our operating performance and are beyond our control. Such factors include, but are not limited to, the following: variations in our actual or anticipated operating results or changes in the expectations of financial market analysts; investor perceptions of our Company and/or the property and casualty industry; market conditions in the insurance industry and any significant volatility in the market; and major catastrophic events.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We share our operating facilities with State Auto Mutual pursuant to the terms of the 2005 Management Agreement. Our corporate headquarters are located in Columbus, Ohio, in buildings owned by State Auto Mutual that contain approximately 280,000 square feet of office space. Our Company and State Auto Mutual also own and lease other office facilities in numerous locations throughout the State Auto Group’s geographical areas of operation.

Item 3. Legal Proceedings

We are a party to a number of lawsuits arising in the ordinary course of our insurance business. Our Management believes that the ultimate resolution of these lawsuits will not, individually or in the aggregate, have a material, adverse effect on our financial condition.

Item 4. Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities

Market Information; Holders of Record

Our common shares are traded on the NASDAQ Global Select Market under the symbol STFC. As of February 21, 2008, there were 3,951 stockholders of record of our common shares.

Market Price Ranges and Dividends Declared on Common Shares

Initial Public Offering—June 28, 1991 – $2.25⁽¹⁾. The following table provides information with respect to the high and low sale prices of our common shares for each quarterly period for the past two years as reported by NASDAQ, along with the amount of cash dividends declared by us with respect to our common shares for each quarterly period for the past two years:

2007	High		Low		Dividend
First Quarter	$	35.22	$	30.61	$	0.10
Second Quarter		34.00		28.67		0.10
Third Quarter		32.25		23.99		0.15
Fourth Quarter		32.38		25.39		0.15

2006	High		Low		Dividend
First Quarter	$	39.94	$	30.59	$	0.09
Second Quarter		36.33		31.11		0.09
Third Quarter		32.90		28.40		0.10
Fourth Quarter		35.15		29.25		0.10

⁽¹⁾ Adjusted for stock splits.

Additionally, see Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Considerations,” for additional information regarding regulatory restrictions on the payment of dividends to State Auto Financial by its insurance subsidiaries.

Purchases of Common Shares by the Company

The following table provides information with respect to purchases made by us of our common shares during the fourth quarter 2007:

Period	Total number of shares purchased(1)		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
10/01/07 – 10/31/07	256,343		$	27.62	256,343	3,650,657
11/01/07 – 11/30/07	388,175	(2)		26.45	380,705	3,269,952
12/01/07 – 12/31/07	85,026	(3)		27.27	83,482	3,186,470
Total	729,544			26.96	720,530

⁽¹⁾ On August 17, 2007, State Auto Financial announced that its board of directors had authorized the repurchase, from time to time, of up to 4.0 million of its common shares, or approximately 10% of State Auto Financial’s outstanding shares, over a period extending until

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December 31, 2009. State Auto Financial will repurchase shares from State Auto Mutual in amounts that are proportional to the respective current ownership percentages of State Auto Mutual, which is approximately 64%, and other shareholders.

⁽²⁾ 7,470 shares acquired as a result of stock swap option exercises.

⁽³⁾ 1,544 shares acquired as a result of stock swap option exercises.

Performance Graph

The line graph below compares the total return on $100 invested on December 31, 2002, in STFC’s shares, the CRSP Total Return Index for the NASDAQ Stock Market (“NASDAQ Index”), and the CRSP Total Return Index for NASDAQ insurance stocks (“NASDAQ Ins. Index”), with dividends reinvested.

	12/31/2002	12/31/2003	12/31/2004	12/31/2005	12/31/2006	12/31/2007
STFC	100.000	148.984	162.136	165.583	181.920	197.280
NASDAQ Index	100.000	122.725	149.000	166.399	188.819	189.206
NASDAQ Ins. Index	100.000	151.548	168.949	240.058	230.840	178.389

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Item 6. Selected Consolidated Financial Data

(dollars and shares in millions, except per share data)	Year ended December 31:
	2007			2006		2005*	2004	2003
Statement of Income Data – GAAP Basis:
Earned premiums	$	1,011.6		1,023.8		1,050.3	1,006.8	960.6
Net investment income	$	84.7		83.1		78.7	71.8	64.6
Total revenues	$	1,113.4		1,117.4		1,139.5	1,092.4	1,041.7
Net income	$	119.1		120.4		125.9	110.0	63.6
Earned premium growth		(1.2	)%	(2.5	)	4.3	4.8	7.1
Return on average invested assets(1)		4.3	%	4.4		4.3	4.5	4.6
Balance Sheet Data – GAAP Basis:
Total investments	$	2,021.2		1,937.9		1,879.9	1,699.1	1,570.3
Total assets	$	2,337.9		2,255.1		2,274.9	2,168.4	2,029.9
Total notes payable	$	118.0		118.4		118.7	164.5	161.2
Total stockholders’ equity	$	935.5		834.2		763.5	658.2	542.3
Common shares outstanding		40.5		41.0		40.5	40.1	39.6
Return on average equity(2)		13.5	%	15.1		17.7	18.3	12.6
Debt to stockholders’ equity		12.6	%	14.2		15.5	25.0	29.7
Per Common Share Data – GAAP Basis:
Basic EPS	$	2.90		2.95		3.12	2.76	1.62
Diluted EPS	$	2.86		2.90		3.06	2.70	1.58
Cash dividends per share	$	0.50		0.38		0.27	0.17	0.15
Book value per share	$	23.10		20.32		18.86	16.42	13.71
Common Share Price:
High	$	35.22		39.94		38.15	31.83	26.90
Low	$	23.99		28.40		24.30	22.12	14.96
Close at December 31	$	26.30		34.68		36.46	25.85	23.34
Close price to basic EPS		9.07		11.76		11.69	9.37	14.41
Close price to book value per share		1.14		1.71		1.93	1.57	1.70
GAAP Ratios:(3)
Loss and LAE ratio		58.4	%	57.4		58.4	61.5	67.8
Expense ratio		34.4	%	34.0		31.7	30.2	30.4
Combined ratio		92.8	%	91.4		90.1	91.7	98.2
Statutory Ratios:(3)
Loss and LAE ratio		57.9	%	56.8		58.4	61.6	67.9
Expense ratio		33.2	%	32.9		31.6	30.6	30.7
Combined ratio		91.1	%	89.7		90.0	92.2	98.6
Industry combined ratio(4)		93.8	%	92.7		101.2	98.9	100.1
Net premiums written to surplus(5)		1.1		1.2		1.5	1.6	1.9

⁽¹⁾ Invested assets include investments and cash equivalents.

⁽²⁾ Net income divided by average common stockholders’ equity.

⁽³⁾ GAAP ratios are computed using earned premiums for both the loss and LAE ratio and the expense ratio, and include the effect of eliminations in consolidation. The statutory expense ratio is computed using net written premiums. We use the statutory combined ratio to compare our results to the industry statutory combined ratio as there is no industry GAAP combined ratio available.

⁽⁴⁾ The industry combined ratios are from A.M. Best. The 2007 industry combined ratio is an estimate.

⁽⁵⁾ We use the statutory net premiums written to surplus ratio as there is no comparable GAAP measure. This ratio, also called the leverage ratio, measures our statutory surplus available to absorb losses.

* Reflects change in Pooling Arrangement, effective January 1, 2005.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Capitalized terms used in this Item 7 and not otherwise defined have the meanings ascribed to such terms under the caption “Important Defined Terms Used in this Form 10-K” which immediately precedes Part I of this Form 10-K.

OVERVIEW

State Auto Financial is a property and casualty insurance holding company primarily engaged in writing both personal and business lines of insurance. The State Auto Group markets a broad line of property and casualty insurance products through independent agencies in 33 states.

State Auto Financial’s subsidiaries are State Auto P&C, Milbank, Farmers, SA Ohio and SA National, each of which is a property and casualty insurance company; Stateco, which provides investment management services to affiliated insurance companies; S.I.S., a developer and seller of insurance-related software; and 518 PML, which owns and leases property to affiliated companies. S.I.S. and 518 PML are not material to our total operations.

State Auto Mutual owns approximately 64% of State Auto Financial’s outstanding common shares.

State Auto P&C, Milbank, Farmers and SA Ohio (“STFC Pooled Companies”) participate in a quota share reinsurance pooling arrangement (the “Pooling Arrangement”) with State Auto Mutual, SA Florida, SA Wisconsin, Meridian Security and Meridian Citizens Mutual, which together with STFC Pooled Companies are referred to as the “Pooled Companies”. The Pooled Companies provide a broad line of property and casualty insurance, such as standard personal and commercial automobile, homeowners and farmowners, commercial multi-peril, workers’ compensation, general liability and property insurance. SA National, which is not included in the Pooling Arrangement, provides nonstandard personal automobile insurance. Our Pooled Companies and SA National are rated A+ (Superior) by the A.M. Best Company.

Under the Pooling Arrangement, each of the Pooled Companies cedes premiums, losses and expenses on all of its business to State Auto Mutual, and State Auto Mutual 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 participation percentage for the STFC Pooled Companies has remained at 80% since 2001. In general, the Pooling Arrangement covers all the property and casualty insurance written by the Pooled Companies except State Auto Mutual’s voluntary assumed reinsurance, middle market business insurance written by State Auto Mutual and Meridian Security and intercompany catastrophe reinsurance written by State Auto P&C.

As of January 1, 2005, the Pooling Arrangement was modified to add Meridian Security and Meridian Citizens Mutual as participants. In conjunction with this modification, the STFC Pooled Companies received $54.0 million in cash from these two companies which related to the additional net insurance liabilities assumed on January 1, 2005.

As of January 1, 2008, the Pooling Arrangement was further modified to add Patrons Mutual, Litchfield and Beacon National as participants and to include the middle market business insurance written by State Auto Mutual and Meridian Security. Concurrently with the addition of Patrons Mutual, Litchfield and Beacon National, the participating percentages of certain participants were adjusted as presented in the table below; however the STFC Pooled Companies continue to maintain an overall share of the pool at 80% and State Auto Mutual and its subsidiaries and affiliates continue to maintain 20%. In conjunction with this modification, the STFC Pooled Companies will receive approximately $92.0 million in cash from State Auto Mutual and its subsidiaries and affiliates.

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The following table sets forth a chronology of the participant and participation percentages for the Pooling Arrangement since January 1, 2005:

	2005-2007(1)		2008(1)
STFC Pooled Companies:
State Auto P&C	59.0	%	59.0	%
Milbank	17.0		17.0
Farmers	3.0		3.0
SA Ohio	1.0		1.0
Subtotal	80.0		80.0
Mutual Pooled Companies:
State Auto Mutual	19.5		19.0
SA Wisconsin	0.0		0.0
SA Florida	0.0		0.0
Meridian Security	0.0		0.0
Meridian Citizens Mutual	0.5		0.5
Beacon National	N/A		0.0
Patrons Mutual	N/A		0.4
Litchfield	N/A		0.1
Subtotal	20.0		20.0

⁽¹⁾ Time period is for the year ended December 31, except for 2008, which is as of January 1, 2008.

The remainder of this discussion refers to the Pooling Arrangement in effect prior to January 1, 2008, unless otherwise noted.

Prior to January 1, 2007, we operated in two significant reportable segments, a standard segment and a nonstandard segment. In 2006, we undertook initiatives to realign our internal organization, specifically our people, processes, internal reporting systems and compensation reward programs, to become more focused within the business and personal insurance markets. We established integrated personal and business insurance teams with product, profit and production responsibilities for their respective areas. Consequently, beginning with first quarter 2007, our significant reportable segments are personal insurance, business insurance (collectively the “insurance segments” or “our insurance segments”) and investment operations, and we have begun reporting to our principal operating decision makers on these bases, analyzing each segment separately, to support our risk-based pricing focus.

We evaluate the performance of our insurance segments using industry financial measurements determined based on Statutory Accounting Principles (“SAP”), which include loss and loss adjustment expense ratios, underwriting expense ratios, combined ratios, statutory underwriting gain (loss), net premiums earned and net written premiums. One of the most significant differences between SAP and Generally Accepted Accounting Principles (“GAAP”) is that SAP requires all underwriting expenses to be expensed immediately and not deferred over the same period the premium is earned. We evaluate our investment operations segment based on investment returns of assets. Financial information about our segments for 2007 is set forth in Note 15 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. Prior period segment information has been restated to conform to current period presentation.

EXECUTIVE SUMMARY

The results of our operations from year-to-year and quarter-to-quarter are primarily driven by our ability to generate revenue through selecting and pricing risks in a manner that permits premium growth without adversely

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affecting underwriting profits, and disciplined investment strategy. We also recognize that our results will be periodically impacted, sometimes significantly, by the occurrence of catastrophic events, which are generally beyond our control.

• Premium Growth/Underwriting Profitability: The property and casualty insurance industry is highly cyclical. Our industry has been historically characterized by periods of intense price competition due to excess underwriting capacity, as well as periods of shortages of underwriting capacity that result in increased prices and more favorable underwriting terms. During periods of excess underwriting capacity, some property and casualty insurers attempt to generate additional top line growth by setting their prices at levels inappropriate for the risk underwritten. While in the short term this may result in additional revenues, this action compromises their long term underwriting profitability. Our strategy is to insure personal and small-to-medium business risks while adhering to disciplined and consistent underwriting principles through all market cycles.

Our underwriting principles include insistence on selecting and retaining business based on the merits of each account and a dedication to cost-based pricing, where each line of business is priced to generate a profit. It is our intention to set pricing levels so that no line of business, or classification within major lines, subsidizes another line or classification. We are committed to achieving an underwriting profit through all market cycles, even at the expense of periodic slowdowns in written and earned premiums. We will not compromise underwriting profitability for top line growth. We believe that we can implement periodic rate changes in most states and remain an attractive market to our policyholders and independent agents by stressing the strengths we bring to the marketplace. These strengths include stability, financial soundness, prompt and fair claims service, and technology which make it easier for the agent to do business with the State Auto Group and provide substantial value to our customers. We carefully monitor writing insurance in states that we believe present difficult legislative, judicial and/or regulatory environments for the insurance industry.

• Investment Strategy: We have a disciplined approach to our investment strategy that emphasizes the quality of our fixed maturity portfolio, which comprised 86% of our total portfolio at fair value at December 31, 2007, and includes only investment grade securities. During the last year our strategy has included increasing our positions in tax-exempt fixed maturities in an effort to maximize after tax investment income in conjunction with diversifying into additional asset classes, such as treasury inflation protected securities. Our only investments in asset-backed securities are in federal agency pools and government guaranteed GNMAs. Our internally managed equity portfolio, which comprised approximately 13% at fair value of our total portfolio at December 31, 2007, emphasizes large-cap, dividend-paying companies selected based upon their potential for appreciation as well as ability to continue paying dividends. During the fourth quarter, 2007, we began to diversify our equity portfolio, and utilize outside managers to invest in U.S. small-cap equities and international instruments. By diversifying, we hope to achieve a greater total return with reduced volatility.

• Loss Reserves: We maintain reserves for the eventual payment of losses and loss expenses for both reported claims and incurred claims that have not yet been reported. Loss reserves are management’s best estimates at a given point in time of what we expect to pay to claimants, based on facts, circumstances and historical trends then known. Although management uses many resources to calculate reserves, there is no precise method for determining the ultimate liability. We do not discount loss reserves for financial statement purposes. Our objective is to set reserves that are adequate such that the amounts that we originally record as reserves reasonably approximate the ultimate liability for insured losses and loss expenses. We then periodically review and adjust loss reserves on a timely basis.

• Catastrophic Events: We are exposed to claims arising out of catastrophic events. Catastrophe losses can and do cause substantial volatility in our financial results for any fiscal quarter or year. Catastrophes can be caused by various natural events, including hurricanes, hailstorms, tornadoes, windstorms, earthquakes, severe winter weather and fires, none of which are within our control. The frequency and severity of catastrophes are inherently unpredictable. The extent of losses from a

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catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Many catastrophes are restricted to small geographic areas. However, hurricanes, earthquakes and other perils may produce significant damage in larger areas, especially those that are heavily populated. Although catastrophes can cause losses in a variety of our property and casualty lines, most of our catastrophe claims in the past have related to homeowners, other personal lines, allied lines and commercial multiple peril coverages. We deploy specific strategies designed to mitigate our exposure to catastrophe losses, which include obtaining reinsurance. We continually seek to diversify our business on a geographic basis. The number of states we operate in has increased from 17 states in 1991 to 33 states as of January 1, 2008. As we begin 2008, the concentration of our direct written premiums for our property and casualty operations in our largest state, Ohio, has decreased from 28% for the year ended December 31, 1991, to approximately 17% at January 1, 2008. Our underwriting guidelines are designed to limit exposures to high risk insurance matters such as asbestos and environmental claims. Our catastrophe management strategies are designed to mitigate our exposure to earthquakes and hurricanes.

In addition to our adherence to our cost-based pricing, investment and risk mitigation strategies discussed above, our management focuses on several other key areas with the intention of continually improving the results of our operations and financial results, including the following:

• Claims Service: We believe an important element of our success is our focus on claims service. We expect our claim service to be fair, fast and friendly. The role of the claims division is to deliver the promise that we and the independent agent made to the insured. We have the capability of receiving claims 24 hours a day, seven days a week. Claims may be reported to our Claims Contact Center, to the policyholder’s independent agent or via the Internet. We make a pledge to our policyholders to try and make contact with them within two hours of a claim being assigned to a claims handler (except in catastrophe loss situations). In 2007, we established claims catastrophe teams to enhance our response to policyholders in catastrophe loss situations.

• Independent Insurance Agent Network: We offer our products through over 3,000 agencies in 33 states. We believe the success of our independent insurance agent network, which is our only distribution channel, grows out of our commitment to promote and foster close working relationships with our agents. We seek relationships with agencies where we will be one of their top three insurers, measured on the basis of direct premiums written, for the type of business we desire. Our agents’ compensation package includes competitive commission rates and other sales inducements designed to maintain and enhance relationships with existing independent agents as well as to attract new independent agents. We provide our agents with a co-operative advertising program, sales training programs, contingent commissions, travel incentives and agency recognition. We continually monitor our agencies for compatibility with us, taking into account factors such as loss ratio, premium volume, business profiles and relationship history. This allows us to be proactive in helping our agents grow their book of business with us profitably and, thus, enhance the long-term value of our relationship. Our senior management meets frequently with agents to encourage mutual growth and demonstrate our commitment. We believe each of these elements creates a relationship that has resulted in our independent insurance agents placing quality insurance business with us.

• Technology: Our technology efforts are focused on making us as efficient and effective as possible. In 2007, our personal insurance segment technology leveraged past successes with our netXpress^™ agency portal by putting emphasis on the integration between various third party technologies and netXpress^™. One such example was adding functionality to “bridge” data directly into our netXpress^™ portal from comparative rating tools thus eliminating the re-keying effort and increasing the data quality level. Agency personnel have welcomed this functionality and rewarded us with increased quote opportunities and submissions. It has also positioned us to be more effective on book rollover opportunities. Other integration examples include agency management systems and services that dynamically order underwriting products like motor vehicle reports, credit reports, and geographic data used in our pricing algorithms.

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Our business insurance segment benefited by the introduction of our bizXpress^SM portal. The bizXpress^SM portal was deployed in all of our states of operation (except Florida) in 2007. During the course of 2007, several disciplines were more effectively used in our technology efforts. Quality assurance practices were formalized and used resulting in less defects in applications once deployed. Additionally, more project management rigor and application governance allowed our project delivery to be more predictable for all business segments. Finally, we implemented performance testing tools and application monitoring technologies so we can increase our responsiveness and operate our information systems infrastructure efficiently.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are more fully described in Note 1 of the Notes to our Consolidated Financial Statements included in Item 8 of this Form 10-K. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, revenues and expenses for the period then ended and the financial entries in the accompanying notes to the financial statements. Such estimates and assumptions could change in the future, as more information becomes known which could impact the amounts reported and disclosed in this Item 7. We have identified the policies and estimates described below as critical to our business operations and the understanding of the results of our operations.

Investments

Our fixed maturity, equity security and certain other invested asset investments are classified as available-for-sale and carried at fair value. The unrealized holding gains or losses, net of applicable deferred taxes, are shown as a separate component of stockholders’ equity as “accumulated other comprehensive income,” and as such are not included in the determination of net income. Investment income is recognized when earned, and capital gains and losses are recognized when investments are sold.

We regularly monitor our investment portfolio for declines in value that are other-than-temporary, an assessment that requires significant management judgment. Among the factors we consider are the nature of the investment, severity and length of decline in fair value, events impacting the issuer, overall market conditions and our intent and ability to hold securities until the value recovers. When a security in our investment portfolio has been determined to have a decline in fair value that is other-than-temporary, we adjust the cost basis of the security to fair value. This results in a charge to earnings as a realized loss, which is not changed for subsequent recoveries in fair value. For a further discussion regarding our investments see “2007 Compared to 2006” and “2006 Compared to 2005” included in this Item 7.

Deferred Acquisition Costs

Acquisition costs, consisting of commissions, premium taxes and certain underwriting expenses relating to the production of property and casualty business, are deferred and amortized over the same period in which the related premiums are earned. The method followed for computing the acquisition costs limits the amount of such deferred costs to their estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, losses and loss expenses expected to be incurred, and certain other costs expected to be incurred as premium is earned. These amounts are based on estimates, and accordingly, the actual realizable value may vary from the estimated realizable value.

Losses and Loss Expenses Payable

Losses and loss expenses payable are management’s best estimates at a given point in time of what we expect to pay claimants, based on known facts, circumstances and historical trends. Reserves for reported losses are established on either a case-by-case or formula basis depending on the type and circumstances of the loss.

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The case-by-case reserve amounts are determined by claims adjusters based on our reserving practices, which take into account the type of risk, the circumstances surrounding each claim and policy provisions relating to types of loss. The formula reserves are based on historical data for similar claims with provision for trend changes caused by inflation. Case and formula basis loss reserves are reviewed on a regular basis, and as new data becomes available, estimates are updated resulting in adjustments to loss reserves. Generally, reported losses initially reserved on a formula basis and not settled after six months are case reserved at that time.

Loss and loss expense reserves for incurred claims that have not yet been reported (“IBNR”) are estimated based on many variables including historical and statistical information, inflation, legal developments, storm loss estimates, and economic conditions. The process for calculating IBNR is to develop an estimate of the ultimate losses incurred, and then subtract all amounts already paid or held in tabular case reserves. Although we use many internal and external resources, as well as multiple established methodologies to calculate IBNR, there is no method for determining the exact ultimate liability. For a further discussion regarding our losses and loss expense reserves and our reserving methods see “Other—Loss and Loss Expense Reserves” included in this Item 7.

Pension and Postretirement Benefit Obligations

Pension and postretirement benefit obligations are long term in nature and require management’s judgment in estimating the factors used to determine these amounts. We review these factors annually, including the discount rate and expected long term rate of return on plan assets. Because these obligations are based on estimates which could change, the ultimate benefit obligation could be different from the amount estimated. For a further discussion regarding our pension and postretirement benefit obligations see “Other—Employee Benefit Plans” included in this Item 7.

Share-Based Compensation

We have share-based compensation plans which authorize the granting of various equity-based incentives including stock options, restricted stock and restricted share units to employees and non-employee directors and agents. The expense for these equity-based incentives is based on their fair value at date of grant or each reporting date and amortized over their vesting period. The fair value of each stock option granted is estimated on the date of grant or each reporting date using the Black-Scholes closed-form pricing model. The pricing model requires assumptions such as the expected life of the option and expected volatility of our stock over the expected life of the option, which significantly impacts the assumed fair value. We use historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future periods.

Other

Other items that could have a significant impact on the financial statements include the risks and uncertainties listed in Item 1A of this Form 10-K under “Risk Factors.” Actual results could differ materially using different estimates and assumptions, or if conditions are significantly different in the future.

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RESULTS OF OPERATIONS

Summary

The following table summarizes certain key performance indicators used to manage our operations for the years ended December 31, 2007, 2006 and 2005, respectively:

($ millions, except per share data)	2007			2006		2005
GAAP Basis:
Total revenues	$	1,113.4		1,117.4		1,139.5
Net income	$	119.1		120.4		125.9
Stockholders’ equity(1)	$	935.5		834.2		763.5
Book value per share(1)	$	23.10		20.32		18.86
Loss and LAE ratio(2)		58.4		57.4		58.4
Expense ratio(2)		34.4		34.0		31.7
Combined ratio		92.8		91.4		90.1
Catastrophe loss and LAE points(2)		3.7	%	8.9		6.9
Premium written growth(3)		0.0	%	(2.5	)	5.0
Premium earned growth		(1.2	)%	(2.5	)	4.3
Investment yield		4.3	%	4.4		4.3
SAP Basis:
Loss and LAE ratio(4)		57.9		56.8		58.4
Expense ratio(4)		33.2		32.9		31.6
Combined ratio(4)		91.1		89.7		90.0
Net premiums written to surplus(5)		1.1		1.2		1.5

⁽¹⁾ At December 31, 2006, accumulated comprehensive income was reduced by $63.9 million and book value per share was reduced by $1.56, respectively, in connection with the initial adoption of SFAS 158 (defined below) at December 31, 2006. For a further discussion of the impact of SFAS 158, see “Other—Employee Benefit Plans” included in this Item 7.

⁽²⁾ See “2007 Compared to 2006” section below for definitions.

⁽³⁾ 2.3 points of the increase for 2005 related to the $24.0 million of unearned premiums transferred to us in connection with the addition of the Meridian Security and Meridian Citizens Mutual to the Pooling Arrangement.

⁽⁴⁾ SAP loss and LAE ratio is statutory losses and loss expenses as a percentage of net earned premium. SAP expense ratio is statutory underwriting expenses and miscellaneous expenses offset by miscellaneous income (“underwriting expenses”) as a percentage of net written premiums. SAP combined ratio is the sum of the SAP loss and LAE ratio and the SAP expense ratio.

⁽⁵⁾ We use the statutory net premiums written to surplus ratio because there is no comparable GAAP measure. This ratio, also called the leverage ratio, measures our statutory surplus available to absorb losses.

2007 Compared to 2006

Income before federal income tax decreased $6.4 million (4.0%) to $155.3 million from 2006. The most significant factors contributing to this decrease related to a decline in our revenues, specifically our premiums, and an increase in our loss and loss expenses. Our GAAP loss and loss expense ratio for 2007 was 58.4% compared to 57.4% in 2006.

Insurance Segments

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. The more common financial measures used are loss and LAE ratio, underwriting expense ratio, combined ratio, net premiums written and net premiums earned. The combined ratio is the sum of the loss and LAE ratio and the underwriting expense ratio. When the

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combined ratio is less than 100%, the insurer is operating at an underwriting gain and when it is greater than 100%, the insurer is operating at an underwriting loss. Underwriting gain (loss) is determined by subtracting from net earned premiums, losses and loss expenses and underwriting expenses.

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 policy acquisition costs see “Critical Accounting Policies—Deferred Acquisition Costs” included in this Form 10-K. The “GAAP combined ratio” is defined as the sum of the “GAAP loss and LAE ratio” (loss and loss expenses as a percentage of earned premiums) plus “GAAP expense ratio” (acquisition and operating expenses as a percentage of earned premiums). All references to financial measures or components thereof in this discussion are calculated on a GAAP basis, unless otherwise noted.

The following tables provide a summary of our insurance segments’ SAP underwriting gain and SAP combined ratio for the years ended December 31, 2007 and 2006:

($ millions)	2007
	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Written premiums	$	615.1		$	404.7		$	1,019.8
Earned premiums		609.6			402.0			1,011.6
Losses and loss expenses		378.4	62.1		207.2	51.5		585.6	57.9
Underwriting expenses		183.9	29.9		154.2	38.1		338.1	33.2
SAP underwriting profit and SAP combined ratio	$	47.3	92.0	$	40.6	89.6	$	87.9	91.1
($ millions)	2006
	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Written premiums	$	612.8		$	406.7		$	1,019.5
Earned premiums		614.8			409.0			1,023.8
Losses and loss expenses		389.6	63.4		192.4	47.0		582.0	56.8
Underwriting expenses		180.4	29.4		155.1	38.1		335.5	32.9
SAP underwriting profit and SAP combined ratio	$	44.8	92.8	$	61.5	85.1	$	106.3	89.7

Revenue

We measure our top-line growth for our insurance segments based on net written premiums, which represent the premiums on the policies we have issued for a period, net of reinsurance. Net written premiums provide 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 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 terms of the policy.

Personal Insurance Segment Revenue

Our personal insurance segment consists primarily of auto (standard and nonstandard) and homeowners’ products, with personal auto representing approximately 40% of our total consolidated net written premium in

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2007 and 2006. The following table provides a summary of written and earned premium, net of reinsurance, by major product line of business for our personal insurance segment for the years ended December 31, 2007 and 2006:

($ millions)	2007		2006	% Change
Personal Insurance Segment:
Net Written Premium
Standard auto	$	361.5	361.7	(0.1	)
Nonstandard auto		42.7	42.4	0.7
Homeowners		187.7	186.1	0.9
Other personal		23.2	22.6	2.7
Total personal	$	615.1	612.8	0.4
Net Earned Premium
Standard auto	$	357.3	362.1	(1.3	)
Nonstandard auto		42.9	44.8	(4.2	)
Homeowners		186.5	185.2	0.7
Other personal		22.9	22.7	0.9
Total personal	$	609.6	614.8	(0.8	)

In total, the personal insurance segment net written premium increased from 2006 by 0.4%. While a modest increase, it does represent an improvement from 2006 which declined approximately 3.5% from 2005. In particular, competition remains intense within the personal auto market, which is contributing to our overall modest growth. It remains our strategy that rates be risk-based, reflecting the underlying loss and expense trends.

Net written premiums for our standard auto products decreased 0.1% in 2007 compared to 2006. The competitive marketplace combined with some rate reductions in 2007 contributed to this result. However, we have seen increasing new business production related to the introduction of our CustomFit^SM product into new states. CustomFit^SM uses a multi-variate rating approach that broadens the underwriting eligibility for new customers. In 2007, we began introducing the second generation of CustomFit^SM, which further improves our rating sophistication.

Net written premiums for nonstandard personal auto increased 0.7% in 2007 compared 2006. This represents a significant improvement compared to the 2006 premium result which declined 13.3% from 2005. Targeted rate decreases coupled with the introduction of new discounts and an increased marketing effort contributed to an increased level of new policy submissions leading to an increase in premiums.

We believe independent agents value ease of doing business and make it an important factor in their choice of insurance companies when quoting personal auto products to their customers. During 2007, we introduced in 17 states various “real time” comparative rating tools which can be used by our independent agents to prepare comparative rate quotes from multiple insurance companies by entering the rating information once. We believe our independent agents will quote and write more personal standard and nonstandard auto with us as a result of a more efficient quoting process.

Homeowners’ net written premium increased 0.9% in 2007 compared to 2006. In 2007, we introduced a home purchase discount and expanded our age of dwelling discounts to help attract new business which we believe contributed favorably to increased new homeowners policy submission levels.

During 2007, we continued to enhance our personal lines point of sale portal, netXpress^™, by adding several new integration options with a variety of third party tools used by our independent agents including a

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joint credit ordering tool, integrated report ordering, and the comparative rating tools mentioned above. We also have added a number of internal integration points through the use of web services technology. One example of this is real time integration with our enterprise billing system to provide accurate installment information via netXpress^TM . The goal of these technology investments is to streamline quoting and policy issuance for our agents. We strive to be their carrier of choice and ease of doing business is a major driver toward that goal.

We have also focused on improving our policyholders’ ease of doing business with respect to bill payment and claim reporting and settlement. In 2006, we expanded our premium payment options to include credit and debit card via www.stateauto.com. In 2007, we deployed an Interactive Voice Response (“IVR”) solution to accept premium payments over the phone providing yet another option for policyholders. The IVR solution provides a more efficient business process for our payment services department and is expected to drive better policy retention results. During 2007, nearly 189,000 payments were made through self-service technologies such as these representing over $76 million of premium payments.

Additionally, we recently completed several strategic initiatives to enhance our claims handling ability and better manage major catastrophes. Field claims personnel are now equipped with mobile devices that permit adjusting property claims at the loss site. We believe that our professional claims service backed by reliable technology will continue to distinguish us from our competitors.

During the second quarter 2007, we filed an application with the Florida Department of Insurance to withdraw from the state’s personal lines insurance market effective January 1, 2008. After a careful analysis of recent regulatory changes in Florida, we concluded that we could no longer operate our personal lines on a profitable basis in that state. Non-renewals on this business are in process. We will continue to write commercial lines business in Florida. During 2007, we wrote $12.5 million of personal lines premium in Florida.

Business Insurance Segment Revenue

We focus our business insurance sales on small to medium sized exposures and offer a broad range of both property and liability coverages such as commercial auto, commercial multi-peril, fire and allied lines, products liability and workers’ compensation. The following table provides a summary of written and earned premium, net of reinsurance, by major product line of business for our business insurance segment for the years ended December 31, 2007 and 2006:

($ millions)	2007		2006	% Change
Business Insurance Segment:
Net Written Premium
Commercial auto	$	95.8	98.7	(2.9	)
Commercial multi-peril		86.6	87.8	(1.4	)
Fire & allied lines		84.0	83.1	1.1
Other & product liability		75.6	77.2	(2.1	)
Workers’ compensation		36.1	34.3	5.2
Other commercial		26.6	25.6	3.9
Total business	$	404.7	406.7	(0.5	)
Net Earned Premium
Commercial auto	$	96.9	100.3	(3.4	)
Commercial multi-peril		86.8	87.5	(0.8	)
Fire & allied lines		83.4	84.2	(1.0	)
Other & product liability		75.5	77.5	(2.6	)
Workers’ compensation		33.4	33.8	(1.2	)
Other commercial		26.0	25.7	1.2
Total business	$	402.0	409.0	(1.7	)

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The business insurance segment net written premium for 2007 decreased 0.5% from 2006. Business insurance continues to be impacted by rate competition and ease of doing business issues. We are seeking to balance our traditional underwriting discipline with new products and pricing tools that support the production of profitable new business.

In 2007, we began offering our business products in two new states—Colorado and Texas—and increased the number of business products offered in Arizona.

We also continue to enhance our back office systems which enable us to more effectively support our independent agents. We recently implemented the technology to provide real time functionality in our business insurance policy administration systems for quote and issuance transactions. Also known as straight through processing (“STP”), our associates are now able to more effectively and accurately handle typical business insurance processing. The policy service time has been greatly reduced as a result of this new technology.

To make it easier for our agents to submit business insurance accounts, in 2007, we introduced bizXpress^SM, our web-based quote and issuance system, to agents in all of our operating states except Florida. We currently utilize bizXpress^SM for businessowners policies. We are working to expand bizXpress^SM functionality to our business auto products in the first half of 2008, while we develop the same functionality for workers compensation business for introduction at a later date. This has been a highly collaborative initiative that has included agent focus group input throughout the project lifecycle. It also leverages the STP technology investment mentioned above. We believe this technology investment should better position us for revenue growth opportunities in the future and start to drive efficiencies into our business model much like we have seen in personal insurance.

Losses and Expenses

Our GAAP loss and LAE ratio was 58.4% in 2007 compared to 57.4% in 2006. Loss results for the year have been mixed. Our core auto (personal and business) and other and product liability lines continue to perform well. On the property side, catastrophe losses for 2007 were lower than in 2006, but we experienced significantly higher frequency of large fire losses within our personal and business lines during 2007.

Losses and loss expenses for a calendar year represent the combined estimated ultimate liability for claims occurring in the current calendar year along with development of claims occurring in prior years. The following table presents the provision for losses and loss expenses for those claims occurring in the current calendar year and prior years, along with the GAAP loss and LAE ratio for the years 2007 and 2006, respectively:

($ millions)	2007			% GAAP loss and LAE		2006		% GAAP loss and LAE
Provision for losses and loss expenses occurring:
Current year	$	645.5		62.7		659.3		64.4
Prior years		(54.7	)	(4.3	)	(71.7	)	(7.0	)
Total losses and loss expenses	$	590.8		58.4		587.6		57.4

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A tabular presentation of the 2007 $54.7 million favorable development broken down by accident year is shown below.

($ millions) Accident year	Current year development of ultimate liability
	Redundancy /(Deficiency)
1997 and prior	$	(4.8	)
1998		(0.1	)
1999		0.2
2000		0.2
2001		1.8
2002		1.1
2003		4.3
2004		2.3
2005		20.2
2006		29.5
Total	$	54.7

Normal fluctuations and uncertainty associated with loss reserve development and claim settlement contributed to favorable development in the respective calendar years. The favorable development of $54.7 million in 2007 came primarily from accident years 2005-2006. The more notable items contributing to the 2007 development are:

• Favorable development at the product level is primarily from the auto liability and other liability lines, where current loss projections using more mature claim data resulted in lower expected average claim severities than past projections. The impact is approximately $23.5 million for these two lines combined.

• Adjusting and other expense reserves accounted for approximately $11.8 million of prior year reserve change. These expense reserves have a proportional relationship to the overall claim inventory and held reserves by accident year, as they move up or down in relation to carried loss reserves. Since reserves decreased for the prior accident years, the expense reserves declined in a similar fashion. (Allocated loss adjustment expenses (“ALAE”) are those costs that can be related to a specific claim, which may include attorney fees, external claims adjusters and investigation costs, among others. Unallocated loss adjustment expenses (“ULAE”) are those costs incurred in settling claims, such as in-house processing costs, for which no identification can be made to specific claims. “Adjusting and other expenses” are the components of ALAE and ULAE that relate to costs other than defense, litigation, and medical cost containment.)

• We hold ceded loss reserves in anticipation of transferring liabilities to reinsurers and other pools and associations. Ceded loss reserves were above previously anticipated levels by approximately $10.0 million. Historically, we have had less ceded loss activity because our reinsurance retention levels are generally high enough to exclude most claims. This favorable development occurred primarily in the fire, auto liability and workers’ compensation lines.

• Favorable catastrophe loss development of approximately $4.6 million is attributable to the 2006 accident year. This development occurred primarily within our homeowners, other personal and commercial multi-peril lines of business.

• The remaining favorable development is spread across several lines of business and is generally the result of having fewer claims emerge and lower claim severity than anticipated in the estimates developed as of December 31, 2006.

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See discussion regarding the 2006 calendar year development at “2006 Compared to 2005—Losses and Expenses” section included herein. See additional discussion regarding loss and loss expense reserves at the “Other—Loss and Loss Expense Reserves” section included herein.

Catastrophe losses in 2007 totaled $37.1 million (3.7 loss ratio points) compared to $91.2 million (8.9 loss ratio points) in 2006. During 2007, our catastrophe losses resulted primarily from wind and hail in several Midwestern states and mostly impacted our homeowners business. Catastrophe activity in 2006 had a significant impact on both our personal and business insurance property lines. The discussion of catastrophe losses includes those which have been designated as such by ISO’s Property Claim Services (“PCS”) unit, a nationally recognized industry service. PCS defines catastrophes as events resulting in $25.0 million or more in insured losses industry wide and affecting significant numbers of insureds and insurers.

The following table provides our insurance segments’ comparative SAP loss and LAE ratios (“loss ratios”) by major line of business for 2007 and 2006:

	2007	2006	Improve (Deteriorate)
Personal insurance segment:
Standard auto	61.5	57.0	(4.5	)
Nonstandard auto	63.2	60.0	(3.2	)
Homeowners	64.6	78.1	13.5
Other personal	48.2	51.1	2.9
Total personal	62.1	63.4	1.3
Business insurance segment:
Commercial auto	52.2	40.3	(11.9	)
Commercial multi-peril	59.3	48.6	(10.7	)
Fire & allied lines	49.1	58.3	9.2
Other & product liability	43.5	37.5	(6.0	)
Workers’ compensation	74.6	57.5	(17.1	)
Other commercial	24.8	46.3	21.5
Total business	51.5	47.0	(4.5	)
Total SAP personal and business	57.9	56.8	(1.1	)

The personal insurance segment loss ratio was 1.3 points lower in 2007 than in 2006. Catastrophes accounted for 5.0 loss ratio points in 2007 compared to 11.9 points in 2006 period. Excluding the impact of catastrophes, the personal lines loss ratio in 2007 was 5.5 points higher than in 2006 period. The increase in both the standard and nonstandard auto loss ratios can be attributed partially to rate reductions taken in 2006 and 2007. The improvement in the homeowners loss ratio can be attributed primarily to the reduction of catastrophe losses. In 2007, catastrophes added 14.2 points to the homeowners loss ratio compared to 32.2 points in 2006 period.

The business insurance segment’s loss ratio for 2007 was 4.5 points higher than in 2006. Catastrophes accounted for 1.6 loss ratio points in 2007 compared to 4.3 points in 2006. Excluding the impact of catastrophes, the business lines loss ratio in 2007 was 7.2 points higher than in 2006. The overall increase reflects rate reductions in premium per exposure on business written in 2006 and 2007 and an increase in the number of large property losses. Workers’ compensation, which represents approximately 9.0% of our business insurance portfolio and less than 4.0% of our overall insurance segment portfolio, tends to be a more volatile line of business due to its size and risks written. We do not write mono-line workers’ compensation, but make our product available as part of the business package policy. The increase in the level of 2007 losses as compared to 2006 was driven largely by an increase in severity rather than frequency. We regularly monitor frequency and

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severity trends, as well as the overall construction of our workers compensation book of business. In addition, we promote the writing of the low-hazard risk types that have developed a consistent pattern of profitability.

Acquisition and operating expenses, as a percentage of earned premiums (“GAAP expense ratio”) were 34.4% in 2007 compared to 34.0% in 2006. The 2007 expense ratio was largely impacted by a lower premium base in 2007 compared to 2006.

Investment Operations Segment

Our investment portfolio and the investment portfolios of State Auto Mutual, and its subsidiaries and affiliates are managed by our subsidiary, Stateco. The Investment Committee of the Board of Directors of each of our insurers sets investment policies to be followed by Stateco.

At December 31, 2007, our investments in fixed maturities, equity securities and certain other invested assets were held as available-for-sale and carried at fair value. The unrealized holding gains or losses, net of applicable deferred taxes, are included as a separate component of stockholders’ equity as “accumulated other comprehensive loss” and as such are not included in the determination of net income.

Our primary investment objectives are to generate income, preserve capital and maintain adequate liquidity for the payment of claims and expenses. Our current investment strategy does not rely on the use of derivative financial instruments.

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. For the insurance subsidiaries, the maximum investment in any single note or bond is limited to 5.0% or less of statutory assets, other than obligations of the U.S. government or government agencies, for which there is no limit. Our fixed maturity portfolio is composed of high quality, investment grade issues, comprised almost entirely of debt issues rated AAA or AA. At December 31, 2007, we had no fixed maturity investments rated below investment grade. Our only investments in asset-backed securities are in federal agency pools and government guaranteed GNMAs.

Our internally managed equity portfolio invests in U.S. large-cap, dividend-paying companies across many different industries selected based upon their potential for appreciation as well as ability to continue paying dividends. This diversification across companies and industries reduces volatility in the value of the large-cap equity portfolio. In addition, our investment policy guidelines limit the purchase of a specific stock to no more than 2% of the market value of the stock at the time of purchase, and no single equity holding should exceed 5% of the total equity portfolio.

During the fourth quarter 2007, we began to diversify our equity portfolio and utilize outside money managers to invest in U.S. small-cap equities and international instruments. These managers are permitted to manage the portfolios according to their own respective portfolio objectives. In selecting our outside money managers we confirm that their portfolio objectives, including risk tolerance, are acceptable to us; however, there may be slight differences in their objectives with respect to dividend payments and other constraints that we apply to our large cap equity holdings. By further diversifying our portfolio into small-cap equities and international instruments, we hope to achieve a greater total return with reduced volatility.

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In August 2007, we completed a portfolio diversification study with the objective to reduce the volatility of the returns and improve our overall after-tax return while continuing to maintain a high-quality portfolio. Based on this study, the Committee (defined below) approved the following target asset allocation:

Cash and cash equivalents	3.5	%
Core fixed maturities	69.0
Treasury inflation protected securities	10.0
Large-cap equities	10.5
Small-cap equities	3.0
International instruments	4.0
Total portfolio	100.0	%

Composition of Investment Portfolio

Beginning in the fourth quarter of 2007, we began investing funds as they became available moving toward our targeted asset allocations over the next 12 to 18 months. The following table provides a breakdown of our investments relative to our targeted allocated percentages provided above at December 31, 2007. We measure our investment portfolio allocation with fixed maturities at amortized cost and equities and international instruments at fair value.

($ millions)			% of Total
Cash and cash equivalents	$	70.9	3.4
Core fixed maturities		1,710.0	82.6
Treasury inflation protected securities		12.9	0.6
Large-cap equities		242.7	11.7
Small-cap equities		11.5	0.6
International instruments		15.9	0.8
Other invested assets		5.7	0.3
Total portfolio	$	2,069.6	100.0

The following table provides the composition of our available-for-sale investment portfolio at December 31, 2007 and 2006, respectively:

($ millions)	2007				2006
Fixed maturities	$	1,745.4	86.4	%	1,647.4	85.1
Equity securities		254.2	12.6		284.2	14.7
Other invested assets		20.3	1.0		4.5	0.2
Total investments, at fair value	$	2,019.9	100.0	%	1,936.1	100.0

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The amortized cost and fair value of fixed maturities at December 31, 2007, by contractual maturity, are as follows:

($ millions)	Amortized Cost		Fair Value
Due in 1 year or less	$	16.9	16.9
Due after 1 year through 5 years		60.5	62.5
Due after 5 years through 10 years		437.5	451.1
Due after 10 years		1,019.4	1,025.4
U.S. government agencies mortgage-backed securities		188.6	189.5
Total	$	1,722.9	1,745.4

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.

At December 31, 2007, our equity portfolio consisted of approximately 80 different large-cap stocks and 325 small-cap stocks. The largest single position was 3.2% of the equity portfolio based on fair value and the top ten positions were equal to approximately 25.1% of the equity portfolio.

Our equity portfolio consists primarily of large-cap, value-oriented stocks with a small allocation to small-cap equities. Therefore, when large-cap stocks and/or value-oriented stocks perform well our equity portfolio typically performs well compared to benchmarks. Conversely, when growth stocks outperform value and/or small- to mid-cap stocks outperform large-cap stocks, our equity portfolio does not perform as well compared to benchmarks. This is due to the significant overweighting in large-cap, value-oriented stocks versus small-cap and growth stocks in the portfolio.

The chart below shows the industry sector breakdown of our large-cap equity portfolio versus the S&P 500 Index based on fair value as of December 31, 2007.

Industry Sector	Equity Portfolio % of Fair Value	S&P 500 Index % of Fair Value
Basic Materials	2.1	3.4
Communications	5.6	11.3
Consumer Cyclical	16.3	7.1
Consumer Non-cyclical	16.8	20.5
Energy	9.9	12.9
Financial	16.6	17.6
Industrial	24.4	11.8
Technology	8.3	11.8
Utilities	—	3.6
Total	100.0	100.0

In 2005, the Investment Committee of State Auto Financial’s Board of Directors (“the Committee”) approved a targeted allocation of 70% tax-exempt fixed maturities, 15% taxable fixed maturities and 15% equities. This reallocation effort would result in lower pre-tax investment yields but higher after tax investment income than if we had continued under the then current allocation percentages.

In November 2006, the Committee approved a $50.0 million repositioning of the then-current taxable and tax-exempt holdings to reach our targeted percentage at a quicker pace than if we just used new monies. Based

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on this action, the sale of approximately $50.0 million of taxable securities was completed by December 31, 2006. Reinvestment into tax-exempt securities of the proceeds from these actions was completed during the first quarter 2007.

During the Committee’s March 2007 meeting, the allocation status was reviewed and the Committee approved an additional $100.0 million repositioning of the then-current taxable and tax-exempt holdings. Based on this action, the sale of approximately $100.0 million of taxable securities was completed by March 31, 2007. Reinvestment into tax-exempt securities of the proceeds from these actions was completed during the 2007 second quarter. After completion of the targeted rebalancing, we assessed the securities held and confirmed our intent to hold the remaining securities until either recovery of fair value or maturity.

Market Risk

Our decision to make a specific investment is influenced primarily by the following factors: (a) investment risks; (b) general market conditions; (c) relative valuations of investment instruments; (d) general market interest rates; (e) our liquidity requirements at any given time; and (f) our current federal income tax position and relative spread between after tax yields on tax-exempt and taxable fixed maturity investments.

Our primary market risk exposures are to changes in market prices for equity securities and changes in interest rates and credit ratings for fixed maturity securities. Our fixed maturity securities are subject to interest rate risk whereby the value of the securities varies as market interest rates change. We manage this risk by closely monitoring the duration of the fixed maturity portfolio. The duration of the fixed maturity portfolio was approximately 5.10 and 5.35 as of December 31, 2007 and 2006, respectively. The table below summarizes our interest rate risk and shows the effects of a parallel change in interest rates on the fair value of the fixed maturity portfolio (excluding other debt securities) as of December 31, 2007:

Fair value ($ millions)	$	1,952.8		$	1,849.1		$	1,745.4		$	1,641.7		$	1,520.7
Change in interest rates (bps)		-200			-100			0			+100			+200
Value as % of original value		112	%		106	%		100	%		94	%		87	%

This table summarizes only the effects that a parallel change in interest rates could have on the fixed maturity portfolio. This change in rates would also change the value of our liabilities and possibly other financial assets. We caution the reader that this analysis does not take into account nonparallel changes in interest rates. It is likely that some rates would increase or decrease more than others depending upon market conditions at the time of the change. This nonparallel change would alter the value of the fixed maturity portfolio. The analysis is also limited in that it does not take into account any actions that might be taken by us in response to these changes. As a result, the actual impact of a change in interest rates and the resulting fixed maturity values may differ significantly from what is shown in the table.

We believe that the fixed maturity portfolio’s exposure to credit risk is minimal as greater than 94% of the bonds we own are rated AA or better and the remaining bonds are rated A. We do not intend to change our investment policy on the quality of our fixed maturity investments. The fixed maturity portfolio is managed in a laddered-maturity style and considers business mix and liability payout patterns to ensure adequate cash flow to meet claims as they are presented. We also manage liquidity risk by maintaining sufficient cash balances, owning some agency and U.S. Treasury securities at all times, purchasing bonds of major issuers, and purchasing bonds that are part of a medium or large issue. The fixed maturity portfolio does not have any direct exposure to either exchange rate risk or commodity risk. We do not rely on the use of derivative financial instruments. To provide us greater flexibility in order to manage our market risk exposures, we categorize our fixed maturities as available-for-sale. We do not maintain a trading portfolio. We have no asset-backed securities in our fixed maturity portfolio which may be labeled sub-prime mortgage-backed securities. We only invest in conventional mortgage backed securities issued by a federal agency or that are U.S. Government guaranteed. Specifically, our only investment in asset-backed securities (approximately $189.4 million or 9.4% of our available-for-sale

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investment portfolio) are in federal agency pool and government guaranteed GNMAs, of which 63.8% are GNMAs, which are guaranteed by the full faith and credit of the U.S. Government.

Our fixed maturity investment portfolio at December 31, 2007 included securities issued by numerous municipalities with a total carrying value of $1,452.0 million. Approximately $829.4 million or 57% of these securities were enhanced by third-party insurance (the “Credit Enhancement”) for the payment of principal and interest in the event of an issuer default. Such insurance generally results in a rating of “AAA” being assigned by independent ratings agencies to those securities. The downgrade of credit ratings of insurers of these securities could result in a corresponding downgrade in the ratings of the securities from “AAA” to the underlying rating of the respective security without giving effect to the benefit of the Credit Enhancement. Credit Enhancement is not a primary consideration to us when purchasing a municipality security as we consider the underlying credit rating of the security by Moody’s and S&P as a more important factor in our evaluation process. Of the total $829 million of insured municipal securities in our investment portfolio, approximately 82% were rated AA or better, without the benefit of a Credit Enhancement. We do not believe that a loss of a Credit Enhancement would have a material adverse impact on our results of operations, financial position or liquidity, due to the underlying strength of the issuers of the securities, as well as our ability and intent to hold the securities.

As of December 31, 2007, our large-cap equity portfolio had a beta of 0.99 using the S&P 500 Index as a benchmark. Beta estimates the degree the portfolio’s price will fluctuate based on a given movement in the market index. The table below reflects what changes might occur in the value of the large-cap equity portfolio given a change in the S&P 500 Index:

Fair value ($ millions)	$	290.8		$	266.7		$	242.7		$	218.7		$	194.6
Change in S&P 500 Index		+20	%		+10	%		0			-10	%		-20	%
Value as % of original value		120	%		110	%		100	%		90	%		80	%

The above analysis is limited in that it does not take into account any actions that might be taken by us in response to these changes. As a result, the actual impact of a change in equity market prices and the resulting equity values may differ significantly from what is shown in the table. By investing in mostly large-cap issues we hope to limit liquidity risk in the equity portfolio. The equity portfolio does not have any direct exposure to exchange rate risk since we do not directly hold any foreign stocks. We constantly monitor the equity portfolio holdings for any credit risk issues that may arise. We do not invest in any commodity futures or commodity oriented mutual funds.

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Investment Operations Revenue

Net investment income for 2007 was $84.7 million compared to $83.1 million in 2006. In 2007 our average invested assets increased due to our insurance segments’ favorable underwriting cash flows. However, our pre-tax return on investments declined slightly as provided in the table below due largely to rebalancing our fixed maturity portfolio as described above toward tax-exempt bonds, which have a lower yield on a pre-tax basis. After tax, our net investment income for 2007 was $73.6 million (13.2% effective tax rate) compared to $69.8 million (16.1% effective tax rate) for 2006.

($ millions)	Year Ended December 31
	2007			2006
Gross investment income:
Fixed maturities	$	75.3		73.6
Equity securities		5.7		5.1
Other		5.5		6.1
Total gross investment income		86.5		84.8
Less: Investment expenses		1.8		1.7
Net investment income	$	84.7		83.1
Average invested assets (at cost)	$	1,987.1		1,891.6
Annualized investment yield		4.3	%	4.4
Annualized investment yield, after tax		3.7	%	3.7

Realized gains and losses on investments for the years ended December 31, 2007 and 2006, respectively are summarized as follows:

($ millions)	2007					2006
	Realized Gains (Losses)			Proceeds Received on Sale		Realized Gains (Losses)			Proceeds Received On Sale
Realized gains:
Fixed maturities	$	0.8		$	82.5	$	1.8		$	130.1
Equity securities		19.7			76.2		15.6			72.0
Total realized gains		20.5			158.7		17.4			202.1
Realized losses:
Fixed maturities		(1.3	)		72.7		(4.8	)		41.3
Equity securities		(7.1	)		30.8		(7.0	)		31.8
Total realized losses		(8.4	)		103.5		(11.7	)		73.1
Net realized gains on investments	$	12.1		$	262.2	$	5.6		$	275.2

Most of the realized gains in 2007 were derived from the equity segment of the portfolio. Equity sales were executed for various reasons, including the achievement of our price target and raising funds within two of our insurance subsidiaries to fund cash dividends to State Auto Financial. (See “Other Capital Transactions” section below.) The realized gains on the fixed maturity portfolio were achieved by selling shorter-term tax-exempt securities and subsequently reinvesting those funds into longer-term tax-exempt securities as well as selling taxable securities to reinvest the proceeds into the tax-exempt securities as described above. For the year ended December 31, 2007, realized losses of $1.3 million on the fixed maturities related primarily to selling taxable securities to support our shift into tax-exempt securities. Realized losses of $7.1 million on equity securities related primarily to the sale of equity positions where changes in government policy or business conditions, in our opinion, greatly diminished future business prospects.

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We regularly monitor our investment portfolio for declines in value that are other-than-temporary, an assessment which requires significant management judgment. Among the factors considered by management are the nature of the investment, severity and length of decline in fair value, events impacting the issuer, overall market conditions, and our intent and ability to hold securities until recovery. When a security in our investment portfolio has been determined to have a decline in fair value that is other-than-temporary, we adjust the cost basis of the security to fair value. This results in a charge to earnings as a realized loss, which is not changed for subsequent recoveries in fair value. Future increases or decreases in fair value, if not other-than-temporary, are included in other comprehensive income.

For the year ended December 31, 2007, we recognized $1.9 million other-than-temporary impairments compared to $5.4 million for the same 2006 period. During 2007 we recognized no other-than-temporary impairments on our fixed maturity portfolio; however, we recognized $1.9 million in realized losses related to other-than-temporary impairments within our equity portfolio. Of the $1.9 million in realized losses, $1.1 million related to two equity positions within the consumer cyclical sector impacted by the downturn in the housing industry. The remaining $0.8 million in realized losses was limited to our externally managed U.S. small cap portfolio for which we were unable to make the assertion regarding our intent to hold particular securities that were currently valued below cost until recovery in the near term. The other-than-temporary impairments recognized in 2007 were limited to these securities, based on specific facts and judgments related to these particular issuers. The 2006 write-downs related primarily to our investment in certain subordinate income notes and principal protected units representing purchased beneficial interests in securitized financial assets. We reduced the estimate of future cash flows we expected to receive from these securities in light of actual default rates of the underlying collateral securities exceeding the assumed defaults.

Gross Unrealized Investment Gains and Losses

A review of our investment portfolio at December 31, 2007 determined there were no individual investments with an unrealized loss that had a fair value significantly below cost continually for more than one year. There were also no individual material securities with an unrealized holding loss at December 31, 2007.

The following table provides detailed information on our available-for-sale investment portfolio for our gross unrealized gains and losses at December 31, 2007.

($ millions, except number of positions) Investment Category:	Cost or amortized cost		Gross unrealized holding gains		Number of gain positions	Gross unrealized holding losses			Number of loss positions	Fair Value
Fixed Maturities:
U.S. Treasury securities	$	90.9	$	2.2	34	$	(0.1	)	6	$	93.0
States and political subdivisions		1,432.7		23.6	469		(4.3	)	181		1,452.0
Corporate securities		10.7		0.3	11		—		1		11.0
Mortgage-backed securities of U.S. Gov. Agencies		188.6		2.6	23		(1.8	)	48		189.4
Total fixed maturities		1,722.9		28.7	537		(6.2	)	236		1,745.4
Equity Securities:
Consumer		65.3		18.1	78		(1.7	)	5		81.7
Technologies		24.7		5.4	71		(0.3	)	2		29.8
Pharmaceuticals		8.4		0.6	9		(0.2	)	2		8.8
Financial services		35.6		7.9	79		(0.7	)	3		42.8
Manufacturing and other		76.2		15.4	149		(0.5	)	4		91.1
Total equity securities		210.2		47.4	386		(3.4	)	16		254.2
Other invested assets		20.1		0.3	2		(0.1	)	2		20.3
Total investments	$	1,953.2	$	76.4	925	$	(9.7	)	254	$	2,019.9

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Other Income Statement Items

Interest expense on our debt was $7.6 million and $7.4 million for the years ended December 31, 2007 and 2006, respectively.

Our effective tax rate is largely affected by the amount of underwriting profit or loss and net realized investment gains or losses that are taxed at approximately 35% relative to the amount of net investment income at its effective tax rate. For the year ended December 31, 2007, the effective tax rate was 23.3% compared to 25.5% for the same 2006 period. As previously discussed, the effective tax rate on net investment income declined to 13.2% for 2007 versus 16.1% for 2006.

2006 Compared to 2005

Income before federal income taxes decreased $10.3 million (6.0%) to $161.7 million in 2006 from 2005. The most significant factors contributing to this decrease relate to a decline in our revenues, specifically our premiums, an increased level of catastrophe losses and the recognition of share-based compensation expenses beginning in 2006. Catastrophe losses in 2006 were $91.2 million compared to $72.7 million in 2005. Share-based compensation expense, which we began to recognize in 2006, was $6.6 million. Each of these components is discussed more fully below.

Insurance Segments

The following tables provide a summary of our insurance segments’ SAP underwriting gain and SAP combined ratio for the years ended December 31, 2006 and 2005:

($ millions)	2006
	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Written premiums	$	612.8		$	406.7		$	1,019.5
Earned premiums		614.8			409.0			1,023.8
Losses and loss expenses		389.6	63.4		192.4	47.0		582.0	56.8
Underwriting expenses		180.4	29.4		155.1	38.1		335.5	32.9
SAP underwriting profit And SAP combined ratio	$	44.8	92.8	$	61.5	85.1	$	106.3	89.7

($ millions)	2005
	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Written premiums(1)	$	651.0		$	418.6		$	1,069.5
Earned premiums		641.0			409.3			1,050.3
Losses and loss expenses		383.7	59.9		230.2	56.1		613.8	58.5
Underwriting expenses		184.9	28.4		152.6	36.5		337.6	31.6
SAP underwriting profit And SAP combined ratio	$	72.4	88.3	$	26.5	92.6	$	98.8	90.1

⁽¹⁾ Includes approximately $16.0 million and $8.0 million of unearned premium transferred on personal and business segments, respectively, in connection with the addition of the Meridian Security and Meridian Citizens Mutual to the Pooling Arrangement as of January 1, 2005.

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Revenue

Personal Insurance Segment Revenue

The following table provides a summary of written and earned premium, net of reinsurance, by major product line of business for our personal insurance segment for the years ended December 31, 2006 and 2005:

($ millions)	2006		2005(1)	% Change
Personal insurance segment:
Net Written Premium
Standard Auto	$	361.7	379.7	(4.7	)
Nonstandard Auto		42.4	48.9	(13.3	)
Homeowners		186.1	183.2	1.6
Other personal		22.6	23.2	(2.6	)
Total personal	$	612.8	635.0	(3.5	)
Net Earned Premium
Standard auto	$	362.1	385.7	(6.1	)
Nonstandard auto		44.8	53.1	(15.6	)
Homeowners		185.2	178.7	3.6
Other personal		22.7	23.5	(3.4	)
Total personal	$	614.8	641.0	(4.1	)

⁽¹⁾ Net written premium amounts for 2005 have been adjusted to exclude the unearned premium transferred in connection with the addition of the Meridian Security and Meridian Citizens Mutual to the Pooling Arrangement as of January 1, 2005.

Competitive pressures within the standard personal auto market are impacting the writing of new and renewal business and putting downward pressure on our existing rates. Standard personal auto, which accounts for 35.5% of our book of business, continues to be our most profitable line of business. As a result of the competitive market, we reduced our rates approximately 2.7% during 2006 in order to remain competitive without significantly compromising our profitability.

We continue to focus on attracting new business to our standard personal auto line of business. The primary product contributing to new business in standard personal auto is our CustomFit^SM product which uses a multi-variate rating approach that broadens the underwriting and eligibility guidelines for new customers. Having price points for a larger percentage of the personal lines market is expected to improve new business opportunities. As of the end of 2006, we had implemented CustomFit^SM in 19 states, which represented approximately 80% of our standard personal auto written premium volume. Since introducing CustomFit^SM in December 2005, we have seen a significant improvement in our net written premium production trend for new business.

Net written premiums in nonstandard personal auto decreased $6.5 million (13.3%) in 2006. However, nonstandard personal auto is beginning to stabilize; in the fourth quarter of 2006, new business increased 14.6% compared to the same period in 2005. The impact of target rate decreases coupled with the introduction of new discounts has produced what appears to be an improving premium situation.

The personal auto market appears to be changing quickly and dramatically. Many companies are moving to a single auto product (such as our CustomFit^SM) which can accommodate most personal auto risks. As a result, the delineation between standard and nonstandard auto insurance is becoming blurred. The new auto programs accepting a broader range of risks has limited and is expected to continue to limit the nonstandard auto market for us and other insurers.

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We believe independent agents value ease of doing business and make it an important factor in their choice of insurance companies when quoting personal auto products to their customers. To assist in this area, in 2006, we entered into agreements with two major comparative rating companies. These companies’ products allow agents to receive rate quotes from multiple insurance companies by entering the rating information only one time. We worked diligently in the fourth quarter with these two vendors with a launch date for implementation expected in early 2007. We believe agents will quote and write more personal standard and nonstandard auto with us as a result of a more efficient quoting process combined with more competitive rates resulting from the ongoing introduction of CustomFit^SM for standard auto and new policy discounts introduced in 2006 for nonstandard auto.

Homeowners net written premium grew 1.6% in 2006. We are undertaking new homeowners pricing and product initiatives, such as a new home purchase discount and an expanded new home discount that will complement our CustomFit^SM rollout and should position us well for the future. The competitive pressures that have impacted personal auto have also extended to homeowners. In general, our homeowner rate level was impacted (2.0) % due to downward rate changes.

During 2006, we enhanced our personal lines point of sale portal, netXpress^SM. This is the system our agencies use to send us business electronically. We now have real time, on-line information access capabilities that streamline the new business quote and issue process. Approximately 94% of our personal auto and homeowner lines new business was submitted electronically in 2006 compared to 84% in 2005. In addition in 2006, 78% of all personal auto and homeowner lines policy changes came to us electronically from agents.

Business Insurance Segment Revenue

The following table provides a summary of written and earned premium, net of reinsurance, by major product line for our business insurance segment for the years ended December 31, 2006 and 2005:

($ millions)	2006		2005(1)	% Change
Business insurance segment:
New Written Premium
Commercial auto	$	98.7	102.2	(3.4	)
Commercial multi-peril		87.8	86.6	1.4
Fire & allied lines		83.1	84.8	(2.0	)
Other & product liability		77.2	76.9	0.4
Workers’ compensation		34.3	34.2	0.3
Other commercial		25.6	25.9	(1.2	)
Total business	$	406.7	410.6	(0.9	)
Net Earned Premium
Commercial auto	$	100.3	103.2	(2.8	)
Commercial multi-peril		87.5	84.6	3.4
Fire & allied lines		84.2	84.8	(0.7	)
Other & product liability		77.5	76.7	1.0
Workers’ compensation		33.8	34.5	(2.0	)
Other commercial		25.7	25.5	0.8
Total business	$	409.0	409.3	(0.1	)

⁽¹⁾ Net written premium amounts for 2005 have been adjusted to exclude the unearned premium transferred in connection with the addition of the Meridian Security and Meridian Citizens Mutual to the Pooling Arrangement as of January 1, 2005.

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Our business insurance book of business continues to be impacted by rate competition as well as ease of doing business issues. Commercial auto net written premiums decreased 3.4% in 2006. However, commercial multi-peril and workers’ compensation net written premiums reflected positive growth. In general, during 2006 the overall impact to net written premiums from business insurance line rate changes was a slight decrease.

We are pursuing initiatives that we anticipate will generate additional business insurance premium production over the long term. One of our current strategic priorities is to develop a web-based rating system for the three products that generate the most new business submissions. In addition, we are developing more sophisticated pricing models to further segment our business insurance accounts, which we anticipate will improve our growth opportunities while still achieving our profit targets. We are also emphasizing a total account underwriting approach in which we offer additional products to our existing accounts. We are developing product enhancements that we believe will result in increased sales while pursuing process efficiencies to deliver product and pricing developments to the market more quickly. During 2006, we focused on introducing a more marketable pricing structure without forfeiting underwriting profits. Finally, we increased field underwriting authority which quickens our response to our agents.

For both our personal and business products, we continue to emphasize that we will not compromise underwriting profitability for top line growth. We believe that we can implement periodic rate changes in most states and remain an attractive market to our policyholders and independent agents by stressing the strengths we bring to the marketplace. These strengths include stability, financial soundness, prompt and fair claims service, and user-friendly technology which help agents do business with us and provide substantial value to our customers.

Losses and Expenses

Our GAAP loss and LAE ratios were 57.4% and 58.4% for the years ended December 31, 2006 and 2005, respectively. Our auto and liability lines produced better loss results during 2006 while the property lines deteriorated due mostly to catastrophes. Our personal and commercial auto lines continued to produce favorable GAAP loss and LAE ratios benefiting from a combination of cumulative rate changes taken over the past several years along with improvement in claim frequency and severity.

The following table presents the provision for losses and loss expenses for those claims occurring in the current calendar year and prior years, along with the GAAP loss and LAE ratio for the years 2006 and 2005, respectively:

($ millions)	2006			% GAAP loss and LAE		2005			% GAAP loss and LAE
Provision for losses and loss expenses occurring:
Current year	$	659.3		64.4		$	657.7		62.6
Prior years		(71.7	)	(7.0	)		(44.3	)	(4.2	)
Total losses and loss expenses	$	587.6		57.4		$	613.4		58.4

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A tabular presentation of the 2006 $71.7 million favorable development broken down by accident year is shown below.

($ millions) Accident year	Current year development of ultimate liability
	Redundancy /(Deficiency)
1996 and prior	$	(2.8	)
1997		(0.1	)
1998		(0.1	)
1999		0.8
2000		(3.9	)
2001		1.3
2002		6.7
2003		11.8
2004		23.2
2005		34.8
Total	$	71.7

Normal fluctuations and uncertainty associated with loss reserve development and claim settlement contributed to favorable development in the respective calendar years. The favorable development of $71.7 million in 2006 came primarily from accident years 2003-2005. The following are the notable items contributing to the 2006 development:

• We hold ceded loss reserves in anticipation of transferring liabilities to reinsurers and other pools and associations. In 2006, ceded loss reserves developed favorably by $23.7 million, meaning the actual ceded losses were above anticipated levels. Historically, we have had less ceded loss activity because our reinsurance retention levels are generally high enough to exclude most claims. This favorable development occurred primarily in the auto and commercial multi-peril lines.

• Favorable development at the product level is primarily from the personal auto and commercial auto liability lines, where current loss projections using more mature claim data resulted in lower expected average claim severities than past projections. The impact is $24.7 million for these two lines combined.

• Adjusting and other expense reserves accounted for approximately $13.5 million of prior year reserve change. These expense reserves have a proportional relationship to the overall claim inventory and held reserves by accident year, as they move up or down in relation to carried loss reserves. Since reserves decreased for the prior accident years, the expense reserves declined in a similar fashion.

• The remaining favorable development is spread across several lines of business and is generally the result of having fewer claims emerge and lower claim severity, than anticipated in the estimates developed as of December 31, 2005.

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The following table provides our insurance segments’ comparative SAP loss and LAE ratios for the years ended December 31, 2006 and 2005:

	2006	2005	Improve (Deteriorate)
Personal insurance segment:
Standard auto	57.0	59.3	2.3
Nonstandard auto	60.0	64.4	4.4
Homeowners	78.1	62.6	(15.5	)
Other personal	51.1	40.6	(10.5	)
Total personal	63.4	59.9	(3.5	)
Business insurance segment:
Commercial auto	40.3	54.2	13.9
Commercial multi-peril	48.6	59.8	11.2
Fire & allied lines	58.3	61.1	2.8
Other & product liability	37.5	48.6	11.1
Workers’ compensation	57.5	66.9	(9.4	)
Other commercial	46.3	43.5	(2.8	)
Total business	47.0	57.4	10.4
Total SAP personal and business	56.8	58.4	1.6

Catastrophes added 8.9 points ($91.2 million) to the 2006 loss ratio compared to 6.9 points ($72.7 million) for 2005. During 2006, catastrophe losses included $51.8 million (5.1 points) in losses relating to three major Midwestern storms that occurred in April. In 2005, hurricanes accounted for $42.9 million (4.1 points) of total catastrophe losses.

As of January 1, 2006, we began recognizing compensation expense associated with share-based awards granted to employees and non-employee directors within our financial statements in accordance with SFAS 123(R). Consequently, our 2006 expenses include additional share-based awards of $6.6 million associated with the adoption of SFAS 123(R). Prior to January 1, 2006, we accounted for these awards in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations. We adopted the guidance provided by SFAS 123(R) under the modified prospective transition method. Under this transition method, share-based compensation expense in 2006 includes the portion vesting in the period for (1) all share-based awards granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB Statement SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and (2) all share-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

Prior to January 1, 2006, we provided pro-forma disclosures as required under SFAS 123. The reader is referred to the complete disclosure on share-based awards in Note 12, Share-Based Awards, of the Notes to our Consolidated Financial Statements included in this Form 10-K. Our 2005 pro-forma earnings, as reported in December 31, 2005 Form 10-K, included $0.14 diluted per share of share-based compensation expense. For the year ended December 31, 2006, the comparable share-based awards are $0.12 diluted per share. The expense for our share-based awards is based on their fair value at date of grant and amortized over the vesting period. At December 31, 2006, there was $5.6 million of total unrecognized share-based compensation expense related to non-vested service based awards. This expense is expected to be recognized as follows: $3.5 million in 2007; $1.7 million in 2008; and $0.4 million in 2009. Unearned share-based compensation is amortized over the vesting period for the particular grant and is recognized as a component of loss and loss adjustment expenses and acquisition and operating expenses in a manner consistent with other employee compensation in the accompanying Consolidated Statements of Income.

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The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes closed-form pricing model. The pricing model requires assumptions such as the expected life of the option and expected volatility of our stock over the expected life of the option, which significantly impacts the assumed fair value. We use historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future periods.

The GAAP expense ratio was 34.0% and 31.7% for the years ended December 31, 2006 and 2005, respectively. The increase in our 2006 expense ratio is due in part to lower premiums in 2006 compared to 2005, expenses associated with share-based awards under SFAS 123(R) (see previous discussion above), as well as expenses related to our incentive programs, both agency and employee. These incentive programs are directly related to our loss experience. We do not anticipate meaningful reductions in our expense ratio during 2007 as it relates to our incentive compensation programs as well as our investment in new technologies and products as we position ourselves to be more competitive in the market place.

Investment Operations Segment

Composition of Investment Portfolio

The following table provides the composition of our available-for-sale investment portfolio at December 31, 2006 and 2005, respectively:

($ millions)	2006				2005
Fixed maturities	$	1,647.4	85.0	%	$	1,617.3	86.2	%
Equity securities		284.2	14.7			255.6	13.6
Other invested assets		4.5	0.3			3.8	0.2
Total investments	$	1,936.1	100.0	%	$	1,876.7	100.0	%

The amortized cost and fair value of fixed maturities at December 31, 2006, by contractual maturity, are summarized as follows:

($ millions)	Amortized Cost		Fair Value
Due in 1 year or less	$	8.4	8.3
Due after 1 year through 5 years		60.7	60.9
Due after 5 years through 10 years		380.5	388.7
Due after 10 years		976.1	987.1
Subtotal		1,425.7	1,445.0
Mortgage-backed securities		204.9	202.4
Total	$	1,630.6	1,647.4

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.

In 2005 and part of 2006, we participated in a securities lending program whereby certain fixed maturity and equity securities from our investment portfolio were loaned to other institutions for short periods of time. We required collateral, equal to 102% of the market value of the loaned securities. The collateral was invested by the lending agent, in accordance with our guidelines, generating investment income, net of applicable fees. We accounted for this program as a secured borrowing and recorded the collateral held and corresponding liability to return the collateral on our balance sheet. During the second quarter of 2006, we terminated our participation in

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this program and there were no securities on loan or related collateral held as of September 30, 2006. At December 31, 2005, the amount of collateral held was approximately $99.0 million and the amount of securities lent was $96.0 million.

We manage our equity portfolio by investing in a large, but manageable, number of stocks from many different industries. This diversification across companies and industries reduces volatility in the value of the equity portfolio. We invest only in stocks that currently pay a dividend. As of December 31, 2006, our equity portfolio consisted of approximately 100 different stocks. The largest single position was 2.8% of the equity portfolio based on fair value and the top ten positions were equal to approximately 20% of the equity portfolio. The chart below shows the industry sector breakdown of our equity portfolio versus the S&P 500 Index based on fair value as of December 31, 2006.

Industry Sector	Equity Portfolio % of Fair Value	S&P 500 Index % of Fair Value
Basic Materials	1.7	2.9
Communications	4.1	11.6
Consumer Cyclical	22.7	8.2
Consumer Non-cyclical	12.0	20.0
Energy	1.8	9.9
Financial	30.3	22.2
Industrial	20.5	11.1
Technology	6.9	10.6
Utilities	—	3.5
Total	100.0	100.0

Our equity portfolio consists of large-cap, value-oriented stocks. Therefore, when large-cap stocks and/or value-oriented stocks perform well our portfolio typically performs well. Conversely, when growth stocks outperform value stocks and/or small- to mid-cap stocks outperform large-cap stocks, our portfolio does not perform as well.

Investment Operations Revenue

Net investment income increased $4.4 million (5.6%) to $83.1 million in 2006 compared to the same 2005 period. Strong underwriting results in 2005 and 2006 contributed favorably to cash flows, which allowed us to increase the amount of our invested assets during 2006. Total cost of invested assets at December 31, 2006 and 2005 was $1,940.7 million and $1,856.5 million, respectively. Also impacting our 2006 results was the fact that STFC paid off its $45.5 million line of credit with State Auto Mutual at the end of 2005, which had the effect of decreasing net investment income for the year by approximately $2.0 million.

($ millions)	Year Ended December 31
	2006			2005
Gross investment income:
Fixed maturities	$	73.6		72.8
Equity securities		5.1		4.0
Other		6.1		3.6
Total gross investment income		84.8		80.4
Less: Investment expenses		1.7		1.7
Net investment income	$	83.1		78.7
Average invested assets (at cost)	$	1,891.6		1,802.5
Annualized investment yield		4.4	%	4.3
Annualized investment yield, after tax		3.7	%	3.6

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We continue to allocate new monies and reinvestments to tax-exempt bonds, targeting an allocation of 70% of our total portfolio, in an effort to maximize our after tax investment income. During the fourth quarter of 2006, the Investment Committee of the Board of Directors of each of our insurance subsidiaries approved a $50.0 million repositioning of the current taxable and tax-exempt holdings intending to reach the targeted 70% tax-exempt allocation at a quicker pace. At December 31, 2006, tax-exempt bonds accounted for 62% of our total portfolio versus 58% at December 31, 2005. Our after tax net investment income grew to $69.8 million (16.1% effective tax rate) in 2006 compared to $65.2 million (17.3% effective tax rate) in 2005.

Realized gains and losses for the year ended December 31, 2006, are summarized as follows:

($ millions)	Realized Gains/Losses		Fair Value at Sale
Realized gains:
Fixed maturities	$	1.8	130.1
Equity securities		15.6	72.0
Total realized gains		17.4	202.1
Realized losses:
Fixed maturities		4.8	41.3
Equity securities		7.0	31.8
Total realized losses		11.8	73.1
Net realized gains on investments	$	5.6	275.2

Most of the realized gains during 2006 were derived from the equity segment of the portfolio. Equity sales were executed during this time for various reasons, including achieving our price target. The proceeds from these sales were mostly reinvested into equity securities of other companies. The realized gains on the fixed maturity portfolio were achieved by selling shorter-term municipal bonds and subsequently reinvesting those funds into longer term municipal bonds.

We recognized $5.4 million in other-than-temporary impairments in 2006 compared to $1.6 million in 2005. In 2006, we recognized $3.8 million of other-than-temporary impairments related to our investment in certain subordinate income notes and principal protected units representing purchased beneficial interests in securitized financial assets. We reduced our estimate of future cash flows we expect to receive from these securities in light of actual default rates of the underlying collateral securities in excess of assumed defaults. Our carrying value of these securities at December 31, 2006 was $1.6 million. We also recognized $1.6 million of other-than-temporary impairment related to four of our equity holdings within the consumer sector. All four of these equity positions were sold during 2006. The other-than-temporary impairments recognized in 2006 were limited to these securities, based on specific facts and judgments related to these particular issuers.

Gross Unrealized Investment Gains and Losses

A review of our investment portfolio at December 31, 2006 determined there were no individual investments with an unrealized holding loss that had a fair value significantly below cost continually for more than one year. There were also no individual material securities with an unrealized holding loss at December 31, 2006.

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The following table provides detailed information on our available-for-sale investment portfolio for our gross unrealized gains and losses, adjusted for investments with other-than-temporary impairment at December 31, 2006:

($ millions, except number of positions) Investment Category	Cost or amortized cost		Gross unrealized holding gains		Gain number of positions	Gross unrealized holding losses			Loss number of positions	Fair value
Fixed Maturities:
U.S. Treasury securities & Obligations	$	180.1	$	0.6	19	$	(2.8	)	58	$	177.9
States & political subdivisions		1,229.8		23.7	440		(2.5	)	124		1,251.0
Corporate securities		15.8		0.4	11		(0.1	)	2		16.1
Mortgage-backed securities of U.S. Gov. Agencies		204.9		1.7	12		(4.2	)	59		202.4
Total fixed maturities		1,630.6		26.4	482		(9.6	)	243		1,647.4
Equity Securities:
Consumer		69.4		15.8	25		(0.2	)	1		85.0
Technologies		23.3		3.2	7		(0.9	)	3		25.6
Pharmaceuticals		6.6		0.4	4		—		—		7.0
Financial services		64.8		22.9	24		(0.1	)	3		87.6
Manufacturing & other		66.7		12.3	24		—		2		79.0
Total equity securities		230.8		54.6	84		(1.2	)	9		284.2
Other invested assets		4.0		0.5	4		—		—		4.5
Total	$	1,865.4	$	81.5	570	$	(10.8	)	252	$	1,936.1

Other Income Statement Items

Interest expense in 2006 was $7.4 million compared to $8.8 million in 2005. The decrease in interest expense was largely due to our repayment to State Auto Mutual of a $45.5 million note at the end of 2005. The amount of interest expense related to this $45.5 million note was $1.6 million in 2005. For a further discussion of our debt arrangements, see “Liquidity And Capital Resources—Borrowing Arrangements” included in this Item 7.

The effective tax rate is largely affected by the amount of underwriting profit or loss and net realized investment gains or losses that are taxed at approximately 35% relative to the amount of net investment income at its effective tax rate. For 2006, the effective tax rate was 25.5% compared to 26.8% for 2005. As previously discussed, the effective tax rate on net investment income has declined to 16.1% in 2006 compared to 17.3% in 2005, primarily due to increasing our tax-exempt municipal bond holdings throughout 2006.

LIQUIDITY AND CAPITAL RESOURCES

General

Liquidity refers to our ability to generate adequate amounts of cash to meet our needs for both long-term and short-term cash obligations as they come due. Our significant sources of cash are premiums, investment income, investment sales and the maturity of fixed security investments, as well as funds available under our Credit Facility (as defined below). 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 can vary due to uncertainties regarding settlement of large losses or catastrophe events. As a result, we continually monitor our investment and reinsurance programs to ensure they

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are appropriately structured to enable the insurance subsidiaries to meet anticipated short and long-term cash requirements without the need to sell investments to meet fluctuations in claim payments.

We maintain a portion of our investment portfolio in relatively short-term and highly liquid investments to ensure the immediate availability of funds to pay claims and expenses. At December 31, 2007 and 2006, we had $70.9 million and $73.4 million, respectively, in cash and cash equivalents, and $2,019.9 million and $1,936.1 million, respectively, of total available-for-sale investments at fair value. 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 7.

Our insurance subsidiaries must have adequate liquidity to ensure that their cash obligations are met. However, because the STFC Pooled Companies participate in the Pooling Arrangement, they do not have the daily liquidity concerns normally associated with an insurance company. This is due to the fact that, under the terms of the Pooling Arrangement, State Auto Mutual receives all premiums and pays all losses and expenses associated with the insurance business produced by the pool participants and then settles the intercompany balances generated by these transactions with the participating companies within 45 days following each quarter end.

When settling the intercompany balances, State Auto Mutual provides the pool participants with full credit for the premiums written and net losses paid during the quarter and retains all receivable amounts from insureds and agents and reinsurance recoverable on paid losses from unaffiliated reinsurers. Any receivable amounts that are ultimately deemed to be uncollectible are charged-off by State Auto Mutual and allocated to the pool member on the basis of pool participation. As a result, we have an off-balance sheet credit—risk related to the balances due to State Auto Mutual from insureds, agents and reinsurers, which are offset by the unearned premium from the respective policies. 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. Based on historical data, this credit-risk exposure is not considered to be material to our financial position, though the impact to income on a quarterly basis may be material. 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. The amounts deemed uncollectible by State Auto Mutual and allocated to the STFC Pooled Companies are included in Other Expenses in the accompanying Statements of Income.

The State Auto Group’s reliance on ceded reinsurance is not significant in comparison to the State Auto Group’s total statutory surplus or our total financial position. To minimize the risk of reinsurer default, the State Auto Group cedes only to third-party reinsurers who are rated A- or better by A.M. Best 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. For a discussion of our reinsurance arrangements, see “Reinsurance Arrangements” included in this Item 7.

Net cash provided by operating activities was $121.7 million, $93.5 million and $226.9 million for 2007, 2006 and 2005, respectively. The significant sources of operating cash flows are derived from underwriting operations and investment income. The positive cash flows over the three year period is largely due to favorable underwriting and investment income cash flows, offset by increases in cash paid on estimated federal income taxes, interest expense and cash contributions to our defined benefit pension plan. Cash from operations in 2007 increased $28.2 million over 2006 primarily due to a reduction in claim payments from a lower level of catastrophe losses in 2007 compared to 2006 offset partially by an increase in taxes paid. Cash from operations for 2006 decreased from 2005 due to our decline in net written premiums as previously discussed along with an increase in the amount of loss and loss expenses paid from the increased level of catastrophe losses between the two years. In addition, 2005 benefited from the $54.0 million received by the STFC Pooled Companies in connection with adding Meridian Security and Meridian Citizens Mutual to the Pooling Arrangement. Over the last three years, operating cash flows have been sufficient to meet our operating needs while providing increased opportunities for investment. However, should our written premium decline or paid losses increase significantly our cash flows from operations could be impacted requiring us to liquidate investments.

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During 2007, 2006 and 2005, as permitted by regulations of the Internal Revenue Service, we made cash contributions of $11.5 million, $10.0 million and $7.5 million, respectively, to our defined benefit pension plan on behalf of our employees. The actuarially determined contribution to our defined benefit pension plan ranges from the minimum amount we would be required to contribute to the maximum amount that would be tax deductible. Amounts contributed in excess of the minimum are deemed voluntary while amounts in excess of the maximum would be subject to an excise tax and may not be deductible for tax purposes. Amounts paid in each of these three years were within the minimum and maximum funding amounts that would be deductible for tax purposes. The actuarially determined funding amount to the Pension Plan is generally not determined until the second quarter with respect to the contribution year, though we currently expect to make a cash contribution to our defined benefit pension plan of approximately $12.0 million during 2008. For a further discussion regarding our defined benefit pension plan see “Employee Benefit Plans” included in this Item 7.

Net cash used in investing activities was $86.1 million, $43.2 million and $212.5 million for 2007, 2006 and 2005, respectively.

The increase in 2007 versus 2006 is principally the result of:

• a greater amount of cash and cash equivalents available to invest at the beginning of 2007 versus 2006 ($73.4 million in 2007 compared to $28.7 million in 2006);

• an increase in the level of cash provided from operations between the two years.

The decline in 2006 versus 2005 is principally the result of:

• a lesser amount of cash and cash equivalents available to invest at the beginning of 2006 versus 2005 ($28.7 million in 2006 compared to $64.3 million in 2005);

• $54.0 million in cash available from operations in 2005 in connection with adding Meridian Security and Meridian Citizens Mutual to the Pooling Arrangement; and

• a decline in the 2006 level of cash provided by operating activities as described above.

Our financing activities for 2007, 2006 and 2005 produced net cash outflows of $38.0 million, $5.6 million, and $50.0 million, respectively. The following contributed to the fluctuations between years:

• In December 2005, we repaid a $45.5 million line of credit from State Auto Mutual.

• Dividends paid to shareholders totaled $20.5 million, $15.4 million and $8.6 million for 2007, 2006 and 2005, respectively.

• $22.1 million in cash used to repurchase common shares under our stock repurchase program. See “Other Capital Transactions” below.

The increase in dividends paid between the years is due to the following:

• In July 2005, State Auto Mutual’s waiver of its receipt of STFC dividends expired and was not renewed. State Auto Mutual was paid $13.2 million, $12.4 million and $2.4 million in dividends for 2007, 2006 and 2005, respectively; and

• Dividends paid per common share have increased over the three year period: $0.50 in 2007; $0.38 in 2006 and $0.27 in 2005.

Other Capital Transactions

On August 17, 2007, State Auto Financial’s Board of Directors authorized the repurchase, from time to time, of up to 4.0 million of its common shares, or approximately 10% of State Auto Financial’s outstanding shares, over a period extending to and through December 31, 2009. State Auto Financial will repurchase shares from State Auto Mutual in amounts that are proportional to the respective current ownership percentages of State

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Auto Mutual, which is approximately 64%, and other shareholders. Our total share repurchase activity in 2007 was 0.8 million common shares at an average repurchase price of $27.21 per share for a total of $22.1 million.

On March 7, 2008, the Board of Directors of State Auto Financial declared a quarterly cash dividend of $0.15 per common share, payable on March 31, 2008, to stockholders of record on March 17, 2008. This is the 67th consecutive quarterly cash dividend declared by State Auto Financial’s Board since we had our initial public offering of common stock on June 28, 1991. We have increased cash dividends to stockholders for fifteen consecutive years.

To fund these capital transactions and provide additional working capital to State Auto Financial, on September 12, 2007, State Auto P&C and Milbank declared cash dividends of $40.0 million and $10.0 million, respectively, to State Auto Financial. The cash transfer of dividends was completed in October 2007.

Other Events

On February 14, 2008, we issued a press release announcing preliminary estimates of 2008 catastrophe storm activity through February 8, 2008. This press release disclosed our expectation that first quarter 2008 earnings will include between $32.0 and $36.0 million in pre-tax catastrophe losses related to unusual January and early February storm activity. Severe wind and tornado activity which impacted the Midwest during the first five weeks of this year are expected to contribute significantly more losses to our first quarter 2008 results than are normal. Over the past five years, we have experienced an average of $6.7 million in catastrophe losses during the first quarter. We reported $8.1 million in catastrophe losses for the first quarter of 2007. While the 2008 January and February catastrophe storm losses will be significant to our first quarter results, we do not expect these losses to have a significant impact on our overall financial position.

Borrowing Arrangements

The following provides an overview of our borrowing arrangements during 2007 and outstanding at December 31, 2007:

Credit Agreement

Through July 12, 2007, State Auto Financial had a credit agreement with a syndicate of lenders which provided for a $100.0 million five-year unsecured revolving credit facility. State Auto Financial did not borrow any funds under the credit facility.

On July 12, 2007, State Auto Financial terminated its then-current credit agreement and entered into a new credit agreement (“Credit Agreement”) with a syndicate of lenders which provides for a $200.0 million five-year unsecured revolving credit facility (“Credit Facility”). During the term of the Credit Facility, we have the right to increase the total facility to a maximum total facility amount of $250.0 million, provided that no event of default has occurred and is continuing. While the Credit Facility will be available for general corporate purposes, including working capital, acquisitions and liquidity purposes, we presently intend to keep $100.0 million of the Credit Facility available in the event there is a need to fund losses under the catastrophe reinsurance program with State Auto P&C. For a discussion of our catastrophe reinsurance arrangements, see the “Reinsurance Arrangements” section included in this Item 7. The Credit Facility provides for interest-only payments during its term, with principal due in full at maturity. Interest is based on either a London interbank market rate or a base rate plus a calculated margin amount. The Credit Agreement contains certain covenants, including financial covenants that require us to maintain a minimum net worth and not exceed a certain debt to capitalization ratio. As of December 31, 2007, State Auto Financial had not made any borrowings and was in compliance with all of the covenants under the Credit Agreement.

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Senior Notes

In 2003, State Auto Financial issued $100.0 million of unsecured Senior Notes due November 2013. The Senior Notes bear interest at a fixed rate of 6.25% per annum, which is payable each May 15 and November 15. The Senior Notes are general unsecured obligations ranking senior to all existing and future subordinated indebtedness and equal with all existing and future senior indebtedness. The Senior Notes are not guaranteed by any of our subsidiaries and thereby are effectively subordinated to all our subsidiaries’ existing and future indebtedness. As of December 31, 2007, we were in compliance with all covenants related to the Senior Notes.

Trust Securities

State Auto Financial’s Delaware business trust subsidiary (the “Capital Trust”) issued $15.0 million liquidation amount of capital securities in 2003, due 2033. In connection with the Capital Trust’s issuance of the capital securities and the related purchase by State Auto Financial of all of the Capital Trust’s common securities (liquidation amount of $0.5 million), State Auto Financial issued to the Capital Trust $15.5 million aggregate principal amount of unsecured Floating Rate Junior Subordinated Debt Securities due 2033 (the “Subordinated Debentures”). The sole assets of the Capital Trust are the Subordinated Debentures and any interest accrued thereon. Interest on the Capital Trust’s capital and common securities is payable quarterly at a rate equal to the three-month LIBOR rate plus 4.20%, adjusted quarterly. The applicable interest rates for the periods January 2005 through December 31, 2007 ranged from 8.61% to 9.78%.

Notes Payable Summary

At December 31, 2007, our notes payable are summarized as follows:

($ millions)	Carrying Value		Fair Value		Interest Rate
Senior Notes due 2013: issued $100.0 million, November 2003 with fixed interest	$	102.5	$	103.6	6.25	%
Subordinated Debentures due 2033: issued $15.5 million, May 2003 with variable interest adjusting quarterly		15.5		15.5	9.32	%
Total Notes Payable	$	118.0	$	119.1

Related to our notes payable, our primary market risk exposure is to the change in interest rates and our credit rating. For a discussion regarding our credit ratings see “Credit and Financial Strength Ratings” included in this Item 7. Based upon the notes payable carrying value at December 31, 2007, we had $15.5 million notes payable with variable interest and $102.5 million notes payable with interest fixed at 6.25%, which equated to approximately 13.1% variable interest debt and 86.9% fixed interest debt. Our decision to obtain fixed versus variable interest rate debt is influenced primarily by the following factors: (a) current market interest rates (b) anticipated future market interest rates (c) availability of fixed versus variable interest instruments and (d) our currently existing notes payable fixed and variable interest rate position.

See our contractual obligations table included in “Contractual Obligations”.

Reinsurance Arrangements

Members of the State Auto Group follow the customary industry practice of reinsuring a portion of their exposures and paying to the reinsurers a portion of the premiums received. Insurance is ceded principally to reduce net liability on individual risks or for individual loss occurrences, including catastrophic losses. Although reinsurance does not legally discharge the individual members of the State Auto Group from primary liability for the full amount of limits applicable under their policies, it does make the assuming reinsurer liable to the extent of the reinsurance ceded.

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During 2007, the Beacon Group was added to the State Auto Group’s reinsurance programs described below and as of January 1, 2008, the Patrons Group was added to these reinsurance programs.

The terms of the casualty excess of loss program provide that each company in the State Auto Group is responsible for the first $2.0 million of a covered loss. Coverage under the casualty excess of loss program was expanded as of July 1, 2007, so that reinsurers became responsible for 100% of a covered loss in excess of $2.0 million, up to $5.0 million of covered loss, compared to 95% under the previous program. Also, certain unusual claim situations involving bodily injury liability, property damage, uninsured motorist and personal injury protection are covered by an arrangement that provides for $10.0 million of coverage in excess of $5.0 million retention for each loss occurrence. This layer of reinsurance sits above the $3.0 million excess of $2.0 million arrangement. The rates for this reinsurance are negotiated annually.

Under our property per risk excess of loss program, each company within the our State Auto Group is responsible for the first $3.0 million of each covered loss and reinsurers are responsible for 100% of the excess over the retention up to $20.0 million of covered losses. The rates for this reinsurance are negotiated annually.

Under our property catastrophe excess of loss program, the State Auto Group retains the first $55.0 million of catastrophe loss per occurrence. Outside reinsures provide coverage for the next $80.0 million of covered loss with a 5% co-participation. The rates for this reinsurance are negotiated annually.

We also participate in an intercompany catastrophe reinsurance agreement by which State Auto P&C acts as the catastrophe reinsurer for the State Auto Group. The coverage attaches at $135.0 million of catastrophe loss per occurrence. Excess of the $135.0 million retention, this program continues to provide coverage for the next $100.0 million of covered loss. There have been no losses assumed under this agreement. The State Auto Group does not currently intend to renew this intercompany catastrophe reinsurance arrangement upon its expiration on July 1, 2008. The State Auto Group is considering other alternatives, which include securing replacement coverage from a third party reinsurer or relying upon the $100.0 million set aside under the Credit Agreement, discussed above, to fund this layer of catastrophe reinsurance.

In addition to the treaties described above, the State Auto Group is also party to treaties for workers’ compensation excess of loss and workers’ compensation catastrophe excess of loss. The terms of the workers’ compensation excess of loss program provide that each company in the State Auto Group is responsible for the first $2.0 million of covered loss. The reinsurers are responsible for 100% of the excess over $2.0 million up to $10.0 million of covered loss. Net retentions under this contract may be submitted to the casualty excess of loss program, subject to a limit of $2.0 million per loss occurrence. The rates for this reinsurance are negotiated annually.

The workers’ compensation catastrophe excess of loss treaty provides an additional layer of excess of loss reinsurance for workers’ compensation losses involving multiple workers. Subject to $10.0 million of retention, reinsurers are responsible for 100% of the excess over $10.0 million up to $20.0 million of covered loss. This coverage is subject to a “Maximum Any One Life” limit of $10.0 million. The rates for this reinsurance are negotiated annually.

The State Auto Group has also secured other reinsurance to limit the net cost of large loss events for certain types of coverage and certain companies. Included are umbrella liability losses which are reinsured up to a limit of $10.0 million with a maximum $0.6 million retention. The State Auto Group also makes use of facultative reinsurance for unique risk situations and participates in involuntary pools and associations in certain states. (Facultative reinsurance provides for a separate reinsurance agreement that is negotiated for a particular risk or insurance policy.)

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Contractual Obligations

Our significant contractual obligations as of December 31, 2007, were as follows:

($ millions)	Total		Due 1 year or less	Due 1-3 years	Due 3-5 years	Due after 5 years
Direct loss and reserves(1)	$	697.5	275.7	230.6	85.7	105.5
Notes payable(2):
Senior Notes due 2013: issued $100.0, November 2003 with fixed interest(3)	$	100.0	—	—	—	100.0
Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest(4) adjusting quarterly		15.5	—	—	—	15.5
Total notes payable	$	115.5	—	—	—	115.5
Interest payable(2):
Senior Notes due 2013: issued $100.0, November 2003 with fixed interest(3)	$	37.6	6.3	12.5	12.5	6.3
Subordinated Debentures due 2033: issued $15.5, May 2003 with variable interest(4) adjusting quarterly		35.2	1.4	2.8	2.8	28.2
Total interest payable	$	72.8	7.7	15.3	15.3	34.5
Postretirement benefits	$	59.5	4.0	9.0	10.8	35.7
Pension funding(5)	$	83.7	—	20.8	20.5	42.4
Total	$	1,029.0	287.4	275.7	132.3	333.6

⁽¹⁾ We derived expected payment patterns separately for the direct loss and ALAE reserves. Amounts included the STFC Pooled Companies net additional share of transactions assumed from State Auto Mutual through the Pooling Arrangement. For a reconciliation of management’s best estimate see “Loss and Loss Expense Reserves” included in this Item 7. These patterns were applied to the December 31, 2007, loss and ALAE payable to generate estimated annual incremental loss and ALAE payments for each subsequent calendar year. These amounts are based on historical payment patterns and do not represent actual contractual obligations. The actual payment amounts and the related timing of those payments could differ significantly from these estimates.

⁽²⁾ For a discussion of these debt instruments, see “Liquidity and Capital Resources—Borrowing Arrangements” included in this Item 7.

⁽³⁾ The Senior Notes bear interest at a fixed rate of 6.25% per annum, which is payable each May 15 and November 15.

⁽⁴⁾ Interest on the subordinated debentures was calculated using an interest rate equal to the three-month LIBOR rate at December 31, 2007 of 4.7025% plus 4.20%, or 8.9025%.

⁽⁵⁾ These amounts are estimates of ERISA minimum funding levels for our defined benefit pension plan and do not represent an estimate of our expected contributions. See Note 9, “Pension and Postretirement Benefits Plans” to our Consolidated Financial Statements included in Item 8 of this Form 10-K for a tabular presentation of expected benefit payments from the State Auto Group’s defined benefit pension plan.

Lease and other purchase obligations of State Auto Mutual are allocated to us through the Pooling Arrangement.

Regulatory Considerations

At December 31, 2007, 2006 and 2005, each of our insurance subsidiaries was in compliance with statutory requirements relating to capital adequacy.

The National Association of Insurance Commissioners (“NAIC”) utilizes a collection of analytical tools designed to assist state insurance departments with an integrated approach to screening and analyzing the

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financial condition of insurance companies operating in their respective states. One such set of analytical tools is 12 key financial ratios that are known in the insurance industry as the “IRIS” ratios. IRIS ratios are derived from financial statements prepared on a statutory accounting basis, which are accounting practices prescribed or permitted by the insurance department with regulatory authority over our insurance subsidiaries. A “defined range” of results for each ratio has been established by the NAIC for solvency monitoring. While management utilizes each of these IRIS ratios in monitoring our insurance companies’ operating performance on a statutory accounting basis (each of our insurance subsidiaries operates within the defined range for the other measures), the net written premium to statutory surplus ratio (the “leverage ratio”) is monitored to ensure that each of our insurance subsidiaries continue to operate within the “defined range” of 3.0 to 1.0. The higher the leverage ratio, the more risk a company bears in relation to statutory surplus available to absorb losses. In considering this range, management also considers the distribution of net premiums between property and liability lines of business. A company with a larger portion of net premiums from liability lines should generally maintain a lower leverage ratio.

The statutory leverage ratios for our insurance subsidiaries at December 31, 2007, 2006 and 2005 were as follows:

Statutory Leverage Ratios(1)	2007	2006	2005
State Auto P&C	1.2	1.2	1.6
Milbank	1.2	1.2	1.6
Farmers	1.0	1.1	1.3
SA Ohio	1.0	1.0	1.2
SA National	0.6	0.6	0.8
Weighted Average	1.1	1.2	1.5

⁽¹⁾ We use the statutory leverage ratio as there is no comparable GAAP measure.

Our insurance subsidiaries pay dividends to State Auto Financial which in turn may be used by State Auto Financial to pay dividends to stockholders or to make principal and interest payments on debt. Individual states limit the amount of dividends that our insurance subsidiaries domiciled in those states can pay without prior approval. Under current law, at December 31, 2007, after adjustment for dividend payments made in the previous twelve month period, a total of $79.6 million is available in 2008 for payment as a dividend from our insurance subsidiaries to State Auto Financial, without prior approval from our respective domiciliary state insurance departments. In 2007, 2006, and 2005, State Auto Financial received $50 million, $0, and $40.5 million in dividends from its insurance subsidiaries, respectively. We are required to notify the insurance subsidiaries’ applicable state insurance commissioner within five business days after declaration of all such dividends and at least ten days prior to payment. Additionally, the domiciliary state commissioner of each insurance subsidiary has the authority to limit a dividend when the commissioner determines, based on factors set forth in the law, that an insurer’s surplus is not reasonable in relation to the insurer’s outstanding liabilities and adequate to meet its financial needs. Such restrictions are not expected to limit the capacity of State Auto Financial to meet its cash obligations.

State Auto Financial’s insurance subsidiaries are subject to regulation and supervision by the states in which they do business. The NAIC has developed Risk-Based Capital (“RBC”) requirements. RBC attempts to relate an individual insurance company’s statutory surplus to the risk inherent in its overall operations. RBC requires the calculation of a ratio of total adjusted statutory capital to authorized control level. Insurers with a ratio below 200% are subject to different levels of regulatory intervention and action. At December 31, 2007, the ratio of total adjusted statutory capital to authorized control level of State Auto Financial’s insurance subsidiaries ranged from 969% to 1,859%.

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Credit and Financial Strength Ratings

The following table summarizes our credit and insurance company financial strength ratings at December 31, 2007:

	A.M. Best	Moody’s	Standard & Poor’s
STFC (credit rating)	a-	Baa1	BBB
STFC Pooled Companies (financial strength)	A+	A2	A
SA National (financial strength)	A+	n/a	A

We are reviewed regularly by the independent rating agencies listed in the table above. Ratings provide a meaningful way for policyholders, agents, creditors and stockholders to compare us to our competitors. The published credit ratings on State Auto Financial Senior Notes discussed above are opinions as to the ability of State Auto Financial to meet its ongoing obligations under the terms of the Senior Notes. Generally, credit ratings affect the cost, type and availability of debt financing. Higher rated securities receive more favorable pricing and terms relative to lower rated securities at the time of issue. State Auto Financial’s Senior Notes have been rated investment grade by each agency.

The published financial strength ratings on the insurance company subsidiaries of State Auto Financial are opinions as to the ability of those companies to meet their ongoing obligations to their policyholders. The A.M. Best financial strength ratings influence our ability to write insurance business as agents and policyholders generally prefer higher rated companies. Lower rated companies may be required to compete for agents and policyholders by offering higher commissions or lower premiums and expanded coverage, or a combination thereof. State Auto Mutual is one of only 14 companies in the United States that have received A.M. Best’s A+ or higher rating every year since 1954. The STFC Pooled Companies and the Mutual Pooled Companies are collectively assigned a pool rating by A.M. Best while SA National is rated by A. M. Best as a part of the total group.

Our ratings are influenced by many factors including operating and financial performance, asset quality, liquidity, financial leverage, exposure to catastrophe risks and operating leverage. At December 31, 2007, our A.M. Best, Moody’s and Standard & Poor’s ratings were assigned stable outlooks.

OTHER

Employee Benefit Plans

The State Auto Group has a defined benefit pension plan and a postretirement health care plan covering substantially all employees (collectively “the benefit plans”). Several factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the benefit plans. Key factors include assumptions about the expected rates of return on plan assets, discount rates, and health care cost trend rates. We consider market conditions, including changes in investment returns and interest rates, in making these assumptions. We use a measurement date of September 30 as currently permitted under SFAS No. 87 “Employers’ Accounting for Pensions” (“SFAS 87”) and SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other than Pensions” (“SFAS 106”) when determining our liabilities at December 31.

To calculate the State Auto Group’s December 31, 2007 pension projected benefit obligation (“PBO”) we used a discount rate of 6.25% based on an evaluation of the expected future benefit cash flows of our defined benefit pension plan used in conjunction with the Citigroup Pension Discount Curve at the measurement date. A lower discount rate results in, all else equal, a higher present value of the benefit obligation. We selected an expected long-term rate of return on our plan assets of 9.0% by considering the mix of investments and stability of investment portfolio along with actual investment experience during the lifetime of the plan. To calculate the net periodic benefit cost for the year ended December 31, 2007, a discount rate of 6.0% and an expected long-term rate of return on plan assets of 9.0% were used.

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The selected discount rate of 6.25% increased 0.25 points from the 6.00% rate used in 2006 which had the effect of decreasing the 2007 PBO and related unrecognized net actuarial loss by approximately $7.8 million. Cumulative unrecognized actuarial losses of approximately $62.6 million, which are now being recognized on our balance sheet pursuant to SFAS 158 (defined below), are being systematically recognized as an increase in net periodic cost over the average future service period of active participants. Unrecognized gains and losses arise from several factors including expected to actual demographic changes, assumption changes in the obligations and from the difference between expected and actual returns on plan assets.

The accumulated benefit obligation (“ABO”) of a defined benefit plan represents the actuarial present value of benefits attributed by the pension benefit formula to employee service rendered prior to the measurement date and based on current and past compensation levels, while the PBO is the ABO plus a factor for future compensation levels. At December 31, 2007, the ABO and PBO were $194.3 million and $217.3 million, respectively. At December 31, 2007 the fair value of the assets of our defined benefit pension plan was $220.0 million, which resulted in an overfunding status within our balance sheet of $2.7 million. The State Auto Group has consistently targeted contributions to our defined benefit pension plan with the objective of maintaining a fully funded status on an ABO basis. Historically our plan assets have exceeded our ABO. The ABO, which considers current compensations level only, provides information about the obligation an employer would have if the plan were discontinued at the date of measurement date. This funding objective has served our plan participants well knowing that we were fully funded on a current basis as well as the fact that we have not had to recognize in 2006 or anytime prior an additional minimum liability as would have been previously required under SFAS 87.

Key assumptions used in determining the amount of the benefit obligation and related periodic cost recognized for postretirement benefits other than pensions under SFAS 106 include the discount rate and the assumed health care cost trend rate. To calculate the State Auto Group’s 2007 benefit obligation for our health care plan, we increased our selected discount rate by 0.25 points to 6.25% from the 2006 discount rate to match the anticipated stream of future benefit payments. We assume that the relative increase in health care costs will generally trend downward over the next several years, reflecting assumed increases in efficiency in the health care system and cost containment initiatives. For 2007 the expected rate of increase in future health care costs was 10% for 2007, trending down 1% per year to 5% thereafter. The change in the discount rate and adjustment for the assumed health care cost trend rate had the effect of increasing the benefit obligation and related unrecognized net actuarial loss by approximately $0.6 million. The benefit obligation under our health care plan was $123.0 million at December 31, 2007 which exceeded the fair value of plan assets of $2.3 million, resulting in an underfunding status of $120.7 million in our balance sheet.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”) which requires employers with defined benefit pension and other postretirement benefit plans, such as health care, to recognize the funded status of its benefit plans on its balance sheet and measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end balance sheet date thereby eliminating the use of an earlier measurement date and to provide additional disclosures. The new measurement date requirement is not effective until fiscal years ending after December 15, 2008. Adopting SFAS 158 required us to recognize the funded status (i.e. the difference between the fair value of plan assets and the benefit obligations) on our balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adoption of SFAS 158 at December 31, 2006 had the impact of decreasing accumulated comprehensive income by $63.9 million, net of tax, which was represented by the following:

• For our pension plan: net unrecognized actuarial losses of $77.4 million ($50.3 million net of tax); unrecognized prior service costs of $3.4 million ($2.2 million net of tax); unrecognized transition asset remaining from the initial adoption of SFAS 87 of $3.0 million ($1.9 million net of tax), all of which were previously netted against the plan’s funded status on our balance sheet pursuant to the provisions of SFAS 87. These amounts will be subsequently recognized as a component of our net periodic cost (benefit) pursuant to our historical accounting policy for amortizing and allocating such amounts.

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• For our postretirement health care plan: net unrecognized actuarial losses of $23.6 million ($15.3 million net of tax); unrecognized prior service costs of $3.2 million ($2.1 million net of tax), all of which were previously netted against the plan’s funded status in our balance sheet pursuant to the provisions of SFAS 106. These amounts will be subsequently recognized as a component of our net periodic cost (benefit) pursuant to our historical accounting policy for amortizing and allocating such amounts.

The following table provides the incremental effects of adopting the provisions of SFAS 158 on our balance sheet at December 31, 2006. The adoption of SFAS 158 had no effect on our consolidated statement of income for the year ended December 31, 2006, or for any prior period presented.

($ millions)	Prior to Adopting SFAS 158		Effect of Adopting SFAS 158			As Reported
Assets:
Net prepaid pension expense	$	61.8	$	(61.8	)	$	—
Deferred federal income taxes		5.6		40.7			46.3
Liabilities:
Postretirement benefits		98.1		26.7			124.8
Pension benefits		—		16.1			16.1
Stockholders’ Equity:
Accumulated other comprehensive Income (loss)		46.6		(63.9	)		(17.3	)

With regard to the adoption of the new measurement guidelines, we are continuing to review the transition alternatives available to us but intend to adopt the required December 31 measurement at December 31, 2008. The adoption of SFAS 158 did not have an impact on our debt covenants.

The actuarial assumptions used by us in determining benefit obligations may differ materially from actual results due to changing market and economic conditions, higher or lower turnover and retirement rates or longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect our financial position or results of operations.

Loss and Loss Expense Reserves

Our loss and loss expense reserves include the accumulation of unpaid individual case estimates for claims that have been reported and estimates of claims that have been incurred but not reported (“IBNR”) as well as estimates of the expenses associated with processing and settling all reported and unreported claims. Our loss and loss expense reserves are not discounted to present value.

Losses and allocated loss expense reserves (“Loss and ALAE Reserve”) are management’s best estimates (“MBE”) at a given point in time of what we expect to pay claimants, based on known facts, circumstances and historical trends. Reserves for reported losses are established on either a case-by-case or formula basis depending on the type and circumstances of the loss. The case-by-case reserve amounts are determined by claims adjusters based on our reserving practices, which take into account the type of risk, the circumstances surrounding each claim and policy provisions relating to types of loss. The formula reserves are based on historical data for similar claims with provision for trend changes caused by inflation. Case and formula basis loss reserves are reviewed on a regular basis, and as new data becomes available, estimates are updated resulting in adjustments to loss reserves. Generally, reported losses initially reserved on a formula basis and not settled after six months are case reserved at that time. The process for calculating the IBNR component of the Loss and ALAE Reserve is to develop an estimate of the ultimate losses and allocated loss expenses incurred, and then subtract all amounts already paid and held in case and formula reserves.

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The ultimate determination of MBE integrates information and analysis provided by several disciplines within our Company, including claims, actuarial and accounting. This assessment requires considerable judgment in understanding how claims mature, which lines of business are the most volatile, and how trends change over time. Loss and ALAE Reserves represent an estimate at a given point in time based on many variables including historical and statistical information, inflation, legal developments, storm loss estimates, and economic conditions. Although we consider many different sources of information, as well as a number of actuarial methodologies to estimate our Loss and ALAE Reserve, there is no single method for determining the exact ultimate liability.

Our internal actuarial staff conducts quarterly reviews of projected loss development information to assist management in making estimates of ultimate losses and loss expenses. Several factors are considered in estimating ultimate liabilities including consistency in relative case reserve adequacy, consistency in claims settlement practices, recent legal developments, historical data, actuarial projections, accounting projections, exposure growth, current business conditions, catastrophe developments, and late reported claims. In addition, reasonableness tests are performed on many of the assumptions underlying each reserving methodology, such as claim frequency, claim severity and loss ratios. Nonetheless, changes, which are not contemplated, do occur over time, and those changes are incorporated in subsequent valuations of the loss reserves.

We use a number of different methodologies to estimate the IBNR component of the Loss and ALAE Reserves. Our reserves include amounts related to short tail and long tail lines of business. “Tail” refers to the time period between the occurrence of a loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary. The reserving methods and strengths and weaknesses of each are described below.

Short-Tail Business: For short-tailed contracts, the claims are typically settled within five years, and the most common actuarial estimates are based on techniques using link ratio projections of incurred losses, paid losses, claim counts and claim severities. Each of these methods is described below in detail. Separate projections are made for catastrophes that are in the very early stages of development based on specific information known through the reporting date.

Incurred Loss Development Method: The Incurred Loss Development Method is probably the most common actuarial method used in projecting indicated IBNR reserves. This method uses paid loss experience as well as the outstanding estimates (average and case reserves) for claims that have been reported and are still open. The underlying assumption of the Incurred Loss Development Method is that case reserve adequacy remains consistent over time. This method’s advantage is its responsiveness to changes in reported losses, which is particularly valuable in the less mature accident years. The disadvantage of the Incurred Loss Development Method is that case reserve adequacy changes will distort the IBNR projections.

Paid Loss Development Method: The Paid Loss Development Method uses calculations that are very similar to the Incurred Loss Development Method. The key difference is that the data used in paid methods excludes the case reserve estimates, so only paid losses are utilized. With these methods, a payment pattern is estimated to project ultimate settlement values for each accident year, with the underlying assumption that claims are settled at a consistent rate over time. Neither case reserves nor the rate at which claims are reported (except to the extent that the reporting pattern might influence the payment pattern) is relevant to the results of this method. This method’s advantage is the estimates of ultimate loss are independent of case reserve adequacy and are unaffected by company changes in case reserving philosophy. The disadvantages are that the paid method does not use all of the available information, and in some cases the liability payment patterns require the application of very large development factors to relatively small payments in the immature years.

Claim Counts and Severities Method: The Counts and Severities Method calculations are very similar to the other methods. The incurred claim counts reported to date are projected to an ultimate value. Similarly, the incurred loss severities are projected to ultimate. The ultimate incurred count is multiplied by the ultimate

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incurred severity, for each accident year, to arrive at the ultimate incurred loss. Finally, as with the other loss development methods, an estimate of the IBNR reserve is calculated by subtracting the reported losses from the estimated ultimate losses.

Long-Tail Business: Reserve estimates for long-tailed contracts use the same methods listed above for short-tailed lines, along with several other methods as determined by the actuary. For example, premium-based methods may be used in developing ultimate loss estimates, including the Expected Loss Ratio, Bornhuetter-Ferguson, and Least-Squares techniques as described below. We also use statistical models when the historical patterns can be reasonably approximated.

Expected Loss Ratio Method: The Expected Loss Ratio Method generates indicated IBNR by multiplying an expected loss ratio by earned premium, then subtracting incurred-to-date losses. For slower reporting lines of business, new products, or data that is very immature, the actual claim data is often too thin for traditional projections. With this method the premiums are used as a measure of loss exposure, and the loss ratios can be derived from pricing expectations.

Bornhuetter-Ferguson Method: The Bornhuetter-Ferguson Method is a weighted average of the Expected Loss Ratio Method and the Incurred Loss Development Method, using the percentage of losses reported as the weight. This method is particularly useful where there is a low volume of data in the current accident period, or where the experience is volatile. In general this method produces estimates that are very similar to the Incurred Loss Development Method.

Least Square Loss Development Method: In the Least Squares Loss Development Method the statistical technique of least squares regression is applied to a triangle of reported loss ratios to project the ultimate loss ratio in each accident year. Using historical loss ratios puts the data for each time period on a more consistent exposure basis, because premium levels generally correlate well with insured exposures. A by-product of the regression function is an estimate of credibility for each stage of development. In cases where the regression parameters fall outside of a reasonable range, the projection defaults to the incurred loss method.

Selection Process: In determining which reserving method to use for a particular line of business or accident year, diagnostic tests of loss ratios and severity trends are considered, as well as the historic case reserve adequacy and claim settlement rate. In general the Incurred Loss Development Method is used if the projections are stable, the data is credible, historic case reserve adequacy is consistent, and the loss ratios and loss severities are reasonable. Other reserving methods are considered as well for particular lines of business or accident years, given supplementary information like open claim counts and prior period development. For example, if more than one method provides a reasonable projection, the actuary may select an average of those methods. There is considerable judgment applied in the analysis of the historical patterns and in applying business knowledge that reflects our underwriting and claims risk.

Reserve ranges provide a quantification of the variability in the reserve projections. The primary determinant in estimating the reserve range boundaries are the variances measured within the historical reserving data for the various lines of business. Property lines typically have smaller variances, while liability lines can experience significant variability. MBE of loss reserves considers the expected variation to establish an appropriate position within a range. MBE for SA National and the STFC Pooled Companies’ share of the Pooled Companies’ Loss and ALAE Reserves at December 31, 2007 was $697.5 million, within a projected range of $640.6 million to $714.1 million. (These values presented are on a direct basis, gross of salvage and subrogation recoverable, and before reinsurance, except for the STFC Pooled Companies’ participation in the inter-company Pooling Arrangement. Therefore, these values cannot be compared to many of the other loss and loss expenses payable tables included elsewhere within this Form 10-K.)

The potential impact of the reserve variability on net income is quantifiable using the range end points and carried reserve amounts listed above. For example, if ultimate losses reach the high point of $714.1 million, the

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reserve increase of $16.5 million is an after-tax decrease of $10.7 million on net income. Likewise, should losses decline to the low end of $640.6 million, the $57.0 million reserve decrease would add $37.0 million of after-tax net income.

An important assumption underlying the reserve estimation methods for the major casualty lines is that the loss cost trends implicitly built into the loss and ALAE patterns will continue into the future. To estimate the sensitivity of reserves to an unexpected change in inflation, projected calendar year payment patterns were applied to the December 31, 2007, other liability Loss and ALAE Reserve to generate estimated annual incremental loss and ALAE payments for each subsequent calendar year. Then, for purposes of sensitivity testing, an additional annual loss cost trend of 10% was added to the trend implicitly embedded in the estimated payment pattern, and revised incremental loss and ALAE payments were calculated. This type of inflationary jump could arise from a variety of sources including tort law changes, development of new medical procedures, social inflation, and other inflationary changes in costs beyond assumed levels.

The estimated cumulative impact that this additional, unexpected 10% increase in the loss cost trend would have on our results of operations over the lifetime of the underlying claims in other liability is an increase of $54.2 million on reserves, or a $35.3 million after-tax reduction (assuming a tax rate of 35%) to net income. Inflation changes have much more impact on the longer tail commercial lines like other liability and workers’ compensation, and much less impact on the shorter tail personal lines’ reserves.

In addition to establishing Loss and ALAE Reserves, as described above, we establish reserves for loss adjustment expenses contemplating functions and costs that are not attributable to a specific claim, which is called Unallocated Loss Adjustment Expense (“ULAE”). Based on historical patterns, selected ratios of paid ULAE to paid losses are imposed on the current outstanding reserves. Consequently, this component of the loss expense reserve has a proportional relationship to the overall claim inventory and held reserves by accident year, as they move up or down in sync with carried reserves. The method uses a traditional assumption that 50% of the expenses are incurred when the claim is open, and the other 50% are incurred when the claim is closed, and also assumes that the underlying claims process and mix of business do not change drastically over time.

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The following table provides a reconciliation of MBE of our direct Loss and ALAE Reserve to our net loss and loss expenses payable at December 31, 2007 and 2006, respectively. The STFC Pooled Companies net additional share of transactions assumed from State Auto Mutual through the Pooling Arrangement for the years ended December 31, 2007 and 2006, respectively, has been reflected in the table below as assumed by STFC Pooled Companies:

($ millions)	2007			2006
Direct Loss and ALAE Reserve:
STFC Pooled Companies and SA National	$	393.1		$	384.2
Assumed by STFC Pooled Companies		304.4			325.3
Total direct loss and ALAE reserve		697.5			709.5
Direct unallocated loss adjustment expense (“ULAE”)
STFC Pooled Companies and SA National		23.8			23.5
Assumed by STFC Pooled Companies		20.3			21.7
Total direct ULAE		44.1			45.2
Direct salvage and subrogation recoverable:
STFC Pooled Companies and SA National		(20.9	)		(20.5	)
Assumed by STFC Pooled Companies		(8.4	)		(8.5	)
Total direct salvage and subrogation recoverable		(29.3	)		(29.0	)
Reinsurance recoverable		(11.2	)		(13.5	)
Assumed reinsurance		5.1			5.6
Reinsurance assumed by STFC Pooled Companies		(59.1	)		(56.8	)
Total losses and loss expenses payable, net of reinsurance recoverable on losses and loss expenses payable of $11.2 in 2007 and $13.5 in 2006	$	647.1		$	661.0

The following tables present the loss and loss expenses payable by major line of business at December 31, 2007 and 2006, respectively:

($ in millions)	Ending Loss & ALAE Case & Formula		Ending Loss & ALAE IBNR		Ending ULAE Bulk		Total Reserves
December 31, 2007
Personal insurance segment:
Standard auto	$	120.4	$	37.5	$	11.2	$	169.1
Nonstandard auto		13.9		3.0		1.4		18.3
Homeowners		36.4		15.3		1.7		53.4
Other personal		6.3		2.3		0.3		8.9
Total personal		177.0		58.1		14.6		249.7
Business insurance segment:
Commercial auto		44.8		28.9		4.1		77.8
Commercial multi-peril		37.8		36.9		4.1		78.8
Fire & allied lines		18.7		1.0		0.6		20.3
Product & other liability		46.0		71.7		12.4		130.1
Workers’ compensation		38.3		39.4		7.8		85.5
Other business		2.0		2.4		0.5		4.9
Total business		187.6		180.3		29.5		397.4
Total losses and loss expenses payable net of reinsurance recoverable on losses and loss expenses payable	$	364.6	$	238.4	$	44.1	$	647.1

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	Ending Loss & ALAE Case & Formula	Ending Loss & ALAE IBNR	Ending ULAE Bulk	Total Reserves
December 31, 2006
Personal insurance segment:
Standard auto	118.4	42.1	11.3	171.8
Nonstandard auto	16.0	4.0	1.6	21.6
Homeowners	38.6	16.6	1.9	57.1
Other personal	5.7	1.7	0.2	7.6
Total personal	178.7	64.4	15.0	258.1
Business insurance segment:
Commercial auto	46.3	31.4	4.3	82.0
Commercial multi-peril	34.4	40.4	4.4	79.2
Fire & allied lines	19.3	1.8	0.7	21.8
Product & other liability	40.2	75.3	12.3	127.8
Workers’ compensation	37.7	40.2	7.7	85.6
Other business	2.5	3.3	0.7	6.5
Total business	180.4	192.4	30.1	402.9
Total losses and loss expenses payable net of reinsurance recoverable on losses and loss expenses payable	359.1	256.8	45.1	661.0

Net losses and loss expenses payable at December 31, 2007 decreased $13.9 million (2.1%) from 2006 due to a combination of the following:

• Improved claim severity trends, primarily on the auto liability lines as previously discussed;

• At the end of 2006, catastrophe loss reserves, primarily on homeowners and commercial multi- peril lines, remained in reserve status, but were paid during 2007 resulting in some of the reserve decreases.

The property and casualty industry has had significant loss experience from claims related to asbestos, environmental remediation, product liability, mold and other mass torts. Asbestos reserves are $3.2 million, and environmental reserves are $7.9 million, for a total of $11.1 million, or 1.7% of net losses and loss expenses payable. Our environmental reserves increased approximately $1.2 million from 2006 primarily from the state of Indiana where there was an adverse court ruling several years ago. Because we have insured primarily product retailers and distributors, we do not expect to incur the same level of liability as companies that have insured manufacturing risks.

The risks and uncertainties inherent in the estimates include, but are not limited to, actual settlement experience being different from historical data and 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 to settle claims vary from the liability currently recorded. For an additional discussion relating to losses and loss expense reserves see “Impact of Significant External Factors”, included in this Item 7.

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New Accounting Standards:

Adoption of Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”) that requires employers with defined benefit pension and postretirement benefit plans other than pensions (collectively “benefit plans”) to recognize the funded status of their benefit plans in their balance sheet, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end balance sheet date thereby eliminating the use of an earlier measurement date and provide additional disclosures. The new measurement date requirement is not effective until fiscal years ending after December 15, 2008. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158, which had no effect on the Company’s consolidated statement of income for year ended December 31, 2006, or for any prior period presented in the 2006 Form 10-K, and it will not affect the Company’s operating results in future periods. Adopting SFAS 158 required the Company to recognize the funded status (i.e. the difference between the fair value of plan assets and the benefit obligations) of its benefit plans in the December 31, 2006 balance sheet, with a corresponding adjustment to other comprehensive loss, net of tax of $63.9 million. The adoption did not have an impact on the Company’s debt covenants. At December 31, 2007 and 2006, the Company continued to use the earlier measurement date of September 30, and is currently reviewing the transition alternatives available and the related impact.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which was effective for fiscal years beginning after December 15, 2006. FIN 48 clarified the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provided guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no increase in the liability for unrecognized tax benefits. See Note 8 for additional required disclosures.

In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” (“SFAS 155”), which was effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year after September 15, 2006. SFAS 155 permits fair value re-measurement for any hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets in order to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Company adopted this guidance effective January 1, 2007 and there was no impact on the Company’s financial statements.

In September 2005, the Accounting Standards Executive Committee issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”), which was effective for fiscal years beginning after December 15, 2006. SOP 05-1 provides guidance on accounting for deferred acquisition costs associated with modifications to or the internal replacement of insurance contracts. SOP 05-1 focuses on modifications to contracts with integrated product features and internal replacement of contracts in which the new contract offers product features not included in the old contract when both were priced together. The Company’s insurance contracts include only nonintegrated contract features as defined in SOP 05-1, which are contract features that provide coverage that is underwritten and priced only for that incremental insurance coverage and that do not result in re-underwriting or re-pricing of other components of the contract. Nonintegrated contract features do not

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change the existing base contract and do not require further evaluation under SOP 05-1. The Company adopted this guidance effective January 1, 2007 and there was no impact on the Company’s financial statements.

Pending Adoption of Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The statement imposes no new requirements for additional fair-value measures in financial statements. The Company adopted this guidance effective January 1, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 expands the standards under SFAS 157 to provide entities with a one-time election to measure existing financial instruments and certain other items at fair value at the date of adoption. SFAS 159 also amends SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” to require a specific presentation of investments categorized as available-for-sale. This statement is effective for the first fiscal year that begins after November 15, 2007. The Company adopted this guidance on January 1, 2008 and did not elect the fair value option for any of its eligible assets or liabilities as of this date.

In June 2007, the FASB issued EITF 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 addresses how a company should recognize the income tax benefit received on dividends that are (a) paid to employees holding equity-classified non-vested shares, equity-classified non-vested share units, or equity-classified outstanding share options, and (b) charged to retained earnings under FAS 123(R). The tax benefit received on dividends paid to employees associated with their share-based awards should be recorded in additional paid-in capital until the award is settled through exercise (if the award is an option) or vesting (if the award is non-vested stock). This will be effective for tax benefits of dividends declared in fiscal years beginning after December 15, 2007. The Company adopted this guidance effective January 1, 2008 and it had no material impact on the Company’s financial statements.

Impact of Significant External Factors

Inflation can have a significant impact on property and casualty insurers because premium rates are established before the amount of losses and loss expenses are known. When establishing rates, we attempt to anticipate increases from inflation subject to the limitations of modeling economic variables. General inflation, as measured by the Consumer Price Index, has been relatively modest over the last several years. However, price inflation on the goods and services purchased by insurance companies in settling claims has been steadily increasing. In particular, repair costs for homes, autos, commercial buildings, and medical care costs, have risen disproportionately over the last few years. Costs for building materials typically rise dramatically following substantial natural catastrophes such as the industry experienced in Florida and adjacent states in 2004 and in Mississippi and Alabama in 2005. We continue to adjust our pricing projections as loss cost trends change in order to ensure premiums keep pace with inflation in all lines of business.

We consider inflation when estimating liabilities for losses and loss expenses, particularly for claims having a long period between occurrence and settlement. The liabilities for losses and loss expenses are management’s best estimates of the ultimate net cost of underlying claims and expenses and are not discounted for the time value of money. In times of high inflation, the normally higher yields on investment income may partially offset potentially higher claims and expenses.

In “Loss and Loss Expenses Reserves,” we include a discussion of certain factors management considers in estimating the ultimate liability for losses and loss expenses. With respect to the auto line of business, which represents approximately 40% of our total reserves, perhaps the most significant external variable is legal developments. Court decisions, as discussed below, have had significant impact on the property and casualty insurance industry. Some of these decisions have a more prospective effect, for example, when contract

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provisions relating to third party coverages are construed in ways not anticipated by us. Other court decisions may have more of a retroactive effect which may be seen more clearly in the auto insurance line. Auto insurance tends to be a line of business more regulated by statutes; consequently, the courts tend to have more of an opportunity to construe and apply those statutes to existing contracts. Uninsured motorists and underinsured motorists (collectively “UM”) are statutory coverages in almost every state where we do business. If a court construes a UM statute adversely to us and the industry, the decision typically has a retroactive effect with the court’s interpretation being applied as if the UM statute has always been interpreted that way. This retroactive application is exacerbated in UM cases (and other first party coverage cases) because the statute of limitations applicable to UM claims and other first party coverages can be as long as 15 years. Claims that had been closed or not even presented, going back as long as fifteen years, can be restored by an adverse court decision. We consider the impact of adverse court decisions of which we have become aware when we set ultimate loss and loss expense reserves for auto insurance as well as other lines to the extent those lines may be retroactively affected by such matters.

The effect of court decisions is also apparent in the commercial lines of coverages such as commercial multi-peril and other liability and products liability. Courts can expand coverage or void exclusions which can increase our exposure to claims. Some of these third party claims may still be brought within the statute of limitations applicable to such third party claims and expose us to some retroactive liabilities. These liabilities are sought to be addressed by the ultimate loss and loss expense reserve that is our estimate of loss and loss expenses payable.

It is not feasible to quantify the impact of judicial decisions that may have retroactive effect because we cannot foresee, among the range of issues that are litigated every day in courts in each state in which we do business, which cases will be decided adversely and how such decisions will actually apply to us.

The reserve estimates do not contemplate substantial loss from any mass torts, including those already listed above, or others not known at this time. In addition, there is no provision in the reserves for a major retroactive expansion of coverage through judicial interpretation. If these assumptions prove to be incorrect, ultimate liabilities could increase substantially. Our claims, underwriting and actuarial staff track separately all claims within the family of mass torts, and respond accordingly as information becomes known.

Premium rates are actuarially determined to enable an insurance company to generate an underwriting profit. These rates contemplate a certain level of risk. The courts may modify, in a number of ways, the level of risk which insurers had expected to assume including eliminating exclusions, multiplying limits of coverage, creating rights for policyholders not intended to be included in the contract and interpreting applicable statutes expansively to create obligations on insurers not originally considered when the statute was passed. Courts have also undone legal reforms passed by legislatures, which reforms were intended to reduce a litigant’s rights of action or amounts recoverable and so reduce the costs borne by the insurance mechanism. These court decisions can adversely affect an insurer’s profitability. They also create pressure on rates charged for coverages adversely affected, and this can cause a legislative response resulting in rate suppression that can adversely affect an insurer. We may also be adversely affected by regulatory actions on matters within the jurisdiction of the various insurance departments where we do business or have entities domiciled.

For a discussion regarding the federal Terrorism Risk Insurance Act of 2002 and 2005 (collectively, the “Terrorism Acts”) see “Regulation” in Item 1 of this Form 10-K.

Item 7A. Qualitative and Quantitative Disclosures about Market Risk

Qualitative and Quantitative Disclosures about Market Risk are included in Item 7 of this Form 10-K under “2007 Compared to 2006—Investment Operations Segment—Market Risk.”

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Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements, including the Notes to Consolidated Financial Statements and the Reports of Independent Registered Public Accounting Firm are as follows:

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

State Auto Financial Corporation

We have audited the accompanying consolidated balance sheets of State Auto Financial Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of State Auto Financial Corporation and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for share-based compensation expense as of January 1, 2006, to adopt Financial Accounting Standards Board Statement No. 123(R), “Share-Based Payment.” As discussed in Note 1 to the consolidated financial statements, the Company also changed its method of accounting for defined benefit pension and other postretirement plans as of December 31, 2006, to adopt Financial Accounting Standards Board Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), State Auto Financial Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Columbus, Ohio

March 7, 2008

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

State Auto Financial Corporation

We have audited State Auto Financial Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). State Auto Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, State Auto Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of State Auto Financial Corporation as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 of State Auto Financial Corporation and our report dated March 7, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Columbus, Ohio

March 7, 2008

78

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Consolidated Balance Sheets

(in millions, except per share amounts)	December 31
	2007			2006
Assets
Fixed maturities, available-for-sale, at fair value (amortized cost $1,722.9 and $1,630.6 respectively)	$	1,745.4		1,647.4
Equity securities, available-for-sale, at fair value (cost $210.2 and $230.8 respectively)		254.2		284.2
Other invested assets, available-for-sale, at fair value (cost $20.1 and $4.0 respectively)		20.3		4.5
Other invested assets		1.3		1.8
Total investments		2,021.2		1,937.9
Cash and cash equivalents		70.9		73.4
Accrued investment income and other assets		42.1		43.7
Deferred policy acquisition costs		105.8		104.0
Pension asset		2.7		—
Reinsurance recoverable on losses and loss expenses payable (affiliates $1.2 and $2.7 respectively)		11.2		13.5
Prepaid reinsurance premiums (affiliates none)		6.0		6.0
Due from affiliate		19.4		17.9
Net deferred federal income taxes		46.1		46.3
Property and equipment, at cost, (net of accumulated depreciation of $5.6 and $5.1, respectively)		12.5		12.4
Total assets	$	2,337.9		2,255.1
Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliates $257.2 and $281.7, respectively)	$	658.3		674.5
Unearned premiums (affiliates $119.5 and $118.4, respectively)		436.0		428.8
Notes payable (affiliates $15.5 and $15.5, respectively)		118.0		118.4
Postretirement and pension benefits		125.2		140.9
Current federal income taxes		7.8		7.2
Other liabilities		57.1		51.1
Total liabilities		1,402.4		1,420.9
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; 46.0 and 45.7 shares issued, respectively, at stated value of $2.50 per share		115.0		114.3
Treasury stock, 5.5 and 4.7 shares, respectively, at cost		(81.0	)	(58.1	)
Additional paid-in capital		98.2		87.3
Accumulated other comprehensive loss		(3.3	)	(17.3	)
Retained earnings		806.6		708.0
Total stockholders’ equity		935.5		834.2
Total liabilities and stockholders’ equity	$	2,337.9		2,255.1

See accompanying notes to consolidated financial statements.

79

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Consolidated Statements of Income

($ millions, except per share amounts)	Year ended December 31
	2007			2006		2005
Earned premiums (ceded to affiliate $695.7, $687.8 and $683.4, respectively)	$	1,011.6		1,023.8		1,050.3
Net investment income		84.7		83.1		78.7
Net realized gains on investments		12.1		5.6		5.6
Other income (affiliates $3.3, $3.0 and $2.9, respectively)		5.0		4.9		4.9
Total revenues		1,113.4		1,117.4		1,139.5
Losses and loss expenses (ceded to affiliate $405.0, $389.1 and $428.2, respectively)		590.8		587.6		613.4
Acquisition and operating expenses		347.9		348.0		332.9
Interest expense (affiliates $1.5, $1.5 and $2.8, respectively)		7.6		7.4		8.8
Other expenses		11.8		12.7		12.4
Total expenses		958.1		955.7		967.5
Income before federal income taxes		155.3		161.7		172.0
Federal income tax expense (benefit):
Current		43.5		43.5		49.3
Deferred		(7.3	)	(2.2	)	(3.2	)
Total federal income taxes		36.2		41.3		46.1
Net income	$	119.1		120.4		125.9
Earnings per common share:
Basic	$	2.90		2.95		3.12
Diluted	$	2.86		2.90		3.06
Dividends paid per common share	$	0.50		0.38		0.27

See accompanying notes to consolidated financial statements.

80

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Consolidated Statements of Stockholders’ Equity

(in millions)	Year ended December 31
	2007			2006		2005
Common shares:
Balance at beginning of year		45.7		45.1		44.7
Issuance of shares		0.3		0.6		0.4
Balance at end of year		46.0		45.7		45.1
Treasury shares:
Balance at beginning of year		(4.7	)	(4.6	)	(4.6	)
Shares acquired on stock option exercises		—		(0.1	)	—
Shares acquired under repurchase program		(0.8	)	—		—
Balance at end of year		(5.5	)	(4.7	)	(4.6	)
Common stock:
Balance at beginning of year	$	114.3		112.8		111.8
Issuance of shares		0.7		1.5		1.0
Balance at end of year		115.0		114.3		112.8
Treasury stock:
Balance at beginning of year		(58.1	)	(56.8	)	(56.5	)
Shares acquired on stock option exercises		(0.8	)	(1.3	)	(0.3	)
Shares acquired under repurchase program		(22.1	)	—		—
Balance at end of year		(81.0	)	(58.1	)	(56.8	)
Additional paid-in capital:
Balance at beginning of year		87.3		70.2		64.1
Issuance of common stock		4.4		7.2		4.0
Tax benefit from stock options exercises		0.7		3.2		1.8
Stock options granted		5.8		6.7		0.3
Balance at end of year		98.2		87.3		70.2
Accumulated other comprehensive (loss) income:
Balance at beginning of year		(17.3	)	34.3		53.1
Change in unrealized (losses) gains on investments, net of tax and reclassification adjustment		(2.6	)	12.4		(18.7	)
Amortization of gain on derivative used in cash flow hedge		(0.1	)	(0.1	)	(0.1	)
Change in unrecognized benefit plan obligations, net of tax and reclassification adjustment		16.7		—		—
Accumulated other comprehensive (loss) income before SFAS No. 158 adjustment		(3.3	)	46.6		34.3
Cumulative effect of adoption of SFAS No. 158, net of tax		—		(63.9	)	—
Balance at end of year		(3.3	)	(17.3	)	34.3
Retained earnings:
Balance at beginning of year		708.0		603.0		485.7
Net income		119.1		120.4		125.9
Cash dividends paid		(20.5	)	(15.4	)	(8.6	)
Balance at end of year		806.6		708.0		603.0
Total stockholders’ equity at end of year	$	935.5		834.2		763.5

See accompanying notes to consolidated financial statements.

81

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Consolidated Statements of Cash Flows

($ millions)	Year ended December 31
	2007			2006		2005
Cash flows from operating activities:
Net income	$	119.1		120.4		125.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, net		11.0		9.6		9.3
Share-based compensation		6.0		7.0		0.6
Net realized gains on investments		(12.1	)	(5.6	)	(5.6	)
Changes in operating assets and liabilities:
Deferred policy acquisition costs		(1.7	)	2.0		(3.2	)
Accrued investment income and other assets		1.0		1.6		4.4
Postretirement and pension benefits (assets)		7.3		6.2		4.8
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums		2.3		4.0		10.7
Other liabilities and due to/from affiliates, net		4.0		(2.8	)	26.3
Losses and loss expenses payable		(16.2	)	(54.2	)	11.6
Unearned premiums		7.2		(4.1	)	(6.1	)
Excess tax benefits on share-based awards		0.4		(2.4	)	—
Federal income taxes		(6.7	)	11.8		(5.8	)
Cash provided from adding Meridian Security Insurance Company and Meridian Citizens Mutual Insurance Company business to the reinsurance pool, effective January 1, 2005		—		—		54.0
Net cash provided by operating activities		121.6		93.5		226.9
Cash flows from investing activities:
Purchases of fixed maturities – available-for-sale		(331.6	)	(293.8	)	(539.1	)
Purchases of equity securities – available-for-sale		(73.7	)	(101.2	)	(109.2	)
Purchases of other invested assets		(17.1	)	(0.9	)	(3.0	)
Maturities, calls and pay downs of fixed maturities – available-for-sale		73.1		76.0		98.5
Sales of fixed maturities – available-for-sale		155.2		171.4		290.9
Sales of equity securities – available-for-sale		107.0		103.8		49.2
Sales of other invested assets		1.8		1.7		—
Net (additions) disposals of property and equipment		(0.8	)	(0.2	)	0.2
Net cash used in investing activities		(86.1	)	(43.2	)	(212.5	)
Cash flows from financing activities:
Proceeds from issuance of common stock		4.3		7.4		4.1
Payments to acquire treasury shares		(22.1	)	—		—
Excess tax benefits on share-based awards		0.3		2.4		—
Payments of dividends		(20.5	)	(15.4	)	(8.6	)
Change in securities lending collateral		—		99.0		45.7
Change in securities lending obligation		—		(99.0	)	(45.7	)
Payment of debt		—		—		(45.5	)
Net cash used in financing activities		(38.0	)	(5.6	)	(50.0	)
Net (decrease) increase in cash and cash equivalents		(2.5	)	44.7		(35.6	)
Cash and cash equivalents at beginning of year		73.4		28.7		64.3
Cash and cash equivalents at end of year	$	70.9		73.4		28.7
Supplemental disclosures:
Interest paid (affiliates $1.5, $1.4 and $2.7 respectively)	$	7.8		7.7		9.0
Federal income taxes paid	$	42.3		29.4		51.9

See accompanying notes to consolidated financial statements.

82

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

a. Principles of Consolidation

The consolidated financial statements include State Auto Financial Corporation (“State Auto Financial”) and its wholly-owned subsidiaries:

• State Auto Property and Casualty Insurance Company (“State Auto P&C”), an Iowa corporation

• Milbank Insurance Company (“Milbank”), a South Dakota corporation

• Farmers Casualty Insurance Company (“Farmers”), an Iowa corporation

• State Auto Insurance Company of Ohio (“SA Ohio”), an Ohio corporation

• State Auto National Insurance Company (“SA National”), an Ohio corporation

• Stateco Financial Services, Inc. (“Stateco”), an Ohio corporation

• Strategic Insurance Software, Inc. (“S.I.S.”), an Ohio corporation

The financial statements include the operations and financial position of 518 Property Management and Leasing, LLC (“518 PML”), whose members are State Auto P&C and Stateco.

State Auto Financial, an Ohio corporation, is a majority-owned subsidiary of State Automobile Mutual Insurance Company (“State Auto Mutual”), an Ohio corporation. State Auto Financial and subsidiaries are referred to herein as the “Companies” or the “Company.” All significant intercompany balances and transactions have been eliminated in consolidation.

b. Description of Business

The Company, through State Auto P&C, Milbank, Farmers and SA Ohio, provides standard personal and business insurance to its policyholders. The Company’s principal lines of insurance include personal and commercial automobile, homeowners, commercial multi-peril, workers’ compensation, general liability and fire insurance. SA National provides nonstandard automobile insurance. State Auto P&C, Milbank, Farmers, SA Ohio and SA National operate primarily in the central and eastern United States, excluding New York, New Jersey and the New England states, through an independent insurance agency system. State Auto P&C, Milbank, Farmers, SA Ohio and SA National are chartered and licensed property and casualty insurers. As such, they are subject to the regulations of the applicable Departments of Insurance of their respective states of domicile (the “Departments”) and the regulations of each state in which they operate. These property and casualty insurance companies undergo periodic financial examination by the Departments and insurance regulatory agencies of the states that choose to participate. A large portion of the Company’s revenues are derived from a reinsurance pooling agreement with State Auto Mutual and its affiliates. The nature of the underlying policies and geographical distribution of State Auto Mutual’s and its affiliates’ underwriting activity is similar to the Company.

Through State Auto P&C, the Company provides management and operation services under management agreements for all insurance and non-insurance affiliates.

Through Stateco, the Company provides investment management services to affiliated companies.

The Company, through S.I.S., develops and sells software for the processing of insurance transactions, database management for insurance agents and electronic interfacing of information between insurance

83

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

companies and agencies. S.I.S. sells services and products to insurance agencies and nonaffiliated insurers and their agencies. S.I.S. also delivers services and sells products to affiliated entities.

518 PML, an Ohio limited liability company, was formed to engage in the business of owning and leasing property to the Company’s affiliates.

c. Basis of Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which vary in certain respects from statutory accounting principles followed by State Auto P&C, Milbank, Farmers, SA Ohio and SA National that are prescribed or permitted by the Departments.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, revenues and expenses for the periods then ended, and the accompanying notes to the financial statements. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of losses and loss expenses payable. In connection with the determination of this estimate, management uses historical data, current business conditions and assumptions about future conditions to formulate estimates of the ultimate cost to settle claims. These estimates by their nature are subject to uncertainties for various reasons. The Company’s results of operations and financial condition could be materially impacted in future periods should the ultimate payments required to settle claims vary from the amount of the liability currently provided.

Certain reclassifications have been made to the 2006 and 2005 financial statements to conform to the 2007 presentation. This includes reclassifications in the consolidated balance sheet that consist of separately presenting certain other invested assets that are included in the Company’s available-for-sale portfolio from all other invested assets as well as aggregating the Company’s benefit plans where permitted, namely postretirement and pension liability or asset presentation. Consistent with balance sheet reclassifications, 2006 and 2005 line items in the consolidated statement of cash flows have been combined to conform with balance sheet presentation, specifically postretirement and pension benefits (assets).

d. Investments

Investments in fixed maturities, equity securities and certain other invested assets are classified as available-for-sale and, therefore, are carried at fair value. The unrealized holding gains or losses, net of applicable deferred taxes, are shown as a separate component of stockholders’ equity as a part of “accumulated other comprehensive (loss) income” and, as such, are not included in the determination of net income. Realized gains and losses on the sales of investments are computed using the first-in, first-out method.

The Company regularly monitors its investments that have fair values less than cost or amortized cost for signs of other-than-temporary impairment. Among the factors that management considers are market conditions, the amount, timing and length of decline in fair value, events impacting the issuer and the Company’s positive intent and ability to hold the security until anticipated recovery or maturity. For declines in value that are not

84

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

solely attributable to interest rate movements, the Company considers positive evidence indicating that the cost of the investment is recoverable within a reasonable period of time and evidence to the contrary in considering the severity and duration of the impairment in relation to the anticipated market price recovery. When a decline in fair value is deemed to be other-than-temporary, the investment cost is written down to fair value on the date the determination is made and a realized loss is recorded. The cost is not adjusted for any subsequent recovery in fair value.

e. Cash Equivalents

The Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents.

f. Deferred Policy Acquisition Costs

Acquisition costs, consisting of commissions, premium taxes and certain underwriting expenses that relate to and vary with the production of new and renewal property and casualty business, are deferred and amortized ratably over the contract period. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, losses and loss expenses to be incurred, and certain other costs expected to be incurred as premium is earned. These amounts are based on estimates and accordingly, the actual realizable value may vary from the estimated realizable value. Net deferred policy acquisition costs for the years ended December 31 are:

($ millions)	2007			2006		2005
Balance, beginning of year	$	104.0		106.0		97.5
Effect of January 1, 2005 pooling change (Note 6)		—		—		5.3
Acquisition costs deferred		244.5		246.1		255.0
Amortized to expense		(242.7	)	(248.1	)	(251.8	)
Balance, end of year	$	105.8		104.0		106.0

g. Federal Income Taxes

The Company files a consolidated federal income tax return, and pursuant to a written tax sharing agreement, each entity within the consolidated group pays its share of federal income taxes based on separate return calculations.

Income taxes are accounted for using the liability method. Using this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Interest and penalties related to unrecognized tax obligations are recorded in the balance sheet as other liabilities, and recognized in the income statement as other expenses.

85

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

h. Losses and Loss Expenses Payable

Losses and loss expenses payable are based on formula and case-basis estimates for reported claims and on estimates, based on experience and perceived trends, for unreported claims and loss expenses. The liability for unpaid losses and loss expenses, net of estimated salvage and subrogation recoverable of $29.3 million and $29.0 million at December 31, 2007 and 2006, respectively, has been established to cover the estimated ultimate cost to settle insured losses. The amounts are necessarily based on estimates of future rates of inflation and other factors, and accordingly, there can be no assurance that the ultimate liability will not vary materially from such estimates. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations (see Note 4). Anticipated salvage and subrogation is estimated using historical experience. As such, losses and loss expenses payable represent management’s best estimate of the ultimate liability related to reported and unreported claims.

i. Premiums

Premiums are recognized as earned in proportion to the insurance protection provided using the monthly pro rata method over the contract period. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage.

j. Comprehensive Income (Loss)

Comprehensive income (loss) is defined as all changes in an enterprise’s equity during a period other than those resulting from investments by owners and distributions to owners. Comprehensive income (loss) includes net income and other comprehensive income (loss). Other comprehensive income (loss) includes all other non-owner related changes to equity and includes net unrealized gains and losses on available-for-sale investments, derivative instruments and unrecognized benefit plan obligations, adjusted for deferred federal income taxes.

k. Share-Based Compensation

See Note 12—Share-Based Compensation regarding the Company’s adoption of SFAS 123(R) “Share-Based Payment” (SFAS 123(R)) on January 1, 2006. The Company’s share-based compensation plans authorize the granting of various equity-based incentives including stock options, restricted stock and restricted share units to employees and non-employee directors and agents. The expense for these equity-based incentives is based on their fair value at date of grant and amortized over their vesting period. The fair value of each stock option is estimated on the date of grant using the Black-Scholes closed-form pricing model. The pricing model requires assumptions such as the expected life of the option and expected volatility of the Company’s stock over the expected life of the option, which significantly impacts the assumed fair value. The Company uses historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future periods.

86

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

Prior to January 1, 2006, the Company accounted for share-based compensation plans for employees and non-employee directors under the measurement and recognition provisions of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations, as permitted by Statement of Financial Accounting Standards 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Had compensation cost of the employee and non-employee directors’ plans for 2005 been determined based on the fair values at the grant dates consistent with the method of SFAS 123, the Company’s pro-forma net earnings and net earnings per share information would have been as follows:

Pro-forma Fair Value Method:

($ millions, except per share amounts)	2005
Net income as reported	$	125.9
Less pro-forma stock compensation expense, net of tax		(3.5	)
Pro-forma net income	$	122.4
Pro-forma net earnings per common share
Basic	$	3.04
Diluted	$	2.92

The fair value of stock option awards granted to employees and directors in 2005 were estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair values and related assumptions for options granted were as follows:

	2005
Fair value	$	10.38
Expected dividend yield		0.77	%
Risk free interest rate		3.8	%
Expected volatility factor		35.8	%
Expected life in years		6.7

l. New Accounting Standards

Adoption of Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”) that requires employers with defined benefit pension and postretirement benefit plans other than pensions (collectively “benefit plans”) to recognize the funded status of their benefit plans in their balance sheet, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end balance sheet date thereby eliminating the use of an earlier measurement date and provide additional disclosures. The new measurement date requirement is not effective until fiscal years ending after December 15, 2008. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158, which had no effect on the Company’s consolidated statement of income for year ended December 31, 2006, or for any prior period presented in the 2006 Form 10-K, and it will not affect the Company’s operating results in future periods. Adopting SFAS 158 required the Company to recognize the

87

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

funded status (i.e. the difference between the fair value of plan assets and the benefit obligations) of its benefit plans in the December 31, 2006 balance sheet, with a corresponding adjustment to other comprehensive loss, net of tax of $63.9 million. The adoption did not have an impact on the Company’s debt covenants. At December 31, 2007 and 2006, the Company continued to use the earlier measurement date of September 30, and is currently reviewing the transition alternatives available and the related impact.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which was effective for fiscal years beginning after December 15, 2006. FIN 48 clarified the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no increase in the liability for unrecognized tax benefits. See Note 8 for additional required disclosures.

In February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” (“SFAS 155”), which was effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year after September 15, 2006. SFAS 155 permits fair value re-measurement for any hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets in order to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Company adopted this guidance effective January 1, 2007 and there was no impact on the Company’s financial statements.

In September 2005, the Accounting Standards Executive Committee issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”), which was effective for fiscal years beginning after December 15, 2006. SOP 05-1 provides guidance on accounting for deferred acquisition costs associated with modifications to or the internal replacement of insurance contracts. SOP 05-1 focuses on modifications to contracts with integrated product features and internal replacement of contracts in which the new contract offers product features not included in the old contract when both were priced together. The Company’s insurance contracts include only nonintegrated contract features as defined in SOP 05-1, which are contract features that provide coverage that is underwritten and priced only for that incremental insurance coverage and that do not result in re-underwriting or re-pricing of other components of the contract. Nonintegrated contract features do not change the existing base contract and do not require further evaluation under SOP 05-1. The Company adopted this guidance effective January 1, 2007 and there was no impact on the Company’s financial statements.

Pending Adoption of Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The statement imposes no new requirements for additional fair-value measures in financial statements. The Company adopted this guidance effective January 1, 2008.

88

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 expands the standards under SFAS 157 to provide entities with a one-time election to measure existing financial instruments and certain other items at fair value at the date of adoption. SFAS 159 also amends SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” to require a specific presentation of investments categorized as available-for-sale. This statement is effective for the first fiscal year that begins after November 15, 2007. The Company adopted this guidance on January 1, 2008 and did not elect the fair value option for any of its eligible assets or liabilities as of this date.

In June 2007, the FASB issued EITF 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 addresses how a company should recognize the income tax benefit received on dividends that are (a) paid to employees holding equity-classified non-vested shares, equity-classified non-vested share units, or equity-classified outstanding share options, and (b) charged to retained earnings under FAS 123(R). The tax benefit received on dividends paid to employees associated with their share-based awards should be recorded in additional paid-in capital until the award is settled through exercise (if the award is an option) or vesting (if the award is non-vested stock). This will be effective for tax benefits of dividends declared in fiscal years beginning after December 15, 2007. The Company adopted this guidance effective January 1, 2008 and it had no material impact on the Company’s financial statements.

2. Investments

The following tables summarize the cost or amortized cost of available-for-sale securities at December 2007 and 2006:

($ millions)	Cost or amortized cost		Gross unrealized holding gains		Gross unrealized holding losses			Fair value
Available-for-sale at December 31, 2007:
U.S. treasury securities and obligations of U.S. government agencies	$	90.9	$	2.2	$	(0.1	)	$	93.0
Obligations of states and political subdivisions		1,432.7		23.6		(4.3	)		1,452.0
Corporate securities		10.7		0.3		—			11.0
U.S. government agencies mortgage-backed securities		188.6		2.6		(1.8	)		189.4
Total fixed maturities		1,722.9		28.7		(6.2	)		1,745.4
Equity securities		210.2		47.4		(3.4	)		254.2
Other invested assets		20.1		0.3		(0.1	)		20.3
Total	$	1,953.2	$	76.4	$	(9.7	)	$	2,019.9

89

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

($ millions)	Cost or amortized cost		Gross unrealized holding gains		Gross unrealized holding losses			Fair value
Available-for-sale at December 31, 2006:
U.S. treasury securities and obligations of U.S. government agencies	$	180.1	$	0.6	$	(2.8	)	$	177.9
Obligations of states and political subdivisions		1,229.8		23.7		(2.5	)		1,251.0
Corporate securities		15.8		0.4		(0.1	)		16.1
U.S. government agencies mortgage-backed securities		204.9		1.7		(4.2	)		202.4
Total fixed maturities		1,630.6		26.4		(9.6	)		1,647.4
Equity securities		230.8		54.6		(1.2	)		284.2
Other invested assets		4.0		0.5		—			4.5
Total	$	1,865.4	$	81.5	$	(10.8	)	$	1,936.1

Deferred federal income taxes on the net unrealized holding gains for available-for-sale investments were $23.3 million and $24.7 million at December 31, 2007 and 2006, respectively.

At December 31, 2007 and 2006, there were no individual investments reflected in the tables below with an unrealized holding loss that had a fair value significantly below cost continually for more than one year. There are no individual material securities with an unrealized holding loss at December 31, 2007 and 2006. The following tables reflect the Company’s gross unrealized losses and fair value on its investments, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position, at December 31, 2007 and 2006:

At December 31, 2007	Less than 12 months						12 months or more						Total
Description of Securities	Fair Value		Unrealized Losses			Number of Positions	Fair Value		Unrealized Losses			Number of Positions	Fair Value		Unrealized Losses			Number of Positions
($ millions)
U.S. treasury securities and obligations of U.S. government agencies	$	5.4	$	—		2	$	6.5	$	(0.1	)	4	$	11.9	$	(0.1	)	6
Obligations of states and political subdivisions		204.1		(1.8	)	75		283.2		(2.5	)	106		487.3		(4.3	)	181
Corporate securities		—		—		—		1.0		—		1		1.0		—		1
U.S. government agencies mortgage backed securities		2.8		(0.1	)	2		101.2		(1.7	)	46		104.0		(1.8	)	48
Total fixed maturities		212.3		(1.9	)	79		391.9		(4.3	)	157		604.2		(6.2	)	236
Equity securities		36.6		(3.4	)	16		—		—		—		36.6		(3.4	)	16
Other invested assets		15.9		(0.1	)	2		—		—		—		15.9		(0.1	)	2
Total temporarily impaired securities	$	264.8	$	(5.4	)	97	$	391.9	$	(4.3	)	157	$	656.7	$	(9.7	)	254

90

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

At December 31, 2006	Less than 12 months						12 months or more						Total
Description of Securities	Fair Value		Unrealized Losses			Number of Positions	Fair Value		Unrealized Losses			Number of Positions	Fair Value		Unrealized Losses			Number of Positions
($ millions)
U.S. treasury securities and obligations of U.S. government agencies	$	11.9	$	(0.1	)	7	$	111.3	$	(2.7	)	51	$	123.2	$	(2.8	)	58
Obligations of states and political subdivisions		90.0		(0.6	)	35		232.8		(1.9	)	89		322.8		(2.5	)	124
Corporate securities		—		—		—		3.0		(0.1	)	2		3.0		(0.1	)	2
U.S. government agencies mortgage backed securities		17.2		(0.4	)	8		135.2		(3.8	)	51		152.4		(4.2	)	59
Total fixed maturities		119.1		(1.1	)	50		482.3		(8.5	)	193		601.4		(9.6	)	243
Equity securities		21.6		(1.2	)	9		—		—		—		21.6		(1.2	)	9
Total temporarily impaired securities	$	140.7	$	(2.3	)	59	$	482.3	$	(8.5	)	193	$	623.0	$	(10.8	)	252

The amortized cost and fair value of available-for-sale fixed maturities at December 31, 2007, by contractual maturity, are summarized as follows:

($ millions)	Amortized cost		Fair value
Due in 1 year or less	$	16.9	$	16.9
Due after 1 year through 5 years		60.5		62.5
Due after 5 years through 10 years		437.5		451.1
Due after 10 years		1,019.4		1,025.5
U.S. Government agencies mortgage-backed securities		188.6		189.4
Total	$	1,722.9	$	1,745.4

Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay the obligations with or without call or prepayment penalties.

Fixed maturities with fair values of approximately $55.1 million and $52.5 million were on deposit with regulators as required by law or specific escrow agreement at December 31, 2007 and 2006, respectively.

91

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

Components of net investment income for the year ended December 31 are summarized as follows:

($ millions)	2007		2006	2005
Fixed maturities	$	75.3	73.6	72.8
Equity securities		5.7	5.1	4.0
Cash and cash equivalents, and other		5.5	6.1	3.6
Investment income		86.5	84.8	80.4
Investment expenses		1.8	1.7	1.7
Net investment income	$	84.7	83.1	78.7

The Company’s current investment strategy does not rely on the use of derivative financial instruments. See Note 3 for additional fair value disclosures.

The Company recognized realized losses on other-than-temporary impairments of $0, $3.8 million and $0.6 million on its fixed maturity portfolio in 2007, 2006 and 2005, respectively. The Company recognized realized losses on other-than-temporary impairments of $1.9 million, $1.6 million and $1.0 million in 2007, 2006 and 2005, respectively on its equity security portfolio. During 2007 the Company outsourced a segment of its investment portfolio to external money managers. When assessing other-than-temporary impairment on this segment of the investment portfolio, management considers its inability to make the assertion regarding its intent to hold a particular security that is currently valued below cost until recovery in the near term. The Company reviewed its investments at December 31, 2007, and determined no additional other-than-temporary impairment exists in the gross unrealized holding losses due to the evidence that would indicate only temporary impairment.

Proceeds on sales of available-for-sale securities in 2007, 2006, and 2005 were $262.2 million, $275.2 million and $340.1 million, respectively.

92

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

Realized and unrealized gains and losses for the years ended December 31 are summarized as follows:

($ millions)	2007			2006		2005
Realized gains:
Fixed maturities	$	0.8		1.8		5.9
Equity securities		19.7		15.6		6.7
Total realized gains		20.5		17.4		12.6
Realized losses:
Fixed maturities		1.3		4.8		1.7
Equity securities		7.1		7.0		5.3
Total realized losses		8.4		11.8		7.0
Net realized gains on investments	$	12.1		5.6		5.6
Change in unrealized gains (losses):
Increase (decrease) in unrealized holding gains – fixed maturity securities	$	5.7		(3.2	)	(30.2	)
(Decrease) increase in unrealized holding gains – equity securities		(9.4	)	22.6		0.6
(Decrease) increase in unrealized holding gains – other invested assets		(0.3	)	(0.3	)	0.6
Deferred federal income taxes (benefits) thereon		1.4		(6.7	)	10.3
(Decrease) increase in net unrealized holding gains	$	(2.6	)	12.4		(18.7	)

3. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Investment securities: Fair values for investments in fixed maturities are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices.

Cash and cash equivalents: The carrying amounts reported for these instruments approximate their fair value.

93

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

Notes payable: The carrying amount of the Trust Preferred note (defined in Note 6b) in the consolidated balance sheets approximates its fair value as the interest rate adjusts quarterly. The $100.0 million, 6.25% Senior Notes (defined in Note 7) have a fair value of $103.6 million and $99.1 million at December 31, 2007 and 2006, respectively. The fair value of the Senior Notes is based on the quoted market price at December 31, 2007 and 2006, respectively.

($ millions)	December 31, 2007				December 31, 2006
	Carrying Value		Fair Value		Carrying Value		Fair Value
Fixed maturities	$	1,745.4	$	1,745.4	$	1,647.4	$	1,647.4
Equity securities		254.2		254.2		284.2		284.2
Other invested assets		21.6		21.6		6.3		6.3
Cash and cash equivalents		70.9		70.9		73.4		73.4
Notes payable		118.0		119.1		118.4		114.6

4. Losses and Loss Expenses Payable

Activity in the liability for losses and loss expenses for the year ended December 31 is summarized as follows:

($ millions)	2007			2006		2005
Losses and loss expenses payable, at beginning of year	$	674.5		728.7		681.8
Less: reinsurance recoverable on losses and loss expenses payable		13.5		17.4		25.9
Net balance at beginning of year		661.0		711.3		655.9
Incurred related to:
Current year		645.5		659.3		657.7
Prior years		(54.7	)	(71.7	)	(44.3	)
Total incurred		590.8		587.6		613.4
Paid related to:
Current year		368.7		389.4		350.5
Prior years		236.0		248.5		242.8
Total paid		604.7		637.9		593.3
Impact of pooling change, January 1, 2005 (Note 6a)		—		—		35.3
Net balance at end of year		647.1		661.0		711.3
Plus: reinsurance recoverable on losses and loss expenses payable		11.2		13.5		17.4
Losses and loss expenses payable, at end of year (affiliate $257.2, $281.7 and $302.6, respectively)	$	658.3		674.5		728.7

The Company recorded favorable loss and loss expense reserve development in 2007, 2006, and 2005 of $54.7 million, $71.7 million and $44.3 million, respectively. The favorable development in 2007 was primarily due to auto liability and other liability losses being approximately $23.5 million less than anticipated as current loss projections using more mature claim data resulted in lower claim severity than in past projections, loss adjustment expenses being approximately $11.8 million lower than anticipated in proportion to losses and ceded

94

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

losses being above previously anticipated levels by approximately $10.0 million. The favorable development in 2006 was largely due to ceded reserves being above previously anticipated levels by $23.7 million, auto liability losses being $24.7 million less than anticipated as current loss projections using more mature claim data resulted in lower average claim severities than in past projections, and loss adjustment expenses declining by $13.5 million in proportion to losses. The favorable development in 2005 was largely due to ceded reserves being above previously anticipated levels by $14.8 million, catastrophe losses associated with the 2004 hurricanes developing $5.8 million better than previous estimates, and loss adjustment expenses developing favorably by $13.7 million in proportion to losses.

5. Reinsurance

In the ordinary course of business, the Company assumes and cedes reinsurance with other insurers and reinsurers and is a member in various pools and associations. See Note 6a for discussion of reinsurance with affiliates. The voluntary arrangements provide greater diversification of business and limit the maximum net loss potential arising from large risks and catastrophes. Most of the ceded reinsurance is effected under reinsurance contracts known as treaties; the remainder is by negotiation on individual risks. Although the ceding of reinsurance does not discharge the original insurer from its primary liability to its policyholder, the insurance company that assumes the coverage assumes the related liability.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. The recoverability of these assets depends on the reinsurers’ ability to perform under the reinsurance agreements. The Company evaluates and monitors the financial condition and concentrations of credit risk associated with its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. The Company has reported ceded losses and loss expenses payable and prepaid reinsurance premiums with other insurers and reinsurers as assets. All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance.

Prior to the reinsurance transaction with State Auto Mutual under the Pooling Arrangement, as discussed in Note 6a, the effect of the Company’s external reinsurance on its balance sheets and income statements is summarized as follows:

($ millions)	December 31
	2007			2006
Losses and loss expenses payable:
Direct	$	396.0		387.2
Assumed		5.1		5.6
Ceded		(10.1	)	(10.8	)
Net losses and loss expenses payable	$	391.0		382.0
Unearned premiums:
Direct	$	315.3		309.2
Assumed		1.2		1.2
Ceded		(6.0	)	(6.0	)
Net unearned premiums	$	310.5		304.4

95

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

($ millions)	Year ended December 31
	2007			2006		2005
Written premiums:
Direct	$	757.4		748.8		749.5
Assumed		6.5		7.1		6.0
Ceded		(18.8	)	(17.7	)	(16.9	)
Net written premiums	$	745.1		738.2		738.6
Earned premiums:
Direct	$	751.0		743.1		746.9
Assumed		6.5		7.1		6.1
Ceded		(18.8	)	(17.6	)	(16.4	)
Net earned premiums	$	738.7		732.6		736.6
Losses and loss expenses incurred:
Direct	$	438.5		415.0		455.7
Assumed		2.0		10.8		14.6
Ceded		(2.9	)	(3.5	)	(8.2	)
Net losses and loss expenses incurred	$	437.6		422.3		462.1

6. Transactions with Affiliates

a. Reinsurance

Prior to 2005, State Auto P&C, Milbank, Farmers, SA Ohio (the “STFC Pooled Companies”), State Auto Insurance Company of Wisconsin (“SA Wisconsin”) and State Auto Florida Insurance Company (“SA Florida”) participated in a quota share reinsurance pooling arrangement (the “Pooling Arrangement”) with State Auto Mutual. Effective January 1, 2005, the Pooling Arrangement was amended to add as participants Meridian Security Insurance Company (“Meridian Security”) and Meridian Citizens Mutual Insurance Company (“Meridian Citizens”), Indiana domiciled property and casualty insurers. Meridian Security is a wholly-owned subsidiary of Meridian Insurance Group, Inc. (“MIGI”), which is wholly-owned by State Auto Mutual. MIGI is party to an affiliation agreement with Meridian Citizens. Meridian Security and Meridian Citizens Mutual are hereafter referred to collectively as the “MIGI Insurers” and together with MIGI as the “MIGI Companies.” SA Wisconsin and SA Florida are wholly owned subsidiaries of State Auto Mutual.

In conjunction with the Pooling Arrangement amendment, the STFC Pooled Companies received $54.0 million in cash from the MIGI Insurers which related to the additional net insurance liabilities assumed on January 1, 2005.

In general, under the Pooling Arrangement, the STFC Pooled Companies, SA Wisconsin, SA Florida and the MIGI Insurers cede to State Auto Mutual all of their insurance business and assume from State Auto Mutual an amount equal to their respective participation percentages in the Pooling Arrangement. The STFC Pooled Companies’ pooling participation percentage remained at 80% under the amended pooling arrangement effective January 1, 2005. All premiums, losses and loss expenses and underwriting expenses are allocated among the participants on the basis of each Company’s participation percentage in the Pooling Arrangement. The Pooling Arrangement provides indemnification against loss or liability relating to insurance risk and has been accounted for as reinsurance.

96

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

The Pooling Arrangement does not relieve each individual pooled subsidiary of its primary liability as the originating insurer; consequently, there is a concentration of credit risk arising from business ceded to State Auto Mutual. As the Pooling Arrangement provides for the right of offset, the Company has reported losses and loss expenses payable and prepaid reinsurance premiums to State Auto Mutual as assets only in situations when net amounts ceded to State Auto Mutual exceed net amounts assumed. The STFC Pooled Companies’ pooling percentage has remained at an 80% participation level since 2001. All parties that participate in the Pooling Arrangement have an A.M. Best rating of A+ (Superior).

The following provides a summary of the reinsurance transactions on the Company’s balance sheets and income statements for the Pooling Arrangement between the STFC Pooled Companies and State Auto Mutual:

($ millions)	December 31
	2007			2006
Losses and loss expenses payable:
Ceded	$	(371.6	)	(358.2	)
Assumed		628.8		639.9
Net assumed	$	257.2		281.7
Unearned premiums:
Ceded	$	(298.6	)	(292.3	)
Assumed		418.1		410.7
Net assumed	$	119.5		118.4

($ millions)	Year ended December 31
	2007			2006		2005
Written premiums:
Ceded	$	(702.3	)	(695.7	)	(685.8	)
Assumed		973.9		974.1		993.9
Earned premiums:
Ceded	$	(695.7	)	(687.6	)	(676.8	)
Assumed		965.5		976.0		994.4
Losses and loss expenses incurred:
Ceded	$	(405.6	)	(388.4	)	(423.4	)
Assumed		558.2		554.4		579.5

The STFC Pooled Companies, SA National, State Auto Mutual, SA Wisconsin, SA Florida and the MIGI Insurers are collectively referred to as the “State Auto Group.”

State Auto P&C assumes catastrophe reinsurance from the State Auto Group and Beacon National Insurance Company (“Beacon National”), a subsidiary of State Auto Mutual, in the amount of $100.0 million excess of $135.0 million in exchange for a premium paid by each reinsured company. Under this agreement, the Company has assumed from State Auto Mutual and its affiliates premiums written and earned of $3.1 million, $3.0 million and $2.7 million for 2007, 2006 and 2005, respectively. There have been no losses assumed under this agreement. The catastrophe reinsurance program with State Auto P&C has been excluded from the Pooling Arrangement.

97

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

As of July 1, 2005, SA National and State Auto Mutual terminated a reinsurance agreement between the parties that included excess of loss and quota share coverages. SA National and State Auto Mutual mutually agreed to terminate the reinsurance agreement because of SA National’s stronger surplus position, relative to the commencement date of the agreement, which makes it more efficient for SA National to retain such exposures rather than to reinsure them. Under the terms of the termination, State Auto Mutual will continue to be liable, with respect to policies in force at the termination date, for occurrences until the expiration, cancellation or next anniversary, not to exceed one year.

The following provides a summary of the ceded reinsurance transactions on the Company’s balance sheet and income statement for the reinsurance agreement between SA National and State Auto Mutual:

($ millions)	2007		2006
Balance sheet:
Losses and loss expenses payable	$	1.1	2.7

($ millions)	2007			2006	2005
Income statement:
Written premiums	$	—		—	3.8
Earned premiums	$	—		0.2	6.6
Losses and loss expenses incurred	$	(0.6	)	0.7	4.8

Intercompany Balances

Pursuant to the Pooling Arrangement, State Auto Mutual receives all premiums and pays all losses and expenses associated with the insurance business produced by the pool participants and then settles the intercompany balances generated by these transactions with the participating companies on a quarterly basis within 45 days following each quarter end. No interest is paid on this balance. When settling the intercompany balances, State Auto Mutual provides the pool participants with full credit for the premiums written and net losses paid during the quarter and retains all receivable amounts from insureds and agents and reinsurance recoverable on paid losses from unaffiliated reinsurers. Any receivable amounts that are ultimately deemed to be uncollectible are charged-off by State Auto Mutual and allocated to the pool member on the basis of pool participation. As a result, the Company has an off-balance sheet credit–risk related to the balances due to State Auto Mutual from insurers, agents and reinsurers, which are offset by the unearned premium from the respective policies. The Company’s share of the premium balances due to State Auto Mutual from agents and insureds at December 31, 2007 and 2006 is approximately $266.9 million and $250.3 million, respectively.

b. Notes Payable

In May 2003, State Auto Financial formed a Delaware business trust (the “Capital Trust) that issued $15.0 million mandatorily redeemable preferred capital securities to a third party and $0.5 million of its common securities representing all outstanding common securities to State Auto Financial (collectively, the capital and common securities are referred to as the “Trust Securities”). The Capital Trust loaned $15.5 million in proceeds from the issuance of its Trust Securities to State Auto Financial in the form of a Floating Rate Junior Subordinated Debt Securities due in 2033 (the “Subordinated Debentures”). The Subordinated Debentures are the Capital Trust’s only assets along with any interest accrued thereon. Interest on the Trust Securities are payable

98

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

quarterly at a rate equal to the three-month LIBOR rate plus 4.20% adjusted quarterly (total 9.32% at December 31, 2007). Prior to May 2008, the interest rate may not exceed 12.5% per annum. The interest rate and interest payment dates on the Subordinated Debentures are the same as the interest rate and interest payment dates on the Trust Securities, thereby payments from the Subordinated Debentures finance the distributions paid on the Trust Securities. State Auto Financial has the right to redeem the Subordinated Debentures, in whole or in part, on or after May 23, 2008. In accordance with FASB Interpretation No. 46(R), (and related amendments and interpretations) “Consolidation of Variable Interest Entities,” State Auto Financial determined that the business trust is a variable interest entity for which it is not the primary beneficiary and therefore, does not consolidate the Capital Trust with the Company. State Auto Financial has unconditionally and irrevocably guaranteed payment of any required distributions on the capital securities, the redemption price when the capital securities are redeemed, and any amounts due if the Capital Trust is liquidated or terminated. State Auto Financial’s equity interest in the Capital Trust is included in other invested assets.

In December 2005, State Auto Financial repaid a $45.5 million line of credit it had with State Auto Mutual. This repayment was funded through dividends from State Auto Financial’s insurance subsidiaries. The interest rate under this line of credit was 3.50% for 2005.

c. Management Services

Stateco provides State Auto Mutual and its affiliates investment management services. Investment management income is recognized quarterly based on a percentage of the average fair value of investable assets and the equity portfolio performance of each company managed. Revenue related to these services amounted to $2.8 million, $2.5 million and $2.3 million in 2007, 2006 and 2005, respectively, and is included in other income (affiliates).

7. Notes Payable and Credit Facility

In 2003, State Auto Financial issued $100.0 million of unsecured Senior Notes due November 2013. The Senior Notes bear interest at a fixed rate of 6.25% per annum, which is payable each May 15 and November 15. The Senior Notes are general unsecured obligations ranking senior to all existing and future subordinated indebtedness and equal with all existing and future senior indebtedness. The Senior Notes are not guaranteed by any of State Auto Financial’s subsidiaries and thereby are effectively subordinated to all subsidiaries’ existing and future indebtedness. As of December 31, 2007, State Auto Financial was in compliance with all covenants related to the Senior Notes. State Auto Financial incurred $1.5 million in issuance costs related to the Senior Notes, which is recorded in other assets and is being amortized into interest expense ($0.1 million each for 2007, 2006 and 2005) as the underlying interest expense is recognized on the Senior Notes.

On July 12, 2007, State Auto Financial terminated its previous credit agreement which provided for a $100.0 million five-year unsecured revolving credit facility and entered into a new credit agreement (“Credit Agreement”) with a syndicate of lenders which provides for a $200.0 million five-year unsecured revolving credit facility (“Credit Facility”). State Auto did not borrow any funds under the previous credit agreement. During the term of the Credit Facility, the Company has the right to increase the total facility to a maximum total facility amount of $250.0 million, provided that no event of default has occurred and is continuing. While the Credit Facility will be available for general corporate purposes, including working capital, acquisitions and liquidity purposes, the Company presently intends to keep $100.0 million of the Credit Facility available in the event there is a need to fund losses under the catastrophe reinsurance program with State Auto P&C. The Credit Facility provides for interest-only payments during its term, with principal due in full at maturity. Interest is

99

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

based on either a London interbank market rate or a base rate plus a calculated margin amount. The Credit Agreement contains certain covenants, including financial covenants that require the Company to maintain a minimum net worth and not exceed a certain debt to capitalization ratio. As of December 31, 2007, State Auto Financial had not made any borrowings and was in compliance with all of the covenants under the Credit Agreement. State Auto Financial incurred $0.5 million in issuance costs related to the Credit Agreement, which is recorded in other assets and is being amortized into expense ($0.1 million for 2007) over the life of the Credit Agreement.

See discussion of affiliate notes payable at Note 6c. Notes payable at December 31 consisted of the following:

($ millions, except interest rates)	2007						2006
	Carrying Value		Fair Value		Interest Rate		Carrying Value		Fair Value		Interest Rate
Senior Notes due 2013: issued $100.0, November 2003 with fixed interest	$	102.5	$	103.6	6.25	%	$	102.9	$	99.1	6.25	%
Affiliate subordinated debentures due 2033: issued $15.5, May 2003 with variable interest (see Note 6c)		15.5		15.5	9.32			15.5		15.5	9.57
Total Notes Payable	$	118.0	$	119.1			$	118.4	$	114.6

8. Federal Income Taxes

At December 31, 2007, the Company carried no balance for uncertain tax positions.

The Company had no accrual for the payment of interest and penalties at December 31, 2007 or 2006.

The Company is currently not under audit by either the Internal Revenue Service or any state jurisdiction for income tax purposes and all prior audits have been settled. Tax years 2004 through 2006 remain open for audit for federal income tax purposes.

The reconciliation between actual federal income tax expense (benefit) and the amount computed at the indicated statutory rate for the year ended December 31 is summarized as follows:

($ millions)	2007			%		2006			%		2005			%
Amount at statutory rate	$	54.4		35		$	56.6		35		$	60.2		35
Tax-free interest and dividends received deduction		(18.5	)	(12	)		(15.7	)	(10	)		(14.0	)	(8	)
Other, net		0.3		—			0.4		—			(0.1	)	—
Federal income tax expense and rate	$	36.2		23		$	41.3		25		$	46.1		27

100

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of December 31 are presented below:

($ millions)	2007		2006
Deferred tax assets:
Unearned premiums not currently deductible	$	29.6	28.8
Losses and loss expenses payable discounting		20.1	20.7
Postretirement and pension benefits		42.4	47.9
Other		14.3	10.0
Total deferred tax assets		106.4	107.4
Deferred tax liabilities:
Deferral of policy acquisition costs		37.0	36.4
Unrealized holding gains on investments		23.3	24.7
Total deferred tax liabilities		60.3	61.1
Net deferred federal income taxes	$	46.1	46.3

The Company is required to establish a valuation allowance for any portion of the deferred tax asset that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets and, therefore, no such valuation allowance has been established at December 31, 2007 or 2006.

9. Pension and Postretirement Benefit Plans

All Company personnel are employees of State Auto P&C. The Company, through State Auto P&C, provides management and operation services under management agreements for all insurance and non-insurance affiliates. The annual periodic costs related to the Company’s benefit plans are allocated to affiliated companies based on allocations pursuant to intercompany management agreements.

The Company provides a defined benefit pension plan for its eligible employees. Substantially all Company employees become eligible to participate the year after becoming 20 years of age and vest with 5 years of credited service or attained age 65. The Company’s policy is to fund pension costs in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Benefits are determined by applying factors specified in the plan to a participant’s defined average annual compensation.

In addition to the defined benefit pension plan, the Company provides a postretirement benefit plan including certain health care and life insurance benefits for its eligible retired employees. Substantially all of the Company’s employees may become eligible for these postretirement benefits if they retire between age 55 and 65 with 15 years or more of service or if they retire at age 65 or later with 5 years or more of service. The defined benefit pension and postretirement benefit plans are referred to herein as “the benefit plans.”

On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158. SFAS 158 required the Company to recognize the funded status of its benefit plans in the December 31, 2006 balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs, and unrecognized transition assets remaining from the initial adoption of

101

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

SFAS 87 and SFAS 106, all of which were previously netted against the plans’ funded status in the Company’s balance sheet pursuant to the provisions of SFAS 87 and SFAS 106. These amounts will be subsequently recognized as net periodic cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS 158.

The following table provides the incremental effects of adopting the provisions of SFAS 158 on the Company’s balance sheet at December 31, 2006. The adoption of SFAS 158 had no effect on the Company’s consolidated statement of income for the year ended December 31, 2006, or for any prior period presented.

($ millions)	Prior to Adopting SFAS 158		Effect of Adopting SFAS 158			As Reported
Assets:
Net prepaid pension expense	$	61.8	$	(61.8	)	$	—
Deferred federal income taxes		5.6		40.7			46.3
Liabilities:
Postretirement benefits		98.1		26.7			124.8
Pension benefits		—		16.1			16.1
Stockholders’ Equity:
Accumulated other comprehensive income (loss)		46.6		(63.9	)		(17.3	)

The Company uses September 30 as its measurement date to determine its pension and postretirement benefit obligations.

102

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

Information regarding the Company’s pension and postretirement benefit plans’ change in benefit obligation, plan assets and funded status as of December 31 are as follows:

($ millions)	Pension					Postretirement
		2007		2006		2007		2006
Change in benefit obligation:
Benefit obligation at beginning of year	$	213.4		206.8		122.7		109.2
Service cost		9.0		10.0		5.6		4.9
Interest cost		12.5		11.7		7.3		6.2
Actuarial (gain) loss		(5.6	)	(4.3	)	(9.7	)	5.5
Contributions		—		—		(2.9	)	(3.1	)
Benefits paid		(12.0	)	(10.8	)	—		—
Benefit obligation at end of year	$	217.3		213.4		123.0		122.7
Change in plan assets:
Fair value of plan assets at beginning of year	$	197.3		183.4		2.2		2.1
Employer contribution		11.5		10.0		—		—
Actual return on plan assets		23.2		14.7		0.1		0.1
Benefits paid		(12.0	)	(10.8	)	—		—
Fair value of plan assets at end of year	$	220.0		197.3		2.3		2.2
Contribution received during fourth quarter		—		—		(0.2	)	—
SERP (defined below)		—		—		(4.3	)	(4.3	)
Funded status at end of year	$	2.7		(16.1	)	(125.2	)	(124.8	)
Accumulated benefit obligation – end of year	$	194.3		190.9

No assets are expected to be returned during the fiscal year-ended December 31, 2008. The Company had no additional minimum liability included in other comprehensive income for the pension plan for 2006 (prior to adoption of SFAS 158) and 2005.

Included in accumulated other comprehensive loss are the following amounts that have not been recognized in net periodic cost:

($ millions)	December 31
	2007			2006
Net actuarial loss	$	75.7		101.0
Prior service cost		5.7		6.6
Transition asset		(2.4	)	(3.0	)
Total	$	79.0		104.6

103

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

The amount of amortization expected to be recognized during the fiscal year ending December 31, 2008 for the State Auto Group is as follows:

($ millions)	2008
Net actuarial loss	$	3.2
Prior service cost		0.9
Transition asset		(0.6	)
Total	$	3.5

Information regarding the State Auto Group’s pension and postretirement benefit plans’ components of net periodic cost for the year ended December 31 is as follows:

($ millions)	Pension							Postretirement
	2007			2006		2005		2007		2006		2005
Components of net periodic cost:
Service cost	$	9.0		10.0		8.0		5.6		4.9		4.4
Interest cost		12.5		11.7		11.2		7.3		6.2		6.5
Expected return on plan assets		(17.8	)	(17.0	)	(16.9	)	(0.2	)	(0.2	)	(0.2	)
Amortization of prior service cost		0.4		0.4		0.4		0.5		0.5		0.5
Amortization of transition asset		(0.6	)	(0.6	)	(0.6	)	—		—		—
Amortization of net gain		3.9		2.9		1.1		0.8		0.6		0.6
Net periodic cost	$	7.4		7.4		3.2		14.0		12.0		11.8

The following benefit payments, which reflect expected future service, are expected to be paid:

($ millions)	Pension		Postretirement
2008	$	9.0	$	4.0
2009		9.3		4.3
2010		9.7		4.7
2011		10.2		5.2
2012		11.2		5.6
2013 - 2017		72.9		35.7

The Company’s share of the 2007, 2006, and 2005 net periodic costs for the defined benefit plan were $7.4 million, $7.4 million, and $3.2 million, respectively. For postretirement benefits other than pensions, the Company’s share of the 2007, 2006 and 2005 net periodic costs were $11.6 million, $10.3 million and $10.2 million, respectively.

104

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

Summarized in the following table are the weighted average assumptions used to determine the Company’s benefit obligations for the year ended December 31:

	Pension				Postretirement
	2007		2006		2007		2006
Benefit obligations weighted-average assumptions:
Discount rate	6.25	%	6.00	%	6.25	%	6.00	%
Rates of increase in compensation levels	4.00		4.00		—		—

Summarized in the following table are the weighted average assumptions used to determine the Company’s net periodic cost:

	Pension						Postretirement
	2007		2006		2005		2007		2006		2005
Weighted-average assumptions:
Discount rate	6.00	%	5.75	%	6.50	%	6.00	%	5.75	%	6.50	%
Expected long-term rate of return on assets	9.00		9.00		9.00		9.00		9.00		9.00
Rates of increase in compensation levels	4.00		5.00		5.00		—		—		—

The Company’s benefit plan obligations are long-term in nature and consequently the investment strategies have a long-term time horizon. In establishing the long-term rate of return assumption on plan assets, management, along with its pension consulting actuary, reviews the historical performance of the plan assets and the stability in the mix of the investment portfolio. The expected inflation rate and expected real rates of return of applicable asset classes are then determined to assist in setting appropriate assumptions.

The assumed health care cost trend rates used for the year ended December 31 are as follows:

	Postretirement
	2007		2006		2005
Assumed health care cost trend rates:
Health care cost trend rate assumed for the next year	10.00	%	10.00	%	10.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	5.00	%	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2012		2011		2010

The assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement plan. A one percentage point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2007:

($ millions)	Postretirement
	Increase		(Decrease)
One percentage point change:
Effect on total service and interest cost	$	3.1	$	(2.4	)
Effect on accumulated postretirement benefit obligation		23.3		(18.6	)

105

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

The Company also has a supplemental executive retirement plan (“SERP”) for certain executives for which the accrued obligation at December 31, 2007 and 2006 was $4.3 million that is included as a component in postretirement and pension benefits liability in the accompanying consolidated balance sheets.

The Company’s benefit plans’ weighted average asset allocations by asset category at the plans’ measurement date of September 30 are as follows:

	Pension				Postretirement
	2007		2006		2007		2006
Asset Category:
Fixed maturity	37.9	%	35.4	%	100.0	%	100.0	%
U.S. large cap equity	40.3		64.6		—		—
U.S. small cap equities	12.4		—		—		—
International	9.4		—		—		—
Total	100.0		100.0		100.0		100.0

The benefit plan’s investment policy objective is to preserve the investment principal while generating income and appreciation in fair value to meet the benefit plans’ obligations. The benefit plans’ investment strategy and risk tolerance is balanced between meeting cash obligation requirements and a long term relatively high risk tolerance. Since the nature and timing of the benefit plans’ liabilities and cash requirements are predictable, the liquidity requirements are somewhat moderate. During 2007, the following asset allocation targets, as a percentage of total fair value, were approved. Management is in the process of moving towards these allocation targets as funds become available.

	Asset Allocation Target (0 to 100%)
Asset Category:
Fixed maturity	23
U.S. large cap equity	43
U.S. small/mid cap equity	14
Treasury inflation protected securities	10
International	10

The actuarially prepared funding amount to the pension plan ranges from the minimum amount the Company would be required to contribute to the maximum amount that would be deductible for tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible for tax purposes. This range is generally not determined until the second quarter with respect to the contribution year. The Company expects to contribute approximately $12.0 million during 2008 to its pension plan, depending on the actuarially calculated funding requirements of such plan. Postretirement and SERP plan payments are deductible for tax purposes when paid.

The Company maintains a defined contribution plan that covers substantially all employees of the Company. The Company matches the first 2% of contributions of participants’ salary at the rate of 75 cents for each dollar

106

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

contributed. Participant contributions of 3% to 6% are matched at a rate of 50 cents for each dollar contributed. The Company’s share of the expense under the plan totaled $2.6 million, $2.5 million and $2.4 million for the years 2007, 2006 and 2005, respectively.

10. Stockholders’ Equity

a. Treasury Shares

On August 17, 2007, State Auto Financial’s board of directors authorized a plan to repurchase, from time to time, up to 4.0 million of its common shares, or approximately 10% of State Auto Financial’s outstanding shares, over a period extending to and through December 31, 2009 (the “Repurchase Plan”). Under the Repurchase Plan, State Auto Financial may repurchase shares from State Auto Mutual in amounts that are proportional to the respective current ownership percentages of State Auto Mutual, which is approximately 64%, and other shareholders. State Auto Financial’s total share repurchase activity in 2007 was approximately 0.8 million common shares at an average repurchase price of $27.21 per share for a total of $22.1 million.

b. Dividend Restrictions and Statutory Financial Information

State Auto P&C, Milbank, Farmers, SA Ohio and SA National are subject to regulations and restrictions under which payment of dividends from statutory earned surplus can be made to State Auto Financial during the year without prior approval of regulatory authorities. Pursuant to these rules, at December 31, 2007, adjusted for dividend payments made in the previous twelve-month period, approximately $79.6 million is available for payment to State Auto Financial from its insurance subsidiaries in 2008 without prior approval. In 2007 State Auto Financial received dividends of $50.0 million from its insurance subsidiaries, $0 in 2006, and $40.5 million in 2005.

Reconciliations of statutory capital and surplus and net income, as determined using statutory accounting principles, to the amounts included in the accompanying consolidated financial statements as of December 31 are as follows:

($ millions)	2007			2006
Statutory capital and surplus of insurance subsidiaries	$	916.4		856.2
Net liabilities of non-insurance parent and affiliates		(59.5	)	(71.4	)
		856.9		784.8
Increases (decreases):
Deferred policy acquisition costs		105.8		104.0
Postretirement and pension obligations		(22.1	)	(38.2	)
Deferred federal income taxes		(33.6	)	(38.8	)
Fixed maturities at fair value		22.5		16.8
Other, net		6.0		5.6
Stockholders’ equity per accompanying consolidated financial statements	$	935.5		834.2

107

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

($ millions)	Year ended December 31
	2007			2006		2005
Statutory net income of insurance subsidiaries	$	129.5		140.1		123.7
Net income (loss) of non-insurance parent and affiliates		0.5		(0.1	)	(2.1	)
		130.0		140.0		121.6
Increases (decreases):
Deferred policy acquisition costs		1.7		(2.0	)	8.5
Postretirement and pension benefit		(12.0	)	(11.8	)	(7.1	)
Deferred federal income taxes		5.4		0.3		2.7
Share-based compensation expense		(5.5	)	(6.5	)	—
Other, net		(0.5	)	0.4		0.2
Net income per accompanying consolidated financial statements	$	119.1		120.4		125.9

11. Preferred Stock

State Auto Financial has authorized two classes of preferred stock. For both classes, upon issuance, the Board of Directors has authority to fix and determine the significant features of the shares issued, including, among other things, the dividend rate, redemption price, redemption rights, conversion features and liquidation price payable in the event of any liquidation, dissolution, or winding up of the affairs of State Auto Financial.

The Class A preferred stock is not entitled to voting rights until, for any period, dividends are in arrears in the amount of six or more quarterly dividends.

12. Share-Based Compensation

Prior to January 1, 2006, the Company accounted for share-based compensation plans for employees and non-employee directors under the measurement and recognition provisions of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by Statement of Financial Accounting Standards 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Accordingly, share-based compensation was included as a pro forma disclosure in the financial statement footnotes (See Note 1k – Share-Based Compensation). For share-based awards granted to the Company’s independent insurance agencies, the Company recognized share-based compensation within its financial statements in accordance with SFAS 123 and related Interpretations.

The Company maintains share-based compensation plans for its key employees and outside, or non-employee, directors. The share-based compensation plan for key employees is the Amended and Restated Equity Incentive Compensation Plan (the “Equity Plan”). In May 2005, the Company’s shareholders approved amendments to, and a restatement of, the Equity Plan, which was formerly called the 2000 Stock Option Plan. The stock-based compensation plan for outside directors is the Outside Directors Restricted Share Unit Plan (the “Outside Directors RSU Plan”), which was approved by the Company’s shareholders in May 2005. The Outside Directors RSU Plan replaced the 2000 Directors Stock Option Plan for outside directors (the “Outside Directors Stock Option Plan”).

Equity Plan

The 2000 Stock Option Plan provided only for the award of qualified and nonqualified stock options. The Equity Plan now provides for the award of qualified and nonqualified stock options, restricted shares,

108

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

performance shares, performance units and other stock-based awards. The Company has reserved 3.5 million common shares under the Equity Plan. As of December 31, 2007, a total of 1.1 million common shares were available for issuance under the Equity Plan. The Equity Plan provides that (i) no more than 33% of the common shares authorized for issuance under the Equity Plan may be granted in the form of awards other than stock options, (ii) the maximum number of common shares subject to awards of stock options, restricted shares and performance shares that may be granted in any calendar year is equal to 1.5% of the total number of common shares of the Company outstanding as of December 31 of the prior year, and (iii) the maximum number of common shares subject to awards of stock options, restricted shares and performance shares that may be granted in any calendar year to any individual is 250,000 shares. The Equity Plan automatically terminates on July 1, 2010.

The Equity Plan provides that qualified stock options may be granted at an option price not less than the fair market value of the common shares at the date of grant and that nonqualified stock options may be granted at any price determined by the Compensation Committee of the Board of Directors. Options granted generally vest over a three-year period, with one-third of the options vesting on each anniversary of the grant date, and must be exercised no later than ten years from the date of grant. Stock options granted under the Equity Plan for 2007, 2006 and 2005 were 0.4 million, 0.3 million and 0.4 million, respectively.

The Equity Plan provides for the granting of restricted shares subject to a vesting schedule based on the employee’s continued employment (“Restriction Period”), for which vesting is generally on the third anniversary after the date of grant. The Company recognizes compensation expense based on the number of restricted shares granted at the then grant date fair value over the Restriction Period. Restricted shares granted for 2007 and 2006 were 32,000 and 10,500, respectively, with a weighted average grant date fair value of $29.98 and $31.94, respectively. There were no restricted shares granted prior to January 1, 2006.

A summary of the status of the Company’s non-vested restricted shares and changes for the year ended December 31 is as follows:

	2007			2006
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Outstanding, beginning of year	10,500	$	31.94	—
Granted	32,000		29.98	10,500	$	31.94
Outstanding, end of year	42,500		30.46	10,500		31.94

As of December 31, 2007, there was $1.0 million of total unrecognized compensation cost related to non-vested restricted share compensation arrangements. The remaining cost is expected to be recognized over a period of 2.75 years. No shares vested during the years ended December 31, 2007 and 2006.

Employee Stock Purchase Plan

The Company also has a broad-based employee stock purchase plan, under which employees of the Company may choose at two different specified time intervals each year to have up to 6% of their annual base earnings withheld to purchase the Company’s common shares. The purchase price of the common shares is 85%

109

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

of the lower of its beginning-of-interval or end-of-interval market price. The Company has reserved 3.4 million common shares under this plan. As of December 31, 2007, a total of 2.4 million common shares have been purchased under this plan. This plan remains in effect until terminated by the board of directors.

Outside Directors Plan

The Outside Directors RSU Plan is an unfunded deferred compensation plan which provides each outside director with an award of 1,400 restricted share units (the “RSU award”) following each annual meeting of shareholders, however, the amount of the award may change from year to year, based on the provision described below. The RSU awards are fully vested upon grant. RSU awards are not common shares of the Company and, as such, no participant has any rights as a holder of common shares under the Outside Directors RSU Plan. RSU awards represent the right to receive an amount, payable in cash or common shares of the Company, as previously elected by the outside director, equal to the value of a specified number of common shares of the Company at the end of the restricted period. Such election may be changed within the constraints set forth in the RSU Plan. The restricted period for the RSU awards begins on the date of grant and expires on the date the outside director retires from or otherwise terminates service as a director of the Company. During the restricted period, outside directors are credited with dividends, equivalent in value to those declared and paid on the Company’s common shares, on all RSU awards granted to them. At the end of the restricted period, outside directors receive distributions of their RSU awards either (i) in a single lump sum payment, or (ii) in annual installment payments over a five- or ten-year period, as previously elected by the outside director. The administrative committee for the Outside Directors RSU Plan (currently the Company’s Compensation Committee) retains the right to increase the annual number of RSU awards granted to each outside director to as many as 5,000 or to decrease such annual number to not less than 500, without seeking shareholder approval, if such increase or decrease is deemed appropriate by the administrative committee to maintain director compensation at appropriate levels. The Outside Directors RSU Plan automatically terminates on May 31, 2015. The Company accounts for the Outside Directors RSU Plan as a liability plan. There were 11,200 and 9,800 RSUs granted in 2007 and 2006, respectively. There were no RSUs granted by the Company prior to January 1, 2006.

During 2007 and 2006, common shares valued at approximately $9,000 and $60,000, respectively, were distributed by the Company under the Outside Directors RSU Plan. No distributions were made in 2005.

Under the Outside Directors Stock Option Plan, following each annual meeting of shareholders, outside directors received nonqualified options to purchase 4,200 common shares at an option price equal to the fair market value of the common shares at the close of business on the last trading day immediately prior to the date of the annual meeting. These nonqualified options vested upon grant and are exercisable for 10 years from the date of grant. On May 11, 2005 (the date of the Company’s 2005 annual meeting of shareholders), the Outside Directors Stock Option Plan was amended to prohibit the grant of further options under the plan.

Agent Stock Option Plan

The Company has a stock option incentive plan for certain designated independent insurance agencies (“Agent Stock Option Plan”) that represent the Company and its affiliates. The Company has reserved 0.4 million shares of common stock under this plan. As of December 31, 2007, a total of 0.2 million shares were available for issuance under the Agent Stock Option Plan. The plan provides that the options become exercisable on the first day of the calendar year following the agency’s achievement of specific production and profitability requirements over a period not greater than two calendar years from the date of grant or a portion thereof in the

110

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

first calendar year in which an agency commences participation under the plan. Options granted under this plan have a ten-year term. Stock options granted for the years 2007, 2006 and 2005 were 15,862, 16,452 and 29,505, respectively. The Agent Stock Option Plan terminates May 27, 2008.

Stock Options

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes closed-form pricing model. The following tables present the weighted-average assumptions used in the option pricing model for options granted to employees and non-employees (independent insurance agencies) during 2007, 2006, and 2005. The expected life of the options for employees represents the period of time the options are expected to be outstanding and is based on historical trends. For non-employees the expected life of the option approximates the remaining contractual term of the option. The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life and the expected dividend yield is based on the Company’s most recent period’s dividend payout. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and has a term equal to the expected life.

The fair value of the independent agent options granted was estimated at the reporting date or vesting date using the Black-Scholes option-pricing model. The weighted average fair value and related assumptions are as follows:

	2007			2006		2005
Fair value per share	$	7.10		16.61		18.24
Dividend yield		2.28	%	1.15	%	0.99	%
Risk free interest rate		3.9	%	4.7	%	4.3	%
Expected volatility factor		33.8	%	34.7	%	33.6	%
Expected life in years		8.5		8.4		6.4

The fair value of share-based awards granted to employees in 2007 and 2006 was estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair values and related assumptions for options granted were as follows:

	2007			2006
Fair value per share	$	10.82		12.41
Expected dividend yield		1.46	%	1.12	%
Risk free interest rate		4.5	%	5.1	%
Expected volatility factor		33.4	%	32.4	%
Expected life in years		6.4		6.4

As of December 31, 2007, there was $5.4 million of total unrecognized compensation cost related to option-based compensation arrangements granted under the plans. The remaining cost is expected to be recognized over a period of three years.

111

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

A summary of the Company’s total stock option activity and related information for these plans for the years ended December 31, follows:

($ millions, except per share amounts)	2007				2006				2005
	Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price
Outstanding, beginning of year	2.4		$	22.09	2.6		$	18.76	2.6		$	16.46
Granted	0.4			29.55	0.3			33.49	0.4			26.48
Exercised	(0.1	)		15.48	(0.5	)		12.35	(0.4	)		9.88
Canceled	—			31.91	—			27.14	—			23.34
Outstanding, end of year	2.7		$	23.78	2.4		$	22.09	2.6		$	18.76

Intrinsic value for stock options is defined as the difference between the current market value and the grant price. For the years ended December 31, 2007, 2006 and 2005, the total intrinsic value of stock options exercised was $2.6 million, $11.9 million and $6.0 million, respectively. The tax benefit for tax deductions from share-based awards totaled $0.7 million, $3.2 million and $1.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.

A summary of information pertaining to the total options outstanding and exercisable as of December 31, 2007 follows:

($ millions, except per share amounts)	Options Outstanding				Options Exercisable
	Number	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number	Weighted- Average Exercise Price
Range of Exercise Prices:
Less than $10.00	—	2.0	$	9.30	—	$	9.30
$10.01 – $20.00	1.1	3.5		15.40	1.1		15.40
$20.01 – $30.00	0.9	8.4		27.94	0.3		26.43
Greater than $30.01	0.7	7.4		32.11	0.5		31.60
	2.7	6.0	$	23.78	1.9	$	21.39

Aggregate intrinsic value for total options outstanding at December 31, 2007 is $12.3 million. Aggregate intrinsic value for total options exercisable at December 31, 2007 is $12.3 million.

Compensation expense recognized during 2007, 2006 and 2005 was $6.0 million, $7.0 million and $0.3, respectively. See Note 1(k) for a discussion of share based compensation expense prior to the adoption of FAS 123(R) on January 1, 2006. Share-based compensation is recognized as a component of loss and loss adjustment expense and acquisition and operating expense in a manner consistent with other employee compensation. As of December 31, 2007, there was $6.1 million of total unrecognized compensation cost related to option-based compensation arrangements granted under the plans. The remaining cost is expected to be recognized over a period of three years.

112

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

13. Net Earnings Per Common Share

The following table sets forth the compilation of basic and diluted net earnings per common share for the year ended December 31:

($ millions, except per share amounts)	2007		2006	2005
Numerator:
Net earnings for basic net earnings per common share	$	119.1	120.4	125.9
Effect of dilutive share-based awards		0.1	—	—
Adjusted net earnings for dilutive net earnings per common share	$	119.2	120.4	125.9
Denominator:
Weighted average shares for basic net earnings per common share		41.0	40.9	40.3
Effect of dilutive share-based awards		0.6	0.7	0.8
Adjusted weighted average shares for diluted net earnings per common share		41.6	41.6	41.1
Basic net earnings per common share	$	2.90	2.95	3.12
Diluted net earnings per common share	$	2.86	2.90	3.06

The following options to purchase shares of common stock were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price for the year ended December 31:

(in millions)	2007	2006	2005
Number of options	0.7	0.3	0.4

113

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

14. Comprehensive Income

A reconciliation of each component of comprehensive income (loss) and the related federal income tax effect for the year ended December 31, is as follows:

($ millions)	Before-Tax Amount			Tax (Expense) or Benefit		Net-of-Tax Amount
2007:
Net income	$	155.3		(36.2	)	119.1
Other comprehensive income:
Net unrealized holding loss on investments:
Unrealized holding loss arising during the year		8.1		(2.8	)	5.3
Reclassification adjustments for gains realized in net income		(12.1	)	4.2		(7.9	)
		(4.0	)	1.4		(2.6	)
Amortization of gain on derivative used in cash flow hedge		(0.1	)	—		(0.1	)
Net unrecognized benefit plan obligations:
Net actuarial gain arising during period		20.6		(6.9	)	13.7
Reclassification adjustments for amortization to net income:
Transition asset		(0.6	)	0.2		(0.4	)
Net actuarial loss		4.7		(1.9	)	2.8
Prior service cost		0.9		(0.3	)	0.6
		25.6		(8.9	)	16.7
Other comprehensive income		21.5		(7.5	)	14.0
Comprehensive income	$	176.8		(43.7	)	133.1

114

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

($ millions)	Before-Tax Amount			Tax (Expense) or Benefit		Net-of-Tax Amount
2006:
Net income	$	161.7		(41.3	)	120.4
Other comprehensive income:
Net unrealized holding gain on investments:
Unrealized holding loss arising during the year		24.7		(8.7	)	16.0
Reclassification adjustments for gains realized in net income		(5.6	)	2.0		(3.6	)
		19.1		(6.7	)	12.4
Amortization of gain on derivative used in cash flow hedge		(0.1	)	—		(0.1	)
Other comprehensive income		19.0		(6.7	)	12.3
Comprehensive income	$	180.7		(48.0	)	132.7
2005:
Net income	$	172.0		(46.1	)	125.9
Other comprehensive loss:
Net unrealized holding loss on investments:
Unrealized holding gains arising during the year		(23.4	)	8.3		(15.1	)
Reclassification adjustments for gains realized in net income		(5.6	)	2.0		(3.6	)
		(29.0	)	10.3		(18.7	)
Amortization of gain on derivative used in cash flow hedge		(0.1	)	—		(0.1	)
Other comprehensive loss		(29.1	)	10.3		(18.8	)
Comprehensive income	$	142.9		(35.8	)	107.1

15. Reportable Segments

Due to internal reorganization efforts which occurred throughout most of 2006, that included realigning people, processes, systems and compensation programs, the Company changed its significant reportable segments from standard insurance and nonstandard insurance to the new segments described below, effective January 1, 2007. Prior reporting periods have been restated to conform to the new segment presentation

The Company has three significant reportable segments: personal insurance, business 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 operate primarily in the central and eastern United States, excluding New York, New Jersey, and New England states, distributing products through the independent insurance agency system. The personal insurance segment provides primarily personal auto (standard and nonstandard) and homeowners to the personal insurance market. The business insurance segment provides primarily commercial auto, commercial multi-peril, fire and allied lines, other and product liability and workers’ compensation insurance to small to medium sized businesses within the commercial insurance market. The investment operations segment, managed by Stateco, provides investment services for the Company’s invested assets.

115

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

The Company evaluates the performance of its insurance segments using industry financial measurements determined based on Statutory Accounting Principles (“SAP”), which include loss and loss adjustment expense ratios, underwriting expense ratios, combined ratios, statutory underwriting gain (loss), net premiums earned and net written premiums. One of the most significant differences between SAP and GAAP is that SAP requires all underwriting expenses to be expensed immediately and not deferred and amortized over the same period the premium is earned as under GAAP.

Asset information by segment is not reported for the insurance segments because the Company does not produce such information internally. The investment operations segment is evaluated based on investment returns of assets managed by Stateco.

116

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

The following provides financial information regarding the Company’s reportable segments for the year ended December 31:

($ millions)	2007			2006		2005
Revenues from external customers:
Insurance segments
Personal insurance	$	609.6		614.8		641.0
Business insurance		402.0		409.0		409.3
Total insurance segments		1,011.6		1,023.8		1,050.3
Investment operations segment
Net investment income		84.7		83.1		78.7
Net realized gains on investments		12.1		5.6		5.6
Total investment operations segment		96.8		88.7		84.3
All other		5.0		4.9		4.9
Total revenues from external sources		1,113.4		1,117.4		1,139.5
Intersegment revenues:		9.4		9.0		9.0
Total revenues		1,122.8		1,126.4		1,148.5
Reconciling items:
Eliminate intersegment revenues		(9.4	)	(9.0	)	(9.0	)
Total consolidated revenue	$	1,113.4		1,117.4		1,139.5
Segment income (loss) before federal income tax:
Insurance segments:
Personal insurance SAP underwriting gain	$	47.3		44.9		72.4
Business insurance SAP underwriting gain		40.6		61.5		26.5
Total insurance segments		87.9		106.4		98.9
Investment operations segment:
Net investment income		84.7		83.1		78.7
Net realized gains on investments		12.1		5.6		5.6
Total investment operations segment		96.8		88.7		84.3
All other segments (loss)		(2.6	)	(2.3	)	(1.1	)
Reconciling items:
GAAP adjustments		(17.3	)	(21.7	)	0.6
Interest expense on corporate debt		(7.6	)	(7.4	)	(8.8	)
Corporate expenses		(1.9	)	(2.0	)	(1.9	)
Total consolidated income before federal income taxes	$	155.3		161.7		172.0

117

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

($ millions)	December 31
	2007		2006
Segment assets:
Investment operations segment	$	2,092.1	$	2,011.3
Total segment assets		2,092.1		2,011.3
Reconciling items:
Corporate assets		245.8		243.8
Total consolidated assets	$	2,337.9	$	2,255.1

Assets attributed to the Investment Operations segment include the “Total investments” and “Cash and cash equivalent” categories from the balance sheet. All other assets are corporate assets and are not assigned to a segment.

Revenues from external sources for reportable segments include the following products and services for the year ended December 31:

($ millions)	2007		2006	2005
Earned premiums:
Personal insurance:
Standard auto	$	357.3	362.1	385.7
Nonstandard auto		42.9	44.8	53.0
Homeowners		186.5	185.2	178.7
Other personal		22.9	22.7	23.6
Total personal insurance earned premiums		609.6	614.8	641.0
Business insurance:
Commercial auto		96.9	100.3	103.2
Commercial multi-peril		86.8	87.5	84.6
Fire & allied lines		83.4	84.2	84.8
Other & product liability		75.5	77.5	76.7
Workers compensation		33.4	33.8	34.4
Other business		26.0	25.7	25.6
Total business insurance earned premiums		402.0	409.0	409.3
Total earned premiums		1,011.6	1,023.8	1,050.3
Investment operations:
Net investment income		84.7	83.1	78.7
Realized gains		12.1	5.6	5.6
Total investment operations		96.8	88.7	84.3
Total revenues from significant reportable segments	$	1,108.4	1,112.5	1,134.6

118

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

16. Quarterly Financial Data (unaudited)

($ millions, except per share amounts)	2007
	For three months ended
	March 31		June 30	September 30	December 31
Total revenues	$	275.5	278.7	280.9	278.3
Income before federal income taxes		40.9	28.8	28.6	57.0
Net income		30.9	23.3	23.2	41.7
Net earnings per common share:
Basic	$	0.75	0.57	0.56	1.02
Diluted	$	0.74	0.56	0.55	1.01

($ millions, except per share amounts)	2006
	For three months ended
	March 31		June 30		September 30	December 31
Total revenues	$	276.8	280.0		279.6	281.0
Income (loss) before federal income taxes		56.7	(0.2	)	42.4	62.8
Net income		40.2	4.1		31.2	44.9
Net earnings per common share:
Basic	$	0.99	0.10		0.76	1.10
Diluted	$	0.97	0.10		0.75	1.08

17. Contingencies

The Company’s insurance subsidiaries are involved in litigation and may become involved in potential litigation arising in the ordinary course of business. Additionally, the insurance subsidiaries may be impacted by adverse regulatory actions and adverse court decisions where insurance coverages are expanded beyond the scope originally contemplated in the policies at December 31, 2007. In the opinion of management, the effects, if any, of such litigation and published court decisions are not expected to be material to the consolidated financial statements.

18. Subsequent Event (unaudited)

Effective January 1, 2008, the Pooling Arrangement, described in Note 6a, was further amended to add Patrons Mutual Insurance Company of Connecticut (“Patrons Mutual”), Litchfield Mutual Fire Insurance Company (“Litchfield”) and Beacon National as participants and the middle market business of State Auto Mutual and Meridian Security to the pool. Patrons Mutual and Litchfield are affiliate companies of State Auto Mutual. Concurrently with the addition of the three companies, certain individual participant percentages of State Auto Mutual and its subsidiaries and affiliates were adjusted but continue to maintain an overall 20% participation percentage; STFC’s insurance subsidiaries will maintain its 80% participation percentage.

119

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Consolidated Financial Statements, Continued

In conjunction with the Pooling Arrangement amendment, the STFC Pooled Companies will receive approximately $92.0 million in cash, for additional net insurance liabilities assumed on January 1, 2008. All parties that participate in the Pooling Arrangement, effective January 1, 2008, have an A.M. Best rating of A+ (Superior). The following table presents an estimate of the impact on the Company’s balance sheet at January 1, 2008, for additional net insurance liabilities.

($ millions)
Losses and loss expense payable	$	51.3
Unearned premiums		53.6
Deferred policy acquisition costs		(12.9	)
Net cash received	$	92.0

120

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Management’s Annual Report on Internal Control Over Financial Reporting

Our management’s annual report on internal control over financial reporting required by Item 308(a) of Regulation S-K follows. The attestation report of our independent registered public accounting firm required by Item 308(b) of Regulation S-K is found under the caption “Report of the Independent Registered Public Accounting Firm” in Item 8 of this Form 10-K.

The following report is provided by our management on the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act):

1. Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

2. Our management has used the Committee Of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the effectiveness of our internal control over financial reporting. Our management believes that the COSO framework is a suitable framework for its evaluation of our internal control over financial reporting because it is free from bias, permits reasonably qualitative and quantitative measurements of our internal controls, is sufficiently complete so that those relevant factors that would alter a conclusion about the effectiveness of our internal controls are not omitted and is relevant to an evaluation of internal control over financial reporting.

3. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial reporting.

4. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2007, and has concluded that such internal control over financial reporting is effective. There are no material weaknesses in our internal control over financial reporting that have been identified by our management.

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other information

None.

121

PART III

Item 10. Directors and Executive Officers of the Registrant

Information regarding our directors required by Items 401(a) and (d)-(f) of Regulation S-K will be found under the caption “Proposal One: Election of Directors” in our 2008 Proxy Statement, which information is incorporated herein by reference. Information regarding our executive officers required by Items 401(b) and (d)-(f) of Regulation S-K is found under the caption “Executive Officers of the Registrant” at the end of Item 1 of our Form 10-K, which information is also incorporated by reference into this Item 10.

We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. As of March 3, 2008, the members of our Audit Committee were Richard K. Smith, David J. D’Antoni, David R. Meuse, Thomas E. Markert and Paul S. Williams. Mr. Smith is Chairman of our Audit Committee. Our Board of Directors has determined that Mr. Smith is an “audit committee financial expert,” as that term is defined in Item 407(d)(5)of Regulation S-K, and “independent,” as that term is defined in Rule 10A-3 of the Exchange Act.

Information regarding the filing of reports of ownership under Section 16(a) of the Exchange Act by our officers and directors and persons owning more than 10% of a registered class of our equity securities required by Item 405 of Regulation S-K will be found under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2008 Proxy Statement, which information is incorporated herein by reference.

Information concerning the procedures by which stockholders may recommend nominees to our Board of Directors will be found under the caption “Corporate Governance—Nomination of Directors” in our 2008 Proxy Statement. There has been no material change to the nomination procedures previously disclosed by the Company in its proxy statement for its 2007 annual meeting of stockholders.

Our Board of Directors has adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller, and persons performing similar functions. This code of ethics has been posted on our website at www.stfc.com under “Investors” then “Corporate Governance.” Any amendment (other than any technical, administrative or other non-substantive amendment) to, or waiver from, a provision of this code will be posted on our website described above within four business days following its occurrence.

Item 11. Executive Compensation

Our 2008 Proxy Statement will contain information regarding the following matters: information regarding executive compensation required by Item 402 of Regulation S-K will be found under the captions “Board of Directors and Board Committees—Compensation of Directors and Director Compensation Table” and “Compensation Discussion and Analysis”; information required by Item 407(e)(4) of Regulation S-K will be found under the caption “Compensation Committee Interlocks and Insider Participation”; information required by Item 407(e)(5) of Regulation S-K will be found under the caption “Compensation Committee Report”. This information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information regarding security ownership of certain beneficial owners and management required by Item 403 of Regulation S-K will be found under the caption “Proposal One: Election of Directors” and “Principal Holders of Voting Securities” in our 2008 Proxy Statement, which information is incorporated herein by reference.

Information regarding equity compensation plan information required by Item 201(d) of Regulation S-K will be found under the caption “Equity Compensation Plan Information” in our 2008 Proxy Statement, which information is incorporated herein by reference.

122

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information regarding certain relationships and related transactions required by Item 404 of Regulation S-K will be found under the caption “Related Party Transactions” in our 2008 Proxy Statement, which information is incorporated herein by reference.

Information regarding the independence of our directors required by Item 407(a) of Regulation S-K will be found under the caption “Corporate Governance—Director Independence” in our 2008 Proxy Statement, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information regarding principal accountant fees and services required by Item 9(e) of Schedule 14A will be found under the caption “Independent Registered Public Accounting Firm” in our 2008 Proxy Statement, which information is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1)    LISTING OF FINANCIAL STATEMENTS

The following consolidated financial statements of the Company are filed as part of this Form 10-K and are included in Item 8:

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2007 and 2006

Consolidated Statements of Income for each of the three years in the period ended December 31, 2007

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2007

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2007

Notes to Consolidated Financial Statements

(a)(2)    LISTING OF FINANCIAL STATEMENT SCHEDULES

The following financial statement schedules of the Company for the years 2007, 2006 and 2005 are included in Item 14(d) following the signatures and should be read in conjunction with our consolidated financial statements contained in our Form 10-K.

Schedule Number	Schedule
I.	Summary of Investments—Other Than Investments in Related Parties
II.	Condensed Financial Information of Registrant
III.	Supplementary Insurance Information
IV.	Reinsurance

All other schedules and footnotes are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.

123

(a)(3) LISTING OF EXHIBITS

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
3.01	State Auto Financial Corporation’s Amended and Restated Articles of Incorporation	1933 Act Registration Statement No. 33-40643 on Form S-1 (see Exhibit 3(a) therein)
3.02	State Auto Financial Corporation’s Amendment to the Amended and Restated Articles of Incorporation	1933 Act Registration Statement No. 33-89400 on Form S-8 (see Exhibit 4(b) therein)
3.03	State Auto Financial Corporation Certificate of Amendment to the Amended and Restated Articles of Incorporation as of June 2, 1998	Form 10-K Annual Report for the year ended December 31, 1998 (see Exhibit 3(A)(3) therein)
3.04	State Auto Financial Corporation’s Amended and Restated Code of Regulations	1933 Act Registration Statement No. 33-40643 on Form S-1 (see Exhibit 3(b) therein)
10.01	Guaranty Agreement between State Automobile Mutual Insurance Company and State Auto Property and Casualty Insurance Company dated as of May 16, 1991	1933 Act Registration Statement No. 33-40643 on Form S-1 (see Exhibit 10 (d) therein)
10.02	Form of Indemnification Agreement between State Auto Financial Corporation and each of its directors	1933 Act Registration Statement No. 33-40643 on Form S-1 (see Exhibit 10 (e) therein)
10.03*	1991 Stock Option Plan	1933 Act Registration Statement No. 33-40643 on Form S-1 (see Exhibit 10 (h) therein)
10.04*	Amendment Number 1 to the 1991 Stock Option Plan	1933 Act Registration Statement No. 33-89400 on Form S-8 (see Exhibit 4 (a) therein)
10.05*	Amendment Number 2 to the 1991 Stock Option Plan	Form 10-K Annual Report for the year ended December 31, 1996 (see Exhibit 10(DD) therein)
10.06*	Amendment No. 3 to 1991 Stock Option Plan Effective January 1, 2001	Form 10-Q Quarterly Report for the period ended September 30, 2003 (see 10.01) therein)
10.07*	1991 Directors’ Stock Option Plan	1933 Act Registration Statement No. 33-40643 on Form S-1 (see Exhibit 10 (i) therein)
10.08*	Amendment Number 1 to the 1991 Directors’ Stock Option Plan	Form 10-K Annual Report for the year ended December 31, 1996 (see Exhibit 10(EE) therein)
10.09*	Second Amendment to 1991 Directors’ Stock Option Plan	Form 10-Q Quarterly Report for the period ended September 30, 2001 (see Exhibit 10(JJ) therein)
10.10*	2000 Directors Stock Option Plan	Definitive Proxy Statement on Form DEF 14A, File No. 000-19289, for Annual Meeting of Shareholders held on May 26, 2000 (see Appendix B therein)
10.11*	First Amendment to 2000 Directors Stock Option Plan	Form 10-Q Quarterly Report for the period ended March 31, 2001 (see Exhibit 10(HH) therein)
10.12*	Second Amendment to 2000 Directors Stock Option Plan	Form 10-Q Quarterly Report for the period ended September 30, 2001 (see Exhibit 10(KK) therein)

124

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.13*	Third Amendment to 2000 Directors Stock Option Plan	Form 10-K Annual Report for the year ended December 31, 2001 (see Exhibit 10(EE) therein)
10.14*	Fourth Amendment to 2000 Directors Stock Option Plan	Form 10-K Annual Report for year ended 12-31-02 (see Exhibit 10(UU) therein)
10.15*	Fifth Amendment to 2000 Directors Stock Option Plan of State Auto Financial Corporation	Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.66 therein)
10.16	Investment Management Agreement between Stateco Financial Services, Inc. and State Automobile Mutual Insurance Company, effective April 1, 1993	Form 10-K Annual Report for the year ended December 31, 1992 (see Exhibit 10 (N) therein)
10.17	Investment Management Agreement between Stateco Financial Services, Inc. and Meridian Security Insurance Company, effective June 1, 2001	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.17 therein)
10.18	Investment Management Agreement between Stateco Financial Services, Inc. and State Auto Florida Insurance Company effective April 1, 2002	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.18 therein)
10.19	Investment Management Agreement between Stateco Financial Services, Inc. and Midwest Security Insurance Company effective January 1, 1997	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.19 therein)
10.20	Investment Management Agreement between Stateco Financial Services, Inc. and Meridian Citizens Mutual Insurance Company effective June 1, 2001	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.20 therein)
10.21	Investment Management Agreement dated March 29, 2007, between Stateco Financial Services, Inc. and Beacon National Insurance Company, First Preferred Insurance Company, Petrolia Insurance Company and Beacon Lloyds Insurance Company	Form 10-Q Quarterly Report for the period ended March 31, 2007 (see Exhibit 10.63 therein)
10.22	Amended and Restated Investment Management Agreement dated as of December 31, 2007, among Stateco Financial Services, Inc. and Patrons Mutual Insurance Company of Connecticut, Patrons Fire Insurance Company of Rhode Island, and Provision State Insurance Company	Included herein
10.23	Amended and Restated Investment Management Agreement dated as of December 31, 2007, between Stateco Financial Services, Inc. and Litchfield Mutual Fire Insurance Company	Included herein

125

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.24	Cost Sharing Agreement among State Auto Property and Casualty Insurance Company, State Automobile Mutual Insurance Company, and State Auto Florida Insurance Company effective January 1, 2003	Form 10-K Annual Report for year ended 12-31-02 (see Exhibit 10(OO) therein)
10.25	Midwest Security Insurance Company Management Agreement amended and restated as of January 1, 2000 by and among State Automobile Mutual Insurance Company, an Ohio corporation, State Auto Property and Casualty Insurance Company, a South Carolina corporation and Midwest Security Insurance (nka State Auto Insurance Company of Wisconsin), a Wisconsin corporation	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.45 therein)
10.26	Management and Operations Agreement, Amended and Restated as of January 1, 2005 by and among State Automobile Mutual Insurance Company, State Auto Financial Corporation, State Auto Property and Casualty Insurance Company, State Auto National Insurance Company, Milbank Insurance Company, State Auto Insurance Company of Ohio, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, Meridian Insurance Group, Inc., Farmers Casualty Insurance Company, Stateco Financial Services, Inc., Strategic Insurance Software, Inc., and 518 Property Management and Leasing, LLC	Form 10-Q Quarterly Report for the period ended March 31, 2005 (see Exhibit 10.56 therein)
10.27	First Amendment to Management and Operations Agreement Amended and Restated as of January 1, 2005, by and among State Automobile Mutual Insurance Company, State Auto Financial Corporation, State Auto Property and Casualty Insurance Company, State Auto National Insurance Company, Milbank Insurance Company, State Auto Insurance Company of Ohio, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, Meridian Insurance Group, Inc., Farmers Casualty Insurance Company, Stateco Financial Services, Inc., Strategic Insurance Software, Inc., 518 Property Management and Leasing, LLC, State Auto Florida Insurance Company, Beacon National Insurance Company, Beacon Lloyds, Inc., Beacon Lloyds Insurance Company, First Preferred Insurance Company, and Petrolia Insurance Company, made as of April 1, 2007	Form 10-Q Quarterly Report for the period ended June 30, 2007 (see Exhibit 66.67 therein)

126

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.28	Inter-Company Expense Agreement (dated as of June 18, 2001), including First Amendment (dated as of September 30, 2002) and Second Amendment (dated as of December 14, 2007), thereto, among Patrons Fire Insurance Company of Rhode Island, Patrons Mutual Insurance Company of Connecticut, State Automobile Mutual Insurance Company and State Auto Property & Casualty Insurance Company	Included herein
10.29	Inter-Company Expense Agreement (dated as of January 12, 2001), including First Amendment (dated as of September 30, 2002) and Second Amendment (dated as of December 14, 2007) thereto among Litchfield Mutual Fire Insurance Company, Patrons Mutual Insurance Company of Connecticut, State Automobile Mutual Insurance Company and State Auto Property & Casualty Insurance Company	Included herein
10.30	Inter-Company Expense Agreement (dated as of June 18, 2001), including First Amendment (dated as of December 14, 2007) thereto among Provision State Insurance Company, Patrons Mutual Insurance Company of Connecticut, State Automobile Mutual Insurance Company and State Auto Property and Casualty Insurance Company	Included herein
10.31	Management Services Agreement (dated as of August 30, 1996), including First Amendment (dated as of December 14, 2007) thereto among Patrons Fire Insurance Company of Rhode Island, Patrons Mutual Insurance Company of Connecticut, State Automobile Mutual Insurance Company and State Auto Property & Casualty Insurance Company	Included herein
10.32	Management Services Agreement (dated as of August 26, 1998), including First Amendment (dated as of December 14, 2007) thereto among Litchfield Mutual Fire Insurance Company, Patrons Mutual Insurance Company of Connecticut, State Automobile Mutual Insurance Company and State Auto Property & Casualty Insurance Company	Included herein

127

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.33	Property Catastrophe Overlying Excess of Loss Reinsurance Contract (effective July 1, 2006) among State Automobile Mutual Insurance Company, Milbank Insurance Company, State Auto National Insurance Company, State Auto Insurance Company of Wisconsin, Farmers Casualty Insurance Company, State Auto Insurance Company of Ohio, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, State Auto Florida Insurance Company and State Auto Property and Casualty Insurance Company	Form 10-Q Quarterly Report for the period ended September 30, 2006 (see Exhibit 10.69 therein)
10.34	Property Catastrophe Overlying Excess of Loss Reinsurance Contract (effective July 1, 2007) among State Automobile Mutual Insurance Company, Milbank Insurance Company, State Auto National Insurance Company, State Auto Insurance Company of Wisconsin, Farmers Casualty Insurance Company, State Auto Insurance Company of Ohio, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, State Auto Florida Insurance Company, Beacon National Insurance Company, First Preferred Insurance Company, Petrolia Insurance Company, Beacon Lloyds Insurance Company and State Auto Property and Casualty Insurance Company	Included herein
10.35	Endorsement No. 1 to the Property Catastrophe Overlying Excess of Loss Reinsurance Contract (effective July 1, 2007) among State Automobile Mutual Insurance Company, Milbank Insurance Company, State Auto National Insurance Company, State Auto Insurance Company of Wisconsin, Farmers Casualty Insurance Company, State Auto Insurance Company of Ohio, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, State Auto Florida Insurance Company, Beacon National Insurance Company, First Preferred Insurance Company, Petrolia Insurance Company, Beacon Lloyds Insurance Company, Patrons Mutual Insurance Company of Connecticut, Litchfield Mutual Fire Insurance Company, Patrons Fire Insurance Company of Rhode Island, Provision State Insurance Company and State Auto Property and Casualty Insurance Company	Included herein

128

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.36	Reinsurance Pooling Agreement Amended and Restated as of January 1, 2005 by and among State Automobile Mutual Insurance Company, State Auto Property and Casualty Insurance Company, Milbank Insurance Company, State Auto Insurance Company of Wisconsin, Farmers Casualty Insurance Company, State Auto Insurance Company of Ohio, State Auto Florida Insurance Company, Meridian Security Insurance Company, and Meridian Citizens Mutual Insurance Company	Form 10-K Annual Report for the year ended December 31, 2004 (see Exhibit 10.55 therein)
10.37	First Amendment to the Reinsurance Pooling Agreement Amended and Restated as of January 1, 2005 by and among State Automobile Mutual Insurance Company, State Auto Property and Casualty Insurance Company, Milbank Insurance Company, State Auto Insurance Company of Wisconsin, Farmers Casualty Insurance Company, State Auto Insurance Company of Ohio, State Auto Florida Insurance Company, Meridian Security Insurance Company, and Meridian Citizens Mutual Insurance Company, made as of April 1, 2007	Form 10-Q Quarterly Report for the period ended June 30, 2007 (see Exhibit 10.66 therein)
10.38	Reinsurance Pooling Agreement Amended and Restated as of January 1, 2008 by and among State Automobile Mutual Insurance Company, State Auto Property and Casualty Insurance Company, Milbank Insurance Company, State Auto Insurance Company of Wisconsin, Farmers Casualty Insurance Company, State Auto Insurance Company of Ohio, State Auto Florida Insurance Company, Meridian Security Insurance Company, and Meridian Citizens Mutual Insurance Company, Patrons Mutual Insurance Company of Connecticut, Litchfield Mutual Fire Insurance Company and Beacon National Insurance Company	Included herein
10.39	Amended and Restated Declaration of Trust of STFC Capital Trust I, dated as of May 22, 2003	Form 10-Q Quarterly Report for the period ended June 30, 2003 (see 10(XX) therein)
10.40	Indenture dated as of May 22, 2003, for Floating Rate Junior Subordinated Debt Securities Due 2033	Form 10-Q Quarterly Report for the period ended June 30, 2003 (see 10(YY) therein)
10.41	Indenture dated as of November 13, 2003, among State Auto Financial Corporation, as Issuer, and Fifth Third Bank, as Trustee, regarding 6 1/4% Senior Note due 2013	Securities Act Registration Statement on Form S-4 (File No. 333-111507)(see Exhibit 4.01 therein)

129

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.42	Form of 6 1/4% Senior Note due 2013 (Exchange Note)	Securities Act Registration Statement on Form S-4 (File No. 333-111507)(see Exhibit 4.02 therein)
10.43	Credit Agreement dated as of July 12, 2007, among State Auto Financial Corporation, as borrower, a syndicate of financial institutions, as lenders, and KeyBank National Association, as Administrative Agent, Lead Arranger, Sole Book Runner and Swingline Lender	Form 8-K current Report filed on July 17, 2007 (see Exhibit 10.1 therein)
10.44*	Employment Agreement dated as of March 2, 2006, among State Auto Financial Corporation, State Auto Property and Casualty Insurance Company, State Automobile Mutual Insurance Company and Robert P. Restrepo, Jr.	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.26 therein)
10.45*	Amendment to Employment Agreement dated as of January 24, 2007, among State Auto Financial Corporation, State Auto Property and Casualty Insurance Company, State Automobile Mutual Insurance Company and Robert P. Restrepo, Jr.	Form 10-K Annual Report for the year ended December 31, 2006 (see Exhibit 10.24 therein)
10.46*	Executive Agreement dated as of March 2, 2006, among State Auto Financial Corporation, State Automobile Mutual Insurance Company and Robert P. Restrepo, Jr.	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.29 therein)
10.47*	Employment Agreement dated as of October 4, 2007, among State Auto Financial Corporation, State Auto Property and Casualty Insurance Company, State Automobile Mutual Insurance Company and Mark A. Blackburn	Form 10-Q Quarterly Report for the period ended September 30, 2007 (see Exhibit 10.69 therein)
10.48*	Amended and Restated Executive Agreement dated as of October 4, 2007, among State Auto Financial Corporation, State Automobile Mutual Insurance Company and Mark A. Blackburn	Form 10-Q Quarterly Report for the period ended September 30, 2007 (see Exhibit 10.70 therein)
10.49*	Employment Agreement made as of May 10, 2007, and effective as of January 1, 2007, among BroadStreet Capital Partners, Inc., State Auto Financial Corporation, State Auto Property and Casualty Insurance Company, State Automobile Mutual Insurance Company and Richard L. Miley	Form 10-Q Quarterly Report for the period ended June 30, 2007 (see Exhibit 10.68 therein)
10.50*	Retention Agreement dated as of February 9, 2004, between State Auto Property & Casualty Insurance Company and Steven E. English	Form 10-Q Quarterly Report for the period ended March 31, 2007 (see Exhibit 10.61 therein)
10.51*	Retention Agreement dated as of May 3, 2004, between State Auto Property & Casualty Insurance Company and Steven R. Hazelbaker	Form 10-Q Quarterly Report for the period ended March 31, 2007 (see Exhibit 10.62 therein)

130

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.52*	Amended and Restated Equity Incentive Compensation Plan of State Auto Financial Corporation	Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.60 therein)
10.53*	Restricted Share Award Agreement under the Amended and Restated Equity Incentive Compensation Plan dated as of March 2, 2006 between State Auto Financial Corporation and Robert P. Restrepo, Jr.	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.49 therein)
10.54*	Restricted Stock Agreement under the Amended and Restated Equity Incentive Compensation Plan dated as of October 4, 2007, between State Auto Financial Corporation and Mark A. Blackburn	Form 10-Q Quarterly Report for the period ended September 30, 2007 (see Exhibit 10.71 therein)
10.55*	Form of Non-Qualified Stock Option Agreement under the Amended and Restated Equity Incentive Compensation Plan of State Auto Financial Corporation	Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.62 therein)
10.56*	Non-Qualified Stock Option Agreement under the Amended and Restated Equity Incentive Compensation Plan of State Auto Financial Corporation dated March 2, 2006 between State Auto Financial Corporation and Robert P. Restrepo, Jr.	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.51 therein)
10.57*	Form of Incentive Stock Option Agreement under the Amended and Restated Equity Incentive Compensation Plan of State Auto Financial Corporation	Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.63 therein)
10.58*	Outside Directors Restricted Share Unit Plan of State Auto Financial Corporation	Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.61 therein)
10.59*	First Amendment to the Outside Directors Restricted Share Unit Plan of State Auto Financial Corporation	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.54 therein)
10.60*	Form of Restricted Share Unit Agreement for the Outside Directors Restricted Share Unit Plan of State Auto Financial Corporation	Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.64 therein)
10.61*	Form of Designation of Beneficiary for the Outside Directors Restricted Share Unit Plan of State Auto Financial Corporation	Form 10-Q Quarterly Report for the period ended June 30, 2005 (see Exhibit 10.65 therein)
10.62*	Amended and Restated SERP of State Auto Mutual effective as of January 1, 1994	Form 10-K Annual Report for the year ended December 31, 1997 (see Exhibit 10(HH) therein)
10.63*	State Auto Financial Corporation Supplemental Executive Retirement Plan, effective January 1, 2007	Form 10-Q Quarterly Report for the period ended September 30, 2007 (see Exhibit 10.72 therein)

131

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.64*	Form of Designation of Distribution Election for the State Auto Financial Corporation Supplemental Executive Retirement Plan	Form 10-Q Quarterly Report for the period ended September 30, 2007 (see Exhibit 10.73 therein)
10.65*	State Auto Insurance Companies Amended and Restated Directors Deferred Compensation Plan (amended and restated as of March 1, 2001)	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.58 therein)
10.66*	First Amendment to the state Auto Insurance Companies Amended and restated Directors Deferred Compensation Plan (amendment effective as of December 1, 2005)	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.59 therein)
10.67*	Agreement of Assignment and Assumption dated as of March 1, 2001, among State Auto Financial Corporation, State Automobile Mutual Insurance Company, State Auto Property and Casualty Insurance Company, and Midwest Security Insurance Company (nka State Auto Insurance Company of Wisconsin) regarding the State Auto Insurance Companies Amended and Restated Directors Deferred Compensation Plan	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.60 therein)
10.68*	Form of State Auto Insurance Companies Directors Deferred Compensation Agreement	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.61 therein)
10.69*	State Auto Property & Casualty Insurance Company’s Amended and Restated Incentive Deferred Compensation Plan (amended and restated as of March 1, 2001)	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.62 therein)
10.70*	First Amendment to the State Auto Property & Casualty Insurance Company’s Amended and Restated Incentive Deferred Compensation Plan (amendment effective as of November 22, 2002)	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.63 therein)
10.71*	Agreement of Assignment and Assumption dated as of March 1, 2001, among State Auto Financial Corporation, State Automobile Mutual Insurance Company, and State Auto Property and Casualty Insurance Company regarding the State Auto Property & Casualty Insurance Company’s Amended and Restated Incentive Deferred Compensation Plan	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.64 therein)
10.72*	Form of State Auto Property & Casualty Insurance Company’s Incentive Deferred Compensation Agreement	Form 10-K Annual Report for the year ended December 31, 2005 (see Exhibit 10.65 therein)
10.73*	State Auto Financial Corporation Leadership Bonus Plan	Form 10-Q Quarterly Report for the period ended June 30, 2007 (see Exhibit 10.64 therein)

132

Exhibit No.	Description of Exhibit	If incorporated by reference document with which Exhibit was previously filed with SEC
10.74*	State Auto Financial Corporation Long-Term Incentive Plan	Form 10-Q Quarterly Report for the period ended June 30, 2007 (see Exhibit 10.65 therein)
21.01	List of Subsidiaries of State Auto Financial Corporation	Included herein
23.01	Consent of Independent Registered Public Accounting Firm	Included herein
24.01	Powers of Attorney – Robert P Restrepo, Jr., David J D’Antoni, David R. Meuse, S. Elaine Roberts, Richard K. Smith, Alexander B. Trevor and Paul S. Williams	Form 10-K Annual Report for the year ended December 31, 2007 (see Exhibit 24.01 therein)
24.02	Powers of Attorney – Robert E. Baker and Thomas E. Markert	Included herein
31.01	CEO certification required by Section 302 of Sarbanes-Oxley Act of 2002	Included herein
31.02	CFO certification required by Section 302 of Sarbanes-Oxley Act of 2002	Included herein
32.01	CEO certification required by Section 906 of Sarbanes-Oxley Act of 2002	Included herein
32.02	CFO certification required by Section 906 of Sarbanes-Oxley Act of 2002	Included herein

* Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit.

(b) EXHIBITS

The exhibits included with this Form 10-K, as indicated in Item 15(a) (3), have been separately filed.

(c) FINANCIAL STATEMENT SCHEDULES

Our financial statement schedules included with this Form 10-K, as indicated in Item 15(a) (2), follow the signatures to this Form 10-K.

133

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STATE AUTO FINANCIAL CORPORATION
Dated: March 14, 2008	/s/    ROBERT P. RESTREPO, JR.
	Robert P. Restrepo, Jr.
	Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/    ROBERT P. RESTREPO, JR.         Robert P. Restrepo, Jr.	Chairman, President and Chief Executive Officer (principal executive officer)	March 14, 2008
/s/    STEVEN E. ENGLISH         Steven E. English	Vice President and Chief Financial Officer (principal financial officer)	March 14, 2008
/s/    CYNTHIA A. POWELL         Cynthia A. Powell	Vice President and Treasurer (principal accounting officer)	March 14, 2008
DAVID J. D’ANTONI* David J. D’Antoni	Director	March 14, 2008
ROBERT E. BAKER* Robert E. Baker	Director	March 14, 2008
THOMAS E. MARKERT* Thomas E. Markert	Director	March 14, 2008
DAVID R. MEUSE* David R. Meuse	Director	March 14, 2008
S. ELAINE ROBERTS* S. Elaine Roberts	Director	March 14 2008
RICHARD K. SMITH* Richard K. Smith	Director	March 14, 2008
ALEXANDER B. TREVOR* Alexander B. Trevor	Director	March 14, 2008
PAUL S. WILLIAMS* Paul S. Williams	Director	March 14, 2008

* Steven E. English by signing his name hereto, does sign this document on behalf of the person indicated above pursuant to a Power of Attorney duly executed by such person.

/s/    STEVEN E. ENGLISH         Steven E. English Attorney in Fact March 14, 2008

134

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN

INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 2007

($ millions)
Type of Investments	Cost (1)		Value		Amount at which shown in the balance sheet
Available-for-Sale
Fixed maturities:
Bonds:
U.S. Treasury securities & obligations	$	90.9	$	93.0	$	93.0
States & political subdivisions		1,432.7		1,452.0		1,452.0
Corporate securities		10.7		11.0		11.0
Mortgage-backed securities of U.S. government agencies		188.6		189.4		189.4
Total fixed maturities		1,722.9		1,745.4		1,745.4
Equity securities:
Common stocks:
Consumer		65.2		81.6		81.6
Technologies		24.7		29.9		29.9
Pharmaceuticals		8.5		8.8		8.8
Financial services		35.6		42.8		42.8
Manufacturing & other		76.2		91.1		91.1
Total equity securities		210.2		254.2		254.2
Other Invested Assets		20.1		20.3		20.3
Total Available for Sale		1,953.2		2,019.9		2,019.9
Other invested assets		0.6		1.3		21.6
Total investments	$	1,953.8	$	2,021.2	$	2,021.2

⁽¹⁾ Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Condensed Balance Sheets

($ millions)	December 31
	2007			2006
ASSETS
Fixed maturities, available for sale, at fair value	$	-		1.0
Equity securities, available for sale, at fair value		0.9		10.0
Investments in common stock of subsidiaries (equity method)		1,009.3		920.9
Other invested assets,		1.7		1.5
Cash and cash equivalents		36.3		12.3
Other assets		2.1		1.9
Current federal income tax		3.4		6.3
Net deferred federal income tax		4.1		2.0
Total assets	$	1,057.8		955.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable (affiliates $15.5 and $15.5, respectively)		118.0		118.4
Due to affiliates		1.3		0.7
Accrued expenses		3.0		2.6
Total liabilities		122.3		121.7
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; 46.0 and 45.7 issued, respectively, at stated value of $2.50 per share		115.0		114.3
Less Treasury Stock, 5.5 and 4.7 shares, respectively, at cost		(81.0	)	(58.1	)
Additional paid-in capital		98.2		87.3
Accumulated other comprehensive loss		(3.3	)	(17.3	)
Retained earnings		806.6		708.0
Total stockholders’ equity		935.5		834.2
Total liabilities and stockholders’ equity		1,057.8		955.9

See accompanying note to condensed financial statements.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONTINUED

Condensed Statements of Income

	Year ended December 31
($ millions)	2007			2006		2005
Net Investment income	$	1.4		1.4		1.1
Net realized gain on investments		1.5		0.1		-
Total revenue		2.9		1.5		1.1
Interest expense (affiliate $1.5, $1.5, and $2.8, respectively)		7.6		7.4		8.8
Other operating expenses		3.7		3.2		3.2
Total expenses		11.3		10.6		12.0
Loss before federal income taxes		(8.4	)	(9.1	)	(10.9	)
Federal income tax benefit		(4.4	)	(4.8	)	(3.3	)
Net loss before equity in net income of subsidiaries		(4.0	)	(4.3	)	(7.6	)
Equity in net income of subsidiaries		123.1		124.7		133.5
Net income	$	119.1		120.4		125.9

See accompanying note to condensed financial statements.

STATE AUTO FINANCIAL CORPORATION

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONTINUED

Condensed Statements of Cash Flows

($ millions)	Year Ended December 31
	2007			2006		2005
Cash flows from operating activities:
Net income	$	119.1		120.4		125.9
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization, net		0.2		(0.2	)	0.1
Share-based compensation		0.3		0.4		0.6
Net realized gain on investments		1.3		(0.1	)	-
Equity in net income from consolidated subsidiaries		(123.1	)	(124.7	)	(133.5	)
Changes in operating assets and liabilities:
Accrued expenses and due to affiliates		0.8		-		1.0
Other assets		(0.8	)	0.1		(0.3	)
Excess tax benefits on share-based awards		0.4		(0.1	)	-
Federal income taxes		(7.3	)	(6.2	)	1.9
Net cash used in operating activities		(9.1	)	(10.4	)	(4.3	)
Cash flows from investing activities:
Capitalization of subsidiary		3.7		4.4		(1.5	)
Dividends received from consolidated subsidiaries		57.5		7.1		47.6
Purchase fixed maturities		(2.0	)	(2.0	)	(9.0	)
Purchase equity securities		(0.6	)	(3.9	)	(1.9	)
Purchase other invested assets		(0.4	)	(0.1	)	-
Maturities of fixed maturities		3.0		14.0		2.6
Sale of fixed maturities		-		-		3.9
Sale of equity securities		9.9		3.2		1.7
Disposal of fixed assets		-		-		0.3
Net cash provided by investing activities		71.1		22.7		43.7
Cash flows from financing activities:
Net proceeds from sale of common stock		4.3		7.4		4.1
Payments to acquire treasury shares		(22.1	)	-		-
Repayment of debt		-		-		(45.5	)
Payment of dividends		(20.5	)	(15.4	)	(8.6	)
Excess tax benefits on share-based awards		0.3		0.1		-
Net cash used in financing activities		(38.0	)	(7.9	)	(50.0	)
Net increase (decrease) in cash and invested cash		24.0		4.4		(10.6	)
Cash and cash equivalents at beginning of year		12.3		7.9		18.5
Cash and cash equivalents at end of year	$	36.3		12.3		7.9
Supplemental Disclosures:
Cash received for federal income taxes	$	6.3		5.3		5.1
Cash paid for interest	$	7.8		7.7		9.0

Note to condensed financial statements:

In our parent-company-only financial statements, our Company’s investment in subsidiaries is stated at cost plus equity in net income from consolidated subsidiaries since the date of acquisition. Our Company’s share of net income of its unconsolidated subsidiaries is included in consolidated income using the equity method. Our parent-company-only financial statements should be read in conjunction with our Company’s consolidated financial statements.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION

Years Ended December 31, 2007, 2006, and 2005

($ millions)
Segment	Deferred policy acquisition cost(1)		Future benefits, claims and losses(2)		Unearned premiums(1)		Other claims and benefits payable		Premium revenue
Year ended December 31, 2007:
Personal insurance segment			$	249.6				-	$	609.6
Business insurance segment				397.5				-		402.0
Investment operations segment				-						-
Total	$	105.8	$	647.1	$	436.0			$	1,011.6
Year ended December 31, 2006:
Personal insurance segment			$	258.1				-	$	614.8
Business insurance segment				402.9				-		409.0
Investment operations segment				-						-
Total	$	104.0	$	661.0	$	428.8		-	$	1,023.8
Year ended December 31, 2005:
Personal insurance segment			$	285.5				-	$	641.0
Business insurance segment				425.9				-		409.3
Investment operations segment				-						-
Total	$	106.0	$	711.4	$	432.9		-	$	1,050.3
Segment	Net investment income		Benefits, losses and settlement expenses(3)		Amort. of deferred policy acquisition costs(1)		Other operating expenses(1)		Premiums written
Year ended December 31, 2007:
Personal insurance segment	$	-	$	378.4					$	615.1
Business insurance segment		-		207.2						404.7
Investment operations segment		84.7		-		-				-
Total		84.7	$	585.6	$	242.7	$	105.2	$	1,019.8
Year ended December 31, 2006:
Personal insurance segment	$	-	$	389.6					$	612.8
Business insurance segment		-		192.4						406.7
Investment operations segment		83.1		-		-				-
Total		83.1	$	582.0	$	248.1	$	99.9	$	1,019.5
Year ended December 31, 2005:
Personal insurance segment	$	-	$	383.7					$	650.9
Business insurance segment		-		230.2						418.6
Investment operations segment		78.7		-		-				-
Total		78.7	$	613.9	$	251.8	$	81.1	$	1,069.5

⁽¹⁾ Deferred policy acquisition costs, unearned premiums, amortization of deferred policy acquisition costs, and other operating expense are not allocated to a segment for internal reporting purposes.

⁽²⁾ Segmented balances are net of reinsurance recoverable on losses and loss expenses payable.

⁽³⁾ Benefits, losses and settlement expense are monitored on a statutory basis.

STATE AUTO FINANCIAL CORPORATION

SCHEDULE IV - REINSURANCE

Years Ended December 31, 2007, 2006, and 2005

($ million, except percentages)
	Ceded to						Assumed from				Net Amount		Percentage of amount
	Gross Amount		Outside Companies		Affiliated Companies(1)		Outside Companies		Affiliated Companies(1)				assumed to net(2)
Year ended December 31, 2007:
Property-casualty earned premiums	$	751.0	$	18.8	$	695.7	$	6.5	$	968.6	$	1,011.6	0.6	%
Year ended December 31, 2006:
Property-casualty earned premiums		743.1		17.6		687.8		7.1		979.0		1,023.8	0.7	%
Year ended December 31, 2005:
Property-casualty earned premiums		746.9		16.4		683.4		6.1		997.1		1,050.3	0.6	%

⁽¹⁾ These columns include the effect of intercompany pooling.

⁽²⁾ Calculated as earned premiums assumed from outside companies to net amount.

EX-10.22

Exhibit 10.22

AMENDED AND RESTATED

INVESTMENT MANAGEMENT AGREEMENT

This Amended and Restated Investment Management Agreement (the “Agreement”) dated this 31^st day of December 2007 is by and between Stateco Financial Services, Inc. (aka Stateco, Inc.) (“Stateco”), 518 East Broad Street, Columbus, Ohio 43215 and Patrons Mutual Insurance Company of Connecticut, Patrons Fire Insurance Company of Rhode Island, and Provision State Insurance Company, 769 Hebron Avenue, Glastonbury, Connecticut 06033 (referred to jointly hereinafter as the “Company”).

Recitals

The Company is engaged in the property-casualty insurance underwriting business.

In the ordinary course of its business it is charged with the responsibility of managing and investing policyholder premiums.

Stateco, an Ohio-domiciled corporation, is engaged in the business of providing financial services pertinent to an insurance business including, without limitation, investment management services.

The Company desires to retain the services of Stateco as the investment manager for its investable assets, and Stateco is willing to serve in such capacity.

This Agreement is being amended and restated in response to comments received from the Connecticut Department of Insurance.

Therefore, in consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties hereto agree as follows:

1. TERM

a. This Agreement shall be for a one year term. It shall automatically renew for additional twelve month terms unless either party hereto gives written notice of its intention to terminate this Agreement, which notice must be given at least ninety days prior to the annual anniversary date of the Agreement.

2. AUTHORITY GRANTED TO STATECO

a. The Company understands and agrees that as its investment manager, Stateco shall have full discretion as to investment decisions which are consistent with the investment policy set by the Investment Committee of the Board of Directors of the Company. The Investment Committee agrees to keep Stateco advised of any changes to investment policy adopted by the committee.

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b. Stateco agrees to attend all Investment Committee meetings to review with the committee members the investment activities undertaken in the prior quarter, to respond to questions from committee members and to communicate with the Investment Committee with respect to investment plans, strategies and policies to be pursued by Stateco.

c. The Company understands and agrees the discretion granted to Stateco herein empowers Stateco (within the policy constraints noted) to select investments to purchase, to allocate investable funds between tax free and taxable investments and to make decisions with respect to the sale of investments and the timing of such sale. Stateco is also authorized to give instructions to Company’s custodian(s), with respect to the purchase, sale, exchange and delivery of securities for Company’s account and disbursements relating thereto.

d. Stateco is also authorized to place brokerage orders for Company’s account through such brokerage firms as Stateco, in its sole discretion, may determine.

3. STATECO’S OBLIGATIONS

a. Stateco agrees to maintain records of transactions in which it engages on Company’s behalf in such form and format as Company requires to comply with legal requirements applicable to it.

b. Stateco also agrees to act in good faith and exercise due care in carrying out its responsibilities hereunder. Stateco will not be liable for any error of judgment with respect to its investment decisions providing Stateco has acted in good faith and has exercised due care.

c. Stateco agrees to maintain strict confidence with respect to Company’s financial affairs. Company will maintain confidentiality of investment advice and investment decisions, except to the extent disclosure is mandated by law or disclosure is made to an affiliate of Company.

d. In consideration for the foregoing services provided and responsibilities to be accepted, Company agrees to pay Stateco based on the total investable assets of Company under its management, as per the Fee Schedule attached as Exhibit A. The fee will be paid withing forty-five (45) days after the end of each calendar quarter. It will be reviewed annually and may be amended by mutual agreement, which shall be confirmed in a revised Fee Schedule to be executed by the parties.

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4. ARBITRATION

a. In the event of a dispute arising out of any party’s performance under this Agreement, the parties hereby understand and agree that if the dispute cannot be amicably resolved by the parties, they will arbitrate the dispute in accordance with the rules and procedures set forth in the Ohio Uniform Arbitration Act, which is hereby incorporated by reference.

5. GOVERNING LAW

a. This Agreement shall be governed by Connecticut law.

6. AMENDMENT

This Agreement may be amended by mutual consent of Stateco and the Company. Except as provided herein, no alteration or variation of the terms of this Agreement shall be valid unless made in writing and signed by both Stateco and the Company. Furthermore, no alteration or variation of the terms of this Agreement shall be valid unless prior approval for such alteration or variation has been received from the Commissioners of the Ohio and the Connecticut Departments of Insurance.

7. ASSIGNMENT

This Agreement may not be assigned without the written consent of the other party and without the prior approval of the Commissioners of the Ohio and the Connecticut Departments of Insurance.

8. COMPLETE AGREEMENT

This document, together with such amendments hereto as may from time to time be validly executed in writing by the parties, constitutes the entire agreement between the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter of this Agreement.

9. ACCESS TO RECORDS

The parties shall permit the Ohio and Connecticut Departments of Insurance to have access to books and records pertaining to the services provided and the charges billed pursuant to the provisions of this Agreement, as and to the extent required by law.

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10. EFFECTIVENESS

This Agreement shall be effective (the “Effective Date”) as of the Patrons Closing Date (as defined in the Amended and Restated Affiliation Agreement by and among State Automobile Mutual Insurance Company, Patrons Mutual Insurance Company of Connecticut, and Litchfield Mutual Fire Insurance Company). Notwithstanding the foregoing, the effectiveness of this Agreement is subject to the receipt of all regulatory consents required to implement the terms of this Agreement. Until such time as all such regulatory consents have been obtained, this Agreement shall not become operative in any manner whatsoever and shall be of no force or effect.

[SIGNATURE PAGE TO FOLLOW]

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Stateco Financial Services, Inc.
By	/s/ Robert P Restrepo, Jr.
	Robert P Restrepo, Jr., President
Patrons Mutual Insurance Company of Connecticut
By	/s/ Robert P Restrepo, Jr.
	Robert P Restrepo, Jr., President
Patrons Fire Insurance Company of Rhode Island
By	/s/ Robert P Restrepo, Jr.
	Robert P Restrepo, Jr., President
Provision State Insurance Company
By	/s/ Robert P Restrepo, Jr.
	Robert P Restrepo, Jr., President

5

EXHIBIT A

FEE SCHEDULE

Except as amended or modified by mutual agreement of the parties hereto, Stateco shall be paid an investment management fee every quarter based on a percentage of the average asset value of invested assets which average shall be calculated by adding the market value of invested assets at the beginning of the quarter and at the end of the quarter, dividing that sum by two.

The annual fee for fixed instruments including bonds, (taxable and tax-free) invested cash and preferred stock is 40 basis points or .004 times the average asset value of that category of invested asset.

The annual fee for all common stock portfolios is 50 basis points or .005 times the average asset value of that category of invested assets.

In addition, as respects the common stock portfolios, Stateco shall be entitled to a performance bonus based on the performance of the common stock portfolios determined in the following manner.

In the event the total return on any common stock portfolio exceeds for a particular quarter the total return for the S&P 500 for the same quarter, Stateco shall be paid an annual bonus of 10 basis points or .001 times the portion of the average asset value of the particular portfolio which exceeds the asset value of the same portfolio calculated based on the actual total performance of the S&P 500 for the quarter in question.

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EX-10.23

Exhibit 10.23

AMENDED AND RESTATED

INVESTMENT MANAGEMENT AGREEMENT

This Amended and Restated Investment Management Agreement (the “Agreement”) dated this 31^st day of December 2007 is by and between Stateco Financial Services, Inc. (aka Stateco, Inc.) (“Stateco”), 518 East Broad Street, Columbus, Ohio 43215 and Litchfield Mutual Fire Insurance Company, 769 Hebron Avenue, Glastonbury, Connecticut 06033 (the “Company”).

Recitals

The Company is engaged in the property-casualty insurance underwriting business.

In the ordinary course of its business it is charged with the responsibility of managing and investing policyholder premiums.

Stateco, an Ohio-domiciled corporation, is engaged in the business of providing financial services pertinent to an insurance business including, without limitation, investment management services.

The Company desires to retain the services of Stateco as the investment manager for its investable assets, and Stateco is willing to serve in such capacity.

This Agreement is being amended and restated in response to comments received from the Connecticut Department of Insurance.

Therefore, in consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties hereto agree as follows:

1. TERM

a. This Agreement shall be for a one year term. It shall automatically renew for additional twelve month terms unless either party hereto gives written notice of its intention to terminate this Agreement, which notice must be given at least ninety days prior to the annual anniversary date of the Agreement.

2. AUTHORITY GRANTED TO STATECO

a. The Company understands and agrees that as its investment manager, Stateco shall have full discretion as to investment decisions which are consistent with the investment policy set by the Investment Committee of the Board of Directors of the Company. The Investment Committee agrees to keep Stateco advised of any changes to investment policy adopted by the committee.

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b. Stateco agrees to attend all Investment Committee meetings to review with the committee members the investment activities undertaken in the prior quarter, to respond to questions from committee members and to communicate with the Investment Committee with respect to investment plans, strategies and policies to be pursued by Stateco.

c. The Company understands and agrees the discretion granted to Stateco herein empowers Stateco (within the policy constraints noted) to select investments to purchase, to allocate investable funds between tax free and taxable investments and to make decisions with respect to the sale of investments and the timing of such sale. Stateco is also authorized to give instructions to Company’s custodian(s), with respect to the purchase, sale, exchange and delivery of securities for Company’s account and disbursements relating thereto.

d. Stateco is also authorized to place brokerage orders for Company’s account through such brokerage firms as Stateco, in its sole discretion, may determine.

3. STATECO’S OBLIGATIONS

a. Stateco agrees to maintain records of transactions in which it engages on Company’s behalf in such form and format as Company requires to comply with legal requirements applicable to it.

b. Stateco also agrees to act in good faith and exercise due care in carrying out its responsibilities hereunder. Stateco will not be liable for any error of judgment with respect to its investment decisions providing Stateco has acted in good faith and has exercised due care.

c. Stateco agrees to maintain strict confidence with respect to Company’s financial affairs. Company will maintain confidentiality of investment advice and investment decisions, except to the extent disclosure is mandated by law or disclosure is made to an affiliate of Company.

d. In consideration for the foregoing services provided and responsibilities to be accepted, Company agrees to pay Stateco based on the total investable assets of Company under its management, as per the Fee Schedule attached as Exhibit A. The fee will be paid withing forty-five (45) days after the end of each calendar quarter. It will be reviewed annually and may be amended by mutual agreement, which shall be confirmed in a revised Fee Schedule to be executed by the parties.

4. ARBITRATION

a. In the event of a dispute arising out of any party’s performance under this Agreement, the parties hereby understand and agree that if the dispute cannot be amicably resolved by the parties, they will arbitrate the dispute in accordance with the rules and procedures set forth in the Ohio Uniform Arbitration Act, which is hereby incorporated by reference.

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5. GOVERNING LAW

a. This Agreement shall be governed by Connecticut law.

6. AMENDMENT

This Agreement may be amended by mutual consent of Stateco and the Company. Except as provided herein, no alteration or variation of the terms of this Agreement shall be valid unless made in writing and signed by both Stateco and the Company. Furthermore, no alteration or variation of the terms of this Agreement shall be valid unless prior approval for such alteration or variation has been received from the Commissioners of the Ohio and the Connecticut Departments of Insurance.

7. ASSIGNMENT

This Agreement may not be assigned without the written consent of the other party and without the prior approval of the Commissioners of the Ohio and the Connecticut Departments of Insurance.

8. COMPLETE AGREEMENT

This document, together with such amendments hereto as may from time to time be validly executed in writing by the parties, constitutes the entire agreement between the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter of this Agreement.

9. ACCESS TO RECORDS

The parties shall permit the Ohio and Connecticut Departments of Insurance to have access to books and records pertaining to the services provided and the charges billed pursuant to the provisions of this Agreement, as and to the extent required by law.

10. EFFECTIVENESS

This Agreement shall be effective (the “Effective Date”) as of the Litchfield Closing Date (as defined in the Amended and Restated Affiliation Agreement by and among State Automobile Mutual Insurance Company, Patrons Mutual Insurance Company of Connecticut, and Litchfield Mutual Fire Insurance Company). Notwithstanding the foregoing, the effectiveness of

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this Agreement is subject to the receipt of all regulatory consents required to implement the terms of this Agreement. Until such time as all such regulatory consents have been obtained, this Agreement shall not become operative in any manner whatsoever and shall be of no force or effect.

[SIGNATURE PAGE TO FOLLOW]

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Stateco Financial Services, Inc.
By	/s/ Robert P Restrepo, Jr.
	Robert P Restrepo, Jr., President
Litchfield Mutual Fire Insurance Company
By	/s/ Robert P Restrepo, Jr.
	Robert P Restrepo, Jr., President

5

EXHIBIT A

FEE SCHEDULE

Except as amended or modified by mutual agreement of the parties hereto, Stateco shall be paid an investment management fee every quarter based on a percentage of the average asset value of invested assets which average shall be calculated by adding the market value of invested assets at the beginning of the quarter and at the end of the quarter, dividing that sum by two.

The annual fee for fixed instruments including bonds, (taxable and tax-free) invested cash and preferred stock is 40 basis points or .004 times the average asset value of that category of invested asset.

The annual fee for all common stock portfolios is 50 basis points or .005 times the average asset value of that category of invested assets.

In addition, as respects the common stock portfolios, Stateco shall be entitled to a performance bonus based on the performance of the common stock portfolios determined in the following manner.

In the event the total return on any common stock portfolio exceeds for a particular quarter the total return for the S&P 500 for the same quarter, Stateco shall be paid an annual bonus of 10 basis points or .001 times the portion of the average asset value of the particular portfolio which exceeds the asset value of the same portfolio calculated based on the actual total performance of the S&P 500 for the quarter in question.

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EX-10.28

Exhibit 10.28

EXHIBIT VI

INTER-COMPANY EXPENSE AGREEMENT

BETWEEN

PATRONS FIRE INSURANCE COMPANY

AND

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

THIS AGREEMENT, made as of the 18th day of June, 2001, between Patrons Mutual Insurance Company of Connecticut (“Patrons CT”) and Patron Fire Insurance Company of Rhode Island (“Patrons RI”), both mutual insurance companies organized and exiting under the laws of the State of Connecticut.

WITNESSETH:

WHEREAS, the Boards of Directors of each of Patrons CT and Patrons RI have, at meetings duly convened and held, authorized and approved the formulation and implementation of a plan for a common management services arrangement and the preparation, execution and delivery of such agreements as may be necessary and appropriate to the effectuation of such common management services arrangement and

WHEREAS, the parties wish to set forth herein certain methodologies in determining the expenses charged for the services provided by the Management Services Agreement, effective August 30th, 1996;

NOW, THEREFORE, in consideration of the premises and of the covenants contained in the Management Services Agreement, and for other good and valuable consideration, it is agreed as follows:

Section 1. SERVICES. Commencing on the Effective Date (as defined below) and until the termination of this Agreement, Patrons CT shall provide to Patrons RI such management services as shall be reasonably necessary or desirable for the conduct of the

insurance business of Patrons RI. Such services shall include, but not be limited to, accounting, tax and auditing services, legal services, actuarial services, employee benefit plans and personnel administration, insurance production and underwriting services, processing and payment of claims, servicing of policyholders, billing and collection services, software development services, electronic data processing operations, communications operations, investment and property management services.

Section 2. CHARGES. Patrons RI agrees to pay to Patrons CT a charge equal to all expenses, direct and indirect, reasonably and equitably determined by Patrons CT to be attributable to Patrons RI for services and facilities provided by the former to the latter pursuant hereto, except to the extent application of laws or regulations would otherwise require.

The basis for determining such charges to Patrons RI shall be similar to those used by Patrons CT for internal cost distribution including, where applicable, time records prepared for this purpose. Such basis shall be modified and adjusted where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by Patrons CT on behalf of Patrons RI.

Patrons CT’s determination of charges hereunder shall be conclusive as between such parties, except that if the Patrons RI objects to any such determination, it shall so advise Patrons CT within thirty (30) days of receipt of notice of said determination. Unless such parties can reconcile any such objection, or otherwise agree, they shall select a firm of independent certified public accountants which shall determine the charges properly allocable to Patrons RI and shall, within a reasonable time, submit such determination, together with the basis therefor, in writing to both parties whereupon such determination shall be binding. The expenses of any such determination by a firm of independent certified public accountants shall be borne as determined to be equitable by such accountants.

Section 3. SETTLEMENT. At quarterly intervals, Patrons CT shall submit to Patrons RI an account of amounts payable and the account shall be settled within thirty (30) days thereafter. The amounts payable by Patrons RI may be offset by reciprocal obligations due to Patrons RI from the Inter-company Pooling Arrangement, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.

- 2 -

Section 4. ACCOUNTING RECORDS. Patrons CT shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as Patrons RI may reasonably request for purposes of its internal accounting operations. Patrons CT shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by Patrons RI or any governmental agency having jurisdiction during reasonable business hours.

Section 5. TERMINATION. This agreement shall terminate upon the termination of that certain Management Services Agreement dated August 30th, 1996 between the parties hereto, as amended from time to time.

Section 6. SETTLEMENT OF TERMINATION. No later than ninety (90) days after the effective date of termination, Patrons CT shall deliver to Patrons RI a detailed written statement for all charges incurred and not included in any previous statement to the effective date of termination. The amounts owed hereunder shall be due and payable within thirty (30) days of receipt of such statement.

Section 7. ASSIGNMENT AND ADDITIONAL PARTIES. This Agreement shall not be assignable by Patrons CT or Patrons RI without the consent of the other party, except in the case of assignment to a corporation or other organization which is a successor to Patrons RI or Patrons CT, as the case may be, in which case such successor shall be bound hereunder and by the terms of said assignment in the same manner as its assignor is bound hereunder.

Section 8. GOVERNING LAW. This Agreement shall be governed by and constructed in accordance with Connecticut law.

Section 9. This Agreement may be executed in one or more counterparts, and by different parties on separate counterparts, either of which shall and will be treated and considered as an original, but all of which together shall constitute one and the same instrument.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.

PATRONS FIRE INSURANCE COMPANY OF     CONNECTICUT
By
	Its Vice President and Treasurer

PATRONS MUTUAL INSURANCE COMPANY OF     CONNECTICUT
By
	Its President and CEO

- 4 -

EXHIBIT V

AMENDMENT NO. 1

to the

INTER-COMPANY EXPENSE AGREEMENT

(hereinafter and thereafter referred to as the “Agreement”)

between

Patrons Mutual Insurance Company of Connecticut, a Connecticut corporation (“Patrons CT”), and Patrons Fire Insurance Company of Rhode Island, a Connecticut corporation (“Patrons RI”), dated June 18th, 2001. Patrons CT and Patrons RI are sometimes herein referred to individually as a “Party” and collectively as the “Parties”.

It is understood and agreed that, effective September 30, 2002, this Agreement is amended as follows:

Section 3., SETTLEMENT shall be amended as follows:

Section 3. Settlement. At quarterly intervals, Patrons CT shall submit to Patrons RI an account of amounts payable and the account shall be settled within ninety (90) days thereafter. The amounts payable by Patrons RI may be offset by reciprocal obligations due to Patrons RI from the Inter-company Pooling Arrangement, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.

ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.

IN WITNESS WHEREOF, the parties hereto, have caused this Agreement to, be executed by their duly authorized officers effective as of the day and year set forth in the opening paragraph of this Agreement.

Patrons Mutual Insurance Company of Connecticut
By:
Date:	___________
Name:	William Siclari
Title:	President & CEO

Patrons Fire Insurance Company of Rhode Island
By:
Date:	___________
Name:	William Siclari
Title:	President & CEO

Attest:

                Treasurer

Patrons Mutual Insurance Company of Connecticut

- 2 -

SECOND AMENDMENT

to

INTER-COMPANY EXPENSE AGREEMENT

among

PATRONS FIRE INSURANCE COMPANY OF RHODE ISLAND

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

and

STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY

This Second Amendment to Inter-Company Expense Agreement (“Second Amendment”), dated as of December 14, 2007, amends the Inter-Company Expense Agreement (the “Expense Agreement”), dated as of June 18, 2001, as amended, by and between Patrons Fire Insurance Company of Rhode Island (“Patrons RI”) and Patrons Mutual Insurance Company of Connecticut (“Patrons CT”) as follows:

RECITALS

WHEREAS, Patrons RI and Patrons CT have previously entered into the Expense Agreement and the First Amendment to Expense Agreement, effective as of September 30, 2002; and

WHEREAS, Patrons CT and Patrons RI will affiliate their business operations with State Automobile Mutual Insurance Company (“SAM”) upon the closing of the transactions contemplated by the Amended and Restated Affiliation Agreement (the “Restated Affiliation Agreement”), by and among SAM, Patrons CT and Litchfield Mutual Fire Insurance Company; and

WHEREAS, the parties intend to add SAM and State Auto Property and Casualty Insurance Company (“SAP&C”) as parties to the Expense Agreement, and to set forth herein certain methodologies in determining the expenses charged for services provided to Patrons RI by SAM and SAP&C.

STATEMENT OF AGREEMENT

In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties to this Second Amendment agree to amend the Expense Agreement as follows:

1. Capitalized terms used in this Second Amendment (including the Recitals) which are not otherwise defined herein shall have the meanings ascribed to such terms in the Expense Agreement.

2. Upon the Effective Date (as defined below) of this Second Amendment, SAM and SAP&C shall supplement the management and operations services provided to Patrons RI by Patrons CT pursuant to Section 1 of the Expense Agreement. The parties acknowledge that Patrons CT has its own employees who provide managerial, supervisory, administrative, technical, professional, and clerical services to Patrons RI. Notwithstanding the foregoing, Patrons CT and Patrons RI understand and agree that State Auto P&C, acting by and through its employees, is authorized to provide certain other executive, administrative,

1

technical, managerial and professional support services to Patrons RI as needed and agreed upon by the parties, while SAM is authorized to provide certain data processing equipment, office supplies and equipment, furniture and fixtures, automobiles and such other items of tangible personal property or facilities to Patrons RI as needed and agreed upon by the parties, the costs of which shall be allocated as described below.

3. Section 2 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“Patrons RI agrees to pay to Patrons CT, SAM and SAP&C a charge equal to all expenses, direct and indirect, reasonably and equitably determined by Patrons CT, SAM and SAP&C to be attributable to Patrons RI for services and facilities provided by the former to the latter pursuant hereto, except to the extent application of laws or regulations would otherwise require.

“The basis for determining such charges to Patrons RI shall be similar to those used by Patrons CT, SAM and SAP&C for internal cost distribution including, where applicable, time records prepared for this purpose. Such basis shall be modified and adjusted where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by Patrons CT, SAM and SAP&C on behalf of Patrons RI. Patrons CT’s, SAM’s and SAP&C’s determination of charges hereunder shall be conclusive as between such parties, except that if the Patrons RI objects to any such determination it shall so advise Patrons CT, SAM and SAP&C within thirty (30) days of receipt of notice of said determination. Unless such parties can reconcile any such objection, or otherwise agree, they shall select a firm of independent certified public accountants which shall determine the charges properly allocable to Patrons RI and shall, within a reasonable time, submit such determination, together with the basis therefor, in writing to both parties whereupon such determination shall be binding. The expenses of any such determination by a firm of independent certified public accountants shall be borne as determined to be equitable by such accountants.”

4. Section 3 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“Within 45 days after the end of each calendar quarter, Patrons CT shall submit to Patrons RI an account of amounts payable and the account shall be settled within thirty (30) days thereafter. The amounts payable by Patrons RI may be offset by reciprocal obligations due to Patrons RI from the Inter-company Pooling Arrangement, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.

“Within 45 days after the end of each calendar quarter, SAM and SAP&C shall submit to Patrons RI an account of amounts payable and the account shall be settled within thirty (30) days thereafter. SAM and SAP&C shall pay none of Patrons RI’s insurance losses, loss adjustment expenses and underwriting expenses. Underwriting expenses include, without limitation, expenses for SAP&C employees providing services on behalf of Patrons RI for only part of their time, which expenses shall be allocated in accordance with statutory accounting principles to Patrons RI in proportion to the amount of time those employees spend on behalf of Patrons RI. Patrons RI’s share of pension and benefit expenses under the benefit plans for employees of SAP&C shall be allocated to Patrons RI based on the percentage of SAP&C’s payroll expenses allocated to Patrons RI pursuant to the terms hereof. The amounts payable by Patrons RI may be offset by any reciprocal obligations due to Patrons RI, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.”

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5. Section 4 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“Patrons CT, SAM and SAP&C shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as Patrons RI may reasonably request for purposes of its internal accounting operations. Expenses shall be apportioned in accordance with statutory accounting principles consistently applied. The books, accounts, and records shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the expenses apportioned to the respective parties. Patrons CT, SAM and SAP&C shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by Patrons RI or any governmental agency having jurisdiction during reasonable business hours.”

6. Section 6 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“No later than ninety (90) days after the effective date of termination, Patrons CT, SAM and SAP&C shall deliver to Patrons RI a detailed written statement for all charges incurred and not included in any previous statement to the effective date of termination. The amounts owed hereunder shall be due and payable within thirty (30) days of receipt of such statement.”

7. Section 7 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“This Agreement shall not be assignable by Patrons CT, SAM, SAP&C or Patrons RI without the consent of the other parties, except in the case of assignment to a corporation or other organization which is a successor to Patrons RI, SAM, SAP&C or Patrons CT, as the case may be, in which case such successor shall be bound hereunder and by the terms of said assignment in the same manner as its assignor is bound hereunder. Under no circumstances can this Agreement be assigned without the prior approval of the Insurance Departments of Connecticut and Ohio.”

8. The following is hereby added to the Expense Agreement as new Section 10:

“COMPLETE AGREEMENT. This document, together with such amendments hereto as may from time to time be validly executed in writing by the parties, constitutes the entire agreement between the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter of this Agreement.”

9. The following is hereby added to the Expense Agreement as new Section 11:

“AMENDMENT. This Agreement may be amended by mutual consent of the parties. Except as provided herein, no alteration or variation of the terms of this Agreement shall be valid unless made in writing and signed by all the parties to this Agreement. Furthermore, no alteration or variation of the terms of this Agreement shall be valid unless prior approval for such alteration or variation has been received from the Commissioners of the Ohio and the Connecticut Departments of Insurance.”

10. This Second Amendment shall be effective (the “Effective Date”) as of the Patrons Closing Date (as defined in the Restated Affiliation Agreement). Notwithstanding the foregoing, the effectiveness of this Second Amendment is subject to the receipt of all regulatory consents required to implement the terms of this Second Amendment. Until such time as all such regulatory consents have been obtained, this Second Amendment shall not become operative to amend the Expense Agreement in any manner whatsoever and shall be of no force or effect.

3

11. This Second Amendment constitutes an integral part of the Expense Agreement. In the event of any inconsistencies between the provisions of the Expense Agreement and this Second Amendment, the provisions of this Second Amendment shall control. Except as expressly amended hereby, the terms and provisions of the Expense Agreement shall continue in full force and effect without change for the balance of the term thereof.

[SIGNATURE PAGE FOLLOWS]

4

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the day and year first above written.

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT
By:	/s/ William Siclari
	William Siclari, President
PATRONS FIRE INSURANCE COMPANY OF RHODE ISLAND
By:	/s/ William Siclari
	William Siclari, President
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President
STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President

5

EX-10.29

Exhibit 10.29

INTER-COMPANY EXPENSE AGREEMENT

BETWEEN

LITCHFIELD MUTUAL FIRE INSURANCE COMPANY

AND

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

THIS AGREEMENT, made as of the 12th day of January, 2001, between Patrons Mutual Insurance Company of Connecticut (“Patrons”) and Litchfield Mutual Fire Insurance Company (“Litchfield”), both mutual insurance companies organized and exiting under the laws of the State of Connecticut.

WITNESSETH:

WHEREAS, the Boards of Directors of each of Patrons and Litchfield have, at meetings duly convened and held, authorized and approved the formulation and implementation of a plan for a common management services arrangement and the preparation, execution and delivery of such agreements as may be necessary and appropriate to the effectuation of such common management services arrangement and

WHEREAS, the parties wish to set forth herein certain methodologies in determining the expenses charged for the services provided by the Management Services Agreement, effective August 26th, 1998;

NOW, THEREFORE, in consideration of the premises and of the covenants contained in the Management Services Agreement, and for other good and valuable consideration, it is agreed as follows:

Section 1. SERVICES. Commencing on the Effective Date (as defined below) and until the termination of this Agreement, Patrons shall provide to Litchfield such management services as shall be reasonably necessary or desirable for the conduct of the insurance business of Litchfield. Such services shall include, but not be limited to, accounting, tax and auditing services, legal

services, actuarial services, employee benefit plans and personnel administration, insurance production and underwriting services, processing and payment of claims, servicing of policyholders, billing and collection services, software development services, electronic data processing operations, communications operations, investment and property management services.

Section 2. CHARGES. Litchfield agrees to pay to Patrons a charge equal to all expenses, direct and indirect, reasonably and equitably determined by Patrons to be attributable to Litchfield for services and facilities provided by the former to the latter pursuant hereto, except to the extent application of laws or regulations would otherwise require.

The basis for determining such charges to Litchfield shall be similar to those used by for internal cost distribution including, where applicable, time records prepared for this purpose. Such basis shall be modified and adjusted where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by Patrons on behalf of Litchfield.

Patrons’s determination of charges hereunder shall be conclusive as between such parties, except that if the Litchfield objects to any such determination, it shall so advise Patrons within thirty (30) days of receipt of notice of said determination. Unless such parties can reconcile any such objection, or otherwise agree, they shall select a firm of independent certified public accountants which shall determine the charges properly allocable to Litchfield and shall, within a reasonable time, submit such determination, together with the basis therefor, in writing to both parties whereupon such determination shall be binding. The expenses of any such determination by a firm of independent certified public accountants shall be borne as determined to be equitable by such accountants.

Section 3. SETTLEMENT. At quarterly intervals, Patrons shall submit to Litchfield an account of amounts payable and the account shall be settled within thirty (30) days thereafter. The amounts payable by Litchfield may be offset by reciprocal obligations due to Litchfield from the Inter-company Pooling Arrangement, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.

- 2 -

Section 4. ACCOUNTING RECORDS. Patrons shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as Litchfield may reasonably request for purposes of its internal accounting operations. Patrons shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by Litchfield or any governmental agency having jurisdiction during reasonable business hours.

Section 5. TERMINATION. This agreement shall terminate upon the termination of that certain Management Services Agreement dated August 30th, 1996 between the parties hereto, as amended from time to time.

Section 6. SETTLEMENT OF TERMINATION. No later than ninety (90) days after the effective date of termination, Patrons shall deliver to Litchfield a detailed written statement for all charges incurred and not included in any previous statement to the effective date of termination. The amounts owed hereunder shall be due and payable within thirty (30) days of receipt of such statement.

Section 7. ASSIGNMENT AND ADDITIONAL PARTIES. This Agreement shall not be assignable by Patrons or Litchfield without the consent of the other party, except in the case of assignment to a corporation or other organization which is a successor to Lichfield or Patrons, as the case may be, in which case such successor shall be bound hereunder and by the terms of said assignment in the same manner as its assignor is bound hereunder.

Section 8. GOVERNING LAW. This Agreement shall be governed by and constructed in accordance with Connecticut law.

Section 9. This Agreement may be executed in one or more counterparts, and by different parties on separate counterparts, either of which shall and will be treated and considered as an original, but all of which together shall constitute one and the same instrument.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.

LITCHFIELD MUTUAL FIRE INSURANCE

    COMPANY OF CONNECTICUT

By

Its

PATRONS MUTUAL INSURANCE COMPANY

    OF CONNECTICUT

By

Its

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AMENDMENT NO. 1

to the

INTER-COMPANY EXPENSE AGREEMENT

(hereinafter and thereafter referred to as the “Agreement”)

between

Patrons Mutual Insurance Company of Connecticut, a Connecticut corporation (“Patrons CT”), and Litchfield Mutual Fire Insurance Company, a Connecticut corporation (“Litchfield”), dated January 12, 2001. Patrons CT and Litchfield are sometimes herein referred to individually as a “Party” and collectively as the “Parties”.

It is understood and agreed that, effective September 30, 2002, this Agreement is amended as follows:

Section 3., SETTLEMENT shall be amended as follows:

Section 3. Settlement. At quarterly intervals, Patrons shall submit to Litchfield an account of amounts payable and the account shall be settled within ninety (90) days thereafter. The amounts payable by Litchfield may be offset by reciprocal obligations due to Litchfield from the Inter-company Pooling Arrangement, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.

ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.

IN WITNESS WHEREOF, the parties hereto, have caused this Agreement to, be executed by their duly authorized officers effective as of the day and year set forth in the opening paragraph of this Agreement.

Patrons Mutual Insurance Company of Connecticut
By:
Date:	___________
Name:	William Siclari
Title:	President & CEO

Litchfield Mutual Fire Insurance Company
By:
Date:	___________
Name:	William Siclari
Title:	Vice President

Attest:

                Treasurer

Patrons Mutual Insurance Company of Connecticut

- 2 -

SECOND AMENDMENT

to

INTER-COMPANY EXPENSE AGREEMENT

among

LITCHFIELD MUTUAL FIRE INSURANCE COMPANY

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

and

STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY

This Second Amendment to Inter-Company Expense Agreement (“Second Amendment”), dated as of December 14, 2007, amends the Inter-Company Expense Agreement (the “Expense Agreement”), dated as of January 12, 2001, as amended, by and between Litchfield Mutual Fire Insurance Company (“Litchfield”) and Patrons Mutual Insurance Company of Connecticut (“Patrons”) as follows:

RECITALS

WHEREAS, Litchfield and Patrons have previously entered into the Expense Agreement and the First Amendment to Expense Agreement, effective as of September 30, 2002; and

WHEREAS, Patrons and Litchfield will affiliate their business operations with State Automobile Mutual Insurance Company (“SAM”) upon the closing of the transactions contemplated by the Amended and Restated Affiliation Agreement (the “Restated Affiliation Agreement”), by and among Litchfield, Patrons and SAM; and

WHEREAS, the parties intend to add SAM and State Auto Property and Casualty Insurance Company (“SAP&C”) as parties to the Expense Agreement, and to set forth herein certain methodologies in determining the expenses charged for services provided to Litchfield or Patrons by SAM and SAP&C.

STATEMENT OF AGREEMENT

In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties to this Second Amendment agree to amend the Expense Agreement as follows:

1. Capitalized terms used in this Second Amendment (including the Recitals) which are not otherwise defined herein shall have the meanings ascribed to such terms in the Expense Agreement.

2. Upon the Effective Date (as defined below) of this Second Amendment, SAM and SAP&C shall supplement the management and operations services provided to Litchfield by Patrons pursuant to Section 1 of the Expense Agreement and such management and operations services Patrons provides to itself. The parties acknowledge that Patrons has its own employees who provide managerial, supervisory, administrative, technical, professional, and clerical services to Litchfield and to itself. Notwithstanding the foregoing, Patrons and Litchfield understand and agree that SAP&C, acting by and through its employees, is authorized to provide certain other executive, administrative, technical, managerial and professional support services to Litchfield and Patrons

1

as needed and agreed upon by the parties, while SAM is authorized to provide certain data processing equipment, office supplies and equipment, furniture and fixtures, automobiles and such other items of tangible personal property or facilities to Litchfield and Patrons as needed and agreed upon by the parties, the costs of which shall be allocated as described below.

3. Section 2 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“Litchfield agrees to pay to Patrons a charge equal to all expenses, direct and indirect, reasonably and equitably determined by Patrons to be attributable to Litchfield for services and facilities provided by the former to the latter pursuant hereto, except to the extent application of laws or regulations would otherwise require.

“The basis for determining such charges to Litchfield shall be similar to those used by Patrons for internal cost distribution including, where applicable, time records prepared for this purpose. Such basis shall be modified and adjusted where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by Patrons on behalf of Litchfield.

“Patron’s determination of charges hereunder shall be conclusive as between such parties, except that if the Litchfield objects to any such determination, it shall so advise Patrons within thirty (30) days of receipt of notice of said determination. Unless such parties can reconcile any such objection, or otherwise agree, they shall select a firm of independent certified public accountants which shall determine the charges properly allocable to Litchfield and shall, within a reasonable time, submit such determination, together with the basis therefor, in writing to both parties whereupon such determination shall be binding. The expenses of any such determination by a firm of independent certified public accountants shall be borne as determined to be equitable by such accountants.

“Litchfield and Patrons agree to pay to SAM & SAP&C a charge equal to all expenses, direct and indirect, reasonably and equitably determined by SAM & SAP&C to be attributable to Litchfield or Patrons for services and facilities provided by the former to the latter pursuant hereto, except to the extent application of laws or regulations would otherwise require.

“The basis for determining such charges to Litchfield or Patrons shall be similar to those used by SAM and SAP&C for internal cost distribution including, where applicable, time records prepared for this purpose. Such basis shall be modified and adjusted where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by SAM and SAP&C on behalf of Litchfield or Patrons.

“SAM’s and SAP&C’s determination of charges hereunder shall be conclusive as between such parties, except that if Litchfield or Patrons objects to any such determination, it shall so advise SAM and SAP&C within thirty (30) days of receipt of notice of said determination. Unless such parties can reconcile any such objection, or otherwise agree, they shall select a firm of independent certified public accountants which shall determine the charges properly allocable to Litchfield and Patrons and shall, within a reasonable time, submit such determination, together with the basis therefor, in writing to both parties whereupon such determination shall be binding. The expenses of any such determination by a firm of independent certified public accountants shall be borne as determined to be equitable by such accountants.”

2

4. Section 3 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“Within 45 days after the end of each calendar quarter, Patrons shall submit to Litchfield an account of amounts payable and the account shall be settled within thirty (30) days thereafter. The amounts payable by Litchfield may be offset by reciprocal obligations due to Litchfield from the Inter-company Pooling Arrangement, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.

“Within 45 days after the end of each calendar quarter, SAM and SAP&C shall submit to Litchfield and Patrons an account of amounts payable and the account shall be settled within thirty (30) days thereafter. SAM and SAP&C shall pay none of Litchfield’s or Patrons’ insurance losses, loss adjustment expenses and underwriting expenses. Underwriting expenses include, without limitation, expenses for SAP&C employees providing services on behalf of Litchfield or Patrons for only part of their time, which expenses shall be allocated in accordance with statutory accounting principles to Litchfield or Patrons in proportion to the amount of time those employees spend on behalf of Litchfield or Patrons. Litchfield’s and Patrons’ share of pension and benefit expenses under the benefit plans for employees of SAP&C shall be allocated to Litchfield and Patrons based on the percentage of SAP&C’s payroll expenses allocated to Litchfield and Patrons pursuant to the terms hereof. The amounts payable by Litchfield or Patrons may be offset by any reciprocal obligations due to Litchfield or Patrons, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.”

5. Section 4 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“Patrons shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as Litchfield may reasonably request for purposes of its internal accounting operations. Expenses shall be apportioned in accordance with statutory accounting principles consistently applied. The books, accounts, and records shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the expenses apportioned to the respective parties. Patrons shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by Litchfield or any governmental agency having jurisdiction during reasonable business hours.

“SAM and SAP&C shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as Patrons or Litchfield may reasonably request for purposes of its internal accounting operations. Expenses shall be apportioned in accordance with statutory accounting principles consistently applied. The books, accounts, and records shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the expenses apportioned to the respective parties. SAM and SAP&C shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices during reasonable business hours for audit, inspection and copying by Patrons or Litchfield or any governmental agency having jurisdiction.”

3

6. Section 6 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“No later than ninety (90) days after the effective date of termination, Patrons shall deliver to Litchfield, and SAM and SAP&C shall deliver to Patrons and Litchfield, a detailed written statement for all charges incurred and not included in any previous statement to the effective date of termination. The amounts owed hereunder shall be due and payable within thirty (30) days of receipt of such statement.”

7. Section 7 of the Expense Agreement is hereby deleted in its entirety and replaced by the following:

“This Agreement shall not be assignable by Patrons, SAM, SAP&C or Litchfield without the consent of the other parties, except in the case of assignment to a corporation or other organization which is a successor to Litchfield, SAM, SAP&C or Patrons, as the case may be, in which case such successor shall be bound hereunder and by the terms of said assignment in the same manner as its assignor is bound hereunder. Under no circumstances can this Agreement be assigned without the prior approval of the Insurance Departments of Connecticut and Ohio.”

8. The following is hereby added to the Expense Agreement as new Section 10:

“COMPLETE AGREEMENT. This document, together with such amendments hereto as may from time to time be validly executed in writing by the parties, constitutes the entire agreement between the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter of this Agreement.”

9. The following is hereby added to the Expense Agreement as new Section 11:

“AMENDMENT. This Agreement may be amended by mutual consent of the parties. Except as provided herein, no alteration or variation of the terms of this Agreement shall be valid unless made in writing and signed by all the parties to this Agreement. Furthermore, no alteration or variation of the terms of this Agreement shall be valid unless prior approval for such alteration or variation has been received from the Commissioners of the Ohio and the Connecticut Departments of Insurance.”

10. This Second Amendment shall be effective (the “Effective Date”) as of the Litchfield Closing Date (as defined in the Restated Affiliation Agreement). Notwithstanding the foregoing, the effectiveness of this Second Amendment is subject to the receipt of all regulatory consents required to implement the terms of this Second Amendment. Until such time as all such regulatory consents have been obtained, this Second Amendment shall not become operative to amend the Expense Agreement in any manner whatsoever and shall be of no force or effect.

11. This Second Amendment constitutes an integral part of the Expense Agreement. In the event of any inconsistencies between the provisions of the Expense Agreement and this Second Amendment, the provisions of this Second Amendment shall control. Except as expressly amended hereby, the terms and provisions of the Expense Agreement shall continue in full force and effect without change for the balance of the term thereof.

[SIGNATURE PAGE TO FOLLOW]

4

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the day and year first above written.

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT
By:	/s/ William Siclari
	William Siclari, President
LITCHFIELD MUTUAL FIRE INSURANCE COMPANY
By:	/s/ Peter R. L. Faber
	Peter R. L. Faber, President
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President
STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President

5

EX-10.30

Exhibit 10.30

INTER-COMPANY EXPENSE AGREEMENT

BETWEEN

PROVISION STATE INSURANCE COMPANY

AND

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

THIS AGREEMENT, made as of the 18th day of June, 2001, between Patrons Mutual Insurance Company of Connecticut (“Patrons CT”) and Provision State Insurance Company (“Provision”), both insurance companies organized and exiting under the laws of the State of Connecticut.

WITNESSETH:

WHEREAS, Provision is a wholly-owned subsidiary of Patrons CT and an inactive insurance company whose primary activity is holding the investment in Real Estate for Patrons;

WHEREAS, Patrons CT has extensive experience in the operation of its insurance business and has trained personnel, for conducting its present and future operations (which include insurance, reinsurance and investment operations and activities incidental, ancillary or complementary to an insurance business);

WHEREAS, Patrons CT and Provision desire to arrange that Patrons CT having the appropriate experience, personnel, equipment and facilities shall provide administrative and other services to Provision;

NOW, THEREFORE, in consideration for providing these services, it is agreed as follows:

Section 1. SERVICES. Commencing on the Effective Date (as defined below) and until the termination of this Agreement, Patrons CT shall provide to Provision such management services as shall be reasonably necessary or desirable for the conduct of the

insurance business of Provision. Such services shall include, but not be limited to, accounting, tax and auditing services, legal services, actuarial services, employee benefit plans and personnel administration, insurance production and underwriting services, processing and payment of claims, servicing of policyholders, billing and collection services, software development services, electronic data processing operations, communications operations, investment and property management services.

Section 2. CHARGES. Provision agrees to pay to Patrons CT a charge equal to all expenses, direct and indirect, reasonably and equitably determined by Patrons CT to be attributable to Provision for services and facilities provided by the former to the latter pursuant hereto, except to the extent application of laws or regulations would otherwise require.

The basis for determining such charges to Provision shall be similar to those used by Patrons CT for internal cost distribution including, where applicable, time records prepared for this purpose. Such basis shall be modified and adjusted where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by Patrons CT on behalf of Provision.

Patron CT’s determination of charges hereunder shall be conclusive as between such parties, except that if the Provision objects to any such determination, it shall so advise Patrons CT within thirty (30) days of receipt of notice of said determination. Unless such parties can reconcile any such objection, or otherwise agree, they shall select a firm of independent certified public accountants which shall determine the charges properly allocable to Provision and shall, within a reasonable time, submit such determination, together with the basis therefor, in writing to both parties whereupon such determination shall be binding. The expenses of any such determination by a firm of independent certified public accountants shall be borne as determined to be equitable by such accountants.

Section 3. SETTLEMENT. At quarterly intervals, Patrons CT shall submit to Provision an account of amounts payable and the account shall be settled within thirty (30) days thereafter. The amounts payable by Provision may be offset by any reciprocal obligations due to Provision, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.

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Section 4 . ACCOUNTING RECORDS. Patrons CT shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as Provision may reasonably request for purposes of its internal accounting operations. Patrons CT shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by Provision or any governmental agency having jurisdiction during reasonable business hours.

Section 5 . TERMINATION. This agreement may be terminated by action of either the Board of Directors of Patrons CT or Provision and upon one (1) years prior written notice to the other party.

Section 6 . SETTLEMENT OF TERMINATION. No later than ninety (90) days after the effective date of termination, Patrons CT shall deliver to Provision a detailed written statement for all charges incurred and not included in any previous statement to the effective date of termination. The amounts owed hereunder shall be due and payable within thirty (30) days of receipt of such statement.

Section 7 . ASSIGNMENT AND ADDITIONAL PARTIES. This Agreement shall not be assignable by Patrons CT or Provision without the consent of the other party, except in the case of assignment to a corporation or other organization which is a successor to Provision or Patrons CT, as the case may be, in which case such successor shall be bound hereunder and by the terms of said assignment in the same manner as its assignor is bound hereunder.

Section 8 . GOVERNING LAW. This Agreement shall be governed by and constructed in accordance with Connecticut law.

Section 9 . This Agreement may be executed in one or more counterparts, and by different parties on separate counterparts, either of which shall and will be treated and considered as an original, but all of which together shall constitute one and the same instrument.

- 3 -

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.

PROVISION STATE INSURANCE COMPANY
By
	Its Treasurer

PATRONS MUTUAL INSURANCE COMPANY OF     CONNECTICUT
By
	Its President & CEO

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FIRST AMENDMENT

to

INTER-COMPANY EXPENSE AGREEMENT

among

PROVISION STATE INSURANCE COMPANY

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

and

STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY

This First Amendment to Inter-Company Expense Agreement (“First Amendment”), dated as of December 14, 2007, amends the Inter-Company Expense Agreement (the “Expense Agreement”), dated as of June 18, 2001, by and between Provision State Insurance Company (“Provision”) and Patrons Mutual Insurance Company of Connecticut (“Patrons CT”) as follows:

RECITALS

WHEREAS, Provision and Patrons CT have previously entered into the Expense Agreement; and

WHEREAS, Patrons CT and Provision will affiliate their business operations with State Automobile Mutual Insurance Company (“SAM”) upon the closing of the transactions contemplated by the Amended and Restated Affiliation Agreement (the “Restated Affiliation Agreement”), by and among SAM, Patrons CT and Litchfield Mutual Fire Insurance Company; and

WHEREAS, the parties intend to add SAM and State Auto Property and Casualty Insurance Company (“SAP&C”) as parties to the Expense Agreement, and to set forth herein certain methodologies in determining the expenses charged for services provided to Provision by SAM and SAP&C.

STATEMENT OF AGREEMENT

In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties to this First Amendment agree to amend the Expense Agreement as follows:

1. Capitalized terms used in this First Amendment (including the Recitals) which are not otherwise defined herein shall have the meanings ascribed to such terms in the Expense Agreement.

2. Upon the Effective Date (as defined below) of this First Amendment, SAM and SAP&C shall supplement the management and operations services provided to Provision by Patrons CT pursuant to Section 1 of the Expense Agreement. The parties acknowledge that Patrons CT has its own employees who provide managerial, supervisory, administrative, technical, professional, and clerical services to Provision. Notwithstanding the foregoing, Patrons CT and Provision understand and agree that State Auto P&C, acting by and through its employees, is authorized to provide certain other executive, administrative,

1

technical, managerial and professional support services to Provision as needed and agreed upon by the parties, while State Auto Mutual is authorized to provide certain data processing equipment, office supplies and equipment, furniture and fixtures, automobiles and such other items of tangible personal property or facilities to Provision as needed and agreed upon by the parties, the costs of which shall be allocated as described below.

3. Section 2 of the Expense Agreement is hereby deleted in its entirety and replaced by the following: “Provision agrees to pay to Patrons CT, SAM and SAP&C a charge equal to all expenses, direct and indirect, reasonably and equitably determined by Patrons CT, SAM and SAP&C to be attributable to Provision for services and facilities provided by the former to the latter pursuant hereto, except to the extent application of laws or regulations would otherwise require.

“The basis for determining such charges to Provision shall be similar to those used by Patrons CT, SAM and SAP&C for internal cost distribution including, where applicable, time records prepared for this purpose. Such basis shall be modified and adjusted where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by Patrons CT, SAM and SAP&C on behalf of Provision.

“Patrons CT’s, SAM’s and SAP&C’s determination of charges hereunder shall be conclusive as between such parties, except that if the Provision objects to any such determination, it shall so advise Patrons CT, SAM and SAP&C within thirty (30) days of receipt of notice of said determination. Unless such parties can reconcile any such objection, or otherwise agree, they shall select a firm of independent certified public accountants which shall determine the charges properly allocable to Provision and shall, within a reasonable time, submit such determination, together with the basis therefor, in writing to both parties whereupon such determination shall be binding. The expenses of any such determination by a firm of independent certified public accountants shall be borne as determined to be equitable by such accountants.”

4. Section 3 of the Expense Agreement is hereby deleted in its entirety and replaced by the following: “Within 45 days after the end of each calendar quarter, Patrons CT shall submit to Provision an account of amounts payable and the account shall be settled within thirty (30) days thereafter. The amounts payable by Provision may be offset by any reciprocal obligations due to Provision, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.

“Within 45 days after the end of each calendar quarter, SAM and SAP&C shall submit to Provision an account of amounts payable and the account shall be settled within thirty (30) days thereafter. SAM and SAP&C shall pay none of Provision’s insurance losses, loss adjustment expenses and underwriting expenses. Underwriting expenses include, without limitation, expenses for SAP&C employees providing services on behalf of Provision for only part of their time, which expenses shall be allocated in accordance with statutory accounting principles to Provision in proportion to the amount of time those employees spend on behalf of Provision. Provision’s share of pension and benefit expenses under the benefit plans for employees of SAP&C shall be allocated to Provision based on the percentage of SAP&C’s payroll expenses allocated to Provision pursuant to the terms hereof. The amounts payable by Provision may be offset by any reciprocal obligations due to Provision, so that only net amounts shall be required to be transferred between the parties. Settlement shall be in the form of cash or cash equivalent securities.”

2

5. Section 4 of the Expense Agreement is hereby deleted in its entirety and replaced by the following: “Patrons CT, SAM and SAP&C shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as Provision may reasonably request for purposes of its internal accounting operations. Expenses shall be apportioned in accordance with statutory accounting principles consistently applied. The books, accounts, and records shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the expenses apportioned to the respective parties. Patrons CT, SAM and SAP&C shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by Provision or any governmental agency having jurisdiction during reasonable business hours.”

6. Section 5 of the Expense Agreement is hereby deleted in its entirety and replaced by the following: “This agreement may be terminated with respect to any of the parties by action of such party’s Board of Directors and upon ninety (90) days’ prior written notice to the other parties hereto.”

7. Section 6 of the Expense Agreement is hereby deleted in its entirety and replaced by the following: “No later than ninety (90) days after the effective date of termination, Patrons CT, SAM and SAP&C shall deliver to Provision a detailed written statement for all charges incurred and not included in any previous statement to the effective date of termination. The amounts owed hereunder shall be due and payable within thirty (30) days of receipt of such statement.”

8. Section 7 of the Expense Agreement is hereby deleted in its entirety and replaced by the following: “This Agreement shall not be assignable by Patrons CT, SAM, SAP&C or Provision without the consent of the other parties, except in the case of assignment to a corporation or other organization which is a successor to Provision, SAM, SAP&C or Patrons CT, as the case may be, in which case such successor shall be bound hereunder and by the terms of said assignment in the same manner as its assignor is bound hereunder. Under no circumstances can this Agreement be assigned without the prior approval of the Connecticut and the Ohio Insurance Departments.”

9. The following is hereby added to the Expense Agreement as new Section 10:

“COMPLETE AGREEMENT. This document, together with such amendments hereto as may from time to time be validly executed in writing by the parties, constitutes the entire agreement between the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter of this Agreement.”

10. The following is hereby added to the Expense Agreement as new Section 11:

“AMENDMENT. This Agreement may be amended by mutual consent of the parties. Except as provided herein, no alteration or variation of the terms of this Agreement shall be valid unless made in writing and signed by all the parties to this Agreement. Furthermore, no alteration or variation of the terms of this Agreement shall be valid unless prior approval for such alteration or variation has been received from the Commissioners of the Ohio and the Connecticut Departments of Insurance.”

11. This First Amendment shall be effective (the “Effective Date”) as of the Patrons Closing Date (as defined in the Restated Affiliation Agreement). Notwithstanding the foregoing, the effectiveness of this First Amendment is subject to the receipt of all

3

regulatory consents required to implement the terms of this First Amendment. Until such time as all such regulatory consents have been obtained, this First Amendment shall not become operative to amend the Expense Agreement in any manner whatsoever and shall be of no force or effect.

12. This First Amendment constitutes an integral part of the Expense Agreement. In the event of any inconsistencies between the provisions of the Expense Agreement and this First Amendment, the provisions of this First Amendment shall control. Except as expressly amended hereby, the terms and provisions of the Expense Agreement shall continue in full force and effect without change for the balance of the term thereof.

[SIGNATURE PAGE TO FOLLOW]

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IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written.

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT
By:	/s/ William Siclari
	William Siclari, President
PROVISION STATE INSURANCE COMPANY
By:	/s/ William Siclari
	William Siclari, President
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President
STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President

5

EX-10.31

Exhibit 10.31

MANAGEMENT SERVICE AGREEMENT

THIS MANAGEMENT SERVICE AGREEMENT (hereinafter called “Agreement”) is made effective as of the 30^th day of August, 1996, between Patrons Mutual Insurance Company of Connecticut, a Connecticut corporation (“Patrons Connecticut”), and Patrons Fire Insurance Company of Rhode Island, a Rhode Island corporation (“Patrons Rhode Island”).

RECITALS

WHEREAS, Patrons Connecticut has extensive experience in the operation of its insurance business and has trained personnel, equipment and facilities for conducting its present and future insurance operations (which term as hereinafter used shall include reinsurance and investment operations and activities incidental, ancillary or complementary to an insurance business); and in time it is expected that Patrons Rhode Island may develop such experience, personnel, equipment and facilities; and

WHEREAS, Patrons Connecticut and Patrons Rhode Island desire to arrange that such party having the appropriate experience, personnel, equipment and facilities shall provide services and facilities upon request, to the party in need of such services and facilities, and desire to provide generally for such events; and

WHEREAS, the parties desire to provide for the performance of certain administrative and other services (hereinafter called “services”) for their insurance operations and desire further to arrange to make use in their day-to-day operations of certain property, equipment and facilities (hereinafter called “facilities”) of the parties as each may from time to time request, and the parties contemplate that this arrangement will result in certain operating economies and will improve services to the mutual benefit of them; and

WHEREAS, the parties desire to assure that all charges for services and the use of facilities incurred hereunder are reasonable and are arrived at in a fair and equitable manner; and

WHEREAS, the parties desire to identify generally the services to be rendered and the facilities to be used; and

WHEREAS, to the extent a party provides services or facilities to the other pursuant to the terms of this Agreement it may be denominated a “provider” and to the extent that it receives services or the use of facilities of the other it may be denominated a “recipient”.

Now, therefore, in consideration of the premises and of the promises set forth herein, the parties agree as follows:

1. PERFORMANCE OF SERVICES AND JOINT USE OF FACILITIES.

(a) Services. Each party agrees, to the extent requested by the other, to perform services of a type similar to that which provider customarily performs in the course of its own insurance operations for the recipient as such recipient may determine to be reasonably necessary in the conduct of its insurance operations. The services which a provider shall perform in whole or in part for the recipient may include, but need not be limited to: accounting, tax and auditing services; legal services; actuarial services; employee benefit plans and personnel administration; sales services; software development services; electronic data processing operations; communications operations and investment services.

(b) Facilities. Each party agrees to the extent requested by a recipient to make available its facilities to the recipient as the recipient may determine to be reasonably necessary in the conduct of its insurance operations. The facilities of a provider which the recipient may use in whole or in part shall include, but need not be limited to: electronic data processing equipment; business property, whether owned or leased; communications equipment; and a security vault.

(c) Best Efforts. Each party agrees at all times to use its best efforts to maintain sufficient personnel and facilities of the kind necessary to perform this Agreement, in accordance with the reasonable requests of a recipient and upon reasonable notice to the provider. If, however, a provider determines that for any reason, including its own needs, it is or will be unable to perform any service or provide any facility under this Agreement, it shall immediately notify the recipient so that the recipient can make other arrangements for such service or facility.

(d) Designation of Capacity of Personnel. Even though a provider utilizes its personnel to perform services for a recipient pursuant to this Agreement, such personnel shall at all times remain employees of the provider. The provider shall alone retain full liability to such personnel for their welfare, salaries, fringe benefits, legally required employee contributions and tax obligations.

(e) Status of Facilities. No facility of a provider used in performing services for or subject to use by a recipient shall be deemed to be transferred, assigned, conveyed or leased by performance or use pursuant to this Agreement, except as the provider and recipient may otherwise agree in writing. The amount charged as rent for any facilities leased pursuant to any such writing shall be computed in accordance with the provisions of Section 2 of this Agreement.

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(f) Exercise of Judgment in Rendering Services. In providing any service hereunder which requires the exercise of judgment by the provider, the provider will endeavor to perform such service in accordance with any reasonable and appropriate standards and guidelines the recipient develops and communicates to the provider.

(g) Control. The performance or receipt of services or the making available or use of facilities pursuant to this Agreement shall in no way impair the absolute control of the business and operations of each of the parties by its own Board of Directors.

2. CHARGES. Recipient agrees to pay to the provider a charge equal to all expenses, direct and indirect, reasonably and equitably determined by the provider to be attributable to the recipient for services and facilities provided by the former to the latter pursuant hereto, except to the extent application of laws or regulations would otherwise require.

The bases for determining such charges to the recipient shall be similar to those used by the provider for internal cost distribution including, where applicable, time records prepared for this purpose. Such bases shall be modified and adjusted where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the provider on behalf of the recipient.

The provider’s determination of charges hereunder shall be conclusive as between such parties, except that if the recipient objects to any such determination, it shall so advise the provider within thirty (30) days of receipt of notice of said determination. Unless such parties can reconcile any such objection, or otherwise agree, they shall select a firm of independent certified public accountants which shall determine the charges properly allocable to the recipient and shall, within a reasonable time, submit such determination, together with the basis therefor, in writing to both parties whereupon such determination shall be binding. The expenses of any such determination by a firm of independent certified public accountants shall be borne as determined to be equitable by such accountants.

3. PAYMENT. The provider shall submit to the recipient within thirty (30) days of the end of each calendar month (or such other interval not greater than quarterly as such parties may agree), a written statement of the amount estimated to be owed by the recipient to the provider for services and the use of facilities pursuant to this Agreement in that calendar month (or interval) and the recipient shall pay to the provider within thirty (30) days following receipt of such written statement the amount set forth in the statement.

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4. ACCOUNTING RECORDS AND DOCUMENTS. The provider shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as the recipient may reasonably request for purposes of its internal bookkeeping and accounting operations. The provider shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by the recipient or any governmental agency having jurisdiction during all reasonable business hours.

5. OTHER RECORDS AND DOCUMENTS. Each party shall maintain appropriate records identifying the nature and type of each service requested and provided pursuant to this Agreement, and the person requesting any substantial or ongoing service. All books, records, and files established and maintained by the provider by reason of its performance under this Agreement which, absent this Agreement, would have been held by the recipient shall be deemed the property of such recipient, and, together with records called for pursuant to the first sentence of this paragraph, shall be subject to examination by it and persons authorized by it at all times, and shall be delivered to it on demand.

6. LIABILITY; USE OF SERVICES OR FACILITIES. As services are being performed and facilities made available by a provider, such provider shall have no liability for any action taken or omitted by it in furnishing services and facilities under this Agreement, in good faith and without gross negligence.

7. TERMINATION. This Agreement shall terminate upon the termination of that certain Agreement of Association dated March 25, 1989 between the parties hereto, as amended from time to time, or upon order issued by the Director of the Department of Business Regulation.

8. SETTLEMENT ON TERMINATION. No later than ninety (90) days after the effective date of termination, each party which has provided services shall deliver to the other a detailed written statement for all charges incurred and not included in any previous statement to the effective date of termination. The amounts owed hereunder shall be due and payable within thirty (30) days of receipt of such statement.

9. ASSIGNMENT AND ADDITIONAL PARTIES. This Agreement and any rights pursuant hereto shall not be assignable by any party hereto, except by operation of law. Except as and to the extent specifically provided in this Agreement, nothing in this

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Agreement, expressed or implied, is intended to confer on any person other than the parties hereto, or their respective legal successors, any rights, remedies, obligations or liabilities, or to relieve any person other than the parties hereto, or their respective legal successors, from any obligations or liabilities that would otherwise be applicable.

10. GOVERNING LAW. This Agreement is made pursuant to and shall be governed by, interpreted under, and the rights of the parties determined in accordance with, the laws of the State of Rhode Island.

11. NOTICE. All notices, statements or requests provided for hereunder shall be deemed to have been duly given by one party to another when delivered by hand to an officer of the other party, or when deposited with the U.S. Postal Service, as certified or registered mail, postage prepaid, addressed to a party at its principal executive offices as such address appears on its most recent annual statement, attention: Chief Executive Officer, or to such other person or place as that party may from time to time designate by written notice sent as aforesaid.

12. ENTIRE AGREEMENT. This Agreement, together with such Amendments as may from time to time be executed in writing by the parties, constitutes the entire Agreement between the parties with respect to the subject matter hereof.

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EXTENSION OF EFFECTIVE DATE OF

CONFIRMATION OF SUCCESSOR AGREEMENT

This Extension of Effective Date of Confirmation of Successor Agreement (the “Successor Agreement”) is entered into by and between Linda L. Ruthardt, as Trustee (the “Trustee”) of Abington Mutual Liquidating Trust, Patrons Fire Insurance Company of Rhode Island, (“Patrons Rhode Island”), and Patrons Mutual Insurance Company of Connecticut (“Patrons Connecticut”).

For good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, the parties hereto agree that the second sentence of Paragraph 4 of the Successor Agreement is amended to read as follows:

If the Effective Date does not occur prior to August 30, 1996, this Successor Agreement shall become null and void, without recourse to the parties hereto.

The Successor Agreement shall in all other respects remain unchanged.

The undersigned have executed this Extension as a sealed instrument as of the 15th day of August, 1996.

ABINGTON MUTUAL LIQUIDATING TRUST
By:	/s/ J. David Leslie
	Linda L. Ruthardt, as Trustee of Abington Mutual Liquidating Trust, by her attorney, J. David Leslie
PATRONS FIRE INSURANCE COMPANY OF RHODE ISLAND
By:	/s/ J. David Leslie
	Ralph A. Spunzo, President, by his attorney,
	J. David Leslie
PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT
By:	/s/ Terence M. Fracassa
	William Siclari, President, by his attorney, Terence M. Fracassa

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in multiple counterparts by their respect officers duly authorized so to do as of the day and year first above written.

Patrons Mutual Insurance Company of

    Connecticut

By:

Patrons Fire Insurance

Company of Rhode Island

By :

6

FIRST AMENDMENT

to

MANAGEMENT SERVICES AGREEMENT

among

PATRONS FIRE INSURANCE COMPANY OF RHODE ISLAND

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

and

STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY

This First Amendment to Management Services Agreement (“First Amendment”), dated as of December 14, 2007, amends the Management Services Agreement (the “Management Agreement”), dated as of August 30, 1996, by and between Patrons Fire Insurance Company of Rhode Island (“Patrons Rhode Island”) and Patrons Mutual Insurance Company of Connecticut (“Patrons Connecticut”) as follows:

RECITALS

WHEREAS, Patrons Rhode Island and Patrons Connecticut have previously entered into the Management Agreement; and

WHEREAS, Patrons Connecticut and Patrons Rhode Island will affiliate their business operations with State Automobile Mutual Insurance Company (“SAM”) upon the closing of the transactions contemplated by the Amended and Restated Affiliation Agreement (the “Restated Affiliation Agreement”), by and among SAM, Patrons Connecticut and Litchfield Mutual Fire Insurance Company; and

WHEREAS, the parties intend to add SAM and State Auto Property & Casualty Insurance Company (“SAP&C”) as parties to the Management Agreement in order for SAM and SAP&C to provide supplemental management services to Patrons Connecticut and Patrons Rhode Island.

STATEMENT OF AGREEMENT

In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties to this First Amendment agree to amend the Management Agreement as follows:

1. Capitalized terms used in this First Amendment (including the Recitals) which are not otherwise defined herein shall have the meanings ascribed to such terms in the Management Agreement.

2. Upon the Effective Date (as defined below) of this First Amendment, SAM and SAP&C shall become parties to and shall be bound by all the terms and conditions of the Management Agreement, with employees of SAP&C providing such executive, administrative, technical, and professional support as agreed upon by the parties and SAM providing such data processing equipment, office supplies and equipment, furniture and fixtures, automobiles and other items of tangible personal property or facilities as agreed upon by the parties.

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3. Section 1.(a) “Services” of the Management Agreement is hereby deleted in its entirety and replaced by the following:

“(a) Services. Each party agrees, to the extent requested by the others, to perform services of a type similar to that which provider customarily performs in the course of its own insurance operations for the recipient as such recipient may determine to be reasonably necessary in the conduction of its insurance operations. The services which a provider shall perform in whole or in part for the recipient may include, but need not be limited to: accounting, tax and auditing services, legal services, actuarial services, employee benefit plans and personnel administration, sales services, software development services, electronic data processing operations, communications operations and investment services. The cost and expense of the services Patrons Connecticut provides to Patrons Rhode Island hereunder shall be allocated to Patrons Rhode Island in accordance with the terms of the Inter-Company Expense Agreement, as amended (the “Expense Agreement”), by and between Patrons Connecticut and Patrons Rhode Island, a copy of which is attached hereto as Exhibit A. The cost and expense of the services, equipment and facilities provided by SAP&C and SAM to Patrons Connecticut and Patrons Rhode Island pursuant to the terms hereunder shall be allocated to Patrons Connecticut and Patrons Rhode Island in accordance with the terms of the Expense Agreement and in accordance with the terms of the State Auto Reinsurance Pooling Agreement (the “State Auto Pooling Agreement”), a copy of which is attached hereto as Exhibit B.”

4. Section 4 of the Management Agreement is hereby deleted in its entirety and replaced by the following:

“The provider shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as the recipient may reasonably request for purposes of its internal bookkeeping and accounting operations. Expenses shall be apportioned in accordance with statutory accounting principles consistently applied. The books, accounts, and records shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the expenses apportioned to the respective parties. The provider shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by the recipient or any governmental agency having jurisdiction during all reasonable business hours.”

5. Section 7 of the Management Agreement is hereby deleted in its entirety and replaced with the following:

“TERMINATION. This Agreement may be terminated with respect to any party by action of such party’s Board of Directors and upon ninety (90) days’ prior written notice to the other parties hereto.

6. Section 10 of the Management Agreement is hereby deleted in its entirety and replaced with the following:

“This Agreement is made pursuant to and shall be governed by, interpreted under, and the rights of the parties determined in accordance with, the laws of the State of Connecticut.”

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7. The following is hereby added to the Management Agreement as new Section 13:

“AMENDMENT. This Agreement may be amended by mutual consent of the parties. Except as provided herein, no alteration or variation of the terms of this Agreement shall be valid unless made in writing and signed by all the parties to this Agreement. Furthermore, no alteration or variation of the terms of this Agreement shall be valid unless prior approval for such alteration or variation has been received from the Commissioners of the Ohio and the Connecticut Departments of Insurance.”

8. This First Amendment shall be effective (the “Effective Date”) as of the Patrons Closing Date (as defined in the Restated Affiliation Agreement). Notwithstanding the foregoing, the effectiveness of this First Amendment is subject to the receipt of all regulatory consents required to implement the terms of this First Amendment. Until such time as all such regulatory consents have been obtained, this First Amendment shall not become operative to amend the Management Agreement in any manner whatsoever and shall be of no force or effect.

9. This First Amendment constitutes an integral part of the Management Agreement. In the event of any inconsistencies between the provisions of the Management Agreement and this First Amendment, the provisions of this First Amendment shall control. Except as expressly amended hereby, the terms and provisions of the Management Agreement shall continue in full force and effect without change for the balance of the term thereof.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written.

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT
By:	/s/ William Siclari
	William Siclari, President
PATRONS FIRE INSURANCE COMPANY OF RHODE ISLAND
By:	/s/ William Siclari
	William Siclari, President
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President
STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President

4

EXHIBIT A

Inter-Company Expense Agreement

5

EXHIBIT B

State Auto Reinsurance Pooling Agreement

6

EX-10.32

Exhibit 10.32

EXHIBIT II

MANAGEMENT SERVICES AGREEMENT

BETWEEN

LITCHFIELD MUTUAL FIRE INSURANCE COMPANY

AND

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

THIS AGREEMENT, made as of the 26th day of August, 1998, between Patrons Mutual Insurance Company of Connecticut (“Patrons”) and Litchfield Mutual Fire Insurance Company (“Litchfield), both mutual insurance companies organized and exiting under the laws of the State of Connecticut.

WITNESSETH:

WHEREAS, the Boards of Directors of each of Patrons and Litchfield have, at meetings duly convened and held, authorized and approved the formulation and implementation of a plan for a common management services arrangement and the preparation, execution and delivery of such agreements as may be necessary and appropriate to the effectuation of such common management services arrangement and

WHEREAS, the parties wish to set forth herein certain understandings concerning such common management services arrangement;

NOW, THEREFORE, in consideration of the premises and of the covenants herein contained, and for other good and valuable consideration, it is agreed as follows:

Section 1. Commencing on the Effective Date (as defined below) and until the termination of this Agreement, Patrons shall provide to Litchfield such management services as shall be reasonably necessary or desirable for the conduct of the insurance business of Litchfield. Such services shall include, but not be limited to, accounting, tax and auditing services, legal services, actuarial services, employee benefit plans and personnel administration, insurance production and underwriting services, processing and payment of claims, servicing of policyholders, billing and collection services, software development services, electronic data

processing operations, communications operations, investment and property management services. Patrons shall provide such services at its sole cost and expense but all such costs and expenses shall be considered “Expenses” under Section 4 of the Pooling Agreement referred to in Section 10 below.

Section 2. Upon the Effective Date, all officers, employees and other personnel of Litchfield, other than the members of the Board of Directors of Litchfield in their capacity as Directors, shall be transferred to the payroll of Patrons and shall become, and thereafter be deemed to be, employees of Patrons. Although the parties contemplate that certain of such persons may act in a dual capacity as officers, employees or agents of both Litchfield and of Patrons, Patrons shall be solely responsible for the payment of all compensation and other benefits which such persons shall be entitled to as a result of their service, whether such service is rendered to Patrons or to Litchfield or both, and for the discharge of any other employment obligations owed to such persons, but such compensation and benefits also shall be considered “Expenses” under Section 4 of the Pooling Agreement referred to in Section 10 below. Litchfield shall not separately award such persons any compensation or other benefits after this arrangement becomes effective.

Section 3. Each officer, employee and other agent of Litchfield, who is transferred to the payroll of Patrons and becomes an employee of Patrons, shall receive pension and all other employee benefits as favorable as the benefits received by Patrons employees, and in computing such benefits Patrons shall include the total time of employment of such personnel at Litchfield. In order to carry out such intention, the benefits previously received by such employees at Litchfield (prior to the Effective Date) either will be substituted for the benefits payable under the employee benefit plans of Patrons, integrated with such plans, or retained, depending on the individual circumstances of each case.

Section 4. The Boards of Directors of Patrons and Litchfield shall remain responsible for the business and affairs of their respective corporations and the members of such Boards shall continue to be elected to their positions in accordance with the respective charters and bylaws of each such corporation and applicable law. The Litchfield Board of Directors shall appoint annually a President from among the members of its Board of Directors, a Treasurer, a Secretary and such other officers as the Board of

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Directors deems necessary or desirable. Such officers shall be chosen from among the employees of Patrons or upon appointment shall become employees of Patrons in accordance with the provisions of this Agreement. The President of Litchfield, in his capacity as an employee of Patrons, shall serve under the general supervision and control of the President of Patrons. Nevertheless, the President of Patrons shall delegate to the President of Litchfield the power to hire and discharge employees and personnel for Litchfield operations, within guidelines to be agreed upon by them and approved by the Litchfield Board of Directors. Such employees shall be deemed to be employees of Patrons, with all of the rights and obligations of such employees.

Section 5. It is not intended that this Agreement set forth all of the operational details necessary to initiate and implement the aforesaid common management agreement. Consequently, on and after the Effective Date, the Presidents of Patrons and Litchfield are authorized to implement in detail all of the actions contemplated herein, and to perform all acts necessary to initiate and carry out the purpose of this Agreement including consolidation of any of the functions of Patrons and of Litchfield such as production, underwriting, reinsurance, claims, collection of statistics and statistical reporting, accounting, personnel and billing and credit and personnel methods and procedures. Nevertheless, the allocation of expenses of the functions of Patrons and Litchfield shall be reasonable, fair and equitable, and shall be satisfactory to, and meet any requirements of, the Connecticut Insurance Department and no such consolidation shall result in the closing of offices of Litchfield in Litchfield, Connecticut for at least 60 months after the Effective Date.

Section 6. Patrons shall keep the Board of Directors of Litchfield fully informed with regard to the consolidated operations conducted by Patrons and generally as to its then current intentions as to the future. Patrons shall furnish the Board of Directors of Litchfield with copies of all financial statements, a signed copy of each report prepared by independent certified public accountants, and such other information with regard to the affairs of Litchfield as the Board of Directors of Litchfield may from time to time reasonably request. Upon request, the chief executive officer of Patrons shall attend any regular or special meetings of the Board of Directors of Litchfield.

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Section 7. Subject to the foregoing, Patrons and Litchfield each shall retain their respective names and corporate structures and all other aspects of their respective legal identities and corporate rights and obligations. Each also shall maintain its own reserves, assets (including investments) and capital and surplus and shall account separately therefor. Notwithstanding the foregoing, the parties will file combined financial statements consistent with the Pooling Agreement mentioned below and shall establish a steering committee and other committees as they deem desirable, comprised of representatives of their respective Boards of Directors, to consider matters of common concern and make recommendations to their respective Boards of Directors.

Section 8. Directors, officers, employees and agents of Patrons may serve as Directors, officers, employees, agents, nominees or signatories for Litchfield. When executing documents or otherwise acting in such capacities for Litchfield, such persons shall use their respective titles in Litchfield. Such individuals shall not receive from Litchfield any compensation for their services to Litchfield in any such capacities, except that a Director of Litchfield shall be compensated by Litchfield for his services as such Director.

Section 9. Patrons shall not be entitled to any compensation for the management services to be provided hereunder or reimbursement of the expenses to be incurred hereunder, except for the payment to be made pursuant to Section 13 upon the termination (if any) of this Agreement. However, in consideration of the services to be rendered hereunder by Patrons and the expenses to be incurred by Patrons in rendering such services, on the Effective Date Litchfield and Patrons will enter into a Pooling Agreement (“Pooling Agreement”) substantially in the form of Exhibit A attached hereto.

Section 10. This Agreement shall become effective (“Effective Date”) on such date as shall be mutually agreeable to Patrons and Litchfield and as shall be evidenced by an addendum to this Agreement signed by both such corporations. If the parties have not executed and delivered such an addendum to each other on or before                     , 1998, then this Agreement thereafter shall be of no further force or effect unless extended pursuant to authority granted by the respective Boards of Directors of Patrons and Litchfield.

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Section 11. This Agreement shall continue in effect until terminated in accordance with the following provisions. This Agreement may be terminated by action of either the Board of Directors of Patrons or Litchfield after the second anniversary of the Effective Date and upon at least one (1) year’s prior written notice to the other party. Notwithstanding the foregoing, this Agreement also may be terminated under the circumstances and in the manner specified in Section 12 hereof.

Section 12. At the option solely of Litchfield (exercised by its Board of Directors), this Agreement shall be and become terminated immediately upon written notice of termination from Litchfield to Patrons if any of the following events shall occur:

(a) If Patrons shall be adjudged bankrupt or insolvent by a court of competent jurisdiction, or an order shall be made by a court of competent jurisdiction for the appointment of a receiver liquidator or trustee of Patrons or of all or substantially all its property by reason of the foregoing, or approving any petition filed against Patrons for its reorganization, and such adjudication or order shall remain in force or unstayed for a period of sixty days; or

(b) If Patrons shall institute proceedings for voluntary bankruptcy or shall file a petition seeking reorganization under the Federal bankruptcy laws, or for relief under any law for the relief of debtors, or shall consent to the appointment of a receiver of itself or of all or substantially all its property, or shall make a general assignment for the benefit of its creditors, or shall admit in writing its inability to pay its debts generally, as they become due.

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Patrons agrees that if any of the events specified in subsection (b) and (c) of this Section 12 shall occur, it will give written notice thereof to Litchfield within seven days after the occurrence of such event.

Section 13. If this Agreement shall be terminated by either party pursuant to Section 11 or shall be terminated by Litchfield pursuant to Section 12, then, in any such case, within 90 days after such termination becomes effective, Litchfield shall pay to Patrons, as compensation for the services provided hereunder by Patrons prior to such termination, an amount (expressed in dollars) computed by multiplying 20% times the aggregate net insurance premiums earned by Litchfield in all States other than Connecticut during the 12-month period immediately preceding the effective date of such termination.

Section 14. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation. If the matter has not been resolved within sixty (60) days of a party’s request for negotiation, any party may initiate mediation under the Center for Public Resources (“CPR”) Model Procedure for Mediation of Business Disputes. The neutral third party will be selected from the CPR Panels of Neutrals, with the assistance of CPR, unless the parties agree otherwise. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, which is not settled by such negotiation or mediation, shall be settled by arbitration by a panel of three arbitrators in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgments upon the award rendered by the Arbitrators may be entered in any Court having jurisdiction thereof. The place of arbitration shall be East Hartford, Connecticut.

Section 15. Patrons assumes no responsibility under this Agreement other than to render the services called for hereunder in good faith.

Section 16. Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless

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some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto:

If to Litchfield, to:	Litchfield Mutual Fire Insurance Company
	Litchfield, Connecticut 06759
	Attention: Chairman, Board of Directors

If to Patrons, to:	Patrons Mutual Insurance Company
	769 Hebron Avenue
	Glastonbury, Ct 06033-6517
	Attention: President

Section 17. Patrons and Litchfield are not partners or joint venturers with each other and nothing herein shall be construed so as to make them such partners or joint venturers or impose any liability as such on either of them. Patrons shall perform its duties hereunder as an independent contractor and not as an agent of Litchfield or its Board of Directors. Neither party shall have any liability for the obligations of the other party, except as otherwise expressly set forth in this Agreement or in the Pooling Agreement.

Section 18. This Agreement shall not be assignable by Patrons or Litchfield without the consent of the other party, except in the case of assignment to a corporation or other organization which is a successor to Litchfield or Patrons, as the case may be, in which case such successor shall be bound hereunder and by the terms of said assignment in the same manner as its assignor is bound hereunder.

Section 19. This Agreement shall not be changed, modified, terminated or discharged in whole or in part except by an instrument in writing signed by both parties hereto, or their respective successors or permitted assigns.

Section 20. This Agreement shall be governed by and constructed in accordance with Connecticut law.

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Section 21. This Agreement may be executed in one or more counterparts, and by different parties on separate counterparts, either of which shall and will be treated and considered as an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.

LITCHFIELD MUTUAL FIRE INSURANCE

    COMPANY

By

Its

PATRONS MUTUAL INSURANCE COMPANY OF

    CONNECTICUT

By

Its

- 8 -

FIRST AMENDMENT

to

MANAGEMENT SERVICES AGREEMENT

among

LITCHFIELD MUTUAL FIRE INSURANCE COMPANY

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

and

STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY

This First Amendment to Management Services Agreement (“First Amendment”), dated as of December 14, 2007, amends the Management Services Agreement (the “Management Agreement”), dated as of August 26, 1998, by and between Litchfield Mutual Fire Insurance Company (“Litchfield”) and Patrons Mutual Insurance Company of Connecticut (“Patrons”) as follows:

RECITALS

WHEREAS, Patrons and Litchfield have previously entered into the Management Agreement; and

WHEREAS, Patrons and Litchfield will affiliate their business operations with State Automobile Mutual Insurance Company (“SAM”) upon the closing of the transactions contemplated by the Amended and Restated Affiliation Agreement (the “Restated Affiliation Agreement”), by and among SAM, Patrons and Litchfield; and

WHEREAS, the parties intend to add SAM and State Auto Property & Casualty Insurance Company (“SAP&C”) as parties to the Management Agreement in order for SAM and SAP&C to provide supplemental management services to Litchfield and Patrons; and

WHEREAS, the parties intend to add references to the Inter-Company Expense Agreement (the “Expense Agreement”), dated as of January 12, 2001, as amended, by and between Litchfield and Patrons; and

WHEREAS, to the extent a party provides services or facilities to any of the other parties pursuant to the terms of this Agreement, it may be denominated a “Provider,” and to the extent that it receives services or the use of facilities of any of the other parties, it may be denominated a “Recipient.”

STATEMENT OF AGREEMENT

In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties to this First Amendment agree to amend the Management Agreement as follows:

1. Capitalized terms used in this First Amendment (including the Recitals) which are not otherwise defined herein shall have the meanings ascribed to such terms in the Management Agreement.

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2. Upon the Effective Date (as defined below) of this First Amendment, SAM and SAP&C shall supplement the management and operations services provided to Litchfield by Patrons as described in Section 1 of the Management Agreement. In addition, SAM and SAP&C shall provide supplemental management and operations services to Patrons. The parties acknowledge that Patrons has its own employees who provide managerial, supervisory, administrative, technical, professional, and clerical services for itself and to Litchfield. SAP&C, through its employees, will provide certain executive, administrative, technical, and professional support services to Litchfield and Patrons, while SAM will provide certain data processing equipment, office supplies and equipment, furniture and fixtures, automobiles and such other items of tangible personal property or facilities to Litchfield and Patrons, the costs of which shall be allocated as described below.

3. Section 1 of the Management Agreement is hereby deleted in its entirety and replaced by the following:

“Commencing on the Effective Date (as defined below) and until the termination of this Agreement, Patrons shall provide to Litchfield such management services as shall be reasonably necessary or desirable for the conduct of the insurance business of Litchfield. Such services shall include, but not be limited to, accounting, tax and auditing services, legal services, actuarial services, employee benefit plans and personnel administration, insurance production and underwriting services, processing and payment of claims, servicing of policyholders, billing and collection services, software development services, electronic data processing operations, communications operations, investment and property management services. The cost and expense of the services Patrons provides to Litchfield hereunder shall be allocated to Litchfield in accordance with the terms of the Inter-Company Expense Agreement, as amended (the “Expense Agreement”), by and between Patrons and Litchfield, a copy of which is attached hereto as Exhibit B; and in accordance with the terms of the Reinsurance Pooling Agreement (the “Patrons Pooling Agreement”), by and between Patrons and Litchfield, a copy of which is attached hereto as Exhibit A, until the January 1, 2008, 12:01 a.m. termination of said Patrons Pooling Agreement; and in accordance with the terms of the State Auto Reinsurance Pooling Agreement (the “State Auto Pooling Agreement”), a copy of which is attached as Exhibit C, from January 1, 2008 until the termination of this Agreement. The cost and expense of the services, equipment and facilities provided by SAP&C and SAM to Litchfield and Patrons pursuant to the terms hereunder shall be allocated to Litchfield and Patrons in accordance with the terms of the Expense Agreement and the State Auto Pooling Agreement.”

4. Sections 2, 3 and 4 of the Management Agreement do not apply to SAM or SAP&C.

5. Section 5 of the Management Agreement is hereby deleted in its entirety and replaced by the following:

“It is not intended that this Agreement set forth all of the operational details necessary to initiate and implement the aforesaid common management agreement. Consequently, on and after the Effective Date (as set forth in the original Management Agreement), the Presidents of Patrons and Litchfield are authorized to implement in detail all of the actions contemplated herein, and to perform all acts necessary to initiate and carry out the purpose of this Agreement including consolidation of any of the functions of Patrons and of Litchfield such as production, underwriting, reinsurance, claims, collection of statistics and statistical reporting, accounting, personnel, billing and credit, and personnel methods and procedures. Nevertheless, the allocation of expenses of the functions of Patrons and Litchfield shall be reasonable, fair and equitable, and shall be satisfactory to, and meet any requirement of, the Connecticut Insurance Department and no such consolidation shall result in the closing of offices of Litchfield in Litchfield, Connecticut for at least 60 months after the Effective Date (as set forth in the original Management Agreement).

2

“Likewise, upon the addition of SAM and SAP&C as parties to this Agreement, it is not intended that this Agreement set forth all of the operational details necessary to initiate and implement the aforesaid management agreement. Consequently, on and after the Effective Date (as defined below), the Presidents of Patrons, SAM, SAP&C and Litchfield are authorized to implement in detail all of the actions contemplated herein, and to perform all acts necessary to initiate and carry out the purpose of this Agreement. Nevertheless, the allocation of expenses of the functions of Patrons and Litchfield shall be reasonable, fair and equitable, and shall be satisfactory to, and meet any requirement of, both the Connecticut Insurance Department and the Ohio Department of Insurance.”

6. Sections 6, 7 and 8 of the Management Agreement do not apply to SAM or SAP&C.

7. Section 9 of the Management Agreement is hereby deleted in its entirety.

8. Section 10 of the Management Agreement does not apply to SAM or SAP&C.

9. Section 11 of the Management Agreement is hereby deleted in its entirety and replaced by the following: “This Agreement shall continue in effect until terminated in accordance with the following provisions. This Agreement may be terminated by action of the Board of Directors of Patrons, SAM, SAP&C or Litchfield after the second anniversary of the Effective Date and upon at least ninety (90) days’ prior written notice to the other parties. Notwithstanding the foregoing, this Agreement also may be terminated under the circumstances and in the manner specified in Section 12 hereof.”

10. Section 13 of the Management Agreement is hereby deleted in its entirety.

11. Section 15 of the Management Agreement is hereby deleted in its entirety and replaced by the following:

“Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses of the parties hereto:

If to Litchfield, to:	Litchfield Mutual Fire Insurance Company Litchfield, Connecticut 06759 Attention: Chairman, Board of Directors
If to Patrons, to:	Patrons Mutual Insurance Company 769 Hebron Avenue Glastonbury, CT 06033-6517 Attention: President
If to SAM or SAP&C:	State Automobile Mutual Insurance Company 518 East Broad Street Columbus OH 43215 Attention: President

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12. Section 16 of the Management Agreement is hereby deleted in its entirety and replaced by the following:

“This Agreement shall not be assignable by Patrons, SAM, SAP&C or Litchfield without the consent of the other parties, except in the case of assignment to a corporation or other organization which is a successor to Litchfield, SAM, SAP&C or Patrons, as the case may be, in which case such successor shall be bound hereunder and by the terms of said assignment in the same manner as its assignor is bound hereunder. Under no circumstances can this Agreement be assigned without the prior approval of the Insurance Departments of Connecticut and Ohio.”

13. Section 17 of the Management Agreement is hereby deleted in its entirety and replaced by the following:

“This Agreement shall not be changed, modified, terminated or discharged in whole or in part except by an instrument in writing signed by all the parties hereto, or their respective successors or permitted assigns. Furthermore, no change or modification of the terms of this Agreement shall be valid unless prior approval for such change or modification has been received from the Commissioners of the Ohio and the Connecticut Departments of Insurance.”

14. The following is hereby added to the Management Agreement as new Section 20:

“The Provider shall be responsible for maintaining full and accurate accounting records of all services rendered and facilities used pursuant to this Agreement and such additional information as the Recipient may reasonably request for purposes of its internal bookkeeping and accounting operations. Expenses shall be apportioned in accordance with statutory accounting principles consistently applied. The books, accounts, and records shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the expenses apportioned to the respective parties. The Provider shall keep such accounting records insofar as they pertain to the computation of charges hereunder available at its principal offices for audit, inspection and copying by the recipient or any governmental agency having jurisdiction during all reasonable business hours.”

15. The following is hereby added to the Management Agreement as new Section 21:

“The Provider shall submit to the Recipient within thirty (30) days of the end of each calendar month (or such other interval not greater than quarterly as such parties may agree), a written statement of the amount estimated to be owed by the Recipient to the Provider for services and the use of facilities pursuant to this Agreement in that calendar month (or interval) and the Recipient shall pay the Provider within thirty (30) days following receipt of such written statement the amount set forth in the statement.”

16. The following is hereby added to the Management Agreement as new Section 22:

“COMPLETE AGREEMENT. This document, together with such amendments hereto as may from time to time be validly executed in writing by the parties, constitutes the entire agreement among the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter of this Agreement.”

17. This First Amendment shall be effective (the “Effective Date”) as of the Litchfield Closing Date (as defined in the Restated Affiliation Agreement). Notwithstanding the foregoing, the effectiveness of this First Amendment is subject to the receipt of all regulatory consents required to implement the terms of this First Amendment. Until such time as all such regulatory consents have been obtained, this First Amendment shall not become operative to amend the Management Agreement in any manner whatsoever and shall be of no force or effect.

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18. This First Amendment constitutes an integral part of the Management Agreement. In the event of any inconsistencies between the provisions of the Management Agreement and this First Amendment, the provisions of this First Amendment shall control. Except as expressly amended hereby, the terms and provisions of the Management Agreement shall continue in full force and effect without change for the balance of the term thereof.

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written.

[SIGNATURE PAGE FOLLOWS]

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PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT
By:	/s/ William Siclari
	William Siclari, President
LITCHFIELD MUTUAL FIRE INSURANCE COMPANY
By:	/s/ Peter R. L. Faber
	Peter R. L. Faber, President
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President
STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY
By:	/s/ Robert P. Restrepo, Jr.
	Robert P. Restrepo, Jr., President

6

EXHIBIT A

Patrons Reinsurance Pooling Agreement effective January 1, 2007

7

EXHIBIT B

Inter-Company Expense Agreement

8

EXHIBIT C

State Auto Reinsurance Pooling Agreement

9

EX-10.34

Exhibit 10.34

PROPERTY CATASTROPHE OVERLYING EXCESS OF LOSS

REINSURANCE CONTRACT

ISSUED TO

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

MILBANK INSURANCE COMPANY

STATE AUTO NATIONAL INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF WISCONSIN

FARMERS CASUALTY INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF OHIO

MERIDIAN SECURITY INSURANCE COMPANY

MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY

STATE AUTO FLORIDA INSURANCE COMPANY

BEACON NATIONAL INSURANCE COMPANY

FIRST PREFERRED INSURANCE COMPANY

PETROLIA INSURANCE COMPANY

BEACON LLOYDS INSURANCE COMPANY

BY

STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

MILBANK INSURANCE COMPANY

STATE AUTO NATIONAL INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF WISCONSIN

FARMERS CASUALTY INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF OHIO

MERIDIAN SECURITY INSURANCE COMPANY

MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY

STATE AUTO FLORIDA INSURANCE COMPANY

BEACON NATIONAL INSURANCE COMPANY

FIRST PREFERRED INSURANCE COMPANY

PETROLIA INSURANCE COMPANY

BEACON LLOYDS INSURANCE COMPANY

PROPERTY CATASTROPHE OVERLYING EXCESS OF LOSS

REINSURANCE CONTRACT

TABLE OF CONTENTS

ARTICLE NO.	TITLE	PAGE
ARTICLE I	BUSINESS COVERED	1
ARTICLE II	EXCLUSIONS	1 - 3
ARTICLE III	TERM	3
ARTICLE IV	TERRITORY	3
ARTICLE V	AMOUNT OF LIMIT AND RETENTION	4
ARTICLE VI	ULTIMATE NET LOSS	4
ARTICLE VII	NET RETAINED LINES	4
ARTICLE VIII	UNDERLYING EXCESS	5
ARTICLE IX	DEFINITION OF LOSS OCCURRENCE	5 - 6
ARTICLE X	NOTICE OF LOSS AND LOSS SETTLEMENT	6 - 7
ARTICLE XI	PREMIUM	7
ARTICLE XII	CURRENCY	7
ARTICLE XIII	OFFSET	7
ARTICLE XIV	ACCESS TO RECORDS	7
ARTICLE XV	ERRORS AND OMISSIONS	8
ARTICLE XVI	TAXES	8
ARTICLE XVII	INSOLVENCY	8
ARTICLE XVIII	ARBITRATION	9
ARTICLE XIX	ENTIRE AGREEMENT	9
	Exhibit A
	War Exclusion Clause
	Pools, Associations & Syndicates Exclusion Clause
	Nuclear Incident Exclusion Clause – Physical Damage – Reinsurance – U.S.A.
	Nuclear Incident Exclusion Clause – Physical Damage – Reinsurance – CANADA

PROPERTY CATASTROPHE OVERLYING EXCESS OF LOSS

REINSURANCE CONTRACT

between

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

MILBANK INSURANCE COMPANY

STATE AUTO NATIONAL INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF WISCONSIN

FARMERS CASUALTY INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF OHIO

MERIDIAN SECURITY INSURANCE COMPANY

MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY

STATE AUTO FLORIDA INSURANCE COMPANY

BEACON NATIONAL INSURANCE COMPANY

FIRST PREFERRED INSURANCE COMPANY

PETROLIA INSURANCE COMPANY

BEACON LLOYDS INSURANCE COMPANY

(hereinafter collectively referred to as the “Company”)

and

STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY

(hereinafter referred to as the Subscribing “Reinsurer”)

ARTICLE I

BUSINESS COVERED:

The Reinsurer shall indemnify the Company for the net excess liability as hereinafter provided and specified, which may accrue to the Company as a result of any loss or losses which may occur during the currency of the Contract under any and all policies, contracts, binders and other evidence of insurance and reinsurance, oral or written (hereinafter referred to as “Policies”) heretofore or hereafter issued or entered into by or on behalf of the Company and classified by the Company as Fire, Allied Lines, Homeowners (property coverages), Farmowners (property coverages), Commercial Multiple Peril policies (property coverages), Ocean Marine, Inland Marine and Automobile Physical Damage.

ARTICLE II

EXCLUSIONS:

This Contract shall not apply to and specifically excludes the following:

1. Business written and classified by the Company as:

a) Aviation Insurance;

b) Casualty Insurance (i.e. Accident, Health, Third Party Liability, Workers’ Compensation and Employers’ Liability, Fidelity, Plate Glass and Burglary and Theft when written as such);

c) Credit Insurance;

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d) Financial Guarantee Insurance;

e) Insolvency Insurance;

f) Life Insurance;

g) Mortgage Impairment Insurance;

h) Title Insurance;

i) Surety;

j) Flood Insurance when written as such;

k) Earthquake Insurance when written as such;

l) Difference in Conditions Insurance when written as such;

m) Ocean Marine Insurance when written as such, except yachts;

n) Boiler and Machinery;

o) Multiple Peril policies other than the Property coverages as included in the Business Covered Section, hereof;

p) Reinsurance assumed, but not to exclude so-called agency reinsurance, reinsurance of an individual risk or policy, any intercompany pooling arrangements, or reinsurance assumed from affiliates.

2. Wind and Hail on growing and standing crops.

3. Manufacture, processing, storage, filling or breaking down of explosives.

4. Oil and petrochemical refineries and pipelines and oil or gas drilling rigs.

5. Excess of Loss insurance or reinsurance where the deductible exceeds $500,000 for perils other than earthquake or wind..

6. Bridges and Tunnels where the Total Insured Value over all interests exceeds $300,000,000.

7. Extra Contractual Obligations and Loss in Excess of Policy Limits as per the following definitions:

a) Extra Contractual Obligations, which shall mean any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured’s assignee or a third party claimant, by reason of alleged or actual negligence, fraud or bad faith on the part of the Company in handling a claim under a Policy subject to this Contract.

b) Loss in Excess of Policy Limits, which shall mean an amount that the Company would have been contractually liable to pay had it not been for the limit of the original Policy as a result of an action against it by its insured or its insured’s assignee. Such loss in excess of the limit shall have been incurred because of failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action.

8. Loss/or Damage/or Costs/or Expenses arising from seepage and/or Pollution and/or Contamination, other than Contamination from Smoke Damage. Nevertheless, this exclusion does not preclude payment of the cost of removal of debris of property damaged by a loss otherwise covered hereunder, but subject always to a limit of 25% of the Company’s property loss under the original Policy.

2

9. Loss in respect of overhead transmission and distribution lines and their supporting structure other than those on or within 150 meters (or 500 feet) of the insured premises. It is understood and agreed that public utilities extension and/or suppliers extension and/or contingent business interruption coverages are not subject to this exclusion, provided that these are not part of a transmitters’ or distributors’ Policy.

10. Liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

11. War Risk as per the “War Exclusion Clause” attached hereto.

12. Pools, Associations and Syndicates as per the “Pools, Associations & Syndicates Exclusion Clause” attached hereto.

13. Nuclear Incident as per the “Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A.” (NMA 1119) attached hereto.

14. Nuclear Incident as per the “Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - CANADA” (NMA 1980a) attached hereto.

15. Loss, damage, costs, and/or expenses resulting from: i) the release or dispersion of or contamination from harmful micro-organisms or other biological contagion; ii) the release or dispersion of or contamination from harmful chemical agents or contaminants; iii) the use of any nuclear device or release or dispersion of radioactive contamination.

16. Loss, damage, costs, and/or expenses resulting from an act of terrorism.

ARTICLE III

TERM:

The term of this Contract shall be from 12:01 A.M., Eastern Time, July 1, 2007 to 12:01 A.M., Eastern Time, July 1, 2008.

If this Contract expires while a Loss Occurrence covered hereunder is in progress, the Reinsurer’s liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire Loss Occurrence had occurred prior to the expiration of this Contract, provided that no part of such Loss Occurrence is claimed against any renewal or replacement of this Contract.

ARTICLE IV

TERRITORY:

This Contract shall cover wherever the Company’s Policies cover.

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ARTICLE V

AMOUNT OF LIMIT AND RETENTION:

No claim shall be made hereunder unless and until the Company, on a pooled basis where applicable, shall have first sustained an Ultimate Net Loss (as defined below) in excess of $135,000,000, regardless of the number of Policies under which such loss is payable or the number of interests insured. The Reinsurer shall then be liable for the amount of Ultimate Net Loss for the Company in excess of $135,000,000 per occurrence, but the sum recoverable from the Reinsurer shall not exceed $100,000,000 in respect of each such Loss Occurrence and in respect of all Loss Occurrences during the term of this Contract.

The applicability of coverage under this Contract is subject to at least two risks being involved in the same Loss Occurrence.

ARTICLE VI

ULTIMATE NET LOSS:

The term “Ultimate Net Loss” shall mean the amount that the Company pays as insured losses. Ultimate Net Loss also includes, but is not limited to, all expenses incurred by the Company in connection with the settlement of losses or resistance to or negotiations concerning a loss, including salaries and expenses of employees of the Company while diverted from their normal duties to the service of field adjustment but shall not include any office expenses of the Company. However, nothing in this Article shall be construed to prevent the Company from including all such amounts defined as Ultimate Net Loss attributable to the Group (as defined below), on a pooled basis where applicable, for the first $135,000,000 of Ultimate Net Loss. The Group shall mean, collectively, the Company and State Auto Property and Casualty Insurance Company.

Subject to Article VIII, all salvages and recoveries and payments (net of the cost of obtaining any salvage, recovery or payment), whether recovered or received prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance, whether collected or not, shall be applied as if recovered or received prior to the aforesaid settlement and shall be deducted from the actual loss incurred to arrive at the amount of Ultimate Net Loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Ultimate Net Loss to the Company has been ascertained.

ARTICLE VII

NET RETAINED LINES:

This Contract applies to only that portion of any Policy which the Company and the other members of the Group, on a pooled basis where applicable, retains net for its own account.

The amount of the Reinsurer’s liability hereunder in respect of any loss shall not be increased by reason of the inability of the Company to collect from any other reinsurer, whether specific or general, any amounts which may have become due whether such inability arises from the insolvency of such other reinsurer or otherwise.

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ARTICLE VIII

UNDERLYING EXCESS:

The Company has in force underlying catastrophe excess of loss reinsurance and recoveries thereunder shall be disregarded for all purposes of this Contract and shall inure to the sole benefit of the Company.

ARTICLE IX

DEFINITION OF LOSS OCCURRENCE:

The term “Loss Occurrence” shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one “Loss Occurrence” shall be limited to all individual losses sustained by the Company occurring during any period of one hundred sixty-eight (168) consecutive hours arising out of and directly occasioned by the same event except that the term “Loss Occurrence” shall be further defined as follows:

A. 1. As regards windstorm, hail, tornado, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of seventy-two (72) consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards hurricane, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of ninety-six (96) consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

B. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of seventy-two (72) consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of seventy-two (72) consecutive hours may be extended in respect of individual losses which occur beyond such seventy-two (72) consecutive hours during the continued occupation of an assured’s premises by strikers, provided such occupation commenced during the aforesaid period.

C. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of one hundred and sixty-eight (168) consecutive hours may be included in the Company’s “Loss Occurrence.”

D. As regards “freeze”, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company’s “Loss Occurrence.”

5

For all “Loss Occurrences” except as referred to under sub-paragraph B, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident, or loss and provided that only one such period of one hundred and sixty-eight (168) consecutive hours shall apply with respect to one event, except for those “Loss Occurrences” referred to in sub-paragraph A.1 above, where only one such period of seventy-two (72) consecutive hours shall apply with respect to one event, regardless of the duration of the event and except for those “Loss Occurrences” referred to in sub-paragraph A.2 above, where only one such period of ninety-six (96) consecutive hours shall apply with respect to one event, regardless of the duration of the event..

As respect those “Loss Occurrences” referred to in sub-paragraph B above, if the disaster, accident or loss occasioned by the event is of greater duration than seventy-two (72) consecutive hours, then the Company may divide that disaster, accident or loss into two or more “Loss Occurrences” provided no two periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

No individual losses occasioned by an event that would be covered by seventy-two (72) hours clauses or ninety-six (96) hours clause may be included in any “Loss Occurrence” claimed under the one hundred and sixty-eight (168) hours provision.

Losses directly or indirectly occasioned by:

a. loss of, alteration of , or damage to

or

b. a reduction in the functionality, availability or operation of:

a computer system, hardware, program, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the Company or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils:

fire, lightning, explosion, aircraft, or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

ARTICLE X

NOTICE OF LOSS AND LOSS SETTLEMENT:

The Company shall adjust, settle, or compromise all claims and losses hereunder.

All loss settlements by the Company which comply with the terms hereof shall be unconditionally binding upon the Reinsurer.

The Company shall advise the Reinsurer promptly of all claims and any subsequent developments pertaining thereto, which may, in the Company’s opinion, develop into losses involving Reinsurance hereunder. Inadvertent omission or oversight in dispatching such advices shall in no way affect the liability of the Reinsurer under this Contract provided the Company informs the Reinsurer of such omission or oversight promptly upon its discovery.

6

The Reinsurer shall tender all loss payments as soon as practicable after receipt of any proof of loss.

ARTICLE XI

PREMIUM:

The premium to be paid to the Reinsurer shall be $3,560,000, payable in four equal quarterly installments. Each company shall pay a percentage of the premium based on its share of subject premium, as shown in Exhibit A.

ARTICLE XII

CURRENCY:

All retentions, limits and premiums referenced in this Contract are expressed in United States Dollars and all payments made by either party shall be made in United States Dollars.

Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

ARTICLE XIII

OFFSET:

The Company and the Reinsurer, each at its option, may offset any balance or balances, whether on account of premiums, claims and losses, loss expenses or salvages due from one party to the other under this Contract; provided, however, that in the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with applicable statutes and regulations.

ARTICLE XIV

ACCESS TO RECORDS:

The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect through its designated representatives, during the term of this Contract and thereafter, all books, records and papers of the Company in connection with any reinsurance hereunder, or the subject matter hereof.

7

ARTICLE XV

ERRORS AND OMISSIONS:

Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to either party if such delay, omission or error had not been made, provided such delay, omission or error is rectified as soon as practicable after discovery.

ARTICLE XVI

TAXES:

In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada.

ARTICLE XVII

INSOLVENCY:

The reinsurance under this Contract shall be payable by the Reinsurer on the basis of the liability of one or more of the Companies under the Policy or Policies reinsured without diminution because of the insolvency of one or more of the Companies reinsured or because the liquidator, receiver, conservator or statutory successor of the Company(ies) has failed to pay all or a portion of any claim.

In the event of the insolvency of one or more of the Companies reinsured, the liquidator, receiver, conservator or statutory successor of the Company(ies) shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company(ies) on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company(ies) or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company(ies) as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company(ies) solely as a result of the defense undertaken by the Reinsurer.

Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company(ies).

In the event of the insolvency of one or more of the Companies reinsured, the reinsurance under this Contract shall be payable by the Reinsurer directly to the Company(ies) or to the liquidator, receiver, conservator or statutory successor, except as provided by subsection (A) of section 4118 of the Insurance Law of New York or except where (I) the Contract specifies another payee of such Reinsurance in the event of the insolvency of the Company(ies) and (II) the Reinsurer with the consent of the direct insureds and, with the prior approval of the Superintendent of Insurance of New York to the certificate of assumption issued to New York direct insureds, has assumed such Policy obligations of the Company(ies) as its direct obligations to the payees under such Policies, in substitution for the obligations of the Company(ies) to such payees.

8

ARTICLE XVIII

ARBITRATION:

If any dispute shall arise between the parties to this Contract, either before or after its termination, with reference to the interpretation of this Contract or the rights of either party with respect to any transactions under this Contract, including the formation or validity thereof, the dispute shall be referred to three (3) arbitrators as a condition precedent to any right of action arising under this Contract. The arbitrators shall be active or retired disinterested officers of insurance or reinsurance companies or Lloyd’s Underwriters other than the parties or their affiliates. One arbitrator shall be chosen by each party and the third by the two so chosen. If either party refuses or neglects to appoint an arbitrator within thirty (30) days after the receipt of written notice from the other party requesting it to do so, the requesting party may nominate two (2) arbitrators who shall choose the third.

In the event the arbitrators do not agree on the selection of the third arbitrator within thirty (30) days after both arbitrators have been named, the Company shall petition the American Arbitration Association to appoint the third arbitrator. If the American Arbitration Association fails to appoint the third arbitrator within thirty (30) days after it has been requested to do so, either party may request a justice of a court of general jurisdiction of the state in which the arbitration is to be held, to appoint an officer or retired officer of an insurance or reinsurance company or Lloyd’s Underwriter as the third arbitrator. In the event both parties request the appointment of the third arbitrator, the third arbitrator shall be the soonest named in writing by the justice of the court.

Each party shall submit its case to the arbitrators within thirty (30) days of the appointment of the arbitrators. The arbitrators shall consider this Contract an honorable engagement rather than merely a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of a majority of the arbitrators shall be final and binding on both the Company and the Reinsurer. Judgment may be entered upon the award of the arbitrators in any court having jurisdiction.

Each party shall bear the fee and expenses of its own arbitrator, one half of the fee and the expenses of the third arbitrator and one half of the other expenses of the arbitration. In the event both arbitrators are chosen by one party, the fees of the arbitrators shall be equally divided between the parties.

Any such arbitration shall take place in Columbus, Ohio unless some other location is mutually agreed upon by the parties.

With regard to State Auto Insurance Company of Wisconsin (“SAWI”) and in compliance with Wis. Stat. Section 645.58(2), State Auto Property and Casualty Insurance Company (the “Reinsurer”) agrees that this Reinsurance Contract cannot and does not require SAWI to arbitrate an action on or related to this Reinsurance Contract when SAWI is subject to a delinquency proceeding under Subchapter III of Chapter 645 of the Wisconsin Statutes.

ARTICLE XIX

ENTIRE AGREEMENT:

This written Contract constitutes the entire agreement between the parties hereto with respect to the business being reinsured hereunder, and there are no understandings between the parties hereto other than as expressed in this Contract. Any change or modification to this Contract will be made by amendment to this Contract and signed by the parties.

9

EXHIBIT A

State Automobile Mutual Insurance Company

Milbank Insurance Company

State Auto National Insurance Company

State Auto Insurance Company of Wisconsin

Farmers Casualty Insurance Company

State Auto Insurance Company of Ohio

Meridian Security Insurance Company

Meridian Citizens Mutual Insurance Company

State Auto Florida Insurance Company

Beacon National Insurance Company

First Preferred Insurance Company

Petrolia Insurance Company

Beacon Lloyds Insurance Company

PROPERTY CATASTROPHE OVERLYING EXCESS OF LOSS REINSURANCE CONTRACT

FOR THE PERIOD

12:01 A.M., EASTERN TIME, JULY 1, 2007

THROUGH

12:01 A.M., EASTERN TIME, JULY 1, 2008

PREMIUM CALCULATION

Subject Premium Basis - July 1, 2006 through March 31, 2007

Annual Statement Line			Mutual		Milbank		National		SAIC of Wisconsin		Farmers		SAIC of Ohio		Meridian Security		Meridian Citizens Mutual		State Auto Florida		Beacon*		Total
1.0	@	100%	20,998,619		544,199		0		221,970		263,665		1,230,786		3,047,547		508,773		465,995		1,231,599		28,513,153
2.1	@	100%	13,690,523		402,213		0		126,394		316,637		745,121		1,490,907		11,116		726,082		1,728,758		19,237,751
3.0	@	65%	0		0		0		0		0		0		0		9,386,287		0		937,823		10,324,110
4.0	@	65%	32,508,920		9,515,041		0		4,081,306		1,217,305		1,503,788		6,110,275		0		2,112,436		7,965,844		65,014,915
5.0	@	50%	9,293,684		854,886		0		0		534,189		0		1,013,931		0		1,132,730		1,728,758		14,558,178
8.0	@	90%	170,554		220		0		469		1,304		151,158		24,297		0		55,072		0		403,074
9.0	@	100%	9,137,717		982,159		0		403,655		92,445		153,372		743,400		0		331,882		361,570		12,206,200
12.0	@	100%	1,690,139		10,759		0		1,802		10,554		37,270		460,012		154,826		171		0		2,365,533
21.1	@	50%	20,758,665		4,986,626		3,954,261		3,315,035		1,470,715		862,218		3,461,294		0		0		2,643,982		41,452,796
21.2	@	50%	4,741,875		186,043		0		0		47,237		0		257,323		305,943		50		485,860		6,024,331
			112,990,696		17,482,146		3,954,261		8,150,631		3,954,051		4,683,713		16,608,986		10,366,945		4,824,418		17,084,194		200,100,041
Percent of Total			56.5	%	8.7	%	2.0	%	4.1	%	2.0	%	2.3	%	8.3	%	5.2	%	2.4	%	8.5	%	100.0	%
Annual Premium			2,011,400		309,720		71,200		145,960		71,200		81,880		295,480		185,120		85,440		302,600		3,560,000
Quarterly Installment			502,850		77,430		17,800		36,490		17,800		20,470		73,870		46,280		21,360		75,650		890,000

* “Beacon” includes Beacon National, First Preferred, Petrolia and Beacon Lloyds Insurance Companies.

WAR EXCLUSION CLAUSE

As regards interests which at time of loss or damage are on shore, no liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority.

This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty States of the Union and the District of Columbia, its territories and possessions, including the Commonwealth of Puerto Rico and including Bridges between the United States of America and Mexico provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under policies, endorsements or binders containing a standard war or hostilities or warlike operations exclusion clause.

Nevertheless, this Clause shall not be construed to apply to loss or damage occasioned by riots, strikes, civil commotion, vandalism, and malicious damage.

POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE

SECTION A:

EXCLUDING:

(a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.

(b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, l968 for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage.

SECTION B:

It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations, or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder:

Industrial Risk Insurers,

Associated Factory Mutuals,

Improved Risk Mutuals,

Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs,

United States Aircraft Insurance Group,

Canadian Aircraft Insurance Group,

Associated Aviation Underwriters,

American Aviation Underwriters.

SECTION B does not apply:

(a) Where the Total Insured Value over all interests of the risk in question is less than $300,000,000.

(b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis.

(c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B (a).

(d) To risks as follows:

Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builder’s Risks on the classes of risks specified in this subsection (d) only.

Page 1 of 3

SECTION C:

NEVERTHELESS the Reinsurer specifically agrees that liability accruing to the Company from its participation in residual market mechanisms including but not limited to:

(l) The following so-called “Coastal Pools”:

ALABAMA INSURANCE UNDERWRITING ASSOCIATION

MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION

NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION

SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION

TEXAS WINDSTORM INSURANCE ASSOCIATION

AND                            

(2) All “FAIR Plan” and “Rural Risk Plan” business

AND                            

(3) The Louisiana Citizens Property Insurance Corporation, the Citizens Property Insurance Corporation (“CPIC”) and the California Earthquake Authority (“CEA”)

for all perils otherwise protected hereunder shall not be excluded, except, however, that this reinsurance does not include any increase in such liability resulting from:

(i) The inability of any other participant in such “Coastal Pool” and/or “FAIR Plan” and/or “Rural Risk Plan” and/or Residual Market Mechanisms to meet its liability.

(ii) Any claim against such “Coastal Pool” and/or “FAIR Plan” and/or “Rural Risk Plan” and/or Residual Market Mechanisms, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any Insolvency Fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract).

SECTION D:

(1) Notwithstanding Section C above, in respect of the CEA, where an assessment is made against the Company by the CEA, the Company may include in the Ultimate Net Loss only that assessment directly attributable to each separate loss occurrence covered hereunder. The Company’s initial capital contribution to the CEA shall not be included in the Ultimate Net Loss.

(2) Notwithstanding Section C above, in respect of the CPIC, where an assessment is made against the Company by the CPIC, the maximum loss that the Company may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall not exceed the lesser of:

a) The Company’s assessment from the CPIC for the accounting year in which the loss occurrence commenced, or

Page 2 of 3

b) The product of the following:

(i) The Company’s percentage participation in the CPIC for the accounting year in which the loss occurrence commenced; and

(ii) The CPIC’s total losses in such loss occurrence.

Any assessments for accounting years subsequent to that in which the loss occurrence commenced may not be included in the Ultimate Net Loss hereunder. Moreover, notwithstanding Section C above, in respect of the CPIC, the Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the CPIC. For the purposes of this Contract, the Company may not include in the Ultimate Net Loss any assessment or any percentage assessment levied by the CPIC to meet the obligations of an insolvent insurer member or other party, or to meet any obligations arising from the deferment by the CPIC of the collection of monies.

Page 3 of 3

NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE -

REINSURANCE - U.S.A.

1) This Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2) Without in any way restricting the operation of paragraph 1) of this Clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I. Nuclear reactor power plants including all auxiliary property on the site, or

II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or

III. Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material,” and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or

IV. Installations other than those listed in paragraph 2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3) Without in any way restricting the operations of paragraphs 1) and 2) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph 3) shall not operate:

a) where the Reinsured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1^st, January 1960 this sub-paragraph b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4) Without in any way restricting the operations of paragraphs 1), 2) and 3) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reinsured to be the primary hazard.

6) The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954, or by any law amendatory thereof.

7) Reinsured to be sole judge of what constitutes:

a) substantial quantities, and

b) the extent of installation, plant or site.

NOTE: Without in any way restricting the operation of paragraph 1) hereof, it is understood and agreed that:

a) all policies issued by the Reinsured on or before 31^st, December 1957, shall be free from the application of the other provision of this Clause until expiry date or 31^st, December 1960, whichever first occurs whereupon all the provisions of this Clause shall apply,

b) with respect to any risk located in Canada policies issued by the Reinsured on or before 31^st, December 1958, shall be free from the application of the other provisions of this Clause until expiry date or 31^st, December 1960, whichever first occurs whereupon all the provisions of this Clause shall apply.

12/12/57

N.M.A. 1119

NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE -

REINSURANCE - CANADA

1) This Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2) Without in any way restricting the operation of paragraph 1) of this Clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

(a) Nuclear reactor power plants including all auxiliary property on the site, or

(b) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or

(c) Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or

(d) Installations other than those listed in (c) above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3) Without in any way restricting the operations of paragraphs 1) and 2) of this Clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3) shall not operate:

(a) where the Reinsured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

(b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused.

4) Without in any way restricting the operations of paragraphs 1), 2) and 3) of this Clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5) This Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reinsured to be the primary hazard.

6) The term “radioactive material” means uranium, thorium, plutonium, neptunium, their derivatives and compounds, radioactive isotopes of other elements and any other substances which may be designated by or pursuant to any law, act or statute, or any law amendatory thereof as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy.

7) Reinsured to be sole judge of what constitutes:

a) substantial quantities, and

b) the extent of installation, plant or site.

8) Without in any way restricting the operation of paragraphs 1), 2), 3) and 4) of this Clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer caused:

a) by any nuclear incident as defined by The Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensuing loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas;

b) by contamination by radioactive material.

NOTE: Without in any way restricting the operation of paragraphs 1), 2), 3) and 4) of this Clause, paragraph 8) of this Clause shall only apply to all original contracts of the Reinsured whether new, renewal or replacement which become effective on or after December 31, 1992.

01/04/96

N.M.A. 1980a

INTERESTS AND LIABILITIES AGREEMENT

between

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

MILBANK INSURANCE COMPANY

STATE AUTO NATIONAL INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF WISCONSIN

FARMERS CASUALTY INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF OHIO

MERIDIAN SECURITY INSURANCE COMPANY

MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY

STATE AUTO FLORIDA INSURANCE COMPANY

BEACON NATIONAL INSURANCE COMPANY

FIRST PREFERRED INSURANCE COMPANY

PETROLIA INSURANCE COMPANY

BEACON LLOYDS INSURANCE COMPANY

(the “Company”)

and

STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY

(the Subscribing “Reinsurer”)

It is hereby mutually agreed by and between the Company on the one part, and the Subscribing Reinsurer on the other part that effective July 1, 2007, the Subscribing Reinsurer’s share of the Interests and Liabilities of the PROPERTY CATASTROPHE OVERLYING EXCESS OF LOSS REINSURANCE CONTRACT attached hereto and forming part of this Agreement, shall be for one hundred percent (100%).

IN WITNESS WHEREOF, the parties hereto by their authorized representative have executed this Agreement as of the date specified below:

Signed in Columbus, Ohio this                      day of                      , 2007.

STATE AUTO PROPERTY AND     CASUALTY INSURANCE COMPANY
By
Title	Vice President, Chief Financial Officer

Page 1 of 2

Signed in Columbus, Ohio this                      day of                      , 2007.

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

MILBANK INSURANCE COMPANY

STATE AUTO NATIONAL INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF WISCONSIN

FARMERS CASUALTY INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF OHIO

MERIDIAN SECURITY INSURANCE COMPANY

MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY

STATE AUTO FLORIDA INSURANCE COMPANY

BEACON NATIONAL INSURANCE COMPANY

FIRST PREFERRED INSURANCE COMPANY

PETROLIA INSURANCE COMPANY

BEACON LLOYDS INSURANCE COMPANY

By
Title	Vice President

Page 2 of 2

EX-10.35

Exhibit 10.35

ENDORSEMENT NO. 1

to the

PROPERTY CATASTROPHE OVERLYING EXCESS OF LOSS

REINSURANCE CONTRACT

between

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

MILBANK INSURANCE COMPANY

STATE AUTO NATIONAL INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF WISCONSIN

FARMERS CASUALTY INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF OHIO

MERIDIAN SECURITY INSURANCE COMPANY

MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY

STATE AUTO FLORIDA INSURANCE COMPANY

BEACON NATIONAL INSURANCE COMPANY

FIRST PREFERRED INSURANCE COMPANY

PETROLIA INSURANCE COMPANY

BEACON LLOYDS INSURANCE COMPANY

(the “Company”)

and

STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY

(the Subscribing “Reinsurer”)

IT IS HEREBY AGREED that effective January 1, 2008, the Contract shall be amended as follows:

1. The following are added as reinsured companies, as parties to the Contract and shall hereinafter be included in the definition of “Company”:

a. PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

b. LITCHFIELD MUTUAL FIRE INSURANCE COMPANY

c. PATRONS FIRE INSURANCE COMPANY OF RHODE ISLAND

d. PROVISION STATE INSURANCE COMPANY.

2. Exhibit A is revised and attached hereto to reflect premiums for the newly reinsured companies.

3. ARTICLE X – NOTICE OF LOSS AND LOSS SETTLEMENT is deleted in its entirety and the following substituted therefor:

“The Company shall adjust, settle, or compromise all claims and losses hereunder.

All loss settlements by the Company which comply with the terms hereof shall be unconditionally binding upon the Reinsurer.

The Company shall advise the Reinsurer promptly of all claims and any subsequent developments pertaining thereto, which may, in the Company’s opinion, develop into losses involving Reinsurance hereunder. Inadvertent omission or oversight in dispatching such advices shall in no way affect the liability of the Reinsurer under this Contract provided the Company informs the Reinsurer of such omission or oversight promptly upon its discovery.

The Company shall submit a proof of loss within 30 days after the end of the calendar quarter in which it paid a covered loss. The Reinsurer shall tender all loss payments within 45 days after receipt of satisfactory proof of loss.”

4. ARTICLE XI - PREMIUM is deleted in its entirety and the following substituted therefor:

“The premium to be paid to the Reinsurer, as shown in Exhibit A, is payable in equal quarterly installments within 45 days after the end of each such calendar quarter. Each company’s premium will be proportional to its share of subject premium.”

5. Notwithstanding the effective date referenced above, the following parties are deleted from the definition of “Company” effective December 18, 2007 upon their dissolution:

a. FIRST PREFERRED INSURANCE COMPANY

b. PETROLIA INSURANCE COMPANY.

Except as amended herein, the provisions of this Contract shall remain otherwise unchanged.

IN WITNESS WHEREOF, the parties hereto by their authorized representative have executed this Endorsement No. 1 as of the date first written above:

STATE AUTO PROPERTY AND     CASUALTY INSURANCE COMPANY
By
Title	Vice President, CFO

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

MILBANK INSURANCE COMPANY

STATE AUTO NATIONAL INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF WISCONSIN

FARMERS CASUALTY INSURANCE COMPANY

STATE AUTO INSURANCE COMPANY OF OHIO

MERIDIAN SECURITY INSURANCE COMPANY

MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY

STATE AUTO FLORIDA INSURANCE COMPANY

BEACON NATIONAL INSURANCE COMPANY

BEACON LLOYDS INSURANCE COMPANY

PATRONS MUTUAL INSURANCE COMPANY OF CONNECTICUT

LITCHFIELD MUTUAL FIRE INSURANCE COMPANY

PATRONS FIRE INSURANCE COMPANY OF RHODE ISLAND

PROVISION STATE INSURANCE COMPANY

By
Title	Treasurer

EXHIBIT A - Revised January 1, 2008

State Automobile Mutual Insurance Company

Milbank Insurance Company

State Auto National Insurance Company

State Auto Insurance Company of Wisconsin

Farmers Casualty Insurance Company

State Auto Insurance Company of Ohio

Meridian Security Insurance Company

Meridian Citizens Mutual Insurance Company

State Auto Florida Insurance Company

Beacon National Insurance Company

First Preferred Insurance Company

Petrolia Insurance Company

Beacon Lloyds Insurance Company

Patrons Mutual Insurance Company of Connecticut

Litchfield Mutual Fire Insurance Company

Patrons Fire Insurance Company of Rhode Island

Provision State Insurance Company

PROPERTY CATASTROPHE OVERLYING EXCESS OF LOSS REINSURANCE CONTRACT

FOR THE PERIOD

12:01 A.M., EASTERN TIME, JULY 1, 2007

THROUGH

12:01 A.M., EASTERN TIME, JULY 1, 2008

PREMIUM CALCULATION

Subject Premium Basis - July 1, 2006 through March 31, 2007

Annual Statement Line			Mutual		Milbank		National		SAIC of Wisconsin		Farmers		SAIC of Ohio		Meridian Security		Meridian Citizens Mutual		State Auto Florida		Beacon*		Sub-Total
1.0	@	100%	20,998,619		544,199		0		221,970		263,665		1,230,786		3,047,547		508,773		465,995		1,231,599		28,513,153
2.1	@	100%	13,690,523		402,213		0		126,394		316,637		745,121		1,490,907		11,116		726,082		1,728,758		19,237,751
3.0	@	65%	0		0		0		0		0		0		0		9,386,287		0		937,823		10,324,110
4.0	@	65%	32,508,920		9,515,041		0		4,081,306		1,217,305		1,503,788		6,110,275		0		2,112,436		7,965,844		65,014,915
5.0	@	50%	9,293,684		854,886		0		0		534,189		0		1,013,931		0		1,132,730		1,728,758		14,558,178
8.0	@	90%	170,554		220		0		469		1,304		151,158		24,297		0		55,072		0		403,074
9.0	@	100%	9,137,717		982,159		0		403,655		92,445		153,372		743,400		0		331,882		361,570		12,206,200
12.0	@	100%	1,690,139		10,759		0		1,802		10,554		37,270		460,012		154,826		171		0		2,365,533
21.1	@	50%	20,758,665		4,986,626		3,954,261		3,315,035		1,470,715		862,218		3,461,294		0		0		2,643,982		41,452,796
21.2	@	50%	4,741,875		186,043		0		0		47,237		0		257,323		305,943		50		485,860		6,024,331
			112,990,696		17,482,146		3,954,261		8,150,631		3,954,051		4,683,713		16,608,986		10,366,945		4,824,418		17,084,194		200,100,041
Percent of   Total			56.5	%	8.7	%	2.0	%	4.1	%	2.0	%	2.3	%	8.3	%	5.2	%	2.4	%	8.5	%	100.0	%
Annual   Premium			2,011,400		309,720		71,200		145,960		71,200		81,880		295,480		185,120		85,440		302,600		3,560,000
Quarterly   Installment			502,850		77,430		17,800		36,490		17,800		20,470		73,870		46,280		21,360		75,650		890,000
																							Sub-Total
Annual Premium / Subject Premium:																							1.7791%

Annual Statement Line	Patrons Mutual		Litchfield		Patrons Fire		Provision State
1.0  @  100%	1,886,945		101,692		0		0
2.1  @  100%	1,276,795		11,299		0		0
3.0  @    65%	666,645		892,626		0		0
4.0  @    65%	10,203,060		11,299		0		0
5.0  @    50%	4,225,852		158,187		0		0
8.0  @    90%	0		0		0		0
9.0  @  100%	463,262		67,794		0		0
12.0  @  100%	0		0		0		0
21.1  @    50%	1,028,215		0		0		0
21.2  @    50%	0		0		0		0
	19,750,774		1,242,897		0		0
Semi-Annual Premium:	175,694		11,056		0		0
Quarterly Installment:	87,847		5,528		0		0
	Patrons Mutual		Litchfield		Patrons Fire		Provision State
Rate as % of Subject Premium:	1.7791	%	1.7791	%	1.7791	%	1.7791	%

* “Beacon” includes Beacon National, First Preferred, Petrolia and Beacon Lloyds Insurance Companies.

EX-10.38

Exhibit 10.38

REINSURANCE POOLING AGREEMENT

AMENDED AND RESTATED

As of January 1, 2008

This Reinsurance Pooling Agreement Amended and Restated effective as of 12:01 a.m., Eastern Standard Time, January 1, 2008 (the “2008 Pooling Agreement”) is by and among State Automobile Mutual Insurance Company, 518 East Broad Street, Columbus, Ohio (hereinafter referred to as “State Auto Mutual”), State Auto Property and Casualty Insurance Company, 1300 Woodland Drive, West Des Moines, Iowa (hereinafter referred to as “State Auto P&C”), Milbank Insurance Company, East Highway 12, Milbank, South Dakota (hereinafter referred to as “Milbank”), State Auto Insurance Company of Wisconsin (formerly known as Midwest Security Insurance Company), 1062 Oak Forest Drive, Onalaska, Wisconsin (hereinafter referred to as “SA WI”), Farmers Casualty Insurance Company, 1300 Woodland Drive, West Des Moines, Iowa (hereinafter referred to as “Farmers Casualty”), State Auto Insurance Company of Ohio, 518 East Broad Street, Columbus, Ohio (hereinafter referred to as “SA OH”), State Auto Florida Insurance Company, 2955 North Meridian Street, Indianapolis, Indiana (hereinafter referred to as “SA FL”), Meridian Security Insurance Company, 2955 North Meridian Street, Indianapolis, Indiana (hereinafter referred to as “Meridian Security”), Meridian Citizens Mutual Insurance Company, 2955 North Meridian Street, Indianapolis, Indiana (hereinafter referred to as “Meridian Citizens Mutual”), Patrons Mutual Insurance Company of Connecticut, 769 Hebron Avenue, Glastonbury, Connecticut (hereinafter referred to as “Patrons”), Litchfield Mutual Fire Insurance Company, 21 South Street, Litchfield, Connecticut (hereinafter referred to as “Litchfield”) and Beacon National Insurance Company, 2915 Central Fwy East Drive, Wichita Falls, Texas (“Beacon”). (State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Patrons, Litchfield and Beacon are herein collectively referred to as the “Pooled Companies” or “State Auto” and individually as a “Pooled Company”).

Background Information

The Pooled Companies have determined that their business operations should be conducted by employees of State Auto P&C on behalf of each of the Pooled Companies and that State Auto Mutual should remain as the agent for each of the Pooled Companies with respect to collecting and disbursing funds as required by the Pooled Companies’ business operations. These arrangements have been effected through the Management and Operations Agreement Amended and Restated as of January 1, 2005 (the “2005 Management Agreement”), as amended from time to time, as to SA WI through the Amended and Restated Management Agreement dated effective January 1, 2000 (the “2000 Management Agreement”), and by means of mutual reinsurance on a percentage basis as herein provided.

As to Patrons and Litchfield, it is anticipated that their business operations and employees will become fully integrated with the other Pooled Companies on or about January 1, 2009. Until such time, certain management and other services will be made available to Patrons and Litchfield pursuant to the First Amendment to Management Services Agreement (State Auto Mutual, State Auto P&C, Patrons and Litchfield as parties) and Second Amendment to Inter-Company Expense Agreement (State Auto Mutual, State Auto P&C, Patrons and Litchfield as parties) effective January 1, 2008, and by means of mutual reinsurance on a percentage basis as herein provided.

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State Auto Mutual and State Auto P&C originally entered into an intercompany Reinsurance Agreement effective as of 12:01 a.m., January 1, 1987 (the “Reinsurance Agreement”).

The Reinsurance Agreement has since been amended by an Addendum effective January 1, 1987, adding insolvency and arbitration provisions; by Amendment Number 1 effective as of January 1, 1992 amending the pooling percentages from 20% State Auto P&C - 80% State Auto Mutual to 30% and 70% respectively; by Amendment Number 2 effective as of January 1, 1991 excluding post retirement health care benefits liability as a pooled expense and as of January 1, 1994 excluding post employment benefits liability as a pooled expense; and by Amendment Number 3 effective as of January 1, 1995 adding Milbank as a party and adjusting the pooling percentages as follows: State Auto P&C 35%, State Auto Mutual 55% and Milbank 10% and by an Amended and Restated Reinsurance Pooling Agreement dated July 1, 1996 (the “7/1/96 Reinsurance Agreement”), which excluded from the Reinsurance Agreement catastrophic loss claims and loss adjustment expenses incurred by State Auto Mutual, State Auto P&C and Milbank in the amount of $100,000,000 in excess of $120,000,000 of such losses and loss adjustment expense and the premiums for such exposure; and by an Amended and Restated Reinsurance Pooling Agreement effective January 1, 1998 (the “‘98 Pooling Agreement”) which added SA WI as a party and adjusted the Respective Percentages (as defined below) to State Auto P&C 37%, State Auto Mutual 52%, Milbank 10%, and SA WI 1%; and by a Reinsurance Pooling Agreement Amended and Restated as of January 1, 1999 (hereafter referred to as the “‘99 Pooling Agreement”) which added Farmers Casualty as a party and adjusted the Respective Percentages to State Auto P&C-37%, State Auto Mutual-49%, Milbank-10%, Farmers Casualty-3%, and SA WI-1%. In adopting the Reinsurance Pooling Agreement, amended and restated as of January 1, 2000, (the “2000 SA Pooling Agreement”)the parties amended and restated the ‘99 Pooling Agreement as the 2000 Pooling Agreement, to provide for the continuation of the pooling arrangement it effects, including the above-described previous amendments and additional amendments including the following: removing from the scope of the 2000 Pooling Agreement the premiums, losses, underwriting and administrative expenses attributable to State Auto Mutual’s voluntary assumption of reinsurance from third parties which are unaffiliated with State Auto Mutual, which voluntary assumed reinsurance contracts/treaties initially commenced on or after January 1, 1999 (this January 1, 1999 and after voluntary third party assumption reinsurance is hereafter referred to as the “State Auto Mutual Reinsurance Book”); adding SA OH as a new party; removing an exclusion for post retirement health care benefits liabilities; and post employment benefits liabilities and adjusting the Respective Percentages to SA OH 1%, Farmers Casualty 3%, SA WI 1%, Milbank 10%, State Auto P&C 39% and State Auto Mutual 46%. The 2000 Pooling Agreement was itself subject to five different amendments: the First Amendment effective November 17, 2000, clarified that the State Auto P&C Catastrophe Assumption Agreement, as defined in the 2000 SA Pooling Agreement provided such amount of catastrophe reinsurance as was available in the then current Property Catastrophe Overlying Excess of Loss Reinsurance Contract originally effective July 1, 1999 and annually renewed thereafter; the Second Amendment to the 2000 SA Pooling Agreement clarified that the business that became the legal obligation of State Auto Mutual as a result of its merger with Meridian Mutual Insurance Company effective June 1, 2001, was excluded from the 2000 SA Pooling Agreement until July 1, 2001; the Third Amendment to the 2000 SA Pooling Agreement amended the Respective Percentages of the parties to result in the following: SA OH 1%, Farmers Casualty 3%, SA WI 1%, Milbank 17%, State Auto P&C 59% and State Auto Mutual 19% and it also excluded the premiums or losses attributable to the Stop Loss Agreement as defined in the Third Amendment, each effective as of October 1, 2004; The Fourth Amendment, effective January 1, 2003 added SA FL to the 2000 SA Pooling Agreement with 0.7% as a Respective Percentage, while lowering State Auto Mutual’s Respective Percentage to 18.3%; The Fifth

Page 2

Amendment, effective July 1, 2004, excluded State Auto Middle Market Insurance, (as defined below) from the 2000 SA Pooling Agreement; the Reinsurance Pooling Agreement Amended and Restated as of January 1, 2005 (the “2005 Pooling Agreement”) added Meridian Security and Meridian Citizens Mutual as new parties and amended the Respective Percentages of the parties to result in the following: SA OH 1%, Farmers Casualty 3%, SA WI 0.0%, Milbank 17%, State Auto P&C 59%, State Auto Mutual 19.5%, SA FL 0.0%, Meridian Security 0.0% and Meridian Citizens Mutual 0.5%; the First Amendment to the 2005 Pooling Agreement (i) excluded from the 2005 Pooling Agreement all voluntary assumed reinsurance written or placed with State Auto Mutual from and after the effective date of that First Amendment, regardless of whether the ceding company was affiliated with State Auto Mutual; (ii) clarified the attachment point of the State Auto P&C Catastrophe Assumption Agreement (as defined hereinafter) and its interplay with the 2005 Pooling Agreement; and (iii) clarified that all amounts due under the 2005 Pooling Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter. In addition to the foregoing amendments to the pooling arrangement as set forth in the various agreements, each of these agreements and this 2008 Pooling Agreement is subject to the Guaranty Agreement dated as of May 16, 1991 between State Auto Mutual and State Auto P&C (the “Reserve Guaranty Agreement”).

The parties desire to amend and restate the 2005 Pooling Agreement, as amended as described, to (i) add Beacon, Patrons and Litchfield as parties, having Respective Percentages of 0.0%, 0.4% and 0.1%, respectively, (ii) reduce the Respective Percentage of State Auto Mutual from 19.5% to 19.0%, (iii) include all State Auto Middle Market Insurance and, (iv) make certain other technical changes. All of these amendments are effective as of 12:01 a.m. EST, January 1, 2008.

Statement of Agreement

In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties hereto hereby agree as follows:

1. Definitions: As used in this Agreement:

(a) “Net Liabilities” shall mean all direct liabilities plus reinsurance assumed minus reinsurance ceded, except as otherwise expressly excluded below, provided that the parties hereto expressly understand and agree that Net Liabilities excludes any and all liabilities arising out of the State Auto Mutual Reinsurance Book. It is understood and agreed that Net Liabilities includes any and all liabilities arising out of State Auto Middle Market Insurance.

(b) “Net Premiums” shall mean all direct premiums plus reinsurance assumed minus reinsurance ceded, except as otherwise expressly excluded below, provided that the parties hereto expressly understand and agree that Net Premiums excludes any and all premiums arising out of the State Auto Mutual Reinsurance Book. It is understood and agreed that Net Premiums includes any and all premiums arising out of State Auto Middle Market Insurance.

(c) “Respective Percentage” shall be:

As to SA OH	1	%
As to Farmers Casualty	3	%
As to SA WI	0.0	%

Page 3

As to Milbank	17	%
As to State Auto P&C	59	%
As to State Auto Mutual	19.0	%
As to SA FL	0.0	%
As to Meridian Security	0.0	%
As to Meridian Citizens Mutual	0.5	%
As to Beacon	0.0	%
As to Patrons	0.4	%
As to Litchfield	0.1	%

(d) “State Auto Mutual Reinsurance Book” means premiums, losses, underwriting and administrative expenses attributable to State Auto Mutual’s voluntary assumption of reinsurance from third parties which are unaffiliated with State Auto Mutual

(e) “State Auto Middle Market Insurance” means (i) property casualty insurance for commercial risks that are larger than those included in the standard segment of the Pooled Companies’ business; (ii) underwritten by the State Auto Middle Market Insurance underwriting unit; and (iii) coded by State Auto as State Auto Middle Market Insurance.

(f) “State Auto Insurance Ceding Companies” means State Auto Mutual and each insurance company, present and future, in the State Auto Mutual holding company system, other than State Auto P&C, which cedes reinsurance to State Auto P&C under the State Auto P&C Catastrophe Assumption Agreement.

(g) “State Auto P&C Catastrophe Assumption Agreement” means any agreement pursuant to which State Auto P&C provides catastrophe reinsurance to any of the State Auto Insurance Ceding Companies.

(h) “State Auto Traditional Cat Program” means the then current amount of State Auto’s catastrophe loss retention ($55 million as of the date of this 2008 Pooling Agreement) plus the then current amount of catastrophe reinsurance available to State Auto ($80 million as of the date of this 2008 Pooling Agreement).

2. Cession:

(a) State Auto P&C Cession: State Auto Mutual hereby reinsures and assumes and State Auto P&C hereby cedes and transfers to State Auto Mutual all Net Liabilities of State Auto P&C as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by State Auto P&C outstanding and in force as of and subsequent to 12:01 a.m. Eastern Standard Time, January 1, 2008. Such liabilities shall include State Auto P&C’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by State Auto P&C’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of State Auto P&C, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations. It is further agreed State Auto Mutual shall receive the Net Premiums for said contracts and policies.

Page 4

(b) Milbank Cession: State Auto Mutual hereby reinsures and assumes and Milbank hereby cedes and transfers to State Auto Mutual all Net Liabilities of Milbank as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by Milbank outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include Milbank’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by Milbank’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of Milbank, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

(c) SA WI Cession: State Auto Mutual hereby reinsures and assumes and SA WI hereby cedes and transfers to State Auto Mutual all Net Liabilities of SA WI as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by SA WI outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include SA WI’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by SA WI’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of SA WI, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

(d) Farmers Casualty Cession: State Auto Mutual hereby reinsures and assumes and Farmers Casualty hereby cedes and transfers to State Auto Mutual all Net Liabilities of Farmers Casualty as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by Farmers Casualty outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include Farmers Casualty’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by Farmers Casualty’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of Farmers Casualty, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

(e) SA OH Cession: State Auto Mutual hereby reinsures and assumes and SA OH hereby cedes and transfers to State Auto Mutual all Net Liabilities of SA OH as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by SA OH outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include SA OH’s reserves for unearned premiums, outstanding losses and loss

Page 5

expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by SA OH’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of SA OH, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

(f) SA FL Cession: State Auto Mutual hereby reinsures and assumes and SA FL hereby cedes and transfers to State Auto Mutual all Net Liabilities of SA FL as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by SA FL outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include SA FL’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by SA FL’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of SA FL, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

(g) Meridian Security Cession: State Auto Mutual hereby reinsures and assumes and Meridian Security hereby cedes and transfers to State Auto Mutual all Net Liabilities of Meridian Security as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by Meridian Security outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include Meridian Security’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by Meridian Security’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of Meridian Security, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

(h) Meridian Citizens Mutual Cession: State Auto Mutual hereby reinsures and assumes and Meridian Citizens Mutual hereby cedes and transfers to State Auto Mutual all Net Liabilities of Meridian Citizens Mutual as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by Meridian Citizens Mutual outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include Meridian Citizens Mutual’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by Meridian Citizen Mutual’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of Meridian Citizens Mutual, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

Page 6

(i) Beacon Cession: State Auto Mutual hereby reinsures and assumes and Beacon hereby cedes and transfers to State Auto Mutual all Net Liabilities of Beacon as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by Beacon outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include Beacon’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by Beacon’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of Beacon, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

(j) Patrons Cession: State Auto Mutual hereby reinsures and assumes and Patrons hereby cedes and transfers to State Auto Mutual all Net Liabilities of Patrons as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by Patrons outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include Patrons reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by Patrons books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of Patrons, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

(k) Litchfield Cession: State Auto Mutual hereby reinsures and assumes and Litchfield hereby cedes and transfers to State Auto Mutual all Net Liabilities of Litchfield as of January 1, 2008, and all Net Liabilities incurred under or in connection with all contracts and policies of insurance issued by Litchfield outstanding and in force as of and subsequent to 12:01 a.m. EST, January 1, 2008. Such liabilities shall include Litchfield’s reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses) and all other outstanding underwriting and administrative expenses as evidenced by Litchfield’s books and records at the close of business on December 31, 2007, but shall not include intercompany balances, liabilities incurred in connection with the investment transactions of Litchfield, and other liabilities not incurred in connection with underwriting operations. It is further agreed that State Auto Mutual shall receive the Net Premiums for said contracts and policies.

3. Assets Transfer to State Auto Mutual:

(a) State Auto P&C: In consideration of the agreements herein contained, State Auto P&C hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all

Page 7

liabilities of State Auto P&C assumed by State Auto Mutual under paragraph 2(a) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There have been included among the assets assigned and transferred to State Auto Mutual by State Auto P&C all of the right, title and interest of State Auto P&C in and to all assets relative to the underwriting operations of State Auto P&C, due or that became due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(b) Milbank: In consideration of the agreements herein contained, Milbank hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of Milbank assumed by State Auto Mutual under paragraph 2(b) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by Milbank all of the right, title and interest of Milbank in and to all assets relative to the underwriting operations of Milbank due or that may become due as evidenced by its books and records at the close of business on December 31, 2007 not including investments, accrued investment income, intercompany balances and bank deposits.

(c) SA WI: In consideration of the agreements herein contained, SA WI hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of SA WI assumed by State Auto Mutual under paragraph 2(c) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by SA WI all of the right, title and interest of SA WI in and to all assets relative to the underwriting operations of SA WI due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(d) Farmers Casualty: In consideration of the agreements herein contained, Farmers Casualty hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of Farmers Casualty assumed by State Auto Mutual under paragraph 2(d) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by Farmers Casualty all of the right, title and interest of Farmers Casualty in and to all assets relative to the underwriting operations of Farmers Casualty due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

Page 8

(e) SA OH: In consideration of the agreements herein contained, SA OH hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of SA OH assumed by State Auto Mutual under paragraph 2(e) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by SA OH all of the right, title and interest of SA OH in and to all assets relative to the underwriting operations of SA OH due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(f) SA FL: In consideration of the agreements herein contained, SA FL hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of SA FL assumed by State Auto Mutual under paragraph 2(f) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by SA FL: all of the right, title and interest of SA FL in and to all assets relative to the underwriting operations of SA FL due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(g) Meridian Security: In consideration of the agreements herein contained, Meridian Security hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of Meridian Security assumed by State Auto Mutual under paragraph 2(g) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by Meridian Security all of the right, title and interest of Meridian Security in and to all assets relative to the underwriting operations of Meridian Security due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(h) Meridian Citizens Mutual: In consideration of the agreements herein contained, Meridian Citizens Mutual hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of Meridian Citizens Mutual assumed by State Auto Mutual under paragraph 2(h) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by Meridian Citizens Mutual all of the right, title and interest of Meridian Citizens Mutual in and to all assets relative to the underwriting operations of Meridian Citizens Mutual due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

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(i) Beacon: In consideration of the agreements herein contained, Beacon hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of Beacon assumed by State Auto Mutual under paragraph 2(i) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by Beacon all of the right, title and interest of Beacon in and to all assets relative to the underwriting operations of Beacon due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(j) Patrons: In consideration of the agreements herein contained, Patrons hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of Patrons assumed by State Auto Mutual under paragraph 2(j) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by Patrons all of the right, title and interest of Patrons in and to all assets relative to the underwriting operations of Patrons due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(k) Litchfield: In consideration of the agreements herein contained, Litchfield hereby agrees that there has been or will be assigned and transferred to State Auto Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of Litchfield assumed by State Auto Mutual under paragraph 2(k) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto Mutual by Litchfield all of the right, title and interest of Litchfield in and to all assets relative to the underwriting operations of Litchfield due or that may become due as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

4. Assumption of Reinsurance:

(a) State Auto P&C: State Auto P&C hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to State Auto P&C its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by State Auto P&C and reinsured by State Auto Mutual as provided in paragraph 2(a)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

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Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations.

(b) Milbank: Milbank hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to Milbank its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by Milbank and reinsured by State Auto Mutual as provided in paragraph 2(b)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations.

(c) SA WI: SA WI hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to SA WI its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by SA WI and reinsured by State Auto Mutual as provided in paragraph 2(c)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations.

(d) Farmers Casualty: Farmers Casualty hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to Farmers Casualty its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by Farmers Casualty and reinsured by State Auto Mutual as provided in paragraph 2(d)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations.

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(e) SA OH: SA OH hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to SA OH its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by SA OH and reinsured by State Auto Mutual as provided in paragraph 2(e)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations.

(f) SA FL: SA FL hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to SA FL its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by SA FL and reinsured by State Auto Mutual as provided in paragraph 2(f)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations.

(g) Meridian Security: Meridian Security hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to Meridian Security its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by Meridian Security and reinsured by State Auto Mutual as provided in paragraph 2(g)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations.

(h) Meridian Citizens Mutual: Meridian Citizens Mutual hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to Meridian Citizens Mutual its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by Meridian Citizens Mutual and reinsured by State Auto Mutual as provided in paragraph 2(h)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

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Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, and other liabilities not incurred in connection with underwriting operations.

(i) Beacon: Beacon hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to Beacon its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by Beacon and reinsured by State Auto Mutual as provided in paragraph 2(i)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, liabilities for dividends to stockholders declared and unpaid, and other liabilities not incurred in connection with underwriting operations.

(j) Patrons: Patrons hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to Patrons its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by Patrons and reinsured by State Auto Mutual as provided in paragraph 2(j)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, and other liabilities not incurred in connection with underwriting operations.

(k) Litchfield: Litchfield hereby reinsures and assumes and State Auto Mutual hereby cedes and transfers to Litchfield its Respective Percentage of all Net Liabilities as of January 1, 2008 and all Net Liabilities under all contracts and policies of insurance, (including those ceded by Litchfield and reinsured by State Auto Mutual as provided in paragraph 2(k)), on which State Auto Mutual is subject to liability and which are outstanding and in force on or after the effective date hereof.

Such liabilities shall include reserves for unearned premiums, outstanding losses (including unreported losses) and loss expenses and all other underwriting and administrative expenses, but shall not include intercompany balances, liabilities for federal income taxes, liabilities incurred in connection with investment transactions, and other liabilities not incurred in connection with underwriting operations.

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5. Asset Transfer by State Auto Mutual:

(a) State Auto P&C: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to State Auto P&C an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by State Auto P&C under paragraph 4(a) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to State Auto P&C by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(b) Milbank: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to Milbank an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by Milbank under paragraph 4(b) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to Milbank by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(c) SA WI: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to SA WI an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by SA WI under paragraph 4(c) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to SA WI by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(d) Farmers Casualty: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to Farmers Casualty an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by Farmers Casualty under paragraph 4(d) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to Farmers Casualty by State Auto

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Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(e) SA OH: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to SA OH an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by SA OH under paragraph 4(e) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to SA OH by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(f) SA FL: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to SA FL an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by SA FL under paragraph 4(f) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to SA FL by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(g) Meridian Security: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to Meridian Security an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by Meridian Security under paragraph 4(g) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to Meridian Security by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(h) Meridian Citizens Mutual: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to Meridian Citizens Mutual an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by Meridian Citizens Mutual under paragraph 4(h) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which

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are transferred as provided herein. There shall be included among the assets assigned and transferred to Meridian Citizens Mutual by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(i) Beacon: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to Beacon an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by Beacon under paragraph 4(i) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to Beacon by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(j) Patrons: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to Patrons an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by Patrons under paragraph 4(j) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to Patrons by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

(k) Litchfield: In consideration of the agreements herein contained, State Auto Mutual hereby agrees that there has been or will be assigned and transferred to Litchfield an amount, in cash or other assets, equal to the aggregate of all liabilities of State Auto Mutual assumed by Litchfield under paragraph 4(k) hereof, less a ceding commission equal to the sum of the acquisition expenses associated with the unearned premium reserves which are transferred as provided herein. There shall be included among the assets assigned and transferred to Litchfield by State Auto Mutual all of the right, title and interest of State Auto Mutual in and to all assets relative to the underwriting operations of State Auto Mutual, due or that may become due, as evidenced by its books and records at the close of business on December 31, 2007, not including investments, accrued investment income, intercompany balances and bank deposits.

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6. Premium Collection and Payment of Losses:

As of the effective date of this Agreement and pursuant to the terms of the 2005 Management Agreement, the 2000 Midwest Management Agreement, the Litchfield Management Agreement and the Patrons Fire Management Agreement, all as amended from time to time, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield hereby authorize and empower State Auto Mutual to collect and receive all premiums and to take charge of, adjust and administer the payment of all losses with respect to any and all contracts and policies of insurance previously or thereafter issued by State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield and to reinsure or terminate all such contracts and policies, and in all respects to act as though said contracts and policies were issued by State Auto Mutual. State Auto Mutual agrees to administer the payment of all losses and loss adjustment expenses in connection with such contracts and policies. None of the foregoing is intended to affect or impair the direct obligation of State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield, to their insureds under policies issued by State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield respectively.

7. Premium Payable by State Auto Mutual:

(a) State Auto P&C: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay to State Auto P&C its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto (except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including the policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for catastrophe reinsurance ceded by any State Auto Insurance Ceding Company to the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(b) Milbank: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay Milbank its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

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(c) SA WI: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay SA WI its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto (except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(d) Farmers Casualty: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay Farmers Casualty its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(e) SA OH: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay SA OH its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto ,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(f) SA FL: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay SA FL its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of

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this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto ,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(g) Meridian Security: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay Meridian Security its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto ,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(h) Meridian Citizens Mutual: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay Meridian Citizens Mutual its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto ,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(i) Beacon: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay Beacon its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto ,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe

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Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(j) Patrons: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay Patrons its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto ,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

(k) Litchfield: Commencing with the effective date of this Agreement, State Auto Mutual hereby agrees to pay Litchfield its Respective Percentage of the Net Premiums written by the parties hereto. Similarly, commencing with the effective date of this Agreement, all losses, loss expenses, underwriting expenses, and administrative expenses chargeable to underwriting of the parties hereto,(except for losses, loss expenses, underwriting expenses and administrative expenses chargeable to the State Auto Mutual Reinsurance Book), including policyholder dividends, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers other than the parties hereto, (except for the State Auto P&C Catastrophe Assumption Agreement) shall be prorated among the parties on the basis of the Respective Percentage of each. Subject to the offset provision in Section 8 hereof, all amounts due under this Agreement shall be due and payable by the respective Pooled Company within sixty (60) days after the end of each calendar quarter.

8. Offset: It is understood and agreed that, insofar as is practicable and consistent with the purposes and intentions of this Agreement, the obligations of each company under this Agreement to transfer assets to the other company may, in whole or in part, be offset against the reciprocal reinsurance obligations of each company to the other company so that each company shall deliver hereunder only a net amount of assets required under such offset.

9. General Statement of Intent: It is the purpose and intent of this Agreement that:

(a) State Auto Mutual shall be liable as a reinsurer to State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield on the policies and contracts of insurance of State Auto P&C, Milbank, SA WI, Farmers Casualty. SA OH, SA FL, Meridian Security, Meridian Citizens Security, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008, or on which there

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were, at that time, unsettled claims or losses (including unreported losses), and on policies and contracts thereafter issued by State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield to the extent of State Auto Mutual’s Respective Percentage.

(b) State Auto P&C shall be liable as a reinsurer to State Auto Mutual, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield on the policies and contracts of insurance of State Auto Mutual, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008, or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies and contracts thereafter issued by State Auto Mutual, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield to the extent of State Auto P&C’s Respective Percentage.

(c) Milbank shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, SA WI, Farmers Casualty SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, on January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies thereafter issued by State Auto Mutual, State Auto P&C, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield to the extent of Milbank’s Respective Percentage.

(d) SA WI shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, Farmers Casualty SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, on January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies thereafter issued by State Auto Mutual, State Auto P&C, Milbank, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield to the extent of SA WI’s Respective Percentage.

(e) Farmers Casualty shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, SA WI, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, SA WI, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies and contracts thereafter issued by State Auto Mutual, State Auto P&C, Milbank, SA WI, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield to the extent of Farmers Casualty’s Respective Percentage.

Page 21

(f) SA OH shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses) , and on policies and contracts thereafter issued by State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield to the extent of SA OH’s Respective Percentage.

(g) SA FL shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies and contracts thereafter issued by State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield to the extent of SA FL’s Respective Percentage.

(h) Meridian Security shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Citizens Mutual, Beacon, Patrons and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Citizens Mutual, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses) , and on policies and contracts thereafter issued by State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Citizens Mutual, Beacon, Patrons and Litchfield to the extent of Meridian Security’s Respective Percentage.

(i) Meridian Citizens Mutual shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Beacon, Patrons and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Beacon, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies and contracts thereafter issued by State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Beacon, Patrons and Litchfield to the extent of Meridian Citizens Mutual’s Respective Percentage.

Page 22

(j) Beacon shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Patrons and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Patrons and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies and contracts thereafter issued by State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Patrons and Litchfield to the extent of Beacon’s Respective Percentage.

(k) Patrons shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon and Litchfield on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon and Litchfield respectively, issued and in force at 12:01 a.m., EST, January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies and contracts thereafter issued by State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon and Litchfield to the extent of Patron’s Respective Percentage.

(l) Litchfield shall be liable as a reinsurer to State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon and Patrons on the policies and contracts of State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon and Patrons respectively, issued and in force at 12:01 a.m., EST, January 1, 2008 or on which there were, at that time, unsettled claims or losses (including unreported losses), and on policies and contracts thereafter issued by State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon and Patrons to the extent of Litchfield’s Respective Percentage.

(m) The parties hereto shall, on and after 12:01 a.m., EST, January 1, 2008, participate on the basis of, 19.0% for State Auto Mutual, 59% for State Auto P&C, 17% for Milbank, 0.0% for SA WI, 3% for Farmers Casualty, 1% for SA OH, 0.0% for SA FL, 0.0% for Meridian Security, 0.5% for Meridian Citizens Mutual, 0.0% for Beacon, 0.4% for Patrons and 0.1% for Litchfield, in all of the underwriting operations of each of the parties hereto, except as otherwise expressly excluded herein.

10. Losses Excluded: Notwithstanding any of the foregoing, the Pooled Companies agree that the 2008 Pooling Agreement, as amended from time to time, shall not apply to catastrophe losses and loss expenses to the extent such losses and loss expenses are covered by the State Auto P&C Catastrophe Assumption Agreement. Once the limit of coverage available under the State Auto P&C Catastrophe Assumption Agreement is exhausted by loss expenses and loss payments on behalf of any of the State Auto Insurance Ceding Companies or directly by State Auto P&C, all parties understand and agree that catastrophe losses and loss expenses in excess of the sum of the State Auto Traditional Cat Program and the amount of coverage under the State Auto

Page 23

P&C Catastrophe Assumption Agreement shall once again be ceded and assumed under the terms of the 2008 Pooling Agreement, as amended from time to time. All premiums attributable to the State Auto P&C Catastrophe Assumption Agreement are to be paid to State Auto P&C outside of the 2008 Pooling Agreement, as amended from time to time. All premiums, losses, loss expenses, underwriting expenses and administrative expenses attributable to the State Auto Mutual Reinsurance Book are outside the 2008 Pooling Agreement, as amended from time to time. In addition, this 2008 Pooling Agreement, as amended from time to time, is subject to the Reserve Guaranty Agreement.

11. Liabilities Excluded: In addition to the liabilities set forth in paragraphs 2(a), 2(b), 2(c), 2(d), 2(e), 2(f), 2(g), 2(h), 2(i), 2(j), 2(k) and 10 above, this Agreement shall not apply to the investment operation or liabilities for federal income tax or other liabilities excluded by this Agreement.

12. “Follow the Fortunes”: The reinsurance provided by the terms of this Agreement shall be subject to the same terms and conditions under which the original insurance was concluded, or which may be or may have been agreed to during the term of the original insurance contract.

13. Methods and Procedures: The president of State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield or any officer of any of these companies designated by said president, shall determine the methods and procedures, including accounting transactions, by which the terms of this Agreement shall be performed by and on behalf of the parties hereto. The accounting for the transactions shall be in compliance with appropriate Statements of Statutory Accounting Principles (SSAPs) including SSAP No. 62 – Property and Casualty Reinsurance and SSAP No. 63–Underwriting Pools and Associations Including Intercompany Pools, as amended or superseded, and also shall be in compliance with all Ohio laws and regulations.

14. Amendments: This Agreement may be modified from time to time, so as to adapt its provisions to the varying conditions of the business of the Pooled Companies, by a mutual agreement in writing of the parties hereto, subject to ratification by the Board of Directors of each party and with the approval of the insurance regulatory officials from the State of Ohio, the State of South Dakota, the State of Wisconsin, the State of Iowa, the State of Indiana, the State of Texas and the State of Connecticut as required by law.

15. Term and Effect of Termination: This Agreement shall remain in full force and effect until canceled by the giving of twelve months notice by one of the parties to the other parties and to the respective domiciliary insurance department of each of the parties. Upon termination, all Net Liabilities of the terminated Pooled Company incurred under or in connection with all contracts or policies of insurance issued by the terminated Pooled Company prior to 12:01 a.m. EST on the date of termination shall remain subject to all terms and provisions of this 2008 Pooling Agreement; provided, however, if the terminated Pooled Company is not affiliated with State Auto Mutual on the date of termination, then this 2008 Pooling Agreement shall automatically and immediately terminate as to the terminated Pooled Company, all unpaid Net Liabilities of the terminated Pooled Company as of the date of termination shall be retroceded to the terminated Pooled Company.

Page 24

16. Interpretation: Wherever required to give the correct meaning throughout this Agreement, the singular shall be interpreted in the plural. Clerical errors or errors of involuntary or inadvertent omission or commission shall not be interpreted as a discharge of liability on behalf of any of the parties to this contract. Such errors shall be rectified at the time of discovery or as soon as practicable thereafter. Caption headings are for convenience only and are not intended to affect the construction of the terms hereof.

17. Insolvency: The reinsurance made under this Agreement shall be payable by the assuming reinsurer on the basis of the liability of the ceding insurer under the contract or contracts reinsured without diminution because of the insolvency of the ceding insurer. The reinsurance made effective under this Agreement shall be payable by the assuming reinsurer to the ceding insurer or to the liquidator, receiver or statutory successor of the ceding insurer.

In the event that one of the Pooled Companies becomes insolvent or is otherwise subject to liquidation or receivership proceedings, State Auto Mutual shall adjust its net retained portion of the combined Pooled Companies’ Net Liabilities and the remaining pool members shall adjust their assumed portions of the combined Pooled Companies’ Net Liabilities, each on a pro rata basis, so as to collectively absorb or assume in full the net retained portion of the combined Pooled Companies’ Net Liabilities of State Auto Mutual which would otherwise be the responsibility of such impaired company. In the event of such insolvency, liquidation or receivership proceedings of a Pooled Company, the liquidator or receiver or statutory successor of such Pooled Company shall give written notice to State Auto Mutual of the pendency of any claim against the insolvent Pooled Company on the policy or bond reinsured within a reasonable time after such claim is filed in the insolvency proceeding; that during the pendency of such claim State Auto Mutual may investigate such claim and interpose in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the insolvent Pooled Company or its liquidator or receiver or statutory successors; any such expense thus incurred by State Auto Mutual shall be pro-rated among State Auto Mutual and the remaining Pooled Companies, except for the insolvent Pooled Company.

In the event that State Auto Mutual becomes insolvent or is otherwise subject to liquidation or receivership proceedings, the remaining pool members shall adjust their assumed portions, each on a pro rata basis, so as to collectively absorb or assume in full the net retained portion of the combined Pooled Companies’ Net Liabilities of State Auto Mutual which they had not previously assumed and which would otherwise be the responsibility of State Auto Mutual. In the event of such insolvency, liquidation or receivership proceedings of State Auto Mutual, the liquidator or receiver or statutory successor of State Auto Mutual shall give written notice to the Pooled Companies of the pendency of any claim against State Auto Mutual on the policy or bond reinsured within a reasonable time after such claim is filed in the insolvency proceeding; that during the pendency of such claim the Pooled Companies may investigate such claim and interpose in the proceeding where such claim is to be adjudicated any defense or defenses which they may deem available to State Auto Mutual or its liquidator or receiver or statutory successors; any such expense thus incurred shall be pro-rated among the remaining Pooled Companies except for State Auto Mutual.

Page 25

18. Arbitration: In the event of any dispute hereafter arising with respect to this Agreement, State Auto Mutual, State Auto P&C, Milbank, SA WI, Farmers Casualty, SA OH, SA FL, Meridian Security, Meridian Citizens Mutual, Beacon, Patrons and Litchfield hereby agree that such dispute shall, upon the request of the one of the parties, be submitted to arbitration. One arbitrator shall be chosen by each party and those arbitrators shall then select an umpire who shall hear and decide the issues to be arbitrated. If one party fails to name an arbitrator within thirty (30) days after receipt of a written request to do so, the party initiating the arbitration may choose the arbitrators. The decision of the umpire shall be final and binding on the parties. Each party shall bear the expense of its arbitrator and the cost of the umpire shall be shared equally. The arbitration shall be governed by Ohio law and shall take place at Columbus, Ohio or such other location upon which the parties may mutually agree.

The foregoing notwithstanding, with regard to SA WI and in compliance with Wis. Stat. Section 645.58(2), the parties hereto agree that this Agreement cannot and does not require SA WI to arbitrate an action on or related to this Agreement when SA WI is subject to a delinquency proceeding under Subchapter III of Chapter 645 of the Wisconsin Statutes.

19. Access to Records: The parties hereto understand and agree that each shall have such access to the records of the other as is necessary to confirm that the 2008 Pooling Agreement is being properly administered and applied, provided that such access is achieved in compliance with laws protecting the privacy of insureds and claimants. It is further understood and agreed that the parties will permit regulators with jurisdiction to have such access to such records, as and to the extent required by law.

20. Counterparts: The 2008 Pooling Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument.

21. Governing Law: The 2008 Pooling Agreement will be governed by and construed in accordance with the laws of the State of Ohio.

22. Complete Agreement: This document contains the entire amended and restated reinsurance pooling agreement between the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter, including without limitation, the 2005 Pooling Agreement and all previous amendments thereto.

23. Assignment: This Agreement may not be assigned without the written consent of the other parties hereto and without the prior approval of the Insurance Department Commissioners for the states where any of the parties hereto are domiciled.

[SIGNATURE PAGE TO FOLLOW]

Page 26

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date and the year first above written.

Attest	State Automobile Mutual Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	State Auto Property and Casualty Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	Milbank Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	State Auto Insurance Company of Wisconsin
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	Farmers Casualty Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr. President
	State Auto Insurance Company of Ohio
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	State Auto Florida Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	Meridian Security Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President

Page 27

	Meridian Citizens Mutual Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	Beacon National Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	Patrons Mutual Insurance Company of Connecticut
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President
	Litchfield Mutual Fire Insurance Company
/s/ James A. Yano	By	/s/ Robert P. Restrepo, Jr.
Secretary		Robert P. Restrepo, Jr., President

Page 28

EX-21.01

Exhibit 21.01

List of Subsidiaries of

State Auto Financial Corporation

State Auto Property and Casualty Insurance Company, a South Carolina corporation

State Auto National Insurance Company, an Ohio corporation

Stateco Financial Services, Inc., an Ohio corporation

Strategic Insurance Software, Inc., an Ohio corporation

Milbank Insurance Company, a South Dakota corporation

Farmers Casualty Insurance Company, an Iowa corporation

State Auto Insurance Company of Ohio, an Ohio corporation

518 Property Management and Leasing, LLC, an Ohio limited liability company

EX-23.01

EXHIBIT 23.01

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of State Auto Financial Corporation of our reports dated March 7, 2008, with respect to the consolidated financial statements and schedules of State Auto Financial Corporation and the effectiveness of internal control over financial reporting of State Auto Financial Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2007.

Form	Registration Number	Description
S-8	33-44667	1991 Stock Option Plan
	33-89400
S-8	33-44666	1991 Directors’ Stock Option Plan
S-8	33-41423	1991 Employee Stock Purchase and Dividend Reinvestment Plan
	333-05755
	333-147333
S-8	333-56336	State Auto Insurance Companies Capital Accumulation Plan
S-8	333-43882	2000 Directors’ Stock Option Plan
S-8	333-43880	2000 Stock Option Plan
S-3	333-41849	Monthly Stock Purchase Plan for Independent Agents
S-3	333-90529	1998 State Auto Agents’ Stock Option Plan
S-4	333-111507	6 1/4% Senior Notes due 2013
S-8	333-127172	2005 Outside Directors Restricted Share Unit Plan

/s/ Ernst & Young LLP

Columbus, Ohio

March 7, 2008

EX-24.02

Exhibit 24.02

STATE AUTO FINANCIAL CORPORATION

POWER OF ATTORNEY

For Annual Reports on Form 10-K

The undersigned director or officer of State Auto Financial Corporation, an Ohio corporation (the “Company”), hereby constitutes and appoints Robert P. Restrepo, Jr., Steven E. English and James A. Yano, and each of them, my true and lawful attorneys-in-fact and agents, with full power to act without the other, with full power of substitution and resubstitution, for me and in my name, place and stead, in my capacity as director or officer of the Company, to execute the Company’s Annual Report on Form 10-K filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Company’s fiscal year ended December 31, 2007, for each fiscal year thereafter and any amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full powers and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.

The undersigned has executed and delivered this Power of Attorney on the date set forth opposite his or her signature below.

Name	Title	Date
/s/ Robert E. Baker	Director	March 7, 2007
Robert E. Baker
/s/ Thomas E. Markert	Director	March 6, 2007
Thomas E. Markert

EX-31.01

EXHIBIT 31.01

CERTIFICATION

I, Robert P. Restrepo, Jr., certify that:

1. I have reviewed this Form 10-K of State Auto Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2008

/s/ Robert P. Restrepo, Jr.

Robert P. Restrepo, Jr.,

Chief Executive Officer

(Principal executive officer)

EX-31.02

EXHIBIT 31.02

CERTIFICATION

I, Steven E. English, certify that:

1. I have reviewed this Form 10-K of State Auto Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 14, 2008

/s/ Steven E. English

Steven E. English,

Chief Financial Officer

(Principal Financial Officer)

EX-32.01

EXHIBIT 32.01

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of State Auto Financial Corporation (the “Company”) on Form 10-K for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert P. Restrepo, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Robert P. Restrepo, Jr.

Robert P. Restrepo, Jr.

Chief Executive Officer

March 14, 2008

A signed original of this written statement required by Section 906 has been provided to State Auto Financial Corporation and will be retained by State Auto Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.02

EXHIBIT 32.02

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of State Auto Financial Corporation (the “Company”) on Form 10-K for the period ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven E. English, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Steven E. English

Steven E. English

Principal Financial Officer

March 14, 2008

A signed original of this written statement required by Section 906 has been provided to State Auto Financial Corporation and will be retained by State Auto Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request.