State Auto Financial CORP (Form: 10-Q, Received: 08/07/2007 15:35:09)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

¨	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

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 whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

On July 31, 2007, the Registrant had 41,178,924 Common Shares outstanding.

Index to Form 10-Q Quarterly Report for the three and six month periods ended June 30, 2007


Part I. Financial Information

Item 1.	Financial Statements (Unaudited)

	Condensed consolidated balance sheets – June 30, 2007 and December 31, 2006	1

	Condensed consolidated statements of income – Three months ended June 30, 2007 and 2006	2

	Condensed consolidated statements of income – Six months ended June 30, 2007 and 2006	3

	Condensed consolidated statements of cash flows – Six months ended June 30, 2007 and 2006	4

	Notes to condensed consolidated financial statements – June 30, 2007	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

Part II. Other Information

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults upon Senior Securities	30

Item 4.	Submission of Matters to a Vote of Security Holders	30

Item 5.	Other Information	31

Item 6.	Exhibits	32

	Signatures	33

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

PART I – FINANCIAL STATEMENTS

Item 1. Condensed Consolidated Balance Sheets


	June 30 2007			December 31 2006
($ millions, except per share amount)	(unaudited)			(see note 1)
Assets
Fixed maturities, available for sale, at fair value (amortized cost $1,705.1 and $1,630.6, respectively)	$	1,691.0		1,647.4
Equity securities, available for sale, at fair value (cost $224.8 and $230.8, respectively)		287.3		284.2
Other invested assets		5.7		6.3

Total investments		1,984.0		1,937.9
Cash and cash equivalents		26.4		73.4
Accrued investment income and other assets		44.7		43.7
Deferred policy acquisition costs		105.8		104.0
Reinsurance recoverable on losses and loss expenses payable (affiliates $2.2 and $2.7, respectively)		12.6		13.5
Prepaid reinsurance premiums		6.5		6.0
Due from affiliate		45.9		17.9
Current federal income taxes		3.0		—
Deferred federal income taxes		58.7		46.3
Property and equipment, at cost (net of accumulated depreciation of $5.4 and $5.1, respectively)		12.3		12.4

*Total assets*	$	2,299.9		2,255.1

Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliates $279.0 and $281.7, respectively)	$	682.0		674.5
Unearned premiums (affiliates $119.0 and $118.4, respectively)		439.3		428.8
Notes payable (affiliates $15.5)		118.2		118.4
Postretirement benefits		129.8		124.8
Pension benefits		19.6		16.1
Current federal income taxes		—		7.2
Other liabilities		39.3		51.1

*Total liabilities*		1,428.2		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; 45.9 and 45.7 shares issued, respectively, at stated value of $2.50 per share		114.7		114.3
Less 4.7 treasury shares, at cost		(58.6	)	(58.1	)
Additional paid-in capital		93.0		87.3
Accumulated other comprehensive loss		(31.2	)	(17.3	)
Retained earnings		753.8		708.0

*Total stockholders’ equity*		871.7		834.2

*Total liabilities and stockholders’ equity*	$	2,299.9		2,255.1

See accompanying notes to condensed consolidated financial statements.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Condensed Consolidated Statements of Income


($ millions, except per share amounts)	Three months ended June 30
(unaudited)	2007		2006
Earned premiums (ceded to affiliates $173.9 and $171.2, respectively)	$	253.3	256.7
Net investment income		20.6	20.6
Net realized gains on investments		3.6	1.4
Other income (affiliates $0.8 and $0.7, respectively)		1.2	1.3

*Total revenues*		278.7	280.0
Losses and loss expenses (ceded to affiliates $102.9 and $120.4, respectively)		160.4	194.0
Acquisition and operating expenses		84.4	80.9
Interest expense (affiliates $0.4 )		1.8	1.9
Other expenses, net		3.2	3.4

*Total expenses*		249.8	280.2

Income (loss) before federal income taxes		28.9	(0.2	)
Federal income tax expense (benefit)		5.5	(4.3	)

Net income	$	23.4	4.1

Earnings per common share:
Basic	$	0.57	0.10

Diluted	$	0.56	0.10

Dividends paid per common share	$	0.10	0.09

See accompanying notes to condensed consolidated financial statements.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Condensed Consolidated Statements of Income


($ millions, except per share amounts)	Six months ended June 30
(unaudited)	2007		2006
Earned premiums (ceded to affiliates $346.5 and $341.2, respectively)	$	505.2	512.8
Net investment income		41.9	41.0
Net realized gains on investments		4.7	0.5
Other income (affiliates $1.6 and $1.5, respectively)		2.4	2.5

*Total revenues*		554.2	556.8
Losses and loss expenses (ceded to affiliates $200.5 and $205.8, respectively)		303.4	321.3
Acquisition and operating expenses		171.4	168.4
Interest expense (affiliates $0.7 )		3.7	3.7
Other expenses, net		6.0	6.9

*Total expenses*		484.5	500.3

Income before federal income taxes		69.7	56.5
Federal income tax expense		15.5	12.2

Net income	$	54.2	44.3

Earnings per common share:
Basic	$	1.32	1.09

Diluted	$	1.30	1.07

Dividends paid per common share	$	0.20	0.18

See accompanying notes to condensed consolidated financial statements.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Condensed Consolidated Statements of Cash Flows


($ millions)	Six months ended June 30
(unaudited)	2007			2006
Cash flows from operating activities:
Net income	$	54.2		44.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, net		5.3		4.9
Share-based compensation		3.6		4.1
Net realized gains on investments		(4.7	)	(0.5	)
Changes in operating assets and liabilities:
Deferred policy acquisition costs		(1.8	)	(0.3	)
Accrued investment income and other assets		(1.3	)	1.0
Net prepaid pension expense		—		3.7
Postretirement and pension benefit liabilities		9.3		4.0
Other liabilities and due to/from affiliates, net		(43.3	)	(23.7	)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums		0.4		2.5
Losses and loss expenses payable		7.5		0.7
Unearned premiums		10.5		3.7
Excess tax benefits on share based awards		0.1		0.4
Federal income taxes		(15.3	)	(20.6	)

*Net cash provided by operating activities*		24.5		24.2
Cash flows from investing activities:
Purchases of fixed maturities – available-for-sale		(243.1	)	(122.6	)
Purchases of equity securities – available-for-sale		(25.8	)	(41.9	)
Purchases of other invested assets		(0.6	)	(0.3	)
Maturities, calls and pay downs of fixed maturities – available-for-sale		38.6		47.9
Sales of fixed maturities – available-for-sale		127.4		51.3
Sales of equity securities – available-for-sale		37.1		46.7
Sales of other invested assets		1.3		0.7
Net additions of property and equipment		(0.2	)	(0.2	)

*Net cash used in investing activities*		(65.3	)	(18.4	)
Cash flows from financing activities:
Proceeds from issuance of common stock		1.9		4.2
Excess tax benefits on share based awards		0.1		2.4
Payment of dividends		(8.2	)	(7.3	)
Change in securities lending collateral		—		99.0
Change in securities lending obligation		—		(99.0	)

*Net cash used in financing activities*		(6.2	)	(0.7	)

Net (decrease) increase in cash and cash equivalents		(47.0	)	5.1
Cash and cash equivalents at beginning of period		73.4		28.7

Cash and cash equivalents at end of period	$	26.4		33.8

Supplemental disclosures:
Federal income taxes paid	$	30.5		29.4

Interest paid ($0.7 to affiliates)	$	3.9		3.8

See accompanying notes to condensed consolidated financial statements.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, (Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of State Auto Financial Corporation (“State Auto Financial” or the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”). Capitalized terms used herein and not otherwise defined shall have the meaning ascribed to them in the 2006 Form 10-K.

Certain items in the prior period consolidated financial statements have been reclassified to conform to the 2007 presentation.

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 of 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 postretirement 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, 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 is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies 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 is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins 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.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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 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 (defined below) to provide entities 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 is currently assessing the impact of this new guidance and plans to adopt this guidance effective January 1, 2008.

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 is currently assessing the impact of this new guidance and plans to adopt this guidance effective January 1, 2008.

2. Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share:


	Three months ended June 30			Six months ended June 30
($ millions, except per share amounts)	2007		2006	2007		2006
Numerator:
Net income for basic earnings per share	$	23.4	4.1	$	54.2	44.3

Denominator:
Basic weighted average shares outstanding		41.1	40.8		41.1	40.7
Effect of dilutive share-based awards		0.7	0.8		0.7	0.8

Diluted weighted average shares outstanding		41.8	41.6		41.8	41.5

Basic earnings per share	$	0.57	0.10	$	1.32	1.09

Diluted earnings per share	$	0.56	0.10	$	1.30	1.07

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

The following number of options to purchase shares of common stock was not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price:


	Three months ended June 30		Six months ended June 30
(number of options in millions)	2007	2006	2007	2006
Number of options	0.3	—	0.3	—

3. Comprehensive Income (Loss)

The components of comprehensive income (loss), net of related tax are as follows:


($ millions)	Three months ended June 30					Six months ended June 30
($ millions)	2007			2006		2007			2006
Net income	$	23.4		4.1		$	54.2		44.3
Change in unrealized holding gains, net of tax		(12.0	)	(15.3	)		(14.3	)	(24.6	)
Amortization of gain on derivative used in cash flow hedge		0.1		—			—		—
Amortization of pension and postretirement benefit obligations, net of tax		0.3		—			0.4		—

Comprehensive income (loss)	$	11.8		(11.2	)	$	40.3		19.7

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

4. Reinsurance

The following table provides a summary of the Company’s reinsurance transactions with other insurers and reinsurers, as well as reinsurance transactions with affiliates:


	Three months ended June 30					Six months ended June 30
($ millions)	2007			2006		2007			2006
Premiums earned:
Assumed from other insurers and reinsurers	$	1.6		1.8		$	3.1		3.9
Assumed under State Auto Pool and other affiliate arrangements		242.4		245.2			483.6		489.5
Ceded to other insurers and reinsurers		(4.5	)	(4.8	)		(9.0	)	(9.4	)
Ceded under State Auto Pool and other affiliate arrangements		(173.9	)	(171.2	)		(346.5	)	(341.2	)

Net assumed premiums earned	$	65.6		71.0		$	131.2		142.8

Losses and loss expenses incurred:
Assumed from other insurers and reinsurers	$	0.6		2.2		$	0.1		8.0
Assumed under State Auto Pool and other affiliate arrangements		151.4		185.3			286.8		304.4
Ceded to other insurers and reinsurers		(0.9	)	(1.3	)		(1.8	)	(1.1	)
Ceded under State Auto Pool and other affiliate arrangements		(102.9	)	(120.4	)		(200.5	)	(205.8	)

Net assumed losses and loss expenses incurred	$	48.2		65.8		$	84.6		105.5

5. Pension

and Postretirement Benefit Plans

The following table provides components of net periodic cost for the State Auto Group of Companies’ pension and postretirement benefit plans:


	Pension					Postretirement				Pension					Postretirement
	Three months ended June 30									Six months ended June 30
($ millions)	2007			2006		2007			2006	2007			2006		2007			2006
Service cost	$	2.2		2.5		$	1.4		1.2	$	4.5		5.0		$	2.8		2.4
Interest cost		3.1		2.9			1.8		1.5		6.2		5.8			3.6		3.1
Expected return on plan assets		(4.5	)	(4.3	)		(0.1	)	—		(9.0	)	(8.5	)		(0.1	)	(0.1	)
Amortization of prior service costs		0.1		0.1			0.1		0.1		0.2		0.2			0.2		0.2
Amortization of transition assets		(0.1	)	(0.1	)		—		—		(0.3	)	(0.3	)		—		—
Amortization of net loss		1.0		0.8			0.2		0.2		2.0		1.5			0.4		0.3

Net periodic cost	$	1.8		1.9		$	3.4		3.0	$	3.6		3.7		$	6.9		5.9

The Company expects to contribute approximately $11.5 million to its pension plan in 2007. As of June 30, 2007, this contribution had not been made.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

6. Share-Based Compensation

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”). The stock-based compensation plan for outside directors is the Outside Directors Restricted Share Unit Plan (the “Outside Directors RSU Plan”).

Equity Plan

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 during the three and six months ended June 30, 2007 and 2006 were 0.4 million and 0.3 million, respectively.

Outside Directors RSU 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. The RSU awards are fully vested upon grant. RSU awards represent the right to receive an amount, payable in cash or common shares of the Company, The Company accounts for the Outside Directors RSU Plan as a liability plan. In total, there were 11,200 and 9,800 RSUs granted for the three and six months ended June 30, 2007 and 2006, respectively.

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 during 2007 and 2006.


	2007			2006
Fair value per share	$	11.28		13.77
Expected dividend yield		1.35	%	1.10
Risk free interest rate		4.67	%	5.16
Expected volatility factor		32.49	%	33.64
Expected life in years		7.0		7.0

As of June 30, 2007, there was $7.4 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 3 years.

Aggregate intrinsic value for total options outstanding at June 30, 2007 is $21.5 million. Aggregate intrinsic value for total options exercisable at June 30, 2007 is $20.3 million. Compensation expense recognized during the three months ended June 30, 2007 and 2006 was $2.1 million and $2.4 million, respectively and for the six months ended June 30, 2007 and 2006 was $3.2 million and $3.6 million, respectively.

7. Segment Information

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 the 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,

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

other and product liability and workers’ compensation insurance to small to medium sized businesses within the commercial insurance market. The Company’s investable assets, the investment operations segment, are managed by Stateco Financial Services, Inc (“Stateco”), a subsidiary of the Company. The Company’s investment portfolio is comprised primarily of publicly traded fixed income and equity securities.

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 above, effective January 1, 2007. Prior reporting periods have been restated to conform to the new segment presentation.

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 U. S. 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.

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.

The all other category is attributable to three other operating segments of the Company, which individually are not material: management and operations services segment, a developer and seller of insurance-related software segment, and a property management and leasing segment.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

The following table provides financial information regarding the Company’s reportable segments for the periods ended June 30:


	Three months ended June 30					Six months ended June 30
($ millions)	2007			2006		2007			2006
Revenues from external sources:
Insurance segments
Personal insurance	$	152.6		153.9		$	304.2		308.5
Business insurance		100.7		102.8			201.0		204.3

Total insurance segments		253.3		256.7			505.2		512.8
Investment operations segment
Net investment income		20.6		20.6			41.8		41.0
Realized capital gains		3.5		1.4			4.7		0.5

Total investment operations segment		24.1		22.0			46.5		41.5
All other		1.3		1.3			2.5		2.5

Total revenues from external sources		278.7		280.0			554.2		556.8
Intersegment revenues		2.1		2.2			4.4		4.5

Total revenues		280.8		282.2			558.6		561.3
Reconciling items:
Intersegment expenses		(2.1	)	(2.2	)		(4.4	)	(4.5	)

Total consolidated revenues	$	278.7		280.0		$	554.2		556.8

Segment income (loss) before federal income tax:
Insurance segments:
Personal insurance SAP underwriting gain (loss)	$	4.7		(15.6	)	$	21.7		11.1
Business insurance SAP underwriting gain (loss)		4.9		(0.5	)		15.6		20.4

Total insurance segments		9.6		(16.1	)		37.3		31.5
Investment operations segment:
Net investment income		20.6		20.6			41.9		41.0
Realized capital gains		3.6		1.4			4.7		0.5

Total investment operations segment		24.2		22.0			46.6		41.5
All other segments		(0.7	)	(0.4	)		(1.4	)	(1.2	)

Total segment income before taxes		33.1		5.5			82.5		71.8
Reconciling items:
GAAP expense adjustments		(1.8	)	(3.1	)		(8.0	)	(10.5	)
Interest expense on corporate debt		(1.8	)	(1.9	)		(3.7	)	(3.7	)
Corporate expenses		(0.6	)	(0.7	)		(1.1	)	(1.1	)

Total consolidated income (loss) before federal income taxes	$	28.9		(0.2	)	$	69.7		56.5

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

Revenues from external sources for reportable segments include the following products and services for the period ended June 30:


	Three months ended June 30			Six months ended June 30
($ millions)	2007		2006	2007		2006
Revenues from significant reportable segments:
Insurance Segments – Premiums earned:
Standard personal auto	$	89.2	90.5	$	177.9	181.6
Nonstandard personal auto		10.9	11.4		21.6	23.2
Homeowners		46.8	46.2		93.3	92.2
Other personal		5.7	5.8		11.4	11.5

Total personal insurance		152.6	153.9		304.2	308.5
Commercial auto		24.4	25.2		48.8	50.4
Commercial multi-peril		21.7	22.0		43.5	43.6
Fire & allied lines		20.4	21.1		41.2	42.4
Other & product liability		19.2	19.7		38.1	38.5
Workers’ compensation		8.5	8.4		16.6	16.6
Other business		6.5	6.4		12.8	12.8

Total business insurance		100.7	102.8		201.0	204.3

Total premiums earned		253.3	256.7		505.2	512.8

Net investment income		20.6	20.6		41.9	41.0
Realized capital gain		3.6	1.4		4.7	0.5

Total investment operations		24.2	22.0		46.6	41.5

Total revenues from significant reportable segments	$	277.5	278.7	$	551.8	554.3

Investable assets attributable to the Company’s investment operations segment totaled $2,010.4 million at June 30, 2007 and $2,011.3 million at December 31, 2006.

8. Federal Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007, and as a result recognized no material adjustment in the liability for unrecognized income tax benefits. At June 30, 2007, the Company carried no balance for unrecognized tax benefits that it believes are uncertain tax positions.

During the year ended December 31, 2006, the Company recognized only de minimus amounts in interest and penalties. The Company had no accrual for the payment of interest and penalties at June 30, 2007 or December 31, 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 were settled in years prior to 2007. Tax years 2003 through 2006 remain open for audit.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

9. Subsequent Event

On July 12, 2007, the Company entered into a new credit agreement (“New Credit Agreement”) with a syndicate of lenders which provides for a $200.0 million five-year unsecured revolving credit facility (“New Credit Facility”). During the term of the New 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. The New Credit Facility will be available for general corporate purposes, including working capital, acquisitions and liquidity purposes. However, the Company currently intends to keep $100.0 million of the New Credit Facility available in the event there is a need to fund losses under the catastrophe reinsurance program with State Auto Property and Casualty Company. The New 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 New Credit Facility replaced the $100.0 million revolving credit facility in place through July 12, 2007, which was terminated in connection with entering into this New Credit Agreement. The New 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.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The term “State Auto Financial” as used below refers only to State Auto Financial Corporation and the terms “our Company,” “we,” “us,” and “our” as used below refer to State Auto Financial Corporation and its consolidated subsidiaries. The term “second quarter” as used below refers to the three months ended June 30 for the time period then ended. The term “SAP” as used below refers to Statutory Accounting Principles and the term “GAAP” as used below refers to U.S. Generally Accepted Accounting Principles.

The discussion and analysis presented below relates to the material changes in financial condition and results of operations for our consolidated balance sheets as of June 30, 2007 and December 31, 2006, and for the consolidated statements of income for the three-month and six-month periods ended June 30, 2007 and 2006. This discussion and analysis should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for our year ended December 31, 2006 (the “2006 Form 10-K”), and in particular the discussions in those sections thereof entitled “Executive Summary” and “Critical Accounting Policies.” Readers are encouraged to review the entire 2006 Form 10-K, as it includes information regarding our Company not discussed in this Form 10-Q. This information will assist in your understanding of the discussion of our current period financial results.

The discussion and analysis presented below includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology. Forward-looking statements speak only as of the date the statements were made. Although we believe that the expectations reflected in forward-looking statements have a reasonable basis, we can give no assurance that these expectations will prove to be correct. Forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. For a discussion of the most significant risks and uncertainties that could cause our actual results to differ materially from those projected, see “Risk Factors” in Item 1A of the 2006 Form 10-K, which information is incorporated in this Form 10-Q by reference, updated by Part II, Item 1A of this Form 10-Q. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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 have now established integrated personal and business insurance teams with product, profit and production responsibilities for their respective areas. We also recognize that our insurance segments’ pricing of products is risked-based and should not rely on returns from our invested assets to support underwriting results. Consequently, beginning with first quarter 2007, our significant reportable segments became 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. Financial information about our segments for 2007 is set forth in Note 7 of our Company’s Condensed Consolidated Financial Statements included in Item 1 of the Form 10-Q. Prior period segment information has been restated to conform to current period presentation.

RESULTS OF OPERATIONS

During the three- and six-month periods ended June 30, 2007, net income was $23.4 million and $54.2 million, respectively, as compared to $4.1 million and $44.3 million, respectively for the same 2006 periods. Income (loss) before federal income taxes for the three- and six-month periods ended June 30, 2007 was $28.9 million and $69.7 million, respectively, as compared to $(0.2) million and $56.5 million, respectively for the same 2006 periods. The improvement for the quarter and first six months of 2007 was primarily the result of a reduction in catastrophe losses compared to the same periods a year ago. Our GAAP loss and loss expense ratio for the three- and six-month periods ended June 30, 2007 was 63.3% and 60.1%, respectively, as compared to 75.6% and 62.7%, respectively for the same 2006 periods.

The following table summarizes certain key performance metrics for the three- and six-month periods ended June 30, 2007 and 2006 that we use to monitor our financial performance:


	Three months ended June 30					Six months ended June 30
($ millions, except per share amounts)	2007			2006		2007			2006
GAAP Basis:
Total revenue	$	278.7		280.0		$	554.2		556.8
Net income	$	23.4		4.1		$	54.2		44.3
Stockholders’ equity	$	871.7		786.9		$	871.7		786.9
Book value per share ⁽¹⁾	$	21.17		19.25		$	21.17		19.25
Loss and LAE ratio ⁽²⁾		63.3	%	75.6	%		60.1	%	62.7	%
Expense ratio ⁽²⁾		33.4	%	31.5	%		33.9	%	32.8	%
Combined ratio ⁽²⁾		96.7	%	107.1	%		94.0	%	95.5	%
Catastrophe loss and LAE points		8.2		23.3			5.7		13.5
Premium written growth		0.0	%	(2.4	%)		(0.3	%)	(2.9	%)
Premium earned growth		(1.3	%)	(2.7	%)		(1.5	%)	(2.7	%)
Investment yield		4.2	%	4.4	%		4.3	%	4.4	%


	Three months ended June 30				Six months ended June 30
	2007		2006		2007		2006
SAP Basis:
Loss and LAE ratio ⁽³⁾	62.7	%	75.0	%	59.5	%	62.1	%
Expense ratio ⁽³⁾	31.7	%	30.0	%	32.5	%	31.5	%
Combined ratio ⁽³⁾	94.4	%	105.0	%	92.0	%	93.6	%

					Twelve months ended June 30
					2007		2006
Net premiums written to surplus ⁽⁴⁾					1.1		1.4

⁽¹⁾

At June 30, 2007, accumulated other comprehensive loss, a component of stockholders’ equity included a loss of $63.6 million which reduced book value per share $1.54 for the impact of 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)”, which we adopted at December 31, 2006.

⁽²⁾	Defined below.

⁽³⁾

SAP loss and LAE ratio is 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.

⁽⁴⁾	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 a company’s statutory surplus available to absorb losses.

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 ratios, 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 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 our 2006 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 three- and six-month periods ended June 30, 2007 and 2006:

Three months ended

June 30, 2007

($ millions)

Personal

Ratio

Business

Ratio

Total

Ratio

Net written premiums

159.7

107.9

267.6

Net earned premiums

152.6

100.7

253.3

Losses and loss expenses

102.2

66.9

56.7

56.3

158.8

62.7

Underwriting expenses

45.7

28.6

39.1

36.3

84.8

31.7

SAP underwriting gain and SAP combined ratio

4.7

95.5

4.9

92.6

9.6

94.4


	Three months ended June 30, 2006
($ millions)	Personal			% Ratio	Business			% Ratio	Total			% Ratio
Net written premiums	$	158.9			$	108.8			$	267.7
Net earned premiums		153.9				102.8				256.7
Losses and loss expenses		126.8		82.4		65.6		63.8		192.4		75.0
Underwriting expenses		42.7		26.9		37.7		34.6		80.4		30.0

SAP underwriting loss and SAP combined ratio	$	(15.6	)	109.3	$	(0.5	)	98.4	$	(16.1	)	105.0

Six months ended

June 30, 2007

($ millions)

Personal

Ratio

Business

Ratio

Total

Ratio

Net written premiums

304.4

210.7

515.1

Net earned premiums

304.2

201.0

505.2

Losses and loss expenses

193.6

63.6

107.1

53.3

300.7

59.5

Underwriting expenses

88.9

29.2

78.3

37.2

167.2

32.5

SAP underwriting gain

and SAP combined ratio

21.7

92.8

15.6

90.5

37.3

92.0


	Six months ended June 30, 2006
($ millions)	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Net written premiums	$	305.5		$	211.3		$	516.8
Net earned premiums		308.5			204.3			512.8
Losses and loss expenses		211.5	68.6		106.9	52.3		318.4	62.1
Underwriting expenses		85.9	28.1		77.0	36.4		162.9	31.5

SAP underwriting gain and SAP combined ratio	$	11.1	96.7	$	20.4	88.7	$	31.5	93.6

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 39.2% of our total consolidated net written premium at June 30, 2007.

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 2007 and 2006:


	Three months ended June 30					Six months ended June 30
	2007		2006	% Change		2007		2006	% Change
($ millions)	Net Written Premiums
Personal insurance segment:
Standard Auto	$	91.6	91.8	(0.2	)	$	179.8	181.9	(1.2	)
Nonstandard Auto		10.0	9.9	1.0			22.3	22.6	(1.3	)
Homeowners		52.0	51.2	1.6			90.6	89.7	1.0
Other personal		6.1	6.0	1.7			11.7	11.3	3.5

Total personal	$	159.7	158.9	0.5		$	304.4	305.5	(0.4	)


	Net Earned Premiums
Personal insurance segment:
Standard auto	$	89.2	90.5	(1.4	)	$	177.9	181.6	(2.0	)
Nonstandard auto		10.9	11.4	(4.4	)		21.6	23.3	(7.3	)
Homeowners		46.8	46.2	1.3			93.3	92.2	1.2
Other personal		5.7	5.8	(1.7	)		11.4	11.4	—

Total personal	$	152.6	153.9	(0.8	)	$	304.2	308.5	(1.4	)

In total, the personal insurance segment net written premium for the first six months of 2007 decreased $1.1 million compared to the same period a year ago. This decrease is attributable to some modest price reductions taken to address competitive concerns as well as a reflection of favorable loss trends. In particular, competition remains intense in the personal auto arena, which is contributing to the small decline in written premium. It remains our strategy that rates be cost-based, reflecting the underlying loss and expense trends. Second quarter 2007 net written premiums were $0.8 million above second quarter 2006, reflecting an improving premium trend. Personal auto policy counts have increased from year end, while counts for other personal products have remained stable.

Net written premiums for our standard auto products decreased 0.2% and 1.2% for the three- and six-months ended June 30, 2007, respectively, compared to the same periods a year ago. We continue to focus on attracting new business to our standard personal auto line. 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. By having price points for a larger percentage of the personal auto market, we expect an increase in new business opportunities. As of the end of second quarter 2007, we had introduced CustomFit ^SM in 20 states, which represented approximately 82% 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. We continue to refine CustomFit ^SM and introduced the second generation of this product into our first state in 2007 with additional states to follow before year-end. This second generation product includes approximately 300 additional price points to further improve rating sophistication.

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 the second quarter we introduced two new “real time” comparative rating tools which can be used by our agents to prepare comparative rate quotes from multiple insurance companies by entering the rating information only one time. We believe agents will quote and write more personal standard and nonstandard auto with us as a result of a more efficient quoting process. Easier rating processes 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 are expected to produce more new business opportunities.

Net written premiums for nonstandard personal auto increased 1.0% in the second quarter 2007 compared to the same 2006 period and decreased 1.3% for the first six months of 2007 compared to the same 2006 period. Nonstandard personal auto production continues to improve. During the past quarter, new business premium increased compared to the same period a year earlier. The impact of targeted rate decreases coupled with the introduction of new discounts has produced an improving premium situation. During the first half of 2007, nonstandard auto policy counts increased.

Homeowners net written premium increased 1.6% and 1.0% in the three and six months ended June 30, 2007, respectively as compared to the same 2006 periods. We have undertaken new homeowners pricing and product initiatives, such as various new home discounts that complement our CustomFit ^SM automobile rollout. Homeowner policy counts were down slightly during the first half of 2007, but new business policy premiums increased in each of the first two quarter of 2007.

During the first half of 2007, we continued to enhance our personal lines point of sale portal, netXpress ^TM , by adding several new integration options with a variety of third party tools used by our independent agents. 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 us with respect to bill payment and claim reporting and settlement. In December 2006, we expanded our premium payment method options to include credit and debit card payment options via www.stateauto.com. During the first half of 2007, we received over 80,000 payments through our website. Late in the second quarter, we also 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.

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 this state’s personal lines insurance market beginning with January 1, 2008 renewals. After 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. We will continue to write commercial lines business in Florida. See the “Regulation – Rates and Related Regulation” section included in Item 1 of our 2006 Form 10-K for a further discussion of the Florida regulatory changes.

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 for our business insurance segment for 2007 and 2006:


	Three months ended June 30					Six months ended June 30
	2007		2006	% Change		2007		2006	% Change

($ millions)	Net Written Premiums
Business insurance segment:
Commercial auto	$	26.4	27.3	(3.3	)	$	51.7	53.1	(2.6	)
Commercial multi-peril		22.5	23.1	(2.6	)		44.3	44.8	(1.1	)
Fire & allied lines		21.0	21.2	(0.9	)		41.3	41.4	(0.2	)
Other & product liability		20.6	20.9	(1.4	)		41.0	40.8	0.5
Workers’ compensation		10.3	9.4	9.6			18.5	17.7	4.5
Other commercial		7.1	6.9	2.9			13.9	13.5	3.0

Total business	$	107.9	108.8	(0.8	)	$	210.7	211.3	(0.3	)


	Net Earned Premiums
Business insurance segment:
Commercial auto	$	24.4	25.2	(3.2	)	$	48.8	50.4	(3.2	)
Commercial multi-peril		21.7	22.0	(1.4	)		43.5	43.6	(0.2	)
Fire & allied lines		20.4	21.1	(3.3	)		41.2	42.4	(2.8	)
Other & product liability		19.2	19.7	(2.5	)		38.1	38.5	(1.0	)
Workers’ compensation		8.5	8.4	1.2			16.6	16.6	(0.0	)
Other commercial		6.5	6.4	1.6			12.8	12.8	(0.0	)

Total business	$	100.7	102.8	(2.0	)	$	201.0	204.3	(1.6	)

The business insurance segment net written premium for second quarter 2007 decreased slightly in comparison to the same 2006 period. Business insurance continues to be impacted by rate competition as well as 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.

We continue to invest in products, processes and systems that we believe will increase our writings in the small business sector. We have broadened the marketability of our business owners product by making it available for more types of businesses by increasing the exposure value per location we insure, and adding 31 new retail and distributor classifications. In addition, we have developed several risk specific packages which will make our business owners product easier to present to prospects. We are also pursuing a more granular pricing structure that we believe will help us price risks more accurately and improve account retention. To strengthen our ability to compete for small retail, wholesale and office accounts, we introduced a new workers’ compensation tier that specifically targets these low-hazard operations.

We also continue to enhance our back office systems which enable us to more effectively support our 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, we introduced bizXpress ^SM , our web-based quote and issuance system for business owners policies, to the first two states during the second quarter. We plan to make bizXpress ^SM available in 27 more states by the end of the year. In addition, we plan to add our workers’ compensation and business auto products to bizXpress ^SM . 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. In the second quarter 2007, we also introduced our business owners product in Arizona and Colorado, strengthened our underwriting staff with additional loss control positions, and obtained the endorsement of three new state business associations.

Losses and Expenses

Our GAAP loss and LAE ratio was 63.3% and 60.1% for the three and six months ended June 30, 2007, respectively as compared to 75.6% and 62.7% for the same 2006 periods. The improvement in the 2007 ratios was primarily due to a reduction in catastrophe losses.

Catastrophe losses for the three and six months ended June 30, 2007 totaled $20.7 million (8.2 loss ratio points) and $28.8 million (5.7 loss ratio points) compared to $59.8 million (23.3 loss ratio points) and $69.4 million (13.5 loss ratio points) in the same 2006 periods. During the second quarter of 2007, our catastrophe losses resulted primarily from wind and hail in Ohio, Minnesota, and Wisconsin and mostly impacted our homeowners business. In addition, we experienced adverse development on prior year weather related catastrophes. Catastrophe activity during the second quarter of 2007 was less intense than second quarter of 2006 in which we experienced wind and hail storms throughout our Midwestern operating states. The 2006 storms had a significant impact on both our personal and business insurance property lines. Catastrophe losses discussed herein include 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 by major line of business for 2007 and 2006:


	SAP Loss and LAE Ratios
	Three months ended June 30				Six months ended June 30
	2007	2006	Improve (Deteriorate)		2007	2006	Improve (Deteriorate)
Personal insurance segment:
Standard auto	57.7	57.2	(0.5	)	61.7	56.6	(5.1	)
Nonstandard auto	65.9	60.8	(5.1	)	63.7	59.6	(4.1	)
Homeowners	86.9	133.8	46.9		71.5	94.2	22.7
Other personal	50.1	108.8	58.7		30.1	70.2	40.1
Total personal	66.9	82.4	15.5		63.6	68.6	5.0
Business insurance segment:
Commercial auto	49.2	38.7	(10.5	)	49.5	34.5	(15.0	)
Commercial multi-peril	59.7	75.6	15.9		58.1	58.3	0.2
Fire & allied lines	53.0	110.6	57.6		54.6	86.0	31.4
Other & product liability	45.3	40.5	(4.8	)	42.7	35.3	(7.4	)
Workers’ compensation	113.1	63.4	(49.7	)	93.6	45.7	(47.9	)
Other commercial	39.5	40.2	0.7		26.1	50.4	24.3
Total business	56.3	63.8	7.5		53.3	52.3	(1.0	)
Total SAP personal & business	62.7	75.0	12.3		59.5	62.1	2.6

The personal insurance segment’s loss ratio for 2007 second quarter was 15.5 points better than the same 2006 period. Catastrophes accounted for 11.8 loss ratio points in the 2007 second quarter compared to 29.5 loss ratio points in the same 2006 period. Standard auto results closely tracked our experience from the comparable prior year period . Our nonstandard auto loss ratios deteriorated but remained within acceptable ranges. Homeowners results were substantially better than last year due primarily to a decrease in catastrophe losses during the quarter. The catastrophe impact to the homeowners’ loss ratio for the second quarter 2007 was 32.0 points compared to 79.1 points in the same 2006 period.

For the first six months of 2007 the personal insurance segment loss ratio was 5.0 points better than for the same 2006 period. Catastrophes accounted for 8.1 loss ratio points in the first half of 2007 compared to 16.0 points in the same 2006 period. Excluding the impact of catastrophes, the personal lines loss ratio for the six months of 2007 was 2.9 loss ratio points higher than for the same 2006 period. The increase in both the standard and nonstandard auto loss ratios can be attributed mostly to the rate reductions taken in 2006 as well as to an increase in the average severity of claims. The improvement in the homeowners loss ratio can be attributed primarily to the reduction of catastrophe losses. For the first six months of 2007, catastrophes added 23.0 points to the homeowners loss ratio compared to 43.1 points for the same 2006 period.

The 2007 second quarter loss ratio for the business insurance segment improved 7.5 loss ratio points from the same 2006 period. Property lines performed substantially better, resulting from more normal catastrophe experience. Catastrophes accounted for 2.6 loss ratio points in the 2007 second quarter compared to 14.0 loss ratio points in the same 2006 period. Results for business automobile, commercial multi peril, other property and liability lines, except for workers’ compensation, continue to produce strong results. Our workers’ compensation line of business, which comprises approximately 3.6% of our book of business, produced a loss for the quarter. Frequency for this line of business is flat, but we have experienced a modest rise in severity, primarily related to coverage for lost income. Medical severity is up somewhat, but not significantly. The cause for the significant loss ratio increase for workers’ compensation was unfavorable development on case reserves from prior years. Overall, business insurance, with the exception of workers’ compensation, had a strong performance during the second quarter.

The business insurance segment’s loss ratio for the first six months of 2007 was 1.0 point higher than for the same 2006 period. Catastrophes accounted for 2.0 loss ratio points in the first half of 2007 compared to 9.8 points in the first half of 2006. Excluding the impact of catastrophes, the business lines loss ratio for the first six months of 2007 was 8.7 points higher than for the same 2006 period. Worsening workers’ compensation results accounts for 3.9 points of the increase. The remaining increase is attributed to various other business lines reflecting rate reductions in 2006 along with normal fluctuations in the loss ratios between reporting periods.

Loss and loss expenses payable by major line of business at June 30, 2007 and December 31, 2006, respectively, are shown in the following table:


($ millions)	June 30, 2007		December 31, 2006	$ Change
Personal insurance segment:
Standard auto	$	170.1	171.8	(1.7	)
Nonstandard auto		20.1	21.6	(1.5	)
Homeowners		68.4	57.1	11.3
Other personal		8.1	7.6	0.5

Total personal		266.7	258.1	8.6
Business insurance segment:
Commercial auto		78.7	82.0	(3.3	)
Commercial multi-peril		80.3	79.2	1.1
Fire & allied lines		21.3	21.8	(0.5	)
Product & other liability		128.1	127.7	0.4
Workers’ compensation		88.3	85.6	2.7
Other business		6.0	6.6	(0.6	)

Total business		402.7	402.9	(0.2	)

Total losses and loss expenses payable net of reinsurance recoverable on losses and loss expenses payable	$	669.4	661.0	8.4

As shown in the table above, there was an $8.4 million increase in total loss and loss expense reserves during the first half of 2007. The increase relates primarily to the homeowners line which was impacted by second quarter 2007 catastrophes that occurred near the end of the quarter and that had not settled and the workers’ compensation line where we experienced adverse case reserve development on several prior year claims. We conduct periodic reviews of loss development reports and make judgments in determining the reserves for ultimate losses and loss expenses payable. Several factors are considered by us when estimating ultimate liabilities including consistency in relative case reserve adequacy, consistency in claims settlement practices, recent legal developments, historical data, actuarial projections, accounting projections, exposure changes, anticipated inflation, current business conditions, catastrophe developments, late reported claims, and other reasonableness tests.

The risks and uncertainties inherent in our estimates include, but are not limited to, actual settlement experience different from historical data, trends, changes in business and economic conditions, court decisions creating unanticipated liabilities, ongoing interpretation of policy provisions by the courts, inconsistent decisions in lawsuits regarding coverage and additional information discovered before settlement of claims. Our results of operations and financial condition could be impacted, perhaps significantly, in the future if the ultimate payments required to settle claims vary from the liability currently recorded. For a discussion of our reserving methodologies as well as a measure of sensitivity discussion see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Other,” “Loss Reserves” in Item 7 of the 2006 Form 10-K.

Acquisition and operating expenses, as a percentage of earned premiums (“GAAP expense ratio”) were 33.4% and 33.9% for the three and six months ended June 30, 2007, respectively, as compared to 31.5% and 32.8% in the same 2006 periods. Our second quarter 2007 ratio was higher than the comparable period in 2006 primarily due to agent and employee bonuses, which are related to our level of profitability, which was lower in the second quarter of 2006. The increase in the 2007 six month expense ratio relates mostly to the agent bonuses as well as an increase in expenses associated with technological and process improvement initiatives.

Investment Operations Segment

Our investment portfolio and the investment portfolios of our parent, State Automobile Mutual Insurance Company (“State Auto Mutual”) and its subsidiaries are managed by our subsidiary Stateco Financial Services, Inc. (“Stateco”). The Investment Committee of the Board of Directors of each of our insurers sets investment policies to be followed by Stateco.

At June 30, 2007, all investments in fixed maturity and equity securities 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. Our current investment strategy does not rely on the use of derivative financial instruments. Our Investment Policy and Guidelines permit investment in debt issues rated A, or better, by two major rating services. Our fixed maturities portfolio is composed of high quality, investment grade issues, comprised almost entirely of debt issues rated AAA or AA. At June 30, 2007, we had no fixed maturity investments rated below investment grade, nor any mortgage loans. 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

For further discussion regarding management of investment portfolio see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Other,” “Investments,” “Overview” and “Market Risk” in Item 7 of the 2006 Form 10-K.

Composition of Investment Portfolio

The following table provides the composition of our investment portfolio at fair market value at June 30, 2007 and December 31, 2006, respectively:


($ millions)	June 30, 2007				December 31, 2006
Fixed maturities, at fair value	$	1,691.0	85.2	%	1,647.4	85.0
Equity securities, at fair value		287.3	14.5		284.2	14.7
Other invested assets		5.7	0.3		6.3	0.3

Total investments	$	1,984.0	100.0	%	1,937.9	100.0

The amortized cost and fair value of fixed maturities at June 30, 2007, by contractual maturity, are as follows:


($ millions)	Amortized Cost		Fair Value
Due in 1 year or less	$	6.2	6.2
Due after 1 year through 5 years		54.0	53.8
Due after 5 years through 10 years		338.8	342.4
Due after 10 years		1,106.9	1,095.2
Mortgage-backed securities		199.2	193.4

Total	$	1,705.1	1,691.0

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.

During 2004, with our improving loss experience, we began allocating a higher proportion of new monies and reinvestments to tax-exempt fixed maturities. 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 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 2007 first quarter.

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 at June 30, 2007, and confirmed our intent to hold the remaining securities until either recovery of fair value or maturity.

The following table provides a breakdown of our investment relative to our targeted allocated percentages provided above at June 30, 2007 and December 31, 2006. Note that we measure our investment portfolio allocation with fixed maturities at amortized cost and equities at fair value.


($ millions)	June 30, 2007		% of Total	December 31, 2006	% of Total
Taxable fixed maturities (amortized cost)	$	296.9	14.7	400.8	20.0
Tax-exempt fixed maturities (amortized cost)		1,408.2	69.5	1,229.8	61.7
Equities (fair value)		287.3	14.2	284.2	14.2
Other invested assets		5.7	0.3	6.3	0.3
Cash and cash equivalents		26.4	1.3	73.4	3.7

Total portfolio	$	2,024.5	100.0	1,994.5	100.0

Investment Operations Revenue

Net investment income for the three and six months ended June 30, 2007 was the same as the comparable 2006 periods. In 2007 our average invested assets increased due to our insurance segments’ favorable underwriting cash flows. However, our return on investments declined due to rebalancing our bond 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 the three- and six-months periods ended June 30, 2007 was $18.0 million (12.4% effective tax rate) and $36.2 million (13.5% effective tax rate), respectively, as compared to $17.3 million (16.1% effective tax rate) and $34.3 million (16.2% effective tax rate) for the same 2006 periods.


	Three months ended June 30				Six months ended June 30
($ millions)	2007			2006	2007			2006
Gross investment income:
Fixed income securities	$	18.7		18.2	$	37.5		36.5
Equity securities		1.4		1.1		2.8		2.2
Other		0.9		1.9		2.5		3.1

Total gross investment income		21.0		21.2		42.8		41.8
Investment expenses		0.4		0.6		0.9		0.9

Net investment income	$	20.6		20.6	$	41.9		40.9

Average invested assets (at cost)	$	1,973.6		1,880.1	$	1,962.6		1,872.2
Annualized investment yield		4.2	%	4.4		4.3	%	4.4
Annualized investment yield after tax		3.7	%	3.7		3.7	%	3.7

Realized gains and losses on investment sales for three- and six-month periods ended June 30, 2007 are summarized as follows:


	Three months ended June 30, 2007					Six months ended June 30, 2007
($ millions)	Realized Gains (Losses)			Proceeds Received on Sale		Realized Gains (Losses)			Proceeds Received On Sale
Realized gains:
Fixed maturities	$	0.2		$	14.9	$	0.6		$	57.0
Equity securities		3.9			10.6		6.9			24.7

Total realized gains		4.1			25.5		7.5			81.7
Realized losses:
Fixed maturities		—			—		(1.3	)		70.4
Equity securities		(0.5	)		7.3		(1.5	)		12.4

Total realized losses		(0.5	)		7.3		(2.8	)		82.8

Net realized gains on investments	$	3.6		$	32.8	$	4.7		$	164.5

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. The proceeds from these sales were mostly reinvested into equity securities of other companies. The realized gains on the fixed income portfolio were achieved by selling shorter-term municipal bonds and subsequently reinvesting those funds into longer dated municipal bonds as well as selling of taxable securities to reinvest into the tax-exempt fixed securities as described above. For the six- month period ended June 30, 2007, the realized losses on the fixed maturities related primarily to selling taxable securities to support our shift into tax-exempt securities. The realized losses 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.

We regularly monitor our investment portfolio for declines in value that are other-than-temporary, an assessment which requires significant management judgment regarding the evidence known. Such judgments could change in the future as more information becomes known which could negatively impact the amounts reported herein. Among the factors that management considers 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. We recognized no other-than-temporary impairments in second quarter 2007 versus $1.1 million in the same 2006 period. For the six months ended June 30, 2007, we recognized no other-than-temporary impairments compared to $5.4 million for the same 2006 period. 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 June 30, 2007 determined that there were no other-than-temporary impairments in the gross unrealized holding losses, as provided in the table below, due to the evidence that exists indicating temporary impairment. In addition, there were no 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 were also no individually material securities with an unrealized holding loss at June 30, 2007.

The following table provides detailed information on our investment portfolio for our gross unrealized gains and losses at June 30, 2007:


($ millions, except # of positions)	Cost or amortized cost		Gross unrealized holding gains		Number of gain positions	Gross unrealized holding losses			Number of loss positions	Fair Value
Investment Category:
Fixed Maturities:
U.S. Treasury securities	$	85.0	$	0.1	8	$	(1.3	)	39	$	83.8
States & political subdivisions		1,408.2		12.1	269		(19.4	)	374		1,400.9
Corporate securities		12.7		0.3	8		(0.1	)	5		12.9
Mortgage-backed securities of U.S. Gov. Agencies		199.2		1.3	10		(7.1	)	61		193.4

Total fixed maturities		1,705.1		13.8	295		(27.9	)	479		1,691.0
Equity Securities:
Consumer		75.0		18.4	29		(0.3	)	2		93.1
Technologies		18.0		5.0	8		—		—		23.0
Pharmaceuticals		7.0		0.5	2		(0.1	)	1		7.4
Financial services		53.4		20.4	22		(0.0	)	1		73.8
Manufacturing & other		71.4		18.6	27		(0.0	)	2		90.0

Total equity securities		224.8		62.9	88		(0.4	)	6		287.3
Other invested assets		4.7		1.0	4		—		—		5.7

Total investments	$	1,934.6	$	77.7	387	$	(28.3	)	485	$	1,984.0

Other Income Statement Items

Interest expense on our debt was $1.8 million and $3.7 million versus $1.9 million and $3.7 million for the three and six months ended June 30, 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 three- and six-month periods ended June 30, 2007, the effective tax rate was 19.0% and 22.2%, respectively, as compared to (2,085.2)% and 21.6% for the same 2006 periods. As previously discussed, the effective tax rate on net investment income declined to 12.4% and 13.5%, respectively for three and six months ended June 30, 2007 versus 16.1% and 16.2% in the same 2006 periods due to our decision to increase our position in tax-exempt securities.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to our ability to generate adequate amounts of cash to meet our needs to pay 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 (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 are appropriately structured to enable our insurance subsidiaries to meet anticipated short and long-term cash requirements without the need to sell investments to meet fluctuations in claim payments.

At June 30, 2007 and December 31, 2006, we had $26.4 million and $73.4 million, respectively, of cash and cash equivalents and $1,984.0 million and $1,937.9 million, respectively, of total investments at fair market value. Substantially all of our fixed maturity and equity securities are traded on public markets.

Net cash provided by operating activities was $24.5 million during the first six months of 2007 versus $24.2 million for the same 2006 period. Premium collections were lower during the first six months of 2007 compared to the same 2006 period. However loss and expenses paid in the first half of 2007 were lower than during the first half of 2006, netting to similar cash from operations for both periods.

Net cash used in investing activities was $65.3 million during the first six months of 2007 compared to $18.4 million in the same 2006 period. The increased cash flow in 2007 was primarily due to the $50.0 million fixed securities repositioning program described above that occurred during the 2006 fourth quarter. At the beginning of 2007, we had $44.7 more in cash than at the beginning of 2006 as the reinvestment into tax-exempt securities of proceeds resulting from the 2006 fourth quarter action had not been completed until the 2007 first quarter.

Net cash used in financing activities was $6.2 million during the first six months of 2007 compared to $0.7 million during the same 2006 period. Contributing to this change in cash flows were fewer stock option exercises during the second quarter of 2007 which resulted in $2.3 million less in proceeds along with a related $2.3 million cash flow decline in tax benefits. Our quarterly shareholder dividend rate for the six months ended June 30, 2007 was $0.20 per share compared to $0.18 per share from the same 2006 period.

Borrowing Arrangements

The following provides an overview of our borrowing arrangements during 2007 and outstanding at June 30, 2007.

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 State Auto Financial’s subsidiaries and thereby are effectively subordinated to all State Auto Financial’s subsidiaries’ existing and future indebtedness. As of June 30, 2007, State Auto Financial was 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 has issued to the Capital Trust $15.5 million aggregate principal amount of unsecured Floating Rate Junior Subordinated Debt Securities due 2033 (the “Subordinated Debentures”). The sole assets of the Capital Trust are the Subordinated Debentures and any interest accrued thereon. Interest on the Capital Trust’s capital and common securities is payable quarterly at a rate equal to the three-month LIBOR rate plus 4.20%, adjusted quarterly. The applicable interest rates for the periods January 2006 through June 30, 2007 ranged from 8.61% to 9.60%.

Credit Agreement

Through July 12, 2007, State Auto Financial had a Credit Agreement (the “Credit Agreement”) with a syndicate of lenders which provided for a $100.0 million five-year unsecured revolving credit facility (the “Credit Facility”). Interest was based on a London interbank market rate or a base rate plus a calculated margin amount. In addition to requiring the payment of a monthly fee to maintain availability of funds, the Credit Agreement contained certain covenants, including financial covenants that required us to (i) maintain a minimum net worth, (ii) not exceed a certain debt to capitalization ratio and (iii) not go below a certain fixed charge coverage ratio. State Auto Financial intended to use the funds available under the Credit Agreement in connection with its catastrophe reinsurance program with State Auto Property & Casualty Insurance Company (“State Auto P&C”). State Auto Financial did not borrow any funds under the Credit Agreement. As of June 30, 2007, State Auto Financial was in compliance with all of the covenants under the Credit Agreement.

On July 12, 2007, State Auto Financial terminated the Credit Agreement and entered into a new credit agreement (“New Credit Agreement”) with a syndicate of lenders which provides for a $200.0 million five-year unsecured revolving credit facility (“New Credit Facility”). During the term of the New 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 New 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 New 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 herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Reinsurance Arrangements” in Item 7 of the 2006 Form 10-K. The New 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 New 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.

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. For a discussion of our reinsurance arrangements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Reinsurance Arrangements” in Item 7 of the 2006 Form 10-K.

For the first two quarters of 2007, there were no material changes in our reinsurance arrangements since December 31, 2006. As of July 1, 2007 we made revisions to our casualty excess of loss program. Coverage under the casualty excess of loss program was expanded as of July 1, 2007, so that reinsurers are responsible for 100% of the excess over $2 million up to $5 million of covered loss, compared to 95% under the previous program. Our property per risk, property catastrophe excess of loss, intercompany catastrophe reinsurance agreement, workers’ compensation excess of loss and workers’ compensation catastrophe excess of loss programs were also renewed, as is usual and customary annually, as of July 1, 2007 with no material revisions. Overall, the changes to these programs will result in a modest decrease in cost that is not expected to be material to our quarter or year to date results of operations.

Regulatory Considerations

At June 30, 2007, all of our insurance subsidiaries were in compliance with statutory requirements relating to capital adequacy.

MARKET RISK

With respect to Market Risk, see the discussion regarding this subject at “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Other,” “Investments,” “Market Risk” in Item 7 of the 2006 Form 10-K. There have been no material changes from the information reported regarding Market Risk in the 2006 Form 10-K.

Item 3. Quantitative and Qualitative Disclosure of Market Risk

The information called for by this item is provided under the caption “Market Risk” under Item 2 – Management’s Discussion and Analysis of Financial Condition.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

With the participation of our principal executive officer and principal financial officer, our management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report:

Information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission;

Information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; and

Our disclosure controls and procedures are effective in timely making known to them material information required to be included in our periodic filings with the Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in the 2006 Form 10-K under Part I, Item 1A – Risk Factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities


Period	Total Number of Shares Purchased * (in whole numbers)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased under the Plans or Programs
04/01/07 thru 04/30/07	4,264	$	33.21	—	—
05/01/07 thru 05/31/07	1,710		29.81	—	—
06/01/07 thru 06/30/07	3,418		30.94	—	—

Total	9,392	$	31.73	—	—

*	All shares repurchased were acquired as a result of stock swap option exercises.

Item 3. Defaults Upon Senior Securities

None.

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

The annual meeting of shareholders of State Auto Financial Corporation was held on May 4, 2007. The total shares represented at the meeting were 39,281,833 common shares. This constituted 95.6% of the Company’s 41,079,773 common shares outstanding as of March 9, 2007, the record date for the determination of shareholders entitled to notice of and to vote at the annual meeting. Items below without broker non-vote counts are considered routine matters, and broker non-votes do not apply to routine matters. At the annual meeting, the shareholders voted on the following proposals:

1.	The election of Robert E. Baker, Thomas E. Markert, and Alexander B. Trevor as Class I directors, each to hold office until the 2010 annual meeting of shareholders and until a successor is elected and qualified, with each director nominee receiving the votes indicated:


	Number of Votes
	For	Withheld
Robert E. Baker	39,078,108	203,726
Thomas E. Markert	39,078,664	203,170
Alexander B. Trevor	33,801,272	5,480,561

On the basis of this vote, each of Robert E. Baker, Thomas E. Markert, and Alexander B. Trevor was elected as a Class I director to serve until the 2010 annual meeting and until a successor is elected and qualified.

2.	A proposal to approve an Amendment to the Company’s 1991 Employee Stock Purchase and Dividend Reinvestment Plan and Trust.


For the Proposal	Opposed to Proposal	Abstain	Broker Non-Vote
36,666,163	122,668	416,999	2,076,033

On the basis of this vote, the proposal to approve the Amendment to the Company’s 1991 Employee Stock Purchase and Dividend Reinvestment Plan and Trust was adopted by the shareholders.

3.	A proposal to approve the material terms of Company’s Leadership Bonus Plan.


For the Proposal	Opposed to Proposal	Abstain
35,910,051	2,939,286	432,493

On the basis of this vote, the proposal to approve the material terms of the Company’s Leadership Bonus Plan was adopted by the shareholders.

4.	A proposal to approve the material terms of the Company’s Long-Term Incentive Plan.


For the Proposal	Opposed to Proposal	Abstain	Broker Non-Vote
34,361,567	2,413,828	430,436	2,076,002

On the basis of this vote, the proposal to approve the material terms of the Company’s Long-Term Incentive Plan was adopted by the shareholders.

5.	A proposal to ratify the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for 2007.


For the Proposal	Opposed to Proposal	Abstain
37,206,262	2,052,682	22,887

On the basis of this vote, the proposal to ratify the selection of Ernst & Young LLP as the Company’s independent public accountants for 2007 was adopted by the shareholders.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.		Description of Exhibits

10.64		State Auto Financial Corporation Leadership Bonus Plan

10.65		State Auto Financial Corporation Long-Term Incentive Plan

10.66		First Amendment to the Reinsurance Pooling Agreement Amended and Restated as of January 1, 2005

10.67		First Amendment to Management and Operations Agreement Amended and Restated as of January 1, 2005

10.68		Employment Agreement 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

31.01		CEO certification required by Section 302 of Sarbanes Oxley Act of 2002

31.02		CFO certification required by Section 302 of Sarbanes Oxley Act of 2002

32.01		CEO certification required by Section 906 of Sarbanes Oxley Act of 2002

32.02		CFO certification required by Section 906 of Sarbanes Oxley Act of 2002

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


				State Auto Financial Corporation

Date: August 7, 2007				/s/ Steven E. English
				Steven E. English
				Chief Financial Officer
				(Duly Authorized Officer and
				Principal Financial Officer)

Exhibit 10.64

STATE AUTO FINANCIAL CORPORATION

LEADERSHIP BONUS PLAN

Article 1. Establishment and Purpose

1.1. Establishment of Plan . State Auto Financial Corporation desires to establish and provide a bonus program for its executive officers and other key management employees, managers and professionals. This document reflects the material terms and design for such plan, known as the State Auto Financial Corporation Leadership Bonus Plan (the “Plan”). The Plan is intended to provide for performance-based compensation which is not subject to the deduction limitation rules under Code Section 162(m) as in effect from time to time and as applicable to Covered Employees, and shall remain in effect until terminated by the Board or the Committee.

1.2. Purpose . The primary purposes of the Plan are to:

(a) Advance the interests of the Company and its shareholders by providing Employees in leadership positions with an annual bonus incentive to achieve the strategic objectives of the Company;

(b) Focus management on key measures that drive superior financial and business performance and that build shareholder value over the long term;

(c) Provide compensation opportunities that are externally competitive and internally consistent with the Company’s strategic objectives and total reward strategies; and

(d) Provide bonus opportunities that reward executives, managers and key professionals who are in positions to make significant contributions to the overall success of the Company.

Article 2. Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the defined meaning is intended, the term is capitalized:

2.1. “Administrator” means the Committee or such other authorized officers or officer of the Company to whom the power to administer the Plan has been delegated by the Committee.

2.2. “Applicable Law” means the requirements of Code Section 162(m) applicable to performance-based compensation.

2.3. “Award” means the cash bonus a Participant may earn under the Plan as established by the Administrator for a Performance Period.

2.4. “Board” or “Board of Directors” means the Board of Directors of State Auto Financial Corporation.

2.5. “Code” means the Internal Revenue Code of 1986, as amended, and the regulations and rulings of general applicability issued thereunder, as in effect from time to time.

2.6. “Committee” means the Compensation Committee of the Board.

2.7. “Company” means State Auto Financial Corporation and its related entities, subsidiaries and affiliates, including State Auto Mutual Insurance Company (“State Auto Mutual”), or any successors thereto (the “State Auto Group”). Notwithstanding the foregoing, whenever the terms of this Plan authorize the Company to take any action, such action shall be considered properly authorized if taken by the Board, the Committee, or the Administrator as defined herein.

2.8. “Covered Employee” means any Employee who is, or who is determined by the Committee to be likely to become, a “covered employee” within the meaning of Code Section 162(m).

2.9. “Disability” shall have the meaning ascribed to such term in the long term disability plan maintained by the Participant’s employer at the time that the determination regarding Disability is made hereunder. Notwithstanding the foregoing, if a payment under this Plan is subject to Code Section 409A, “Disability” has the meaning ascribed to such term under that Code section.

2.10. “Effective Date” of this document is January 1, 2007.

2.11. “Employee” means a regular, active employee of the Company. Directors who are not employed by the Company shall not be considered Employees under the Plan, nor shall independent contractors, leased employees, consultants or anyone else designated as not eligible to participate in the Plan by the Administrator.

2.12. “Final Bonus” means the actual bonus earned during a Performance Period by a Participant, as determined by the Administrator.

2.13. “Participant” means an Employee who meets the eligibility requirements of Article 3 with respect to one or more Performance Periods.

2.14. “Performance Criteria” shall have the meaning set forth in Article 4.

2.15. “Performance Period” means the twelve month period beginning on each January 1 ^st and ending on December 31 ^st during the term of the Plan, or such other time period established by the Administrator from time to time with respect to which the attainment of Performance Criteria will be determined.

2.16. “Plan” means this State Auto Financial Corporation Leadership Bonus Plan, as may be amended from time to time.

Article 3. Eligibility and Participation

3.1. Eligibility and Participation . The Administrator shall designate, or determine the methodology and criteria for the designation of, the key Employees who are eligible to receive an Award under the Plan. In general, an Employee may be designated as a key Employee if such Employee holds an executive, management or selected professional position and is responsible for or contributes to the management, growth, and/or profitability of the business of the Company, one of its subsidiaries or affiliates, or business segments in a material way. Only the Committee may determine the eligibility of Employees who are Covered Employees.

3.2. Partial Performance Period Participation . An Employee who becomes eligible after the beginning of a Performance Period may participate in the Plan for that Performance Period on a ratable basis. Such situations may include, but are not limited to (a) new hires; or (b) when an Employee is promoted from a position which did not previously meet the eligibility criteria. The Administrator, in its sole discretion, retains the right to prohibit or allow participation in the initial Performance Period of eligibility for any of the aforementioned Employees. If an Employee participates for only a portion of a Performance Period for any reason, the Performance Criteria previously established under the Plan for that Performance Period shall apply to any Employees who become eligible after the beginning of the Performance Period, but his or her Award will be prorated. Such proration shall be based on the number of days the Employee performed services during the Performance Period while a Participant in the Plan over the total days in the Performance Period, or some similar method adopted by the Committee that results in a ratable reduction of the Award based on the partial Performance Period applicable to the Employee. In addition, in the event a Participant changes job levels during a Performance Period, the Participant’s Award may be adjusted to reflect the amount of time at each job level during the Performance Period.

Notwithstanding anything in this Section 3.2 or in the Plan to the contrary, the participation in the Plan for a Covered Employee who becomes eligible after the beginning of the Performance Period shall comply with the provisions of Code Section 162(m), as set forth in Article 4.

3.3. No Right to Participate . No Participant or other Employee shall at any time have a right to be selected for participation in the Plan for any Performance Period, whether or not he or she previously participated in the Plan.

Article 4. Award Determination

4.1. Performance Criteria . As to each Performance Period, the Administrator will establish in writing Performance Criteria based on one or more of the following performance measures of the State Auto Group over the Performance Period: (i) earnings; (ii) return on capital; (iii) revenue; (iv) premiums; (v) net income; (vi) earnings per share; (vii) combined ratio; (viii) loss ratio; (ix) expense ratio; (x) assets; (xi) equity; (xii) cash flow; (xiii) stock price; (xiv) total shareholders’ return; (xv) premium growth; (xvi) corporate surplus growth (defined as growth in State Auto Mutual’s surplus less the impact of the value of its holdings of the Company); and (xvii) individual performance related to personal goals. Performance Criteria applicable to Covered Employees will not include item (xvii) above (individual performance related to personal goals), unless a separate Award is issued specific to such goals. Any Award issued to a Covered Employee that includes item (xvii) as a Performance Criteria will not be performance-based compensation governed by Code Section 162(m). Except as otherwise provided herein, the extent to which the Performance Criteria are satisfied will determine the amount, if any, of the Award that will be earned by each Participant. The Performance Criteria may vary for different Performance Periods and need not be the same for each Participant eligible for an Award for a Performance Period.

4.2. Adjustment of Performance Criteria . Once established, the Performance Criteria shall not be changed during the Performance Period. Subject to the requirements of Code Section 162(m) with respect to Covered Employees, at the time the Award is made and Performance Criteria are established, the Administrator is authorized to determine the manner in which the Performance Criteria will be calculated or measured to take into account certain factors over which Participants have no or limited control, including, but not limited to, changes in debt levels, changes in accounting principles, and extraordinary charges or credits to income.

4.3. Awards . For each Performance Period established by the Administrator, the Administrator shall establish an Award for each Covered Employee and for all other Participants. Awards shall be earned based upon the financial performance of the Company or one or more operating groups of the Company and the attainment of established Performance Criteria during a Performance Period; provided, however, the maximum Award that may be paid to any single Participant for any Performance Period is $2,500,000.00, such maximum Award amount to be pro-rated if the Performance Period is less than a full fiscal year. Performance Criteria and Awards shall be established prior to the beginning of each Performance Period or as soon as practicable thereafter. If a Participant commences participation after the beginning of a Performance Period, Performance Criteria in effect for the Participant’s position shall apply for the remaining balance of the Performance Period, unless otherwise determined by the Administrator within 90 days of the date the Employee became a Participant. In all cases where the Participant is a Covered Employee, the Performance Criteria and Award shall be established in no event later than 90 days following the first day of the Performance Period or after 25% of the Performance Period has elapsed, if earlier, and the outcome relative to the attainment of the Performance Criteria shall not be substantially certain at the time the Performance Criteria and Award are established. This Section 4.3 is intended to ensure compliance with the exception from Code Section 162(m) for “performance-based compensation,” and shall be construed, applied and administered accordingly with respect to any Participant who is a Covered Employee.

4.4. Final Bonus Determinations . At the end of each Performance Period, the Administrator shall certify in writing the extent to which the Performance Criteria were met during the Performance Period for any Awards for Covered Employees. If the Performance Criteria for the Performance Period are met, Covered Employees shall be entitled to the payment of the Awards, subject to the Committee’s exercise of negative discretion to reduce any Final Bonus payable to a Covered Employee based on business objectives established for that Covered Employee or other factors as determined by the Committee in its sole discretion. With respect to Participants who are not Covered

Employees, the Administrator will determine the Final Bonus based on the Performance Criteria and other business objectives. The Administrator may adjust (up or down) any Final Bonus for Participants who are not Covered Employees on the basis of such further considerations as the Administrator shall determine in its sole discretion.

Article 5. Payment of Final Bonuses

5.1. Form and Timing of Payment . Each Participant’s Final Bonus shall be paid in cash, in one lump sum, subject to applicable tax and other authorized withholdings, on or before the 15 ^th day of the third month after the end of each Performance Period. If payment is delayed due to an unforeseeable event or other administrative delays, payment shall in no event be made later than December 31 ^st of the taxable year following the year in which the Final Bonus was earned. The Administrator may permit or provide for deferred payment of any Final Bonus to a specified date or to a date not less than six (6) months after termination of employment, in accordance with such conditions and procedures as the Administrator may specify in compliance with the requirements of Code Section 409A.

5.2. Unsecured Interest . No Participant or any other party claiming an interest in amounts earned under the Plan shall have any interest whatsoever in any specific asset of the Company. The Plan is intended to constitute an unfunded plan for incentive compensation. To the extent that any party acquires a right to receive a cash payment under the Plan, such right shall be equivalent to that of an unsecured general creditor of the Company.

Article 6. Termination of Employment

6.1. Termination of Employment Due to Death, Disability or Retirement . In the event a Participant’s employment is terminated during the applicable Performance Period by reason of death, Disability or retirement upon the attainment of early or normal retirement age as defined in the State Auto Insurance Companies Employees’ Retirement Plan, the Final Bonus determined in accordance with Section 4.4 herein shall be reduced to reflect participation prior to termination only. The Final Bonus, if any, shall be equal to 100% of the Participant’s target bonus, prorated based upon the length of time that the Participant was employed by the Company during the Performance Period. In the case of a Participant’s Disability, the employment termination shall be deemed to have occurred as of the date that the Administrator determines was the date on which the definition of Disability was satisfied. The Final Bonus thus determined shall be paid as soon as practicable and reasonable following the Participant’s death, Disability or retirement. The Administrator may establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant’s death are to be paid. If no beneficiary is designated, the right of the Participant to receive any payment under this Plan will pass to the Participant’s estate.

6.2. Involuntary Termination of Employment . If the employment of a Participant is terminated by the Company other than for “Cause” during the fourth quarter of the applicable Performance Period, the Final Bonus determined in accordance with Section 4.4 herein shall be reduced to reflect participation prior to termination only. The Final Bonus, if any, shall be based upon the actual performance results at the end of the Performance Period and then prorated based upon the length of time that the Participant was employed by the Company during the Performance Period. The Final Bonus thus determined shall be paid as soon as practicable and reasonable following the end of the Performance Period in which employment termination occurs, and shall be made at the same time payments are made to participants who did not terminate employment during the applicable Performance Period. Whether an involuntary termination is for “Cause” shall be determined in the absolute discretion of the Administrator, whose decision shall be final and binding on all parties.

6.3. Termination of Employment for Other Reasons . In the event a Participant’s employment is terminated before the fourth quarter of the Performance Period due to involuntary termination, with or without Cause, all of the Participant’s rights to any Final Bonus for that Performance Period shall be forfeited unless otherwise determined by the Administrator in its sole discretion due to the business circumstances of the termination, including, but not limited to, a termination in connection with the divestiture of a business segment or subsidiary or affiliate. If a Participant terminates employment for any other reason prior to the date the Final Bonus, if any, is paid, all of the Participant’s rights to any Final Bonus for that Performance Period shall be forfeited. Except as provided in Sections

6.1 and 6.2, only Participants who are, as of the date the Final Bonus, if any, is paid, either current, active Employees or current Employees who are on a leave of absence authorized by the Company shall be entitled to any Final Bonus earned for the Performance Period.

6.4. Other Forfeiture Events . The Administrator may, in its discretion, require that all or any portion of a Final Bonus is subject to an obligation of repayment to the Company upon the violation of a non-competition and confidentiality covenant applicable to the Participant. The Administrator may, in its discretion, also require a Participant to repay the Company all or any portion of a Final Bonus if (i) the amount of such Participant’s Final Bonus was calculated based upon the achievement of certain financial results that were subsequently the subject of a financial statement restatement; (ii) such Participant engaged in fraudulent misconduct that caused or substantially contributed to the need for the financial statement restatement; and (iii) the amount of such Participant’s Final Bonus would have been lower than the amount actually awarded to such Participant had the financial results been properly reported. This Section 6.4 shall not be the Company’s exclusive remedy with respect to such matters. This Section 6.4 shall not apply after a “change of control” or “potential change in control” of the Company as defined in the Amended and Restated Equity Incentive Compensation Plan or any successor plan thereto.

Article

7. Rights of Participants

7.1. Employment . No person shall have any claim or right to be granted an Award under this Plan and the grant of an Award shall not confer upon any Participant any right to be retained as an employee of the Company, nor shall it limit or interfere in any way with the right of the Company to terminate the employment of any Participant at any time or to increase or decrease the compensation of any Participant. There is no obligation for uniformity of treatment of Participants under this Plan or otherwise.

7.2. Nontransferability . No right or interest of any Participant in the Plan shall be assignable or transferable, other than by will or pursuant to the laws of descent and distribution, or subject to any lien, directly, by operation of law or otherwise, including, but not limited to, by execution, levy, garnishment, attachment, pledge, or bankruptcy, and any attempt to take any such action shall be null and void.

Article

8. Administration

8.1. Authority of the Administrator .

(a) General . The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee will have full authority to interpret the Plan and the terms of Awards made hereunder, to establish, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions for making or modifying Awards, to correct administrative errors, and to make all other determinations necessary or advisable for the administration of the Plan. All decisions made by the Committee pursuant to the provisions hereof shall be made in the Committee’s sole discretion and shall be final and binding on all persons. Notwithstanding any other provision of the Plan, the Committee shall not have any discretion or authority to make changes to any Award that is intended to quality as “performance-based compensation” under Code Section 162(m) to the extent that the existence of such discretion or authority would cause such Award not to so qualify.

(b) Delegation of Authority for the Day-to-Day Administration of the Plan . Except to the extent prohibited by Applicable Law, the Committee may delegate to one or more individuals the day-to-day administration of the Plan and any of the functions assigned to it in this Plan, including the power to approve Awards to Employees who are not Covered Employees. Such delegation may be revoked at any time. All determinations and decisions of any delegate as to any disputed question arising under the Plan, including questions of construction and interpretation, shall be final, binding and conclusive upon all parties.

any kind, the Administrator may, in its sole discretion, (i) apply such amount directly for the comfort, support and maintenance of such person; (ii) reimburse any person for any such support theretofore supplied to the person entitled to receive any such payment; (iii) pay such amount to any person selected by the Administrator to disburse it for such comfort, support and maintenance, including without limitation, any relative who has undertaken, wholly or partially, the expense of such person’s comfort, care and maintenance, or any institution in whose care or custody the person entitled to the amount may be; or (iv) with respect to any amount due to a minor, deposit such amount to his or her credit in any savings or commercial bank of the Administrator’s choice, direct that such distribution be paid to the legal guardian, or if none, to a parent of such person or a responsible adult with whom the minor maintains his or her residence, or to the custodian for such person under the Uniform Gift to Minors Act or Gift to Minors Act, if such payment is permitted by the laws of the state in which the minor resides. Payment pursuant to this Section 8.2 shall fully discharge the Company, the Board, the Committee, the Administrator, and the Plan from further liability on account thereof.

Article

9. Amendments

The Committee, without notice, at any time and from time to time, may modify or amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely; provided, however, that no such modification, amendment, suspension, or termination may, without the consent of a Participant, materially reduce the right of a Participant to a payment or distribution hereunder to which he or she has already become entitled, as determined under Articles 4 and 6 hereof. Shareholder approval of any amendment will be required only as required by Applicable Law. No new Award may be granted during any period of suspension of the Plan or after termination of the Plan.

Article

10. Miscellaneous

10.1. Choice of Law . The Plan and all agreements hereunder shall be governed by and construed in accordance with the laws of the State of Ohio, except as to matters pre-empted or governed by federal law.

10.2. Withholding Taxes . The Company shall have the right to deduct from all cash payments under the Plan any federal, state, or local taxes required by law to be withheld with respect to any Final Bonus.

10.3. Additional Arrangements . Nothing contained in this Plan shall prevent the Company from adopting other or additional compensation arrangements for any Participant.

10.4. Gender and Number . Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular, and the singular shall include the plural.

10.5. Severability . In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

10.6. Successors . All obligations of the Company under the Plan shall be binding upon and inure to the benefit of any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

10.7. Titles; Construction . Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. Any reference to a section (other than to a section of the Plan) shall also include a successor to such section.

Exhibit 10.65

STATE AUTO FINANCIAL CORPORATION

LONG-TERM INCENTIVE PLAN

Article

1. Establishment and Purpose

1.1. Establishment of Plan . State Auto Financial Corporation desires to establish and provide a long-term incentive bonus program for its executive officers and other key management employees, managers and professionals. This document reflects the material terms and design for such plan, known as the State Auto Financial Corporation Long-Term Incentive Plan (the “Plan”). The Plan is intended to provide for performance-based compensation which is not subject to the deduction limitation rules under Code Section 162(m) as in effect from time to time and as applicable to Covered Employees, and shall remain in effect until terminated by the Board or the Committee.

1.2. Purpose . The primary purposes of the Plan are to:

(a) Align performance and results with the expectations of shareholders and the Company’s goals;

(b) Recognize and reward long-term operating performance as compared with the Company’s peer group of regional property and casualty companies;

(c) Provide compensation opportunities that are externally competitive and internally consistent with the Company’s growth objectives and total compensation strategies; and

(d) Provide award opportunities that reward executives with financial and operating responsibilities that can impact achievement of the Company’s growth goals.

Article

2. Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the defined meaning is intended, the term is capitalized:

2.1. “Administrator” means the Committee or such other authorized officers or officer of the Company to whom the power to administer the Plan has been delegated by the Committee.

2.2. “Applicable Law” means the requirements of Code Section 162(m) applicable to performance-based compensation.

2.3. “Award” means the Performance Award Units issued to a Participant under the Plan.

2.4. “Board” or “Board of Directors” means the Board of Directors of State Auto Financial Corporation.

2.5. “Code” means the Internal Revenue Code of 1986, as amended, and the regulations and rulings of general applicability issued thereunder, as in effect from time to time.

2.6. “Committee” means the Compensation Committee of the Board.

2.7. “Company” means State Auto Financial Corporation and its related entities, subsidiaries and affiliates, including State Automobile Mutual Insurance Company, or any successor thereto (the “State Auto Group”). Notwithstanding the foregoing, whenever the terms of this Plan authorize the Company to take any action, such action shall be considered properly authorized if taken by the Board, the Committee or the Administrator as defined herein.

2.8. “Covered Employee” means any Participant who is, or who is determined by the Committee to be likely to become, a “covered employee” within the meaning of Code Section 162(m).

2.10. “Effective Date” means January 1, 2007.

2.12. “Final Award” means the actual incentive compensation earned during a Performance Period by a Participant, as determined by the Administrator following the end of the Performance Period.

2.13. “Participant” means an Employee who meets the eligibility requirements of Article 3 with respect to one or more Performance Periods.

2.14. “Performance Award Units” means the units issued to a Participant which represent the right of the Participant to receive an amount in cash equal to the value related to the Performance Award Units issued, such value to be determined in the manner established by the Administrator at the time of the Award.

2.15. “Performance Period” means the three-year rolling period beginning on the date an Award is granted and ending on December 31 of the third calendar year following the grant, calculated by including the year of grant as the first year in the three-year rolling period.

2.16. “Plan” means this State Auto Financial Corporation Long-Term Incentive Plan.

2.17. “Qualifying Performance Criteria” means any of the performance goals set forth in Article 4 as determined by the Administrator.

Article

3. Eligibility and Participation

3.1. Eligibility . The Administrator shall designate, or determine the methodology and criteria for the designation of, the Employees who are eligible to receive Awards under the Plan. In general, an Employee may be designated as a Participant if such Employee holds a strategic position and is responsible for or contributes to the management, growth, and/or profitability of the business of the Company in a material way. Only the Committee may determine if an Employee is a Covered Employee.

3.2. Participation . Employees who are chosen to participate in the Plan shall be apprised of the performance criteria and related Awards determined for them for the Performance Period, as soon as is practicable after such Awards are established.

3.3. Partial Performance Period Participation . An Employee who becomes eligible to participate in the Plan after the beginning of the Performance Period may participate in the Plan for that Performance Period on a ratable basis. Such situations may include, but are not limited to (a) new hires; or (b) when an Employee is promoted from a position which did not previously meet the eligibility criteria. The Administrator, in its sole discretion, retains the right to prohibit or allow participation for any of the aforementioned Employees. The performance criteria previously established under the Plan shall apply to any Employees who become eligible after the beginning of the Performance Period. If an Employee participates for only a portion of the Performance Period for any reason, his or her Award will be pro-rated based on the number of days he or she performed services during the Performance Period over the total days in the Performance Period, or some similar method adopted by the Committee that results in a ratable reduction of the Award

based on the partial Performance Period applicable to the Employee. In addition, in the event a Participant changes job levels during a Performance Period, the Participant’s Award may be adjusted to reflect the amount of time at each job level during the Performance Period. Notwithstanding anything in this Section 3.3 or in the Plan to the contrary, the participation in the Plan for a Covered Employee who becomes eligible after the beginning of the Performance Period shall comply with the provisions of Code Section 162(m), as set forth in Article 4.

3.4. No Right to Participate . No Participant or other Employee shall at any time have a right to be selected for participation in the Plan for any Performance Period, whether or not he or she previously participated in this Plan or any similar program.

Article

4. Award Determination

4.1. Qualifying Performance Criteria . As to each Performance Period, the Administrator shall select and establish in writing Qualifying Performance Criteria for the Performance Period, which, if met, may entitle Participants to the payment of a Final Award. Such Qualifying Performance Criteria shall be based on one or more of the following performance measures of the State Auto Group over the Performance Period: (i) earnings; (ii) return on capital; (iii) revenue; (iv) premiums; (v) net income; (vi) earnings per share; (vii) combined ratio; (viii) loss ratio; (ix) expense ratio; (x) assets; (xi) equity; (xii) cash flows; (xiii) stock price; (xiv) total shareholders’ return; (xv) Company performance relative to the designated peer group determined by the group’s statutory combined ratio, the Company’s book value per share and total group revenue growth, or any other performance goal approved by the shareholders of the Company in accordance with Code Section 162(m).

To ensure compliance with the exception from Code Section 162(m) for qualified performance-based compensation for Participants who are Covered Employees, the performance criteria established will be based on one or more Qualifying Performance Criteria selected by the Administrator in writing within 90 days following the first day of the period of service of such Covered Employee as a Participant under the Plan (or, if earlier, before 25% of that period has elapsed), and at a time when the outcome relative to the attainment of the performance criteria is not substantially certain. Subject to the requirements of Code Section 162(m) with respect to Covered Employees, if a Participant commences participation after the beginning of a Performance Period, the performance criteria established for the Performance Period shall apply to that Participant, with the Final Award amount adjusted or pro-rated over the remaining balance of the Performance Period to reflect the partial period of participation in the Plan. Once established, the Qualifying Performance Criteria shall not be changed during the Performance Period. Subject to the requirements of Code Section 162(m) with respect to Covered Employees, at the time the Performance Award Units are issued and Qualifying Performance Criteria are established, the Administrator is authorized to determine the manner in which the performance criteria will be calculated or measured to take into account certain factors over which Participants have no or limited control, including, but not limited to, changes in debt levels, changes in accounting principles, and extraordinary charges or credits to income. This Section 4.1 is intended to ensure compliance with the exception from Code Section 162(m) for “performance-based compensation,” and shall be construed, applied and administered accordingly with respect to any Participant who is a Covered Employee.

4.2. Awards . For each Performance Period established by the Administrator, the Administrator will establish in writing an Award for each Covered Employee and for all other Participants for the Performance Period. Awards shall be earned based upon the financial performance of the Company and the attainment of established Qualifying Performance Criteria during the Performance Period. Participants who are Covered Employees may receive an Award solely if the Qualifying Performance Criteria are met.

4.3. Final Award Determinations . At the end of each Performance Period, the Administrator shall certify in writing the extent to which the Qualifying Performance Criteria were met during the Performance Period for any Awards for Covered Employees. If the Qualifying Performance Criteria for the Performance Period are met, Covered Employees shall be entitled to the payment of the Final Awards, subject to the Committee’s exercise of negative discretion to reduce any Final Award payable to a Covered Employee based

on business objectives established for that Covered Employee or other factors as determined by the Committee in its sole discretion. With respect to Participants who are not Covered Employees, the Administrator will determine the Final Awards based on the performance criteria and other business objectives. The Administrator may adjust (either up or down) any Final Award for Participants who are not Covered Employees on the basis of such further considerations as the Administrator shall determine in its sole discretion.

Notwithstanding anything in the Plan to the contrary, the maximum amount payable to any single Participant pursuant to any Final Award earned with respect to any single Performance Period shall not exceed $2,500,000.00, such maximum Final Award amount to be pro-rated if the Performance Period is less than three years.

Article

5. Payment of Final Awards

5.1. Form and Timing of Payment . The value of each Participant’s Final Award shall be paid in cash, in one lump sum, subject to applicable tax withholding, on or before the 15 ^th day of the third month after the end of each Performance Period. If payment is delayed due to an unforeseeable event or other administrative delays, payment shall in no event be made later than the December 31 ^st of the taxable year following the year in which the Final Award was earned. The Administrator may permit or provide for deferred payment of any Final Award to a specified date or to a date not less than six (6) months after termination of employment, in accordance with such conditions and procedures as the Administrator may specify in compliance with the requirements of Code Section 409A.

Article

6. Termination of Employment; Other Forfeiture Events

6.1. Termination of Employment Due to Death or Disability . In the event a Participant’s employment is terminated during the applicable Performance Period by reason of death or Disability, the Final Award determined in accordance with Section 4.3 herein shall be reduced to reflect participation prior to termination of employment only. The Final Award, if any, shall be equal to 100% of the Participant’s target bonus, prorated by multiplying the Final Award by a fraction, the numerator of which is the number of days of employment in the Performance Period through the date of employment termination, and the denominator of which is the number of days in the Performance Period. In the case of a Participant’s Disability, the employment termination shall be deemed to have occurred as of the date that the Administrator determines was the date on which the definition of Disability was satisfied. The Final Award thus determined shall be paid as soon as practicable and reasonable following the Participant’s death or Disability. The Administrator may establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant’s death are to be paid. If no beneficiary is designated, the right of the Participant to receive any payment under this Plan will pass to the Participant’s estate.

6.2 Termination of Employment due to Retirement . In the event a Participant’s employment is terminated due to retirement upon the attainment of early or normal retirement age as defined in the State Auto Insurance Companies Employees’ Retirement Plan at any time during the applicable Performance Period, the Final Award determined in accordance with Section 4.3 herein shall be reduced to reflect participation prior to termination only. The Final Award, if any, shall be based upon the actual performance results at the end of the Performance Period and then prorated based upon the length of time that the Participant was employed by the Company during the Performance Period. The Final Award thus determined shall be paid as soon as practicable and reasonable following the end of the Performance Period in which employment termination occurs, and shall be made at the same time payments are made to Participants who did not terminate employment during the applicable Performance Period.

6.3. Involuntary Termination of Employment . If the employment of a Participant is terminated by the Company other than for “Cause” during an applicable Performance Period, the Final Award determined in accordance with Section 4.3 herein shall be reduced to reflect participation prior to termination only. The Final Award, if any, shall be based upon the actual performance results at the end of the Performance Period and then prorated based upon the length of time that the Participant was employed by the Company during the Performance Period. The Final Award thus determined shall be paid as soon as possible and reasonable following the end of the Performance Period in which employment termination occurs, and shall be made at the same time payments are made to Participants who did not terminate employment during the applicable Performance Period. Whether an involuntary termination is for “Cause” shall be determined in the absolute discretion of the Administrator, whose decision shall be final and binding on all parties.

6.4. Termination of Employment for Other Reasons . In the event of a Participant’s termination of employment before the last date of a Performance Period for any reason other than death, Disability, retirement or involuntary termination by the Company (other than for Cause), all of the Participant’s rights to any Final Award for that Performance Period shall be forfeited. If a Participant terminates employment for any other reason prior to the date the Final Award, if any, is paid, all of the Participant’s rights to any Final Award for that Performance Period shall be forfeited. Except as provided in Sections 6.1, 6.2 and 6.3, only Participants who are, as of the date the Final Award, if any, is paid, either current, active Employees or current Employees who are on a leave of absence authorized by the Company shall be entitled to any Final Award earned for the Performance Period.

6.5. Other Forfeiture Events . The Administrator may, in its discretion, require that all or any portion of a Final Award is subject to an obligation of repayment to the Company upon the violation of a non-competition and confidentiality covenant applicable to the Participant. The Administrator may, in its discretion, also require a Participant to repay the Company all or any portion of a Final Award if (i) the amount of such Participant’s Final Award was calculated based upon the achievement of certain financial results that were subsequently the subject of a financial statement restatement; (ii) such Participant engaged in fraudulent misconduct that caused or substantially contributed to the need for the financial statement restatement; and (iii) the amount of such Participant’s Final Award would have been lower than the amount actually awarded to the Participant had the financial results been properly reported. This Section 6.5 shall not be the Company’s exclusive remedy with respect to such matters. This Section 6.5 shall not apply after a Change in Control or Potential Change in Control.

Article

7. Rights of Participants

7.1. Employment . No person shall have any claim or right to be granted an Award under this Plan and the grant of an Award shall not confer upon any Participant any right to be retained as an Employee of the Company, nor shall it limit or interfere in any way with the right of the Company to terminate the employment of any Participant at any time or to increase or decrease the compensation of any Participant. There is no obligation for uniformity of treatment of Participants under this Plan or otherwise.

7.3. Change in Control . In the event of a Change in Control, all Participants shall become vested in and entitled to their Awards calculated based on their individual awards times a fraction, the numerator of which is the number of days from the beginning of the Performance Period to the date of the Change in Control and the denominator of which is the total number of days in the Performance Period. The amount so calculated shall be the minimum amount payable as a Final Award for the Performance Period in which the Change in Control occurs. For purposes of this Plan, a “Change in Control” or “Potential Change in Control” shall be defined as stated in the Amended and Restated Equity Incentive Compensation Plan or any successor plan thereto.

Article

8. Administration

8.1. Authority of the Administrator .

8.2. Facility of Payment . If the Administrator deems any person entitled to receive any amount under the provisions of the Plan to be incapable of receiving or disbursing the same by reason of minority, illness or infirmity, mental incompetence, or incapacity of any kind, the Administrator may, in its sole discretion, (i) apply such amount directly for the comfort, support and maintenance of such person; (ii) reimburse any person for any such support theretofore supplied to the person entitled to receive any such payment; (iii) pay such amount to any person selected by the Administrator to disburse it for such comfort, support and maintenance, including without limitation, any relative who has undertaken, wholly or partially, the expense of such person’s comfort, care and maintenance, or any institution in whose care or custody the person entitled to the amount may be; or (iv) with respect to any amount due to a minor, deposit such amount to his or her credit in any savings or commercial bank of the Administrator’s choice, direct that such distribution be paid to the legal guardian, or if none, to a parent of such person or a responsible adult with whom the minor maintains his or her residence, or to the custodian for such person under the Uniform Gift to Minors Act or Gift to Minors Act, if such payment is permitted by the laws of the state in which the minor resides. Payment pursuant to this Section 8.2 shall fully discharge the Company, the Board, the Committee, the Administrator, and the Plan from further liability on account thereof.

Article

9. Amendment or Termination

The Committee, without notice, at any time and from time to time, may modify or amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely; provided, however, that no such modification, amendment, suspension or termination may, without the consent of a Participant, materially reduce the right of a Participant to a payment or distribution hereunder to which he or she has already become entitled, as determined under Articles 4 and 6 hereof. Shareholder approval of any amendment will be required only as required by Applicable Law. No Award may be granted during any period of suspension of the Plan or after termination of the Plan.

Article

10. Miscellaneous

10.3. Additional Arrangements . Nothing contained in this Plan shall prevent the Company from adopting other or additional compensation arrangements for any Participant.

Exhibit 10.66

FIRST AMENDMENT TO THE

REINSURANCE POOLING AGREEMENT

AMENDED AND RESTATED AS OF JANUARY 1, 2005

This First Amendment (this “First Amendment”) to the Reinsurance Pooling Agreement Amended and Restated as of January 1, 2005 (the “2005 Pooling Agreement”), is made as of April 1, 2007, by and among State Automobile Mutual Insurance Company (“State Auto Mutual”), State Auto Property and Casualty Insurance Company (“State Auto P&C”), Milbank Insurance Company (“Milbank”), State Auto Insurance Company of Wisconsin (“SA WI”), Farmers Casualty Insurance Company (“Farmers Casualty”), State Auto Insurance Company of Ohio (“SA OH”), State Auto Florida Insurance Company (“SA FL”), Meridian Security Insurance Company (“Meridian Security”), and Meridian Citizens Mutual Insurance Company (“Meridian Citizens Mutual”) (collectively, the “Pooled Companies”). This First Amendment shall be effective and operative as set forth in Section 9 of this First Amendment.

Background Information

The 2005 Pooling Agreement excludes premiums, losses, loss expenses, underwriting expenses and administrative expenses attributable to the State Auto Mutual Reinsurance Book.

With this First Amendment, State Auto intends to (i) exclude from the 2005 Pooling Agreement the voluntary assumption of reinsurance by State Auto Mutual, regardless of whether the ceding company is affiliated with State Auto Mutual, from and after the Effective Date, and (ii) clarify certain matters between the State Auto P&C Catastrophe Assumption Agreement and the 2005 Pooling Agreement.

The Independent Committee of the Board of Directors of each of State Auto Mutual and State Auto Financial Corporation has approved the matters set forth in this Amendment.

Statement of Agreement

In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the Pooled Companies agree to amend the 2005 Pooling Agreement as follows:

1.	Capitalized terms used in this First Amendment (including the Background Information) which are not otherwise defined herein shall have the meanings ascribed such terms in the 2005 Pooling Agreement.

2.	Section 1(d) of the 2005 Pooling Agreement is amended in its entirety to read as follows:

(d)

“State Auto Mutual Reinsurance Book” means (i) 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, 2005, and (ii) premiums, losses, underwriting and administrative expenses attributable to State Auto Mutual’s voluntary assumption of reinsurance from affiliates of State Auto Mutual, which voluntary assumed reinsurance contracts/treaties initially commenced on or after January 1, 2007.

3.	Section 1 of the 2005 Pooling Agreement is amended to add the following subsection (f):

(f)

“State Auto Insurance Ceding Companies” means State Auto Mutual and each insurance company, present and future, in the State Auto Mutual insurance holding company system, other than State Auto P&C, which cede reinsurance to State Auto P&C under the State Auto P&C Catastrophe Assumption Agreement.

4.	The definition of the “State Auto P&C Catastrophe Assumption Agreement” set forth in Section 7(a) of the 2005 Pooling Agreement is deleted in its entirety. In its place, Section 1 of the 2005 Pooling Agreement is amended to add the following subsection (g):

(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.

In subsections 7(a) through 7(h), the sentence “Accounts shall be rendered at quarterly intervals and shall be settled within sixty (60) days thereafter.” is hereby deleted and replaced by the following sentence: “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.”

6.	Section 1 of the 2005 Pooling Agreement is amended to add the following subsection (h):

(h)

“State Auto Traditional Cat Program” means the then current amount of State Auto’s catastrophe loss retention ($55 million as of the Effective Date of this First Amendment) plus the then current amount of catastrophe reinsurance available to State Auto ($80 million as of the date of this First Amendment).

7.	Section 10 of the 2005 Pooling Agreement is hereby deleted in its entirety and replaced by the following:

10.

Losses Excluded: Notwithstanding any of the foregoing, the Pooled Companies agree that the 2005 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 P&C Catastrophe Assumption Agreement shall once again be ceded and assumed under the terms of the 2005 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 2005 Pooling Agreement, as amended from time to time. All premiums, losses, loss expenses, underwriting expenses and administrative expenses attributable to either State Auto Middle Market Insurance from and after 12:01 a.m. EST January 1, 2005, or the State Auto Mutual Reinsurance Book are outside the 2005 Pooling Agreement, as amended from time to time. In addition, this 2005 Pooling Agreement, as amended from time to time, is subject to the Reserve Guaranty Agreement.

8.	It is agreed that the home office address of State Auto P&C is 1300 Woodland Drive, West Des Moines, Iowa, and the home office address of SA FL is 2955 North Meridian Street, Indianapolis, Indiana.

This First Amendment shall be effective as of 12:01 a.m. Columbus, Ohio time, on January 1, 2007 (the “Effective Date”). Notwithstanding the foregoing, this First Amendment shall only become operative when this First Amendment has been approved, or deemed approved, by any insurance regulator with jurisdiction over any of the Pooled Companies. If this First Amendment is not approved as indicated, this First Amendment shall be deemed null and void and shall not become operative to amend the 2005 Pooling Agreement in any manner whatsoever.

10.

This document is an amendment to the 2005 Pooling Agreement. In the event of any inconsistencies between the provisions of the 2005 Pooling Agreement and this First Amendment, the provisions of this First Amendment shall control. Except as expressly amended hereby, the 2005 Pooling Agreement shall continue in full force and effect without change for the balance of the term thereof.


State Automobile Mutual Insurance Company

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

State Auto Property & Casualty Insurance Company

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

Milbank Insurance Company

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President


State Auto Insurance Company of Wisconsin

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

Farmers Casualty Insurance Company

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

State Auto Insurance Company of Ohio

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

State Auto Florida Insurance Company

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

Meridian Security Insurance Company

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

Meridian Citizens Mutual Insurance Company

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

Exhibit 10.67

FIRST AMENDMENT

MANAGEMENT AND OPERATIONS AGREEMENT

AMENDED AND RESTATED

As of January 1, 2005

This First Amendment (this “First Amendment”) to the Management and Operations Agreement Amended and Restated as of January 1, 2005 (the “2005 Management Agreement”), is made as of April 1, 2007, by and among State Automobile Mutual Insurance Company (“State Auto Mutual”), State Auto Financial Corporation (“STFC”), State Auto Property and Casualty Insurance Company (“State Auto P&C”), State Auto National Insurance Company (“National”), Milbank Insurance Company (“Milbank”), State Auto Insurance Company of Ohio (“SA OH”), Meridian Security Insurance Company (“Meridian Security”), Meridian Citizens Mutual Insurance Company (“Meridian Citizens Mutual”), Meridian Insurance Group, Inc. (“MIGI”), Farmers Casualty Insurance Company (“Farmers Casualty”), Stateco Financial Services, Inc. (“Stateco”), Strategic Insurance Software, Inc. (“S.I.S.”), 518 Property Management and Leasing, LLC (“518 PML”), State Auto Florida Insurance Company (“SA FL”), Beacon National Insurance Company (“Beacon”), Beacon Lloyds, Inc. (“BLI”) and Beacon Lloyds Insurance Company (“Beacon Lloyds”), First Preferred Insurance Company (“First Preferred”), and Petrolia Insurance Company (“Petrolia”) (Beacon, BLI, Beacon Lloyds, First Preferred, and Petrolia are collectively referred to herein as the “Beacon Insurers”). This First Amendment shall be effective and operative as set forth in Sections 11 and 12 of this First Amendment.

Background Information

The 2005 Management Agreement describes the operating relationship among substantially all of the affiliates of State Auto Mutual and State Auto Mutual, the ultimate controlling person in the State Auto Mutual insurance holding company system.

SA FL is a wholly owned subsidiary of State Auto Mutual and has re-domesticated to the State of Indiana from the State of Florida.

Eagle Development Corporation (“Eagle”) and the Beacon Insurers became indirect subsidiaries of State Auto Mutual pursuant to a merger (the “Merger”) of a subsidiary of MIGI, a wholly owned subsidiary of State Auto Mutual, with and into Eagle, with Eagle being the surviving corporation of the Merger and a wholly owned subsidiary of MIGI. The Merger was effective on March 28, 2007. The Beacon Insurers became affiliates of State Auto P&C by virtue of the Merger.

For purposes of the 2005 Management Agreement and this First Amendment, the “Mutual Group” or the “State Auto Mutual Group” shall mean State Auto Mutual, Meridian Security, Meridian Citizens Mutual, MIGI, SA FL and the Beacon Insurers, and the “State Auto Financial Group” shall mean STFC, State Auto P&C, National, Milbank, SA OH, Farmers Casualty, Stateco, S.I.S. and 518 PML.

With this First Amendment, the parties to this First Amendment intend to (i) add SA FL as a party to the 2005 Management Agreement, and (ii) add the Beacon Insurers as parties to the 2005 Management Agreement, provided that the arrangements between the Beacon Insurers, State Auto P&C and State Auto Mutual recognize that Beacon has its own employee force performing services for it and the other Beacon Insurers.

In response to a recommendation from the Independent Committee of the Board of Directors of each of State Auto Mutual and STFC, the Boards of Directors of the State Auto Financial Group and the State Auto Mutual Group have approved this First Amendment.

Statement of Agreement

In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the parties to this Amendment agree to amend the 2005 Management Agreement as follows:

1.	Capitalized terms used in this First Amendment (including the Background Information) which are not otherwise defined herein shall have the meanings ascribed to such terms in the 2005 Management Agreement.

Upon the SA FL Effective Date, the existing Cost Sharing Agreement between SA FL, State Auto Mutual and State Auto P & C shall automatically terminate with no further force or effect, and SA FL shall automatically become a Managed Company with all rights and duties thereof as set forth in the 2005 Management Agreement.

Upon the Beacon Insurers Effective Date, each Beacon Insurer shall automatically become a Managed Company with all rights and duties thereof as set forth in the 2005 Management Agreement, except as otherwise specifically set forth in this First Amendment. It is understood and agreed that Beacon has its own employees who provide managerial, supervisory, administrative, technical, professional, and clerical services to it and the other Beacon Insurers. State Auto P&C, through its employees, will provide certain executive, administrative, technical, and professional support services to the Beacon Insurers, while State Auto Mutual will provide certain facilities to the Beacon Insurers, the costs of which shall be allocated among the Beacon Insurers, State Auto P&C and State Auto Mutual as described below.

Section 3 of the 2005 Management Agreement shall not be applicable to the Beacon Insurers because Beacon’s own employees provide many of the organizational, operational, and management functions for the Beacon Insurers. Notwithstanding the foregoing, the Beacon Insurers understand and agree that State Auto P&C, acting by and through its employees, is authorized to provide organizational, operational, and management functions for the Beacon Insurers. To the extent that employees of State Auto P&C provide any operational, administrative, and management functions to the Beacon Insurers, the costs therefore shall be allocated as described below.

5.	Section 6(a) of the 2005 Management Agreement is made specifically applicable to SA FL. The last sentence of Section 6(a) of the 2005 Management Agreement is amended in its entirety to read as follows:

It is further understood and agreed that while SA WI is a party to the 2005 Pooling Agreement, it is a party to a separate management agreement with State Auto P&C and State Auto Mutual, which contains provisions substantially similar to this section 6(a).

6.	Section 6(c) of the 2005 Management Agreement is deleted in its entirety and replaced by the following:

(c)

Insurance Losses, Loss Adjustment Expenses and Underwriting Expenses of National and the Beacon Insurers- All insurance losses, loss adjustment expenses and underwriting expenses of National, as computed under the statutory accounting principles used by National from time to time shall be paid by National. Underwriting expenses include, without limitation, expenses for State Auto P&C employees providing services on behalf of National for only part of their time, which expenses shall be allocated to National in proportion to the amount of time those employees spend on National’s behalf in accordance with statutory accounting principles used by National from time to time. All insurance losses, loss adjustment expenses and underwriting expenses of the Beacon Insurers, as computed under the statutory accounting principles used by the Beacon Insurers from time to time shall be paid by the Beacon Insurers. Underwriting expenses include, without limitation, expenses for State Auto P&C employees providing services on behalf of the Beacon Insurers for only part of their time, which expenses shall be allocated to the Beacon Insurers in proportion to the amount of time those employees spend on behalf of the Beacon Insurers in accordance with statutory accounting principles used by the Beacon Insurers from time to time.

Section 6(d) of the 2005 Management Agreement shall not apply to the Beacon Insurers. The Beacon Insurers share of pension and benefit expenses under the Plans for employees of State Auto P&C shall be allocated to the Beacon Insurers based on the percentage of State Auto P&C’s payroll expenses allocated to each of the Beacon Insurers pursuant to the terms hereof.

8.	Section 6(e) of the 2005 Management Agreement shall not apply to the Beacon Insurers. The Beacon Insurers rent office space at their principal office location in Wichita Falls, Texas, and this rent expense shall be a direct expense of the Beacon Insurers.

9.	Section 7 of the 2005 Management Agreement is deleted in its entirety and replaced by the following:

7. Payment for Services - All amounts due under this Agreement shall be due and payable by the respective company within sixty (60) days after the end of each calendar quarter.

10.

Section 9(b) of the 2005 Management Agreement is hereby amended to add the following as the last sentence: “The foregoing notwithstanding, the Beacon Insurers may terminate their participation in this Agreement at any time by giving the other parties at least ninety (90) days’ advance written notice of such termination.”

11.	As to SA FL, this First Amendment shall be effective as of 12:01 a.m. Columbus, Ohio time, on April 1, 2007 (the “SA FL Effective Date”). Notwithstanding the foregoing, this First

Amendment shall only become operative as to SA FL when this First Amendment has been approved, or deemed approved, by all insurance regulators whose approval is necessary to implement the terms of the 2005 Management Agreement, as amended by this First Amendment, with respect to SA FL. If this First Amendment is not approved with respect to SA FL as described in this section, this First Amendment shall be deemed null and void as to SA FL and shall not become operative to amend the 2005 Management Agreement in any manner whatsoever as to SA FL.

12.

As to the Beacon Insurers, this First Amendment shall be effective as of 12:01 a.m. Columbus, Ohio time, on April 1, 2007 (the “Beacon Insurers Effective Date”). Notwithstanding the foregoing, this First Amendment shall only become operative as to the Beacon Insurers when this First Amendment has been approved, or deemed approved, by all insurance regulators whose approval is necessary to implement the terms of the 2005 Management Agreement, as amended by this First Amendment, with respect to the Beacon Insurers. If this First Amendment is not approved with respect to the Beacon Insurers as described in this section, this First Amendment shall be deemed null and void as to the Beacon Insurers and shall not become operative to amend the 2005 Management Agreement in any manner whatsoever as to the Beacon Insurers.

13.

This document is an amendment to the 2005 Management Agreement. In the event of any inconsistencies between the provisions of the 2005 Management Agreement and this First Amendment, the provisions of this First Amendment shall control. Except as expressly amended hereby, the 2005 Management Agreement shall continue in full force and effect without change for the balance of the term thereof.


STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

STATE AUTO FINANCIAL CORPORATION

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

STATE AUTO NATIONAL INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President


STATE AUTO INSURANCE COMPANY OF OHIO

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

FARMERS CASUALTY INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

MERIDIAN SECURITY INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

STATE AUTO FLORIDA INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

BEACON NATIONAL INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

FIRST PREFERRED INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

PETROLIA INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President


BEACON LLOYDS, INC.

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

BEACON LLOYDS INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

MERIDIAN INSURANCE GROUP, INC.

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

STATECO FINANCIAL SERVICES, INC.

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

MILBANK INSURANCE COMPANY

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

STRATEGIC INSURANCE SOFTWARE, INC.

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

518 PROPERTY AND MANAGEMENT LEASING, LLC

By:		/ S / R OBERT P. R ESTREPO , J R .
		Robert P. Restrepo, Jr., President

Exhibit 10.68

EMPLOYMENT AGREEMENT

This Employment Agreement (this “ Agreement ”) is made as of May 10, 2007, and shall be effective as of January 1, 2007 (the “ Effective Date ”), among BroadStreet Capital Partners, Inc., an Ohio corporation (“ BSCP ”), State Auto Financial Corporation, an Ohio corporation (“ State Auto Financial ”), State Auto Property and Casualty Insurance Company, an Iowa-domiciled insurance company (“ State Auto P&C ”), State Automobile Mutual Insurance Company, an Ohio-domiciled mutual insurance company (“ State Auto Mutual ”), and Richard L. Miley (“ Executive ”). State Auto Financial, State Auto Mutual and each of their respective subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “ State Auto .”

Background Information

A. State Auto P&C is the principal operating subsidiary of State Auto Financial and the employer of record of all employees of State Auto. State Auto Financial is a majority owned subsidiary of State Auto Mutual. BSCP is a wholly owned subsidiary of State Auto Mutual. State Auto Mutual is the ultimate controlling person in the State Auto holding company system.

B. Executive has been employed by State Auto for a number of years, and for the past several years Executive has served primarily as Vice President of BSCP.

C. State Auto and Executive desire to enter into this Agreement to, among other things, reflect Executive’s promotion to President and Chief Executive Officer of BSCP and set forth Executive’s duties and responsibilities and compensation arrangements as the President and Chief Executive Officer of BSCP.

Statement of Agreement

The parties hereby acknowledge the accuracy of the foregoing Background Information and hereby agree as follows:

§1. Continuation of Employment . State Auto hereby continues Executive’s employment with State Auto, and Executive hereby accepts such continued employment by State Auto, upon the terms and subject to the conditions set forth in this Agreement. This Agreement shall supercede and replace any and all prior employment arrangements, whether written or oral, between Executive and State Auto.

§2. Employment Term . The employment term of Executive’s continued employment with State Auto shall be for a four-year period commencing on the Effective Date and ending on December 31, 2010, both days inclusive (the “ Employment Term ”). Executive’s employment term shall automatically extend for additional one-year renewal terms unless:

(a) At least 60 days prior to the expiration of the applicable Employment Term, State Auto gives notice to Executive that State Auto does not wish to extend the Employment Term, in which case Executive’s employment shall be deemed to have been

terminated effective as of the expiration of the applicable Employment Term, in which case Executive shall receive the payments described in §5(g) of this Agreement; or

(b) At least 60 days prior to the expiration of the applicable Employment Term, Executive gives notice to State Auto that Executive does not wish to extend the Employment Term, in which Executive shall be deemed to have voluntarily terminated his employment as provided by §5(e) of this Agreement effective as of the end of the expiration of the applicable Employment Term.

(c) The parties agree that Executive’s retirement from State Auto shall be deemed a voluntary termination of employment as provided by §5(e) of this Agreement effective as of Executive’s date of retirement.

As used in this Agreement, the term “ Employment Term ” shall include any renewal term. Each renewal term shall commence on the day following the expiration of the initial four-year term or any renewal term, as the case may be, and shall end on the first anniversary of the expiration date of the initial four-year term or any renewal term, as the case may be.

§3. Duties . Executive shall serve as the President and Chief Executive Officer of BSCP. As such, Executive shall perform such duties as are customarily performed by an executive officer in such a position and such other duties related to State Auto as may be assigned to him from time to time by the Chairman (the “ Chairman ”) of the Board of Directors of State Auto Mutual. Executive shall devote his full time and attention and best efforts to the performance of such duties. Executive shall not engage in any business or investment activity (whether or not competitive with BSCP) which requires any substantial amount of his time and which has an adverse affect on his performance as President and Chief Executive Officer, in each case as determined by the Board of Directors of BSCP. Notwithstanding the foregoing, Executive is encouraged to become involved in community and charitable activities in Columbus, Ohio.

Executive shall serve as an officer of any State Auto company if and for so long as Executive shall be duly elected by the respective State Auto boards of directors at any time or times during the Employment Term. Executive shall serve as a director of any State Auto company if and for so long as Executive shall be duly elected by the respective State Auto members or shareholders at any time or times during the Employment Term. In the event Executive’s employment is hereafter terminated, Executive agrees to tender his resignation as a director from all State Auto companies on or prior to the expiration of the Employment Term.

§4. Compensation and Benefits . During the Employment Term, Executive shall receive the following compensation and benefits:

(a) Base Salary . State Auto shall pay Executive a base salary (the “ Base Salary ”) in the amount of $250,000 per year, payable in accordance with State Auto’s general policies and procedures for payment of compensation to its salaried personnel, plus such increases in annual base compensation that the Chairman and the Compensation Committee of the Board of Directors of State Auto Financial (the “ STFC Compensation Committee ”) may authorize from time to time. The compensation of

Executive shall be reviewed by the Chairman and the STFC Compensation Committee no less often than once each calendar year during the Employment Term and may be increased by the Chairman and the STFC Compensation Committee as they determine in the good faith exercise of their business judgment based on such factors as the Chairman and the STFC Compensation Committee deem appropriate. In no event shall the Base Salary be less than the Base Salary set forth above or as hereafter increased.

(b) Performance Bonuses .

(i) Short-Term Incentive Plan . For 2007, Executive’s cash incentive compensation plan providing for short-term bonus payments is set forth in the attached Exhibit B (the “ Short-Term Incentive Plan ”). For each year thereafter, the STFC Compensation Committee shall modify the performance goals and other terms of the Short-Term Incentive Plan as it deems appropriate, in its discretion. In all cases, the targeted annual bonus will be 50% of Base Salary, with a maximum annual bonus of 100% of Base Salary.

(ii) Long-Term Incentive Plan . Executive’s cash incentive compensation plan providing for long-term bonus payments is set forth in the attached Exhibit C (the “ Long-Term Incentive Plan ”).

(iii) No Participation in Other Incentive Compensation Plans . Except for the Short-Term Incentive Plan and the Long-Term Incentive Plan (collectively, the “ Incentive Plans ”), and except as otherwise provided in this Agreement, Executive shall not participate, and shall not have the right to participate, in any other State Auto incentive or equity compensation plan, including without limitation the State Auto Quality Performance Bonus Plan (the “ QPB Plan ”), the State Auto Financial Corporation Amended and Restated Equity Incentive Compensation Plan, the State Auto Financial Corporation Leadership Bonus Plan or the State Auto Financial Corporation Long-Term Incentive Plan.

Executive may participate in any employee stock purchase plan sponsored or administered by State Auto, subject to the eligibility requirements of such plans. It is further understood and agreed that any such plans may be amended, suspended or terminated by State Auto at any time.

(c) Benefits . Executive shall participate (or if elective, may participate) in any and all fringe benefits generally made available to employees of State Auto as described in State Auto’s Employee Reference Guide, in accordance with State Auto’s regular employment policies and practices. In addition, the Chairman and the STFC Compensation Committee may grant such additional fringe benefits and perquisites to Executive as they, in their discretion, deem appropriate. It is understood and agreed that, except for plans or fringe benefits which are generally made available to all employees, the Executive’s right to participate in such plans or receive such fringe benefits shall be on the terms and conditions determined or approved by the Chairman and the STFC Compensation Committee. It is further understood and agreed that any such plans or

fringe benefits may be amended, suspended or terminated by State Auto Mutual at any time. Executive shall be entitled to reimbursement for all out-of-pocket expenses incurred by Executive in the performance of his duties hereunder; provided that such reimbursement shall be in accordance with State Auto Mutual’s then existing policy regarding the same.

(d) D&O Coverage; Indemnification .

(i) During the Employment Term, State Auto shall arrange to provide Executive with coverage under the terms of State Auto’s policy of insurance for directors and officers in effect from time to time (the “ D&O Insurance ”).

(ii) On and after the Effective Date, State Auto shall indemnify and hold harmless Executive to the fullest extent permitted by the laws of the State of Ohio, as such laws may from time to time be amended, if Executive is made, or threatened to be made, a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that Executive was an officer or employee of State Auto. The indemnification provided by this subsection shall not be deemed exclusive of any other rights to which Executive may be entitled under the charter or bylaws of State Auto or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in the Executive’s official capacity and as to action in another capacity while holding such office, and shall inure to the benefit of the heirs, executors and administrators of Executive.

§5. Termination of Employment .

(a) Death . The Employment Term shall automatically terminate upon the death of Executive. In such case, in addition to any other benefits to which any person would be entitled upon Executive’s death, State Auto shall pay the following to the beneficiary indicated on the Beneficiary Designation and Notice Form attached as Exhibit A (the “ Beneficiary ”):

(i) No later than five business days after Executive’s death, a lump sum payment in an amount equal to Executive’s then-current Base Salary and vacation pay each as accrued through the end of the Employment Term.

(ii) The Executive’s then-current Base Salary for a period commencing on the day following the end of the Employment Term and continuing for 12 full calendar months following the termination of the Employment Term, payable at the time and in the manner the Executive’s Base Salary was payable to him at the time of his death.

(iii) A pro rata share of any bonus to which Executive would then have been eligible to receive pursuant to the Incentive Plans, provided that any bonus contemplated by any of the Incentive Plans was in fact earned under the terms of the applicable Incentive Plan for the particular period in which the Employment Term ended. The pro rata share of any bonus due under any of the Short-Term

Incentive Plan shall be determined by dividing a numerator equal to the number of whole months that have elapsed in the calendar year on the date of Executive’s death or disability, as applicable, by the denominator of 12. The pro rata share of any bonus due under any of the Long-Term Incentive Plan shall be determined by dividing a numerator equal to the number of whole months that have elapsed in the Performance Period (as defined in the Long-Term Incentive Plan) on the date of Executive’s death or disability, as applicable, by the denominator of 48. If any bonus is due and payable pursuant to this subsection, such bonus will be paid to the Beneficiary or Executive, as the case may be, as soon as practicable following the end of the calendar year following the determination by State Auto that a bonus is due under the applicable Incentive Plan, but no later than March 15 following such calendar year.

(iv) Executive’s spouse shall be entitled to participate in State Auto’s fringe benefit programs sponsored by State Auto Mutual as would the spouse of any other deceased State Auto employee in similar circumstances.

(b) Disability . The Employment Term and the Executive’s employment with State Auto may be terminated by State Auto upon the Disability of Executive. In such case, in addition to any other benefits to which Executive would be entitled, State Auto shall pay the following to Executive:

(i) No later than five business days after the termination date of his employment, a lump sum payment in an amount equal to the Executive’s then-current Base Salary and vacation pay each as accrued through the end of the Employment Term.

(ii) A pro rata share of any bonus to which Executive would then have been eligible to receive pursuant to the Incentive Plans, provided that any bonus contemplated by the Incentive Plans was in fact earned under the terms of the applicable Incentive Plan for the particular period in which the Employment Term ended. Such bonus shall be calculated in the manner and payable at the time or times set forth in §5(a)(iii).

(iii) An amount equal to 80% of Executive’s then-current Base Salary, less any benefits to which Executive would be entitled to receive under any State Auto Mutual-sponsored long term disability plan as in effect as of the date of his termination of employment (the “ State Auto Disability Plan ”), the payment of which shall continue for the full period of Disability or until Executive attains age 65, whichever first occurs. Such amount shall be payable at the times and in the manner the Executive’s Base Salary was payable to Executive at the time of his Disability.

(iv) Executive shall continue to receive (A) such health insurance benefits or their equivalent as Executive and Executive’s spouse received as of the date of Disability, and (B) such group life insurance as Executive had in place on his life as of the date of Disability, in each case in accordance with those plans

sponsored by State Auto Mutual and generally made available to State Auto employees at the time of his Disability.

(v) In order to terminate the Employment Term pursuant to this §5(b), State Auto shall provide not less than a 45-days notice to Executive of State Auto’s intent to terminate Executive’s employment for his Disability, in which case the Employment Term shall end not less than the 45th day following the date of written notice.

(vi) For purposes of this §5(b), Executive shall be deemed to have suffered a “ Disability ” if, during the Employment Term: (A) Executive was unable to perform substantially his duties under this Agreement because of illness or other incapacity, and such incapacity persisted for a period of at least six consecutive months or nine nonconsecutive months in any 12-month period, or (B) Executive has suffered a long-term disability under the terms of the State Auto Disability Plan. If necessary, a determination of Disability shall be subject to the certification of a qualified medical doctor agreed to by State Auto and Executive or, in the event of Executive’s incapacity to designate a qualified medical doctor, by Executive’s legal representative. If State Auto and Executive (or his legal representative, as the case may be) fail to agree upon a qualified medical doctor, each party shall nominate a qualified medical doctor and the two doctors shall select a third doctor, who shall make the determination as to Disability.

(c) For Cause . The Employment Term and the Executive’s employment with State Auto may be terminated by State Auto upon the occurrence of any event which constitutes for Cause termination. Any for Cause termination of Executive shall be jointly determined by the Chairman and the STFC Compensation Committee. If the Chairman and the STFC Compensation Committee decide to terminate Executive’s employment for Cause, State Auto shall give Executive written notice of its intention to take such action, and Executive’s employment shall cease on the date such notice is delivered to Executive. In the case of for Cause termination:

(i) No later than five business days after the termination date of his employment, State Auto shall pay Executive a lump sum payment in an amount equal to the Executive’s then-current Base Salary and vacation pay each as accrued through the termination date of Executive’s employment.

(ii) No later than five business days after the termination date of his employment, State Auto shall pay Executive a lump sum payment in an amount equal to any bonus to which Executive is entitled to be paid under any of the Incentive Plans as of the termination date of his employment; provided, however, that if Executive’s for Cause termination was for the occurrence of an event set forth in subsections (c)(iii)(B) or (C), below, then Executive shall automatically forfeit any bonus to which Executive is entitled to be paid under any of the Incentive Plans.

(iii) For purposes of this Agreement, “ for Cause ” shall mean: (A) the willful failure of Executive to perform Executive’s duties with State Auto (other than any such failure resulting from incapacity due to a Disability), after (1) a written demand for performance is delivered to Executive by the Chairman which specifically identifies the manner in which the STFC Compensation Committee and the Chairman believe that Executive has not performed Executive’s duties and (2) Executive has been provided 90 days to cure any performance failures (provided, however, that Executive shall be permitted only one 90-day cure period with respect to all performance failures); (B) the willful engaging by Executive in illegal conduct or gross misconduct which has a material adverse effect on State Auto, as determined by the STFC Compensation Committee and the Chairman; (C) the breach of any of the provision of §6 of this Agreement; or (D) the willful failure to comply with any State Auto employment policy, code of conduct or code of ethics applicable to Executive, as determined by the Audit Committee of the Board of Directors of State Auto Financial and the Chairman. For purposes of this provision, no act, or failure to act, on the part of Executive shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of State Auto. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by State Auto’s Board of Directors or upon the advice of counsel for State Auto shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of State Auto.

(d) Intentionally Omitted

(e) Voluntary Termination . The Employment Term and the Executive’s employment with State Auto may be terminated by Executive upon the giving of at least 60-days advance notice (the “ Notice Period ”) to State Auto. If Executive gives notice of termination under this provision, State Auto shall have the right to relieve Executive, in whole or in part, of his duties under this Agreement and to advance the termination date to any date determined by State Auto. In the case of the Executive’s voluntary termination of employment:

(i) No later than five business days after the termination date of his employment, State Auto shall pay Executive a lump sum payment in an amount equal to the Executive’s then-current Base Salary and vacation pay accrued and to accrue through the expiration date of the Notice Period.

(f) Good Reason Termination by Executive . The Employment Term and the Executive’s employment with State Auto may be terminated by Executive for Good Reason (as defined below) upon the giving of at least 30-days advance notice to State

Auto if an event constituting Good Reason occurs within 24 months after a Change of `Control (as defined below). In the case of a Good Reason termination by Executive:

(i) No later than five business days after the termination date of his employment, State Auto shall pay Executive a lump sum payment in an amount equal to the Executive’s then-current Base Salary and vacation pay accrued through the termination date of Executive’s employment.

(iii) No later than 45 days after the termination date of his employment, State Auto shall pay Executive a lump sum payment in an amount equal to three times his Cash Compensation (as defined below) for the fiscal year immediately prior to the termination date of his employment.

(iv) For purposes of this Agreement, a “ Change of Control ” means the occurrence of any of the following:

(A) With respect to BSCP, any of the following occurs:

(1) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of BSCP representing more than 50% of the combined voting power of BSCP’s then outstanding securities, excluding (aa) any acquisition by any State Auto company; or (bb) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by any State Auto company; or

(2) A majority of the Board of Directors of BSCP at any time is comprised of other than Continuing Directors; or

(3) Any of the following occurs:

(aa) a merger or consolidation of BSCP, other than a merger or consolidation in which the voting securities of BSCP immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) more than 50% of the combined voting power of BSCP or surviving entity immediately after the merger or consolidation with another entity;

(bb) a sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of BSCP which shall include, without limitation, the sale of assets or earning power aggregating more than 50% of the assets or earning power of BSCP on a consolidated basis;

(cc) a reorganization, reverse stock split, or recapitalization of BSCP which would result in any of the foregoing; or

(dd) a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.

(B) With respect to State Auto Mutual, any of the following occurs:

(1) State Auto Mutual affiliates with or is merged into or consolidated with a third party and as a result, a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors; or

(2) State Auto Mutual completes a conversion to a stock insurance company and as a result of which a majority of the Board of Directors of State Auto Mutual or its successor is comprised of other than Continuing Directors.

(1) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of State Auto Financial representing 25% or more of the combined voting power of State Auto Financial’s then outstanding securities, excluding (aa) any acquisition by State Auto Financial or any Subsidiary; (bb) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by State Auto Financial, a Subsidiary or State Auto Mutual; or (cc) any acquisition by State Auto Mutual; or

(2) A majority of the Board of Directors of State Auto Financial at any time is comprised of other than Continuing Directors; or

(3) Any event or transaction State Auto Financial would be required to report in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; or

(4) Any of the following occurs:

(aa) a merger or consolidation of State Auto Financial, other than a merger or consolidation in which the voting securities of State Auto Financial immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) 51% or more of the combined voting power of State Auto Financial or surviving entity immediately after the merger or consolidation with another entity;

(bb) a sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of State Auto Financial which shall include, without limitation, the sale of assets or earning power aggregating more than 50% of the assets or earning power of State Auto Financial on a consolidated basis;

(cc) a reorganization, reverse stock split, or recapitalization of State Auto Financial which would result in any of the foregoing; or

(dd) a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.

(v) For purposes of this Agreement, a “ Good Reason ” means the occurrence of any one or more of the following:

(A) The assignment to Executive of duties which are materially and adversely different from or inconsistent with the duties, responsibilities, and status of Executive’s position at any time during the 12-month period prior to such Change of Control, or which result in a significant change in Executive’s authority and responsibility as the chief executive officer of BSCP;

(B) A reduction by in Executive’s Base Salary in place as of the day immediately prior to a Change of Control, or the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of BSCP, or a reduction of Executive’s most recent highest incentive bonus potential under the Incentive Plans prior to such Change of Control, or any successor to such arrangement;

(C) A demand by BSCP that Executive relocate to a location in excess of 35 miles from the location where Executive is currently based, or in the event of any such relocation with Executive’s express written consent, the failure of BSCP to pay (or reimburse Executive for) all reasonable moving expenses incurred by Executive relating to a change of principal residence in connection with such relocation and to indemnify Executive against any loss in the sale of Executive’s principal residence in connection with any such change of residence and any expenses incurred by Executive that are directly attributable to such sale (for purposes of this provision, “ loss ” is understood to mean a sale of such principal residence at a price less than the adjusted basis in such residence);

(D) The failure of BSCP to obtain a satisfactory agreement from any successor to BSCP to assume and agree to perform this Agreement, as contemplated in §21 of this Agreement;

(E) The failure of BSCP to provide Executive with substantially the same employee benefits that were provided to him immediately prior to the Change of Control, or with a package of employee benefits that, though one or more of such benefits may vary from those in effect immediately prior to such Change of Control, is substantially comparable in all material respects to such employee benefits taken as a whole; or

(F) Any reduction in Executive’s compensation or benefits or adverse change in Executive’s location or duties, if such reduction or adverse change occurs at any time after the commencement of any discussion with a third party relating to a possible Change of Control of BSCP or State Auto Mutual involving such third party, if such reduction or adverse change is in contemplation of such possible Change of Control and such Change of Control is actually consummated within 12 months after the date of such reduction or adverse change.

(vi) For purposes of this Agreement, a “ Continuing Director ” of BSCP, State Auto Mutual or State Auto Financial, as the case may be, means a director who was either (A) first elected or appointed as a director prior to the date of this Agreement; or (B) subsequently elected or appointed as a director if such director was nominated by the Nominating and Governance Committee of the Board of Directors of State Auto Mutual or State Auto Financial, as the case may be, or appointed by at least two thirds of the total number of then Continuing Directors of BSCP, State Auto Mutual or State Auto Financial, as the case may be.

(vii) For purposes of this Agreement, “ Cash Compensation ” means the Base Salary plus any bonuses paid or to be paid under the Short-Term Incentive Plan to Executive with respect to the applicable fiscal year of State Auto Mutual.

(g) At End of Employment Term . The Executive’s employment with State Auto may be terminated by State Auto at the expiration of any Employment Term in accordance with §2(a) of this Agreement. In such case:

(i) No later than five business days after the expiration of the Employment Term, State Auto shall pay Executive a lump sum payment in an amount equal to the Executive’s then-current Base Salary and vacation pay accrued through the expiration of the Employment Term.

(ii) No later than 75 days after the expiration of the Employment Term, State Auto shall pay Executive all bonuses payable under the Incentive Plans for the fiscal year coinciding with the expiration of such Employment Term (all payments shall be made at the times and manner set forth in the applicable Incentive Plan).

(iii) Subject to the other provisions of this §5(g), no later than 75 days after the termination date of his employment, State Auto shall pay Executive a lump sum payment in an amount equal to two times his Cash Compensation for the fiscal year coinciding with the expiration of such Employment Term. If Executive’s termination occurs within 24 months after a Change of Control, then the payment required by the preceding sentence shall be an amount equal to three times his Cash Compensation for the fiscal year coinciding with the expiration of such Employment Term.

(iv) Subject to the other provisions of this §5(g), if at the time of Executive’s termination at the expiration of the Employment Term either BSCP or State Auto Mutual has reached an agreement with an unaffiliated third party, the performance of which agreement would result in a Change of Control involving such third party, and such Change of Control is actually consummated within 12 months after the date of such termination, then State Auto shall pay Executive a lump sum payment in an amount equal to one time the amount of his Cash Compensation for the fiscal year coinciding with the expiration of the Employment Term. Such payment shall be made no later than five business days after such Change of Control is consummated.

§6. Noncompetition, Non-Piracy, Confidentiality and Nonsolicitation Covenants .

(a) Noncompetition . During the period of Executive’s employment by State Auto and for 24 months (the “ Noncompetition Period ”) following the date of his termination of employment (the “ Employment Termination Date ”), Executive agrees that he shall not, directly or indirectly, engage in the insurance agency or insurance brokerage business as conducted by BSCP as of the Employment Termination Date in any state where BSCP conducts, or proposes to conduct, business as of the Employment Termination Date. However, except as provided in the next sentence, the foregoing shall not prohibit Executive from being employed by, or providing any services to, a Small Agency (as defined below) during the Noncompetition Period. If Executive begins employment with, or provides services to, a Small Agency, and thereafter during the

Noncompetition Period such Small Agency fails to meet the definition of Small Agency, Executive shall cease such employment with, or providing such services to, such Small Agency immediately upon becoming aware of such Small Agency’s failure to qualify as such. For purposes of this Agreement, a “ Small Agency ” shall mean an insurance agency or brokerage which, together with any affiliated agencies or brokerages, had less than $10.0 million in commission revenues as of the end of the immediately preceding calendar year.

The foregoing shall not be construed to prohibit Executive from owning, directly or indirectly, less than 5% of the securities of any class of any company listed on a national securities exchange or traded in the over-the-counter securities market.

(b) Non-Piracy . In addition to the restrictions set forth in subsection (a), above, for a period of 60 months following the Employment Termination Date (the “ Non-Piracy Period ”), Executive agrees that he shall not, directly or indirectly, solicit, approach or attempt to induce any Person who, as of the Employment Termination Date, (i) is affiliated with any insurance agency or brokerage owned or affiliated with BSCP, or (ii) has any type of business relationship with any insurance agency or brokerage owned or affiliated with BSCP, to cease doing business with BSCP.

(c) Consideration for Noncompetition and Non-Piracy Provisions . In consideration of Executive’s agreement to the noncompetition and non-piracy provisions set forth in this section, Executive shall receive an equity award of options to purchase 20,000 STFC common shares on the following terms: (i) all of the options will be awarded concurrently with the execution and delivery of this Agreement (the “ award date ”); (ii) options to purchase 5,000 STFC common shares shall vest on the award date, with options to purchase 5,000 STFC common shares to thereafter vest on each of the first, second and third anniversary dates of the Effective Date; (iii) the exercise price of the options will equal the fair market value of the STFC common shares as of the award date, with the fair market value to be determined under the terms of the State Auto Financial Corporation Amended and Restated Equity Incentive Compensation Plan; (iv) if Executive’s employment is terminated for any reason prior to the vesting of all such options, then all options theretofore not vested shall automatically vest as of the termination date of Executive’s employment; and (v) the options will be awarded pursuant to the terms of the State Auto Financial Corporation Amended and Restated Equity Incentive Compensation Plan and the terms set forth in separate award agreements entered into on each award date.

(d) Confidentiality . Executive agrees that he will not at any time divulge, furnish or make accessible to any Person, or himself make use of, any Confidential Information (as defined below) obtained by Executive while an employee of State Auto. For purposes of this Agreement, the term “ Confidential Information ” shall mean information disclosed to Executive or known by State Auto and which is not generally known by Persons outside of State Auto, including, but not limited to, information about BSCP’s services, strategies, plans, marketing arrangements, trade secrets, financial information, customer lists, policyholder lists, names of agents or agencies (or lists thereof), books, records, memoranda, and other proprietary information of BSCP.

(e) Nonsolicitation . During the Noncompetition Period, Executive agrees that he will not, directly or indirectly, solicit, recruit, approach, counsel or attempt to induce any person who is then in the employ of any State Auto company to leave the employ of such the State Auto company, or employ or attempt to employee any such person.

(f) Tolling . The Noncompetition Period shall be tolled during the period of any violation or attempted violation of this section by Executive. State Auto shall provide notice to Executive of any tolling of the Noncompetition Period.

(g) Injunctive Relief, Etc . Executive understands that this §6 is an essential element of this Agreement and that State Auto would not have entered into this Agreement without this provision being included in this Agreement. Executive acknowledges that this §6 is reasonable and appropriate in all respects. In the event of any violation or attempted violation of this §6, Executive specifically acknowledges and agrees that State Auto’s remedy at law will be inadequate, that State Auto, its businesses and business relationships will suffer irreparable injury and, therefore, State Auto shall be entitled to injunctive relief upon such breach in addition to any other remedy to which they may be entitled, either in law or in equity, without the necessity of proof of actual damage. If any of the provisions of this §6 shall be held to be unenforceable because of the duration of such provision, the area covered thereby, or the type of conduct restricted therein, the parties agree that the court or arbitral body making such determination shall have the power to modify the duration, geographic area and/or other terms of such provision to the maximum extent permitted by law and, as so modified, said provision shall then be enforceable to the maximum extent permitted by law.

(h) Definitions . For purposes of this Agreement: (i) the term “ directly or indirectly ” shall mean on the Executive’s own behalf, or as an partner, shareholder, member, other owner or equity holder, principal, agent, trustee, manager, employee, officer, director, consultant, or creditor of any corporation, proprietorship, firm, partnership, limited liability company, limited liability partnership, trust, association or other entity; and (ii) the term “ Person ” shall mean any individual, corporation, proprietorship, firm, partnership, limited liability company, limited liability partnership, trust, association or other entity.

§7. Release of Claims .

(a) The obligations of State Auto to make the payments and to provide the benefits due under §5(f)(iii), above, shall be contingent upon Executive signing a release as to all claims Executive may have against State Auto; provided, however, that Executive shall not release State Auto from any claim arising from State Auto’s failure to perform its obligations under (i) § 5(f)(iii), or (ii) §17 (Legal Fees).

(b) Concurrently with the receipt of the release described in §7(b), above, State Auto shall provide Executive with a release as to all claims State Auto may have against Executive, except that State Auto shall not release Executive from any claim arising from the Executive’s failure to perform his obligations under §6, above.

§8. Cooperation with Regard to Litigation . Executive agrees to cooperate with State Auto during the Noncompetition Period by making himself reasonably available to testify on behalf of State Auto in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to assist State Auto in any such action, suit or proceeding by providing information and meeting and consulting with the Board or its counsel or counsel to State Auto as reasonably requested by the Board or such counsel. Executive shall be reimbursed by State Auto for any expenses (including, but not limited to, legal fees) reasonably incurred by Executive in connection with his compliance with the foregoing covenant.

§9. Non-Qualified Deferred Compensation . The parties acknowledge and agree that, to the extent applicable, this Agreement shall be interpreted in accordance with Section 409A of the Internal Revenue of 1986, as amended (“ Section 409A ”). Notwithstanding any provision of this Agreement to the contrary, in the event that State Auto determines that any amounts payable hereunder will be immediately taxable to Executive under Section 409A, State Auto may with the consent of Executive (a) adopt such amendments to this Agreement and appropriate policies and procedures, including amendments and policies with retroactive effect, that State Auto determines necessary or appropriate to preserve the intended tax treatment of the benefits provided by this Agreement and/or (b) take such other actions as State Auto determines necessary or appropriate to comply with the requirements of Section 409A.

In the event of a genuine dispute between State Auto and Executive regarding the amount or timing of payments under this Agreement, a delay in the payment of amounts under this Agreement shall not cause Executive to violate Section 409A to the extent that such delay satisfies the conditions set forth in Section 409A and applicable regulations thereunder.

§10. Withholding of Taxes . State Auto may withhold from any amounts not subject to Section 409A and payable under this Agreement all federal, state, city or other taxes as required by law. State Auto may withhold from any amounts subject to Section 409A and payable under this Agreement all federal employment tax withholding obligations. In the event Section 409A is amended or revised to permit withholding of other federal, state or city taxes required by law, this provision of the Agreement shall be interpreted to permit the same.

§11. Tax Gross-Up . If any amount or benefit paid or provided under §5 is subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (or any similar federal or state excise tax), State Auto shall pay to Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by Executive as a result of the receipt of such additional compensation) to place Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred with respect to any of such amounts or benefits (the “ Tax Gross-Up ”). State Auto shall pay such additional compensation at the time when State Auto withholds such excise tax from any payments to Executive. The calculation of the Tax Gross-Up shall be approved by State Auto’s independent certified public accounting firm then-engaged by State Auto, and the calculation shall be provided to Executive in writing. Executive shall then be given 15 days, or such longer period as Executive reasonably requests, to accept or reject the calculation of the Tax Gross-Up. If the Executive rejects the Tax Gross-Up calculation and the parties are thereafter unable to agree within an additional 45 days, the issue shall be arbitrated. State Auto shall reimburse the Executive for all reasonable legal and

accounting fees incurred with respect to the calculation of the Tax Gross-Up and any dispute related thereto.

For purposes of determining the amount of the Tax Gross-Up, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Tax Gross-Up is to be made and state and local income taxes at the highest marginal rates of taxation in the state and locality of Executive’s residence on the date of termination.

If the excise tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of employment, Executive shall repay to State Auto at the time the reduction in excise tax is finally determined, the portion of the Tax Gross-Up attributable to such reduction. Notwithstanding Executive’s acceptance or rejection of the Tax Gross-Up calculation, if the excise tax is determined to exceed the amount taken into account hereunder at the time of termination of employment, State Auto shall make an additional Tax Gross-Up payment to Executive in respect of such excess at the time the amount of such excess is finally determined.

Notwithstanding anything to the contrary in this Section , if any amount or benefit paid or provided under §5 would be subject to excise tax pursuant to Section 4999 of the Code (or any similar federal or state excise tax), but would not be so subject if the total of such payments would be reduced by 10% or less, then such payment shall be reduced by the minimum amount necessary so as not to cause State Auto to have paid an Excess Severance Payment as defined in Section 280G(b)(1) of the Code and so Executive will not be subject to Excise Tax pursuant to Section 4999 of the Code. The calculation of any potential reduction pursuant to this paragraph or any disputes related thereto shall be resolved as described above with respect to the calculation of the Tax Gross-Up. In the event that the amount of any severance payments that would be payable to or for the benefit of Executive under this Agreement must be modified or reduced to comply with this provision, Executive shall direct which severance payments are to be modified or reduced; provided, however, that no increase in the amount of any payment or change in the timing of the payment shall be made without the consent of State Auto. In no event shall the total payments be reduced by more than 10% in order to avoid treatment as an Excess Severance Payment.

§12. Return of Records . Upon termination of employment, Executive will deliver to State Auto all records, reports, data, memoranda, notes, models, and equipment of any nature that are in Executive’s possession or under Executive’s control prepared or acquired in the course of Executive’s employment relationship with State Auto. Executive further agrees not to take any such information or data, or reproductions of such information or data, which relate to the business activities of State Auto or to parties in a contract relationship with State Auto.

§13. Executive’s Capacity . Executive represents and warrants to State Auto that he has the capacity and right to enter into this Agreement and perform all of his services under this Agreement without any restriction whatsoever by any other agreement, other document, or otherwise.

§14. Complete Agreement . This Agreement contains the entire agreement between the parties concerning Executive’s continued employment with State Auto and supersedes any prior discussions, negotiations, representations, or agreements between them relating to the employment of Executive. No additions or other changes to this Agreement shall be made or be binding on any party unless made in writing and signed by all of the parties to this Agreement.

§15. Notices . All notices, requests, claims, demands and other communications required or permitted to be given under this Agreement to any party shall be in writing and shall be deemed given upon receipt when delivered personally, transmitted by facsimile (which is confirmed), mailed by certified mail (return receipt requested), or delivered to a nationally-recognized express delivery service for delivery to the respective parties hereto at the following addresses (or to such other address or facsimile number as any party may have furnished in writing to the other parties in the manner provided above):

If to State Auto:

BroadStreet Capital Partners, Inc.

c/o State Auto Insurance Companies

518 East Broad Street

Columbus, Ohio 43215

Attention: Chief Executive Officer

Facsimile: (614) 464-4911

with a copy to:

State Auto Insurance Companies

518 East Broad Street

Columbus, Ohio 43215

Attention: General Counsel

Facsimile: (614) 719-0173

If to Executive:

To the address and facsimile number indicated on the Beneficiary Designation and Notice Form attached as Exhibit A .

§16. Governing Law . All questions concerning the validity, intention, or meaning of this Agreement or relating to the rights and obligations of the parties with respect to performance hereunder shall be construed and resolved under the laws of Ohio.

§17. Waiver of Right to Jury Trial . Each of State Auto and the Executive, by its or his execution hereof, waives their respective right to a jury trial of any claim or cause of action based upon or arising out of this Agreement or any dealings between them relating to the subject matter of this transaction and the relationship that is being established. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this agreement, including, without limitation, contract claims, tort

claims, breach of duty claims, and all other common law and statutory claims. State Auto and the Executive acknowledge that this waiver is a material inducement to enter into this Agreement, that each has already relied on the waiver in entering into this Agreement, and that each will continue to rely on the waiver in their related future dealings. State Auto and the Executive further represent and warrant that each has reviewed this waiver with its or his legal counsel, and that each knowingly and voluntarily waives its or his jury trial rights following consultation with legal counsel. This waiver is irrevocable meaning that it shall apply to any subsequent amendments, renewals, supplements, or modifications to this agreement or to any other documents or agreements relating to the transactions contemplated hereby. In the event of any litigation, this Agreement may be filed as a written consent to a trial by the court.

§18. Legal Fees . In the event that any action is brought to enforce any of the provisions of this Agreement, or to obtain money damages for the breach thereof, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of one of the parties to this Agreement, all expenses, including reasonable legal fees and court costs, shall be paid by the non-prevailing party.

§19. Severability . The intention of the parties to this Agreement is to comply fully with all laws and public policies, and this Agreement shall be construed consistently with all laws and public policies to the extent possible. If and to the extent that any court of competent jurisdictions determines that it is impossible or violative of any legal prohibition to construe any provision of this Agreement consistently with any law, legal prohibition, or public policy and consequently holds that provision to be invalid or prohibited, that shall in no way affect the validity of the other provisions of this Agreement which shall remain in full force and effect.

§20. Nonwaiver . No failure by any party to insist upon strict compliance with any term of this Agreement, to exercise any option, enforce any right, or seek any remedy upon any default of any other party shall affect, or constitute a waiver of, the first party’s right to insist upon such strict compliance, exercise that option, enforce that right, or seek that remedy with respect to that default or any prior, contemporaneous, or subsequent default; nor shall any custom or practice of the parties at variance with any provision of this Agreement affect or constitute a waiver of, any party’s right to demand strict compliance with all provisions of this Agreement.

§21. Captions . The captions of the various sections of this Agreement are not part of the context of this Agreement, but are only labels to assist in locating those sections, and shall be ignored in construing this Agreement.

§22. Successors . This Agreement shall be personal to Executive and no rights or obligations of Executive under this Agreement may be assigned by him. Except as described in the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the respective heirs, legal representatives, successors, and assigns of the parties to this Agreement. State Auto shall require any successor to all or substantially all of the business and/or assets of State Auto, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same

manner and to the same extent as State Auto would be required to perform if no such succession had taken place.


BROADSTREET CAPITAL PARTNERS, INC.

By	/s/ Robert P. Restrepo, Jr.		/s/ Richard L. Miley
	Chairman		RICHARD L. MILEY
Print Name and Title

STATE AUTO FINANCIAL CORPORATION		STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

By	/s/ Robert P. Restrepo, Jr.	By	/s/ Robert P. Restrepo, Jr.
	Chairman		Chairman
Print Name and Title		Print Name and Title

STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY

By	/s/ Robert P. Restrepo, Jr.
	Chairman
Print Name and Title

Exhibit 31.01

CERTIFICATION

I, Robert P. Restrepo, Jr., certify that:

I have reviewed this Form 10-Q of State Auto Financial Corporation;

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;

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;

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

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: August 7, 2007				/s/ Robert P. Restrepo, Jr.
				Robert P. Restrepo, Jr., Chief Executive Officer
				(Principal executive officer)

Exhibit 31.02

CERTIFICATION

I, Steven E. English, certify that:

I have reviewed this Form 10-Q of State Auto Financial Corporation;

(a)

(b)

(c)

(d)

(a)

(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: August 7, 2007				/s/ Steven E. English
				Steven E. English, Chief Financial Officer
				(Principal financial officer)

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 Quarterly Report of State Auto Financial Corporation (the “Company”) on Form 10-Q for the period ending June 30, 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

August 7, 2007

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.

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 Quarterly Report of State Auto Financial Corporation (the “Company”) on Form 10-Q for the period ending June 30, 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

Chief Financial Officer

August 7, 2007

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