State Auto Financial CORP (Form: 10-Q, Received: 11/07/2007 16:28:27)

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 September 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 November 1, 2007, the Registrant had 40,922,302 Common Shares outstanding.

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

Part I. Financial Information


Item 1.	Financial Statements (Unaudited)

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

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

	Condensed consolidated statements of income – Nine months ended September 30, 2007 and 2006	3

	Condensed consolidated statements of cash flows – Nine months ended September 30, 2007 and 2006	4

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

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

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	30

Item 6.	Exhibits	31

	Signatures	32

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


($ millions, except per share amount)	September 30 2007 (unaudited)			December 31 2006 (see note 1)
Assets
Fixed maturities, available for sale, at fair value (amortized cost $1,689.3 and $1,630.6, respectively)	$	1,694.5		1,647.4
Equity securities, available for sale, at fair value (cost $199.6 and $230.8, respectively)		258.3		284.2
Other invested assets		5.6		6.3

Total investments		1,958.4		1,937.9
Cash and cash equivalents		115.2		73.4
Accrued investment income and other assets		44.5		43.7
Deferred policy acquisition costs		108.0		104.0
Reinsurance recoverable on losses and loss expenses payable (affiliates $1.9 and $2.7, respectively)		12.4		13.5
Prepaid reinsurance premiums		5.6		6.0
Due from affiliate		24.5		17.9
Current federal income taxes		6.2		—
Deferred federal income taxes		53.3		46.3
Property and equipment, at cost (net of accumulated depreciation of $5.5 and $5.1, respectively)		12.3		12.4

*Total assets*	$	2,340.4		2,255.1

Liabilities and Stockholders’ Equity
Losses and loss expenses payable (affiliates $275.5 and $281.7, respectively)	$	690.5		674.5
Unearned premiums (affiliates $121.6 and $118.4, respectively)		448.6		428.8
Notes payable (affiliates $15.5)		118.1		118.4
Postretirement benefits		132.2		124.8
Pension benefits		9.9		16.1
Current federal income taxes		—		7.2
Other liabilities		42.6		51.1

*Total liabilities*		1,441.9		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		114.8		114.3
Less 4.8 and 4.7 treasury shares, respectively, at cost		(61.3	)	(58.1	)
Additional paid-in capital		95.0		87.3
Accumulated other comprehensive loss		(20.9	)	(17.3	)
Retained earnings		770.9		708.0

*Total stockholders’ equity*		898.5		834.2

*Total liabilities and stockholders’ equity*	$	2,340.4		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 September 30
(unaudited)	2007		2006
Earned premiums (ceded to affiliates $174.1 and $172.6, respectively)	$	252.1	255.8
Net investment income		21.1	20.6
Net realized gains on investments		6.4	2.0
Other income (affiliates $0.8 and $0.7, respectively)		1.3	1.2

*Total revenues*		280.9	279.6

Losses and loss expenses (ceded to affiliates $115.4 and $99.6, respectively)		164.6	145.0
Acquisition and operating expenses		82.6	87.6
Interest expense (affiliates $0.4)		1.9	1.9
Other expenses, net		3.2	2.7

*Total expenses*		252.3	237.2

Income before federal income tax		28.6	42.4

Federal income tax expense		5.4	11.2

Net income	$	23.2	31.2

Earnings per common share:
Basic	$	0.56	0.76

Diluted	$	0.55	0.75

Dividends paid per common share	$	0.15	0.10

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)	Nine months ended September 30
(unaudited)	2007		2006
Earned premiums (ceded to affiliates $520.6 and $513.8, respectively)	$	757.3	768.6
Net investment income		63.0	61.6
Net realized gains on investments		11.1	2.5
Other income (affiliates $2.4 and $2.2, respectively)		3.7	3.7

*Total revenues*		835.1	836.4

Losses and loss expenses (ceded to affiliates $315.9 and $305.4, respectively)		468.0	466.3
Acquisition and operating expenses		254.0	256.0
Interest expense (affiliates $1.1)		5.6	5.6
Other expenses, net		9.2	9.6

*Total expenses*		736.8	737.5

Income before federal income tax		98.3	98.9

Federal income tax expense		20.9	23.4

Net income	$	77.4	75.5

Earnings per common share:
Basic	$	1.88	1.85

Diluted	$	1.86	1.82

Dividends paid per common share	$	0.35	0.28

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)	Nine months ended September 30
(unaudited)	2007			2006
Cash flows from operating activities:
Net income	$	77.4		75.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, net		8.3		7.5
Share-based compensation		4.9		5.4
Net realized gains on investments		(11.1	)	(2.5	)
Changes in operating assets and liabilities:
Deferred policy acquisition costs		(3.9	)	(2.0	)
Accrued investment income and other assets		(1.1	)	(0.1	)
Net prepaid pension expense		—		(4.4	)
Postretirement and pension benefit liabilities		2.4		6.1
Other liabilities and due to/from affiliates, net		(18.5	)	(11.4	)
Reinsurance recoverable on losses and loss expenses payable and prepaid reinsurance premiums		1.5		3.8
Losses and loss expenses payable		16.0		(24.8	)
Unearned premiums		19.8		11.8
Excess tax benefits on share based awards		0.2		—
Federal income taxes		(18.8	)	(8.9	)

*Net cash provided by operating activities*		77.1		56.0

Cash flows from investing activities:
Purchases of fixed maturities – available-for-sale		(280.6	)	(172.1	)
Purchases of equity securities – available-for-sale		(34.9	)	(65.2	)
Purchases of other invested assets		(0.7	)	(0.6	)
Maturities, calls and pay downs of fixed maturities – available-for-sale		68.6		61.0
Sales of fixed maturities – available-for-sale		148.0		86.3
Sales of equity securities – available-for-sale		77.5		77.4
Sales of other invested assets		1.7		1.7
Net additions of property and equipment		(0.4	)	(0.2	)

*Net cash used in investing activities*		(20.8	)	(11.7	)

Cash flows from financing activities:
Proceeds from issuance of common stock		2.5		6.2
Payments to acquire treasury shares		(2.7	)	—
Excess tax benefits on share based awards		0.2		2.5
Payment of dividends		(14.5	)	(11.4	)
Change in securities lending collateral		—		99.0
Change in securities lending obligation		—		(99.0	)

*Net cash used in financing activities*		(14.5	)	(2.7	)

Net increase in cash and cash equivalents		41.8		41.6

Cash and cash equivalents at beginning of period		73.4		28.7

Cash and cash equivalents at end of period	$	115.2		70.3

Supplemental disclosures:
Federal income taxes paid	$	39.3		29.4

Interest paid (affiliates $1.1)	$	4.2		4.2

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 in accordance with U.S. generally accepted accounting principles (“GAAP”) have been included. Operating results for the nine month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending 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 with defined benefit pension and postretirement benefit plans other than pensions (collectively “benefit plans”) to recognize the funded status of their benefit plans in their balance sheet, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end balance sheet date thereby eliminating the use of an earlier measurement date and provide additional disclosures. The new measurement date requirement is not effective until fiscal years ending after December 15, 2008. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158, which had no effect on the Company’s consolidated statement of income for year ended December 31, 2006, or for any prior period presented in the 2006 Form 10-K, and it will not affect the Company’s operating results in future periods. Adopting SFAS 158 required the Company to recognize the funded status (i.e. the difference between the fair value of plan assets and the benefit obligations) of its benefit plans in the December 31, 2006 balance sheet, with a corresponding adjustment to other comprehensive loss, net of tax of $63.9 million. The adoption did not have an impact on the Company’s debt covenants. At December 31, 2006, the Company continued to use the earlier measurement date of September 30, and is currently reviewing the transition alternatives available and the related impact.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which was effective for fiscal years beginning after December 15, 2006. FIN 48 clarified the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provided guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no increase in the liability for unrecognized tax benefits. See Note 7 for additional required disclosures.

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

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 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.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 expands the standards under SFAS 157 to provide entities with a one-time election to measure existing financial instruments and certain other items at fair value at the date of adoption. SFAS 159 also amends SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” to require a specific presentation of investments categorized as available-for-sale. This statement is effective for the first fiscal year that begins after November 15, 2007. The Company 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:


(in millions, except per share amounts)	Three months ended September 30			Nine months ended September 30
	2007		2006	2007		2006
Numerator:
Net income for basic earnings per share	$	23.2	31.2	$	77.4	75.5

Denominator:
Basic weighted average shares outstanding		41.2	41.0		41.1	40.8
Effect of dilutive share-based awards		0.5	0.6		0.7	0.8

Diluted weighted average shares outstanding		41.7	41.6		41.8	41.6

Basic earnings per share	$	0.56	0.76	$	1.88	1.85

Diluted earnings per share	$	0.55	0.75	$	1.86	1.82

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:


(number of options in millions)	Three months ended September 30		Nine months ended September 30
	2007	2006	2007	2006
Number of options	1.1	0.3	0.3	0.3

3. Comprehensive Income

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


($ millions)	Three months ended September 30				Nine months ended September 30
	2007			2006	2007			2006
Net income	$	23.2		31.2	$	77.4		75.5
Change in unrealized holding gains (losses), net of tax		10.2		28.5		(4.1	)	3.9
Amortization of gain on derivative used in cash flow hedge		(0.1	)	—		(0.1	)	—
Amortization of pension and postretirement benefit obligations, net of tax		0.2		—		0.6		—

Comprehensive income	$	33.5		59.7	$	73.8		79.4

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:


($ millions)	Three months ended September 30					Nine months ended September 30
	2007			2006		2007			2006
Premiums earned:
Assumed from other insurers and reinsurers	$	1.6		1.6		$	4.7		5.5
Assumed under State Auto Pool and other affiliate arrangements		241.3		244.9			724.9		734.4
Ceded to other insurers and reinsurers		(5.6	)	(4.6	)		(14.6	)	(14.0	)
Ceded under State Auto Pool and other affiliate arrangements		(174.1	)	(172.6	)		(520.6	)	(513.8	)

Net assumed premiums earned	$	63.2		69.3		$	194.4		212.1

Losses and loss expenses incurred:
Assumed from other insurers and reinsurers	$	0.9		0.8		$	1.0		8.8
Assumed under State Auto Pool and other affiliate arrangements		156.7		137.4			443.5		441.8
Ceded to other insurers and reinsurers		(0.8	)	(1.4	)		(2.6	)	(2.5	)
Ceded under State Auto Pool and other affiliate arrangements		(115.4	)	(99.6	)		(315.9	)	(305.4	)

Net assumed losses and loss expenses incurred	$	41.4		37.2		$	126.0		142.7

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:


($ millions)	Pension					Postretirement				Pension					Postretirement
	Three months ended September 30									Nine months ended September 30
	2007			2006		2007		2006		2007			2006		2007			2006
Service cost	$	2.3		2.5		$	1.4	1.2		$	6.8		7.5		$	4.2		3.6
Interest cost		3.1		2.9			1.8	1.6			9.3		8.7			5.4		4.7
Expected return on plan assets		(4.5	)	(4.2	)		—	(0.1	)		(13.5	)	(12.7	)		(0.1	)	(0.2	)
Amortization of prior service costs		0.1		0.1			0.1	0.2			0.3		0.3			0.3		0.4
Amortization of transition assets		(0.2	)	(0.2	)		—	—			(0.5	)	(0.5	)		—		—
Amortization of net actuarial loss		1.0		0.7			0.2	0.1			3.0		2.2			0.6		0.4

Net periodic cost	$	1.8		1.8		$	3.5	3.0		$	5.4		5.5		$	10.4		8.9

During September 2007, the Company contributed $11.5 million in cash to its pension plan.

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. 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, 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 GAAP is that SAP requires all underwriting expenses to be expensed immediately and not deferred and amortized over the same period the premium is earned as under GAAP.

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

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 September 30:


($ millions)	Three months ended September 30					Nine months ended September 30
	2007			2006		2007			2006
Revenues from external sources:
Insurance segments
Personal insurance	$	152.4		153.5		$	456.6		462.0
Business insurance		99.7		102.3			300.7		306.6

Total insurance segments		252.1		255.8			757.3		768.6
Investment operations segment
Net investment income		21.1		20.6			63.0		61.6
Net realized gains on investments		6.4		2.0			11.1		2.5

Total investment operations segment		27.5		22.6			74.1		64.1
All other		1.3		1.2			3.7		3.7

Total revenues from external sources		280.9		279.6			835.1		836.4
Intersegment revenues		2.3		2.2			7.0		6.7

Total revenues		283.2		281.8			842.1		843.1

Reconciling items:
Eliminate intersegment revenue		(2.3	)	(2.2	)		(7.0	)	(6.7	)

Total consolidated revenues	$	280.9		279.6		$	835.1		836.4

Segment income (loss) before federal income tax:
Insurance segments:
Personal insurance SAP underwriting gain	$	0.8		8.9		$	22.5		20.0
Business insurance SAP underwriting gain		5.9		16.2			21.5		36.6

Total insurance segments		6.7		25.1			44.0		56.6
Investment operations segment:
Net investment income		21.1		20.6			63.0		61.6
Net realized gains on investments		6.4		2.0			11.1		2.5

Total investment operations segment		27.5		22.6			74.1		64.1
All other segments (loss)		(0.6	)	(0.6	)		(2.0	)	(1.7	)

Total segment income before taxes		33.6		47.1			116.1		119.0

Reconciling items:
GAAP adjustments		(2.2	)	(2.5	)		(10.2	)	(13.0	)
Interest expense on corporate debt		(1.9	)	(1.9	)		(5.6	)	(5.6	)
Corporate expenses		(0.9	)	(0.3	)		(2.0	)	(1.5	)

Total consolidated income before federal income taxes	$	28.6		42.4		$	98.3		98.9

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Notes to Condensed Consolidated Financial Statements, Continued (Unaudited)

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


($ millions)	Three months ended September 30			Nine months ended September 30
	2007		2006	2007		2006
Revenues from significant reportable segments:
Insurance Segments – Premiums earned:

Standard personal auto	$	89.7	90.6	$	267.6	272.2
Nonstandard personal auto		10.7	11.0		32.3	34.2
Homeowners		46.3	46.3		139.6	138.5
Other personal		5.7	5.6		17.1	17.1

Total personal insurance		152.4	153.5		456.6	462.0
Commercial auto		24.1	25.1		72.9	75.5
Commercial multi-peril		21.6	21.9		65.1	65.5
Fire & allied lines		20.7	21.0		61.9	63.4
Other & product liability		18.7	19.1		56.8	57.6
Workers’ compensation		8.1	8.8		24.7	25.4
Other business		6.5	6.4		19.3	19.2

Total business insurance		99.7	102.3		300.7	306.6


Total insurance segments		252.1	255.8		757.3	768.6

Net investment income		21.1	20.6		63.0	61.6

Net realized gains on investments		6.4	2.0		11.1	2.5

Total investment operations		27.5	22.6		74.1	64.1


Total revenues from significant reportable segments	$	279.6	278.4	$	831.4	832.7

Investable assets attributable to the Company’s investment operations segment totaled $2,073.6 million at September 30, 2007 and $2,011.3 million at December 31, 2006.

7. 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 September 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 September 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 have been settled. Tax years 2003 through 2006 remain open for audit for federal income tax purposes.

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 “third quarter” as used below refers to the three months ended September 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 September 30, 2007 and December 31, 2006, and for the consolidated statements of income for the three-month and nine-month periods ended September 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 risk-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 6 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 nine-month periods ended September 30, 2007, net income was $23.2 million and $77.4 million, respectively, as compared to $31.2 million and $75.5 million, respectively for the same 2006 periods. Income before federal income taxes for the three- and nine-month periods ended September 30, 2007 was $28.6 million and $98.3 million, respectively, as compared to $42.4 million and $98.9 million, respectively for the same 2006 periods. Our GAAP loss and loss expense ratio for the three- and nine-month periods ended September 30, 2007 was 65.3% and 61.8%, respectively, as compared to 56.7% and 60.7%, respectively for the same 2006 periods. In the third quarter 2007, we experienced a higher frequency of large property losses, which contributed to the increase in the loss and loss expense ratios and decline in net income for the period.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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


($ millions, except per share amounts)	Three months ended September 30					Nine months ended September 30
GAAP Basis:	2007			2006		2007			2006
Total revenue	$	280.9		279.6		$	835.1		836.4
Net income	$	23.2		31.2		$	77.4		75.5
Stockholders’ equity	$	898.5		846.1		$	898.5		846.1
Book value per share ⁽¹⁾	$	21.85		20.63		$	21.85		20.63
Loss and LAE ratio ⁽²⁾		65.3	%	56.7	%		61.8	%	60.7	%
Expense ratio ⁽²⁾		32.7	%	34.2	%		33.5	%	33.3	%
Combined ratio ⁽²⁾		98.0	%	90.9	%		95.3	%	94.0	%
Catastrophe loss and LAE points		5.6		8.0			5.7		11.7
Premium written growth		(0.6	%)	(1.7	%)		(0.4	%)	(2.5	%)
Premium earned growth		(1.4	%)	(2.7	%)		(1.5	%)	(2.7	%)
Investment yield		4.3	%	4.4	%		4.3	%	4.4	%

	Three months ended September 30					Nine months ended September 30
SAP Basis:	2007			2006		2007			2006
Loss and LAE ratio ⁽³⁾		64.8	%	56.2	%		61.3	%	60.1	%
Expense ratio ⁽³⁾		31.3	%	33.0	%		32.0	%	32.0	%
Combined ratio ⁽³⁾		96.1	%	89.2	%		93.3	%	92.1	%

						Twelve months ended September 30
						2007			2006
Net premiums written to surplus ⁽⁴⁾							1.1		1.3

⁽¹⁾

At September 30, 2007, accumulated other comprehensive loss, a component of stockholders’ equity, included a loss of $63.4 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 (based on the last twelve months of premiums written) 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

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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 nine-month periods ended September 30, 2007 and 2006:


($ millions)	Three months ended September 30, 2007
	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Net written premiums	$	162.4		$	100.0		$	262.4

Net earned premiums		152.4			99.7			252.1
Losses and loss expenses		105.5	69.2		57.8	58.0		163.3	64.8
Underwriting expenses		46.1	28.4		36.0	36.0		82.1	31.3

SAP underwriting gain and SAP combined ratio	$	0.8	97.6	$	5.9	94.0	$	6.7	96.1


($ millions)	Three months ended September 30, 2006
	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Net written premiums	$	161.9		$	102.1		$	264.0

Net earned premiums		153.5			102.3			255.8
Losses and loss expenses		96.6	62.9		47.1	46.1		143.7	56.2
Underwriting expenses		48.0	29.6		39.0	38.2		87.0	33.0

SAP underwriting loss and SAP combined ratio	$	8.9	92.5	$	16.2	84.2	$	25.1	89.2

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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


($ millions)	Nine months ended September 30, 2007
	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Net written premiums	$	466.8		$	310.7		$	777.5

Net earned premiums		456.6			300.7			757.3
Losses and loss expenses		299.1	65.5		164.9	54.8		464.0	61.3
Underwriting expenses		135.1	28.9		114.3	36.8		249.4	32.0

SAP underwriting gain and SAP combined ratio	$	22.5	94.4	$	21.5	91.6	$	44.0	93.3


($ millions)	Nine months ended September 30, 2006
	Personal		% Ratio	Business		% Ratio	Total		% Ratio
Net written premiums	$	467.4		$	313.4		$	780.8

Net earned premiums		462.0			306.6			768.6
Losses and loss expenses		308.2	66.7		154.0	50.2		462.2	60.1
Underwriting expenses		133.9	28.6		116.0	37.0		249.9	32.0

SAP underwriting gain and SAP combined ratio	$	20.0	95.3	$	36.6	87.2	$	56.6	92.1

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 39.4% of our total consolidated net written premium at September 30, 2007.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

The following table provides a summary of written and earned premium, net of reinsurance, by major product line of business for our personal insurance segment for the three- and nine-month periods ended September 30, 2007 and 2006:


($ millions)	Three months ended September 30				Nine months ended September 30
	2007		2006	% Change	2007		2006	% Change

	Net Written Premiums
Personal insurance segment:
Standard Auto	$	92.9	93.0	(0.1)	$	272.7	274.9	(0.8)
Nonstandard Auto		11.1	10.7	3.7		33.4	33.3	0.3
Homeowners		52.6	52.5	0.2		143.2	142.2	0.7
Other personal		5.8	5.7	1.8		17.5	17.0	2.9

Total personal	$	162.4	161.9	0.3	$	466.8	467.4	(0.1)


	Net Earned Premiums
Personal insurance segment:
Standard auto	$	89.7	90.6	(1.0)	$	267.6	272.2	(1.7)
Nonstandard auto		10.7	11.0	(2.7)		32.3	34.2	(5.6)
Homeowners		46.3	46.3	0.0		139.6	138.5	0.8
Other personal		5.7	5.6	1.8		17.1	17.1	0.0

Total personal	$	152.4	153.5	(0.7)	$	456.6	462.0	(1.2)

In total, the personal insurance segment net written premium for the first nine months of 2007 decreased $0.6 million compared to the same period a year ago. This decrease is attributable to some modest price reductions taken in 2006 and 2007 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 risk-based, reflecting the underlying loss and expense trends. Third quarter 2007 net written premiums were $0.5 million or 0.3% above third quarter 2006, reflecting an improving premium trend.

Net written premiums for our standard auto products decreased 0.1% and 0.8% for the three- and nine-months ended September 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 third quarter 2007, we had introduced CustomFit ^SM in 22 states. Almost 17% of our standard auto written premium is now in the CustomFit ^SM program. 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 into five states two new “real time” comparative rating tools which can be used by our agency partners to prepare comparative rate quotes from multiple insurance companies by entering the rating information only one time. During the third quarter, we expanded the use of these tools to 10 more states. 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 3.7% in the third quarter 2007 compared to the same 2006 period and increased 0.3% for the first nine months of 2007 compared to the same 2006 period. The impact of targeted rate decreases

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

coupled with the introduction of new discounts has produced an improving premium situation. During the past quarter, new business premium increased compared to the same period a year earlier.

Homeowners net written premium increased 0.2% and 0.7% in the three and nine months ended September 30, 2007, respectively, as compared to the same 2006 periods. During the quarter we introduced a home purchase discount and expanded our age of dwelling discounts to help attract new business. New business premiums were down slightly for the quarter but are up for the nine-month period.

During the nine months 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 including a joint credit ordering tool introduced during the third quarter. 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. 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. During the 2007 third quarter the total number of payments made by policyholders through self service technologies such as these increased 19% over the second quarter.

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

During the second quarter 2007, we filed an application with the Florida Department of Insurance to withdraw from the state’s personal lines insurance market 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.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

The following table provides a summary of written and earned premium, net of reinsurance, by major product line for our business insurance segment for the three- and nine-month periods ended September 30, 2007 and 2006:


($ millions)	Three months ended September 30					Nine months ended September 30
	2007		2006	% Change		2007		2006	% Change

	Net Written Premiums
Business insurance segment:
Commercial auto	$	22.7	23.8	(4.6	)	$	74.4	76.9	(3.3	)
Commercial multi-peril		21.9	22.5	(2.7	)		66.2	67.3	(1.6	)
Fire & allied lines		21.9	21.9	0.0			63.2	63.3	(0.2	)
Other & product liability		17.8	18.7	(4.8	)		58.8	59.5	(1.1	)
Workers’ compensation		9.1	9.0	1.1			27.6	26.7	3.4
Other commercial		6.6	6.2	6.5			20.5	19.7	4.1

Total business	$	100.0	102.1	(2.1	)	$	310.7	313.4	(0.9	)


	Net Earned Premiums
Business insurance segment:
Commercial auto	$	24.1	25.1	(4.0	)	$	72.9	75.5	(3.4	)
Commercial multi-peril		21.6	21.9	(1.4	)		65.1	65.5	(0.6	)
Fire & allied lines		20.7	21.0	(1.4	)		61.9	63.4	(2.4	)
Other & product liability		18.7	19.1	(2.1	)		56.8	57.6	(1.4	)
Workers’ compensation		8.1	8.8	(8.0	)		24.7	25.4	(2.8	)
Other commercial		6.5	6.4	1.6			19.3	19.2	0.5

Total business	$	99.7	102.3	(2.5	)	$	300.7	306.6	(1.9	)

The business insurance segment net written premium for third quarter 2007 decreased 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 businessowners product, making it available for more types of businesses by increasing the exposure value per location we insure, and adding 30 new retail and distributor classifications. In addition, we have developed several risk specific packages which will make our businessowners 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 in 10 states specifically targeting these low-hazard operations.

We also continue to enhance our back office systems which enable us to more effectively support our agency partners. 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 have introduced bizXpress ^SM , our web-based quote and issuance system, to agents in all of our operating states except Florida. We currently utilize bizXpress ^SM for businessowners policies. We are working to expand bizXpress ^SM functionality to our business auto and workers’ compensation products and we plan to roll this out during the first half of 2008. 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

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

model much like we have seen in personal insurance. In the third quarter 2007, we introduced our businessowners product in Texas. In addition, we announced other product enhancements to our package and auto products in all states.

Losses and Expenses

Our GAAP loss and LAE ratio was 65.3% and 61.8% for the three and nine months ended September 30, 2007, respectively as compared to 56.7% and 60.7% for the same 2006 periods. Loss results for the year and quarter have been mixed. Our core auto (personal and commercial) and other and product liability lines continue to perform well. On the property side, catastrophe losses for the 2007 third quarter were lower than the same 2006 period, but we experienced significantly higher frequency of large fire losses within our personal and business lines.

Catastrophe losses for the three and nine months ended September 30, 2007 totaled $14.2 million (5.6 loss ratio points) and $43.0 million (5.7 loss ratio points) compared to $20.4 million (8.0 loss ratio points) and $89.8 million (11.7 loss ratio points) in the same 2006 periods. During the third quarter of 2007, our catastrophe losses resulted primarily from wind and hail in several of our midwestern states and mostly impacted our homeowners business. Catastrophe activity during the third quarter of 2007 was less intense than third quarter of 2006. 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 (“loss ratios”) by major line of business for 2007 and 2006:


	SAP Loss and LAE Ratios
	Three months ended September 30				Nine months ended September 30
	2007	2006	Improve (Deteriorate)		2007	2006	Improve (Deteriorate)
Personal insurance segment:
Standard auto	58.2	54.8	(3.4	)	60.5	56.0	(4.5	)
Nonstandard auto	62.2	56.3	(5.9	)	63.2	58.5	(4.7	)
Homeowners	90.1	76.6	(13.5	)	77.7	88.3	10.6
Other personal	85.9	93.7	7.8		48.8	78.0	29.2
Total personal	69.2	62.9	(6.3	)	65.5	66.7	1.2
Business insurance segment:
Commercial auto	53.6	44.0	(9.6	)	50.9	37.7	(13.2	)
Commercial multi-peril	82.0	64.4	(17.6	)	66.0	60.3	(5.7	)
Fire & allied lines	56.1	28.2	(27.9	)	55.1	66.8	11.7
Other & product liability	45.1	38.9	(6.2	)	43.5	36.5	(7.0	)
Workers’ compensation	71.7	68.1	(3.6	)	86.4	53.5	(32.9	)
Other commercial	20.5	41.3	20.8		24.2	47.4	23.2
Total business	58.0	46.1	(11.9	)	54.8	50.2	(4.6	)
Total SAP personal and business	64.8	56.2	(8.6	)	61.3	60.1	(1.2	)

The personal insurance segment’s loss ratio for 2007 third quarter was 6.3 points higher than the same 2006 period. Catastrophes accounted for 7.4 loss ratio points in the 2007 third quarter compared to 12.8 loss ratio points in the same 2006 period. Standard auto’s loss ratio increased partially due to rate decreases taken in 2006 but remained profitable. Our nonstandard auto loss ratios increased but remained within an acceptable range. Homeowners loss ratios, absent catastrophes, increased from the same 2006 period due to an increase in the number of large fire losses and weather events not classified as catastrophes. Catastrophes added 22 points to the homeowners’ loss ratio for the third quarter 2007 compared to 37.6 points in the same 2006 period.

For the first nine months of 2007, the personal insurance segment loss ratio was 1.2 points lower than for the same 2006 period. Catastrophes accounted for 7.9 loss ratio points in the first nine months of 2007 compared to 14.9 points in the same 2006

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

period. Excluding the impact of catastrophes, the personal lines loss ratio for the first nine months of 2007 was 5.9 loss ratio points higher than for the same 2006 period. The increase in both the standard and nonstandard auto loss ratios can be attributed partially to rate reductions taken in 2006 and 2007. The improvement in the homeowners loss ratio can be attributed primarily to the reduction of catastrophe losses. For the first nine months of 2007, catastrophes added 22.7 points to the homeowners loss ratio compared to 41.3 points for the same 2006 period.

The 2007 third quarter loss ratio for the business insurance segment was 58.0% including 2.3 points for catastrophes compared to a very favorable 46.1% including 0.7 points for catastrophes for the same 2006 period. Property lines performed worse due to an increase in large property claims and an increase in catastrophe losses. Business automobile as well as other and product liability lines continue to produce strong results. Our workers’ compensation loss ratio increased primarily due to one large loss that occurred in the quarter. Overall, business insurance had a strong performance during the third quarter.

The business insurance segment’s loss ratio for the first nine months of 2007 was 4.6 points higher than for the same 2006 period. Catastrophes accounted for 2.3 loss ratio points in the first nine months of 2007 compared to 6.8 points in the first nine months of 2006. Excluding the impact of catastrophes, the business lines loss ratio for the first nine months of 2007 was 9 points higher than for the same 2006 period. The increase reflects rate reductions in premium per exposure on business written in 2006 and 2007, adverse development of prior period worker’s compensation claims and an increase in the number of large property losses.

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


($ millions)	September 30, 2007		December 31, 2006	$ Change
Personal insurance segment:
Standard auto	$	169.0	171.8	(2.8	)
Nonstandard auto		19.2	21.6	(2.4	)
Homeowners		69.9	57.1	12.8
Other personal		9.9	7.6	2.3

Total personal		268.0	258.1	9.9

Business insurance segment:
Commercial auto		78.6	82.0	(3.4	)
Commercial multi-peril		83.6	79.2	4.4
Fire & allied lines		22.4	21.8	0.6
Product & other liability		131.4	127.7	3.7
Workers’ compensation		88.8	85.6	3.2
Other business		5.3	6.6	(1.3	)

Total business		410.1	402.9	7.2

Total losses and loss expenses payable net of reinsurance recoverable on losses and loss expenses payable	$	678.1	661.0	17.1

As shown in the table above, there was a $17.1 million increase in total loss and loss expense reserves during the nine months ended September 30, 2007. The increase relates primarily to the homeowners line which was impacted significantly by third quarter catastrophes that occurred near the end of the quarter. 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

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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 32.8% and 33.5% for the three and nine months ended September 30, 2007, respectively, as compared to 34.2% and 33.3% in the same 2006 periods. Our third quarter 2007 ratio was lower 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 third quarter of 2007. The 2007 nine month expense ratio was also favorably impacted by lower agent and employee bonuses but was offset by 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 September 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 September 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.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Composition of Investment Portfolio

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


($ millions)	September 30, 2007				December 31, 2006
Fixed maturities, at fair value	$	1,694.5	86.5	%	1,647.4	85.0
Equity securities, at fair value		258.3	13.2		284.2	14.7
Other invested assets		5.6	0.3		6.3	0.3

Total investments	$	1,958.4	100.0	%	1,937.9	100.0

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


($ millions)	Amortized Cost		Fair Value
Due in 1 year or less	$	—	—
Due after 1 year through 5 years		52.4	52.9
Due after 5 years through 10 years		333.6	341.3
Due after 10 years		1,112.7	1,112.5
Mortgage-backed securities		190.6	187.8

Total	$	1,689.3	1,694.5

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

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 and confirmed our intent to hold the remaining securities until either recovery of fair value or maturity.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

The following table provides a breakdown of our investments relative to our targeted allocated percentages provided above at September 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)	September 30, 2007		% of Total	December 31, 2006	% of Total
Taxable fixed maturities (amortized cost)	$	279.8	13.5	400.8	20.1
Tax-exempt fixed maturities (amortized cost)		1,409.5	68.1	1,229.8	61.7
Equities (fair value)		258.3	12.5	284.2	14.2
Other invested assets		5.6	0.3	6.3	0.3
Cash and cash equivalents		115.2	5.6	73.4	3.7

Total portfolio	$	2,068.4	100.0	1,994.5	100.0

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


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

Total portfolio	100.0	%

Beginning in the fourth quarter of 2007, we will invest available funds moving toward these targets over the next 12 to 18 months.

Investment Operations Revenue

Net investment income for the three and nine months ended September 30, 2007 was $21.1 million and $63.0 million, respectively. Net investment income for the three and nine months ended September 30, 2006 was $20.6 million and 61.6 million, respectively. In 2007 our average invested assets increased due to our insurance segments’ favorable underwriting cash flows. However, our pre-tax 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 nine-months periods ended September 30, 2007 was $18.3 million (13.5% effective tax rate) and $54.5 million (13.5% effective tax rate), respectively, as compared to $17.3 million (16.0% effective tax rate) and $51.7 million (16.1% effective tax rate) for the same 2006 periods.


($ millions)	Three months ended September 30				Nine months ended September 30
	2007			2006	2007			2006
Gross investment income:
Fixed income securitites	$	18.7		18.5	$	56.3		55.0
Equity securities		1.4		1.1		4.1		3.3
Other		1.4		1.4		3.9		4.6

Total gross investment income		21.5		21.0		64.3		62.9
Investment expenses		0.4		0.4		1.3		1.3

Net investment income	$	21.1		20.6	$	63.0		61.6

Average invested assets (at cost)	$	1,983.8		1,889.3	$	1,973.9		1,879.3
Annualized investment yield		4.3	%	4.4		4.3	%	4.4
Annualized investment yield after tax		3.7	%	3.7		3.7	%	3.7

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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


	Three months ended September 30, 2007					Nine months ended September 30, 2007
($ millions)	Realized Gains (Losses)			Proceeds Received on Sale		Realized Gains (Losses)			Proceeds Received On Sale
Realized gains:
Fixed maturities	$	0.1		$	19.6	$	0.7		$	76.6
Equity securities		7.9			33.5		14.7			58.2

Total realized gains		8.0			53.1		15.4			134.8
Realized losses:
Fixed maturities		—			1.0		(1.2	)		71.4
Equity securities		(1.6	)		7.2		(3.1	)		19.6

Total realized losses		(1.6	)		8.2		(4.3	)		91.0

Net realized gains on investments	$	6.4		$	61.3	$	11.1		$	225.8


	Three months ended September 30, 2006					Nine months ended September 30, 2006
($ millions)	Realized Gains (Losses)			Proceeds Received on Sale		Realized Gains (Losses)			Proceeds Received on Sale
Realized gains:
Fixed maturities	$	0.4		$	38.2	$	1.0		$	86.8
Equity securities		4.3			16.8		11.5			47.1

Total realized gains		4.7			55.0		12.5			133.9
Realized losses:
Fixed maturities		—			—		(3.8	)		2.7
Equity securities		(2.7	)		11.2		(6.2	)		27.6

Total realized losses		(2.7	)		11.2		(10.0	)		30.3

Net realized gains on investments	$	2.0		$	66.2	$	2.5		$	164.2

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Most of the realized gains in 2007 were derived from the equity segment of the portfolio. Equity sales were executed for various reasons, including the achievement of our price target and raising funds within two of our insurance subsidiaries to fund cash dividends to State Auto Financial. (See “Other Capital Transactions” section below.) The realized gains on the fixed 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 nine-month period ended September 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 third quarter 2007 or the same 2006 period. For the nine-months ended September 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.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Gross Unrealized Investment Gains and Losses

A review of our investment portfolio at September 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 September 30, 2007. We do not have any direct exposure to the sub-prime mortgage issue through our bond holdings. However, we do have minimal indirect exposure through our equity ownership of major market banks and investment banks.

The following table provides detailed information on our investment portfolio for our gross unrealized gains and losses at September 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	$	78.5	$	0.9	25	$	(0.5	)	15	$	78.9
States and political subdivisions		1,409.5		17.2	325		(9.9	)	319		1,416.8
Corporate securities		10.7		0.3	10		—		2		11.0
Mortgage-backed securities of U.S. Gov. Agencies		190.6		1.5	11		(4.3	)	59		187.8

Total fixed maturities		1,689.3		19.9	371		(14.7	)	395		1,694.5
Equity Securities:
Consumer		70.8		18.6	27		(0.4	)	3		89.0
Technologies		17.7		5.4	8		(0.1	)	1		23.0
Pharmaceuticals		6.6		0.5	2		—		1		7.1
Financial services		42.3		12.6	18		(0.1	)	2		54.8
Manufacturing and other		62.2		22.2	26		—		—		84.4

Total equity securities		199.6		59.3	81		(0.6	)	7		258.3
Other invested assets		4.4		1.2	4		—		—		5.6

Total investments	$	1,893.3	$	80.4	456	$	(15.3	)	402	$	1,958.4

Other Income Statement Items

Interest expense on our debt was $1.9 million and $5.6 million for the three and nine months ended September 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 nine-month periods ended September 30, 2007, the effective tax rate was 19.0% and 21.3% respectively, as compared to 26.5% and 23.7% for the same 2006 periods. As previously discussed, the effective tax rate on net investment income declined to 13.5% for three and nine months ended September 30, 2007 versus 16.0% and 16.1% in the same 2006 periods.

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

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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 September 30, 2007 and December 31, 2006, we had $115.2 million and $73.4 million, respectively, of cash and cash equivalents and $1,958.4 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 $77.1 million during the first nine months of 2007 versus $56.0 million for the same 2006 period. Cash from operations increased in the first nine months of 2007 due largely to a reduction in the amount of loss and expenses paid during the first nine months of 2007 compared to the same 2006 period. The increased cash flow in 2007 was offset by a decline in premium collections from the same 2006 period as well as an increase in federal income tax payments. Additionally, during the 2007 third quarter, we made an $11.5 million cash contribution to our defined benefit pension plan compared to a $10.0 million cash contribution in the same 2006 time period.

Net cash used in investing activities was $20.8 million during the first nine months of 2007 compared to $11.7 million in the same 2006 period. The increased activity within fixed maturities relates to the security repositioning programs described in the Investments Operations Segment section above.

Net cash used in financing activities increased to $14.5 million during the first nine months of 2007 from $2.7 million during the same 2006 period. Factors contributing to this increase were:

•

There have been fewer stock options exercised and a corresponding reduction in the related tax benefit.

•

We repurchased 93,000 common shares for a total of $2.7 million under our 2007 Repurchase Plan (defined under Other Capital Transactions).

•

Payment of dividends increased because we paid $0.35 per share in the nine months ended September 30, 2007 compared to $0.28 per share in the same 2006 period. See additional discussion under Other Capital Transactions.

Other Capital Transactions

On August 17, 2007, State Auto Financial’s board of directors authorized the repurchase, from time to time, of up to 4.0 million of its common shares, or approximately 10% of State Auto Financial’s outstanding shares, over a period extending to and through December 31, 2009 (the “2007 Repurchase Plan”). State Auto Financial will repurchase shares from State Auto Mutual in amounts that are proportional to the respective current ownership percentages of State Auto Mutual, which is approximately 65%, and other shareholders. During the quarter and year to date ended September 30, 2007, State Auto Financial repuchased 93,000 common shares at a total cost of $2.7 million.

Our share repurchase activity from September 30, 2007 through November 1, 2007 was 256,343 common shares at an average repurchase price of $27.62 per share for a total of $7.1 million.

On August 17, 2007, State Auto Financial’s board of directors also declared an increase in our regular quarterly cash dividend from $0.10 to $0.15 per share. The dividend was payable September 28, 2007 to shareholders of record at the close of business on September 14, 2007. This is the 65 ^th consecutive quarterly cash dividend declared since STFC had its initial public offering in 1991, and represents a 50% increase in the annual dividend rate. The board also announced changing its annual dividend policy review from the third quarter to the fourth quarter, beginning in 2008.

To fund these capital transactions and provide additional working capital to State Auto Financial, on September 12, 2007, State Auto Property and Casualty Insurance Company (“State Auto P&C”) and Milbank Insurance Company (“Milbank”) declared cash dividends of $40.0 million and $10.0 million, respectively, to State Auto Financial. The cash transfer of dividends was completed in October 2007. The dividends from State Auto P&C and Milbank were paid from unassigned statutory surplus and were considered to be not extraordinary for regulatory purposes.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Borrowing Arrangements

The following provides an overview of our borrowing arrangements during 2007 and outstanding at September 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 September 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 September 30, 2007 ranged from 8.61% to 9.78%.

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”). State Auto Financial did not borrow any funds 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. As of September 30, 2007, State Auto Financial had not made any borrowings and was in compliance with all of the covenants under the New Credit Agreement.

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.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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 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. As of July 1, 2007, 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 annually renewed, as is usual and customary 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 September 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.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

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 ⁽¹⁾	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased under the Plans or Programs
07/01/07 thru 07/31/07	—		$	—	—	—
08/01/07 thru 08/31/07	661	⁽²⁾		29.10	—	4,000,000
09/01/07 thru 09/30/07	93,000			29.47	93,000	3,907,000

Total	93,661		$	29.29	93,000	3,907,000

⁽¹⁾

On August 17, 2007, State Auto Financial announced that its board of directors had authorized the repurchase, from time to time, of up to 4.0 million of its common shares, or approximately 10% of State Auto Financial’s outstanding shares, over a period extending to and through December 31, 2009. State Auto Financial will repurchase shares from State Auto Mutual in amounts that are proportional to the respective current ownership percentages of State Auto Mutual, which is approximately 65%, and other shareholders.

⁽²⁾

These shares 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

None.

Item 5. Other Information

None.

STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES

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

Item 6. Exhibits


Exhibit No.		Description of Exhibits

10.69	Employment Agreement dated as of October 4, 2007, among State Auto Financial Corporation, State Auto Property and Casualty Insurance Company, State Automobile Mutual Insurance Company and Mark A. Blackburn

10.70	Amended and Restated Executive Agreement dated as of October 4, 2007, among State Auto Financial Corporation, State Automobile Mutual Insurance Company and Mark A. Blackburn

10.71	Restricted Stock Agreement under the Amended and Restated Equity Incentive Compensation Plan dated as of October 4, 2007, between State Auto Financial Corporation and Mark A. Blackburn

10.72	State Auto Financial Corporation Supplemental Executive Retirement Plan, effective January 1, 2007

10.73	Form of Designation of Distribution Election for the State Auto Financial Corporation Supplemental Executive Retirement Plan

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

Exhibit 10.69

EMPLOYMENT AGREEMENT

This Employment Agreement (this “ Agreement ”) is made as of October 4, 2007 (the “ Commencement Date ”), by and among State Auto Financial Corporation, an Ohio corporation (“ State Auto Financial ”), State Auto Property and Casualty Insurance Company, a South Carolina domiciled insurance company (“ State Auto P&C ”), State Automobile Mutual Insurance Company, an Ohio domiciled mutual insurance company (“ State Auto Mutual ”), and Mark A. Blackburn (“ Executive ”). State Auto Financial, State Auto P&C, State Auto Mutual and each of their respective insurer subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “ State Auto .”

Background Information

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. State Auto Mutual is the ultimate controlling person in the State Auto holding company system.

B.	As of the date of this Agreement, Executive serves as Executive Vice President and Chief Operating Officer of State Auto.

Executive and State Auto Financial are parties to an Executive Agreement dated as of March 2, 2001 (the “ Executive Agreement ”), which, among other things, addresses Executive’s continued service to State Auto in the event of an actual or threatened change of control of State Auto Financial or State Auto Mutual.

D.	Prior to the date of this Agreement, Executive’s duties and responsibilities, compensation arrangements and other employment related matters were not reflected in a written employment agreement, other than those matters set forth in Executive Agreement.

E.	The parties to this Agreement desire to set forth Executive’s duties and responsibilities, compensation arrangements and other employment matters in this Agreement.

F.	Concurrently with the execution of this Agreement, Executive and State Auto Financial are entering into an Amended and Restated Executive Agreement (the “ *A&R Executive Agreement* ”).

Statement of Agreement

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

Article I A&R Executive Agreement .

The terms and conditions of the A&R Executive Agreement are incorporated into this Agreement by reference.

Article II Employment .

State Auto hereby continues Executive’s employment, and Executive hereby accepts such continued employment by State Auto, upon the terms and subject to the conditions set forth in this Agreement. The terms and conditions of this Agreement, together with the terms and conditions of the A&R Executive Agreement, shall supercede and replace in their entirety the terms and conditions of any other employment arrangement, whether oral or written, between Executive and State Auto.

Article III Duties; Term .

(A)

Duties.

Executive shall serve as Executive Vice President and Chief Operating Officer of State Auto Financial and State Auto Mutual. As such, Executive shall perform such duties as are customarily performed by an executive officer in such positions and such other duties as may be assigned to him from time to time by the chief executive officer of State Auto Financial and State Auto Mutual. Executive shall devote Executive’s full time and attention and best efforts to the performance of such duties.

Executive shall serve as an officer of any other State Auto subsidiary and/or affiliate company as requested by the appropriate board of directors.

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 Employment Termination Date (as defined below).

(B)

Term.

The initial term of this Agreement shall be for a three-year period commencing on the Commencement Date and ending on the third anniversary thereof, both dates inclusive, unless such term is terminated at an earlier date pursuant to an event described in Article V of this Agreement (the “ Employment Term ”). The term of this Agreement shall be renewed at the end of any term hereof for additional one-year terms, in which case the Employment Term shall include such renewal term, unless one party notifies the other, in writing, of the intent not to renew at least 90 days prior to the end of the current Employment Term. It is understood and agreed that if Executive desires to renew the term of this Agreement at such time on terms substantially similar to those set forth herein, but State Auto does not, that shall constitute a termination without cause as defined in Article V(E), below. It is further understood and agreed that if State Auto desires to renew the term of this Agreement at such time on terms substantially similar to those set forth herein but Executive does not (including due to mandatory retirement at age 65, as permitted under regulations Section 1625.12 of the Age Discrimination in Employment Act of 1967, (“ ADEA ”)), that shall constitute a voluntary termination by Executive under Article V(C), below. It is further understood that in the event State Auto and Executive agree that Executive is to perform his duties for a period not to exceed 60 days following the Employment Termination Date, that shall not effect a waiver of any right Executive might have to severance benefits otherwise contemplated by the terms of this Agreement.

Article IV Compensation .

State Auto agrees to pay to Executive, and Executive agrees to accept, the following amounts as compensation in full for Executive’s services in any capacity hereunder or in the performance of other like duties assigned to Executive by the chief executive officer of State Auto Financial or State Auto Mutual:

(A)

Base Compensation.

During the Employment Term, State Auto shall pay to Executive a base salary (the “ Base Salary ”) in the amount of $425,000 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 chief executive officer of State Auto Financial may recommend to the Compensation Committee of the Board of Directors of State Auto Financial (the “ STFC Compensation Committee ”) for their approval and recommendation to the Board of Directors of State Auto Financial. The compensation of Executive shall be reviewed by the chief executive officer of State Auto Financial or the STFC Compensation Committee no less often than once each calendar year during the Employment Term and may be increased by the chief executive officer of State Auto Financial as he determines in the good faith exercise of his business judgment based on such factors as he deems appropriate. In no event shall the Base Salary be less than the Base Salary set forth above; provided, however, that a request by State Auto that Executive reduce or suspend any portion of his compensation, bonus or other payments will not constitute ground for a claim by Executive that he has suffered an involuntary Termination Without Cause (as defined below).

(B)

Participation in Short Term Incentive Compensation Plans.

Executive shall participate in the State Auto Financial Corporation Leadership Bonus Plan (the “ LBP ”), the State Auto Quality Performance Bonus Plan (the “ QPB ”), and any other short term incentive compensation plan of State Auto (collectively, the “ Short Term Incentive Plans ”) generally made available to executives of State Auto, so long as State Auto continues to offer that particular Short Term Incentive Plan to executives and on the terms and conditions as determined and approved by the STFC Compensation Committee. It is understood and agreed that any particular Short Term Incentive Plan may be amended, suspended or terminated by the STFC Compensation Committee at any time.

(C)

Restricted Stock Award.

Concurrently with the execution of this Agreement, Executive shall receive an award of 25,000 common shares of State Auto Financial, all of which shares shall be subject to restrictions on transfer and risk of forfeiture until the third anniversary of the Commencement Date (the “ restricted shares ”). The award of the restricted shares shall be made pursuant to the terms of the State Auto Financial Corporation Amended and Restated Equity Incentive Compensation Plan, as amended from time to time, and the terms set forth in a separate Restricted Stock Agreement being concurrently executed by Executive and State Auto Financial.

(D)

Long Term Incentive Compensation Plan.

Executive shall participate in the State Auto Financial Corporation Long Term Incentive Plan and any other long term cash incentive compensation plan of State Auto (collectively, the “ Long Term Incentive Plans ”), generally made available to executives of State Auto, so long as State

Auto continues to offer that particular Long Term Incentive Plan to executives and on the terms and conditions determined and approved by the STFC Compensation Committee. It is understood and agreed that any particular Long Term Incentive Plan may be amended, suspended or terminated by the STFC Compensation Committee at any time.

(E)

Participation in Retirement Plan and Rights under Other Agreements.

(1)

Executive shall be entitled to participate in the following plans: (a) any State Auto employee stock purchase plan; (b) the State Auto Insurance Companies Employee Retirement Plan, a noncontributory, defined benefit retirement plan, qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “ Code ”); (c) the State Auto Insurance Companies Capital Accumulation Plan, a defined contribution plan, qualified under Section 401(k) of the Code; and (d) any successor or similar stock purchase or retirement plans generally made available to employees of State Auto, so long as State Auto continues to offer such plans or similar plans to employees of State Auto. It is understood and agreed that the foregoing plans or any successor or similar plans may be amended, suspended, or terminated by State Auto at any time.

(2)

Executive may participate, if selected to do so by the STFC Compensation Committee, in any of State Auto’s nonqualified, unfunded, non-contributory supplemental executive retirement plans, including but not limited to, the Supplemental Retirement Plan for Executive Employees of State Auto Insurance Companies, the State Auto Property & Casualty Insurance Company Amended and Restated Incentive Deferred Compensation Plan and the State Auto Financial Corporation Supplemental Executive Retirement Plan, or any successor or similar retirement plans made available to executives of State Auto, so long as State Auto continues to offer such plans or successor or similar plans to executives of State Auto and on the terms and conditions determined and approved by the STFC Compensation Committee. It is understood and agreed that the foregoing plans or any successor or similar plans may be amended, suspended or terminated by State Auto at any time.

(3)

Executive shall be entitled to participate in the Amended and Restated Equity Incentive Compensation Plan or any other equity based compensation plans of State Auto (the “ Equity Plans ”), generally made available to executives of State Auto. It is understood and agreed that any Equity Plan may be amended, suspended or terminated by the STFC Compensation Committee at any time.

(F)

Fringe Benefits.

In addition to the benefits provided for in Article IV, Executive shall receive and enjoy 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 STFC Compensation Committee and the Boards of Directors of State Auto Financial and State Auto Mutual shall have the authority to grant such additional fringe benefits and perquisites to Executive as each, in its discretion, deems appropriate. In addition, 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’s then existing policy regarding the same. It is understood and agreed that any fringe benefits may be amended, suspended or terminated by the STFC Compensation Committee or other authorized entity at any time.

(G)

Participation in Future Compensation, Retirement, and Fringe Benefit Plans.

In addition to the benefits provided for in Article IV, Executive shall participate in and shall also receive and enjoy such other compensation, retirement, or fringe benefits which are now or in the future generally made available to executives of State Auto.

Article V Termination .

(A)

Disability.

If during the Employment Term Executive shall be unable to perform substantially his duties hereunder because of illness or other incapacity (referred to hereafter as “ Disability ”), and such Disability shall persist for a period of at least six months in any 12-month period, State Auto shall thereafter have the right, on not less than 45-days’ written notice to Executive, to terminate Executive’s employment, in which case the date of employment termination shall be not less than the 45th day following the date of written notice. State Auto shall be obligated to pay Executive, upon Executive’s termination of employment, an annual amount equal to 80% of Executive’s then-current Base Salary, less any benefits to which Executive might be entitled under State Auto’s long term disability plan described in State Auto’s Employee Reference Guide that is in effect as of the date of such Employment Termination Date (as defined below). The compensation provided under this Section shall continue for the full period of Disability or until Executive attains age 65, whichever first occurs.

A pro rata share of the compensation to which Executive is entitled pursuant to Article IV Sections (B) and (D) hereof shall be paid pursuant to the terms of any Short Term Incentive Plans and Long Term Incentive Plans (collectively, the “ Bonus Plans ”), provided the bonus contemplated by any of the Bonus Plans is in fact earned under the terms of such Bonus Plan then in effect for the particular period in which Executive incurs a Disability. Said pro rata share of the bonus due under the LBP 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 Disability by the denominator of 12. Said pro rata share of any bonus due under the QPB Plan shall be determined by dividing a numerator equal to the number of whole months that have elapsed in the calendar quarter on the date of Executive’s Disability, divided by a denominator of three. The pro-rata share of the payment due under a particular Long Term Incentive Plan shall be determined by dividing a numerator equal to the number of whole months that have elapsed in the Long Term Incentive Plan’s measurement period on the date of Executive’s Disability divided by a denominator equal to the number of whole months in the measurement period applicable to that award. If any bonus due under the Bonus Plans is earned under Article IV Sections (B) and (D), respectively, said sums will be paid to Executive within 75 days following the end of the calendar quarter or calendar year, as the case may be, following the determination by State Auto that the bonus due under the applicable Bonus Plan has in fact been earned pursuant to the terms of each such bonus opportunity, but in any event no later than the December 31 following the 75-day period after such determination calendar quarter or calendar year.

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.

In addition to the foregoing disability compensation described in this Article V Section (A), Executive shall continue to receive such health insurance benefits or their equivalent as he and his spouse receive on the Commencement Date, as well as such group life insurance as Executive has in place on his life, as of the date of Disability, pursuant to the terms of such plans as are generally made available to State Auto employees.

(B)

Death.

In the event of Executive’s death during his employment hereunder, in addition to any other benefits to which any person would be entitled upon Executive’s death, State Auto shall continue to pay his then-current Base Salary for a period of 12 full calendar months following the month in which his death occurs.

A pro rata share of the compensation to which Executive is entitled pursuant to Article IV Sections (B) and (D) hereof shall be paid pursuant to the terms of the Bonus Plans, provided the bonus contemplated by any of the Bonus Plans is in fact earned under the terms of such Bonus Plan then in effect for the particular period in which Executive were to die. Said pro rata share of the bonus due under the LBP 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 by the denominator of 12. Said pro rata share of any bonus due under the QPB Plan shall be determined by dividing a numerator equal to the number of whole months that have elapsed in the calendar quarter on the date of Executive’s death, divided by a denominator of three. The pro-rata share of the payment due under a particular Long Term Incentive Plan shall be determined by dividing a numerator equal to the number of whole months that have elapsed in the Long Term Incentive Plan’s measurement period on the date of Executive’s death divided by a denominator equal to the number of whole months in the performance period applicable to that award. Executive’s compensation for the period following his death shall be paid to the beneficiary indicated on the Beneficiary Designation attached as Exhibit A . If any bonus due under the Bonus Plans is earned under Article IV Sections (B) and (D), respectively, said sums will be paid to the Beneficiary within 75 days following the end of the calendar quarter or calendar year, as the case may be, following the determination by State Auto that the bonus due under the applicable Bonus Plan has in fact been earned pursuant to the terms of each such bonus opportunity, but in any event no later than December 31 following the 75-day period after such determination calendar quarter or calendar year.

In addition to the foregoing, in the event of Executive’s death during his employment hereunder, Executive’s spouse shall be entitled to participate in State Auto’s fringe benefit programs as would the spouse of any other deceased State Auto employee in similar circumstances.

(C)

Voluntary Termination.

Except as provided in the A&R Executive Agreement, in the event Executive voluntarily terminates his employment, including, without limitation, retirement initiated solely by Executive and mandatory retirement at age 65 (as permitted by Section 1625.12 of the ADEA regulations), he shall cease to receive compensation as of the Employment Termination Date, except for any Base Salary accrued and unpaid through the Employment Termination Date and that to which he may then be entitled pursuant to the Bonus Plans. It is understood and agreed that as respects any particular Bonus Plan, Executive is required to be employed by State Auto on the date such amount is paid, such amount to be paid only if he had in fact earned such bonus under the terms of such Bonus Plan.

(D)

Involuntary Termination for Cause.

(1)

In the event that the Boards of Directors of State Auto Mutual and State Auto Financial (collectively, the “ Boards ”) jointly determine in good faith that Executive’s employment should be terminated for Cause, as defined in subsection (D)(2), below, then Executive shall be entitled: (a) to receive payment of any Base Salary accrued through the Employment Termination Date; and (b) to receive the compensation to which he may be entitled pursuant to the Bonus Plans, as then in effect. If the Boards decide, in good faith, to terminate Executive’s employment as provided in this Section, State Auto will give Executive written notice of its actions and Executive’s employment shall cease on the Employment Termination Date. It is further understood and agreed that should Executive dispute the fact that Cause, as defined herein, exists for such termination, Executive has the right to pursue a claim in Arbitration under Section 13 of the A&R Executive Agreement for such benefits that would otherwise have been due to him under Section (E) of this Article V had he not been terminated for Cause.

(2)

For purposes of this Section D of Article V, it is understood and agreed that “ Cause ” shall mean the following: (a) the willful and continued failure of Executive to perform Executive’s duties with State Auto (other than any such failure resulting from incapacity due to a Disability), after a written demand for performance is delivered to Executive by the Boards which specifically identifies the manner in which the Boards believe, in good faith, that Executive has not performed Executive’s duties; (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 Boards in good faith; (c) the breach of any provision of Article VII hereof which has a material adverse effect on State Auto, as determined by the Boards in good faith; or (d) the willful failure to comply with any State Auto code of conduct or code of ethics applicable to Executive, as determined by the Boards in good faith. 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 the Boards 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.

(E)

Involuntary Termination without Cause.

In the event that the employment of Executive is terminated for any reason other than death, Disability, voluntary termination of employment by Executive, or for Cause (such reason is hereafter referred to as a “ Termination Without Cause ”), Executive, or his designated beneficiary, shall be entitled to the lesser of his then current Base Salary for twenty-four months after termination of employment or his then current Base Salary for the number of months until Executive attains age 65. In addition, Executive shall be entitled to receive the average of the annual aggregate bonus under the Short Term Incentive Plans (or its successors) earned by the Executive in each of the two calendar years immediately preceding the calendar year in which the Termination without Cause occurs and the average of the amount earned under the Long Term Incentive Plans in each of the two calendar years immediately preceding the calendar year in which the Termination without Cause occurs. In addition, in this event, Executive shall be entitled: (a) to receive payment of any Base Salary accrued through the date of termination of employment and (b) to receive a pro-rated amount of compensation to which he may be entitled pursuant to the Short Term Incentive Plans and Long Term Incentive Plans, as then in

effect, based on the effective date of the termination described in this section (E). Such amounts shall be paid within 75 days following the end of the calendar quarter or calendar year, as the case may be, following the determination by State Auto that the bonus due under the applicable Bonus Plan has in fact been earned pursuant to the terms of each such bonus opportunity, but in any event no later than the December 31 following the 75-day period after such determination calendar quarter or calendar year.

(F)

Change of Control.

In the event that State Auto shall undergo a Change of Control, as defined in the A&R Executive Agreement, and if Executive then becomes entitled to receive the Severance Benefits, as defined in and payable under the A&R Executive Agreement, all rights and privileges under this Agreement shall automatically terminate, except for any Base Salary accrued and unpaid through the Employment Termination Date. The parties understand and agree that the terms and conditions of the A&R Executive Agreement are intended to apply only in the event of a Change of Control (as defined in the A&R Executive Agreement), and in the absence of any such Change of Control, the terms and provisions of this Agreement shall govern and apply exclusively with respect to Executive’s employment by State Auto.

(G)

Mitigation.

In the event that Executive voluntarily terminates his employment, as set forth in Article V Section (C) herein, or Executive’s employment is Terminated Without Cause, as set forth in Article V Section (E) herein, or Executive’s employment is terminated pursuant to a Change of Control, as set forth in Article V Section (F) herein, Executive shall have no duty to mitigate his damages by seeking other employment, and State Auto shall not be entitled to set off against amounts payable hereunder any compensation which he may receive from future employment.

(H)

Specified Employee Delay.

In the event Executive is a “specified employee” as defined in Section 409A of the Code, any payments under this Agreement due to a separation from service and subject to Section 409A of the Code shall be delayed until a date that is six months after the date of separation from service (or, if earlier, the date of death of Executive). Payments to which a “specified employee” would otherwise be entitled during the first six months following the date of separation shall be accumulated and paid as of the first date of the seventh month following the date of separation from service.

(I)

Date of Employment Termination.

For purposes of this Agreement, the “ Employment Termination Date ” shall mean: (a) with respect to termination of employment due to a Disability, the 45th day following the date written notice is given to Executive of State Auto’s intention to terminate his employment due to a Disability; (b) with respect to death, the date of Executive’s death; (c) with respect to a voluntary termination of employment, the date such voluntary termination becomes effective; (d) with respect to a termination of employment for Cause, the 30th day following the date written notice is given to Executive of State Auto’s termination of his employment for Cause; or (e) with respect to a Termination Without Cause, the date such Termination Without Cause becomes effective.

Article VI Executive’s Rights Under Certain Plans .

Notwithstanding anything contained herein, State Auto agrees that the benefits provided to Executive herein are in addition to any rights and privileges to which Executive may be entitled as an employee of State Auto under any retirement, pension, insurance, hospitalization, or other plan which may now or hereafter be in effect, it being understood that, except to the extent currently provided in such plans, Executive shall have the same rights and privileges to participate in such plans or benefits as any other employee of State Auto.

Article VII Confidential Information; Noncompetition Agreement .

(A)

Confidential Information.

Executive agrees to receive Confidential Information (as defined below) of State Auto in confidence, and not to disclose to others, assist others in the application of, or use for his own gain, such information, or any part thereof, unless and until it has become public knowledge or has come into the possession of such other or others by legal and equitable means and other than as a result of disclosure by Executive. Executive further agrees that, upon termination of his employment with State Auto, all documents, records, notebooks, and similar repositories (including electronic formats) containing Confidential Information, including copies thereof, then in Executive’s possession, whether prepared by him or others, will be left with State Auto. For purposes of this Article VII, “ Confidential Information ” means information disclosed to Executive or known by State Auto, which is not generally known in the business in which State Auto is or may become engaged, including, but not limited to, information about State Auto’s services, trade secrets, financial information, customer lists, books, records, memoranda, and other proprietary information of State Auto. Executive further agrees that the obligation to maintain confidentiality created by this Article VII shall continue in effect for the duration of this Agreement and for three years following the termination of Executive’s employment with State Auto, but that thereafter this obligation shall expire.

(B)

Devotion of Time to Performance of Duties.

Executive further agrees that during the Employment Term he will devote substantially all of his time and effort to the performance of his duties hereunder and will refrain from engaging on his own behalf or on the behalf of a third party in any line of activities or business in which State Auto is or may become engaged. Notwithstanding the foregoing, Executive shall be allotted reasonable time for personal appointments unrelated to the performance of his duties for State Auto. Executive may serve on the board of directors of a public company subject to the approval of the State Auto Mutual Nominating and Governance Committee and subject to the applicable provisions of the State Auto Mutual Board of Directors Corporate Governance Guidelines, the State Auto Code of Business Conduct and/or any other applicable State Auto policy. Executive may serve on the board of directors of other organizations, including civic and charitable organizations, subject to the provisions of the State Auto Code of Business Conduct and/or any other applicable State Auto policy.

(C)

Noncompetition Agreement.

(1)

For a period of two years following the Employment Termination Date (the “ Noncompetition Period ”), Executive agrees that he shall not, directly or indirectly, engage in the property and casualty insurance underwriting business as conducted by State Auto as of the Employment Termination Date in any state that State Auto conducts

its property and casualty insurance 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 services to: (i) a company primarily engaged in the business of reinsurance, determined as of the end of the immediately preceding calendar year, (ii) a Small Insurer (as defined below) or (iii) a Non-P&C Insurer (as defined below) during the Noncompetition Period. For purposes of this Agreement: (a) “ Small Insurer ” shall mean an insurance holding company system in which the aggregate direct written premiums of all property and casualty insurers included in that insurance holding company system is $400 million or less as of the end of the immediately preceding calendar year; and (b) “ Non-P&C Insurer ” shall mean an insurance holding company system in which the aggregate direct written premiums of all insurers included in that insurance holding company system (the “ Aggregate Premiums ”) is greater than $5.0 billion and the aggregate direct written premiums for personal lines and standard commercial lines insurance is less than 50% of the Aggregate Premiums, in each case as of the end of the immediately preceding calendar year.

(2)	Nothing in this Section (C) shall 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.

(3)	For purposes of this Agreement, the term “ *directly or indirectly* ” shall mean on Executive’s own behalf, or as an officer, director, shareholder, member, partner, owner, agent, consultant, advisor, coach, or employee of any corporation, partnership, limited liability company or other entity.

(4)	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 State Auto to leave the employ of State Auto, or employ or attempt to employee any such person.

(5)	The Noncompetition Period shall be tolled (i.e., temporarily suspended) during the period of any violation or attempted violation of this Section by Executive. State Auto shall provide written notice to Executive of any tolling of the Noncompetition Period.

(6)

Executive understands that this Section is an essential element of this Agreement and that State Auto would not have entered into this Agreement without this Section being included in it. Executive acknowledges that this Section is reasonable and appropriate in all respects. In the event of any violation or attempted violation of this Section, Executive specifically acknowledges and agrees that State Auto’s remedy at law will be inadequate, that State Auto and 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 it may be entitled, either in law or in equity, without the necessity of proof of actual damage. If any of the provisions of this Section 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.

(7)

During the Noncompetition Period, Executive shall refrain from making any statements, written or oral, in respect of State Auto or any of its affiliates, directors and officers, or any business or services engaged in or performed by State Auto, which would tend to detract from State Auto’s reputation, except that nothing in this Section shall prevent either party from making any disclosures to professionals retained by either party or that may be required by law, regulation or legal process.

(D)

Forfeiture Events.

The Boards may, in their discretion, require that all or any portion of the termination benefits provided under Article IV Sections (A) through (E) (the “ Termination Benefits ”) are subject to an obligation of repayment to State Auto upon: (i) the violation of the non-competition and/or confidentiality covenants applicable to the Executive, as described in Sections (A) and (C) above; (ii) a financial restatement where (1) the amount of Executive’s Termination Benefits were calculated based upon the achievement of certain financial results that were subsequently the subject of a financial statement restatement; (2) Executive engaged in fraudulent misconduct that caused or substantially contributed to the need for the financial statement restatement; and (3) the amount of Executive’s Termination Benefits would have been lower than the amount actually awarded to such Executive had the financial results been properly reported; or (iii) Executive has engaged in any wrongful conduct during the employment term which has a material adverse effect on State Auto as determined by the Boards, in good faith. This Section (D) shall not be State Auto’s exclusive remedy with respect to such matters.

Article VIII Successors .

(A)

As to State Auto.

This Agreement shall inure to the benefit of and be binding upon State Auto, its successors and assigns, including without limitation, any person, partnership, or corporation which may acquire voting control of State Auto Financial or all or substantially all of its assets and business, or which may be a party to any consolidation, merger, or other transaction that results in a Change of Control of State Auto Financial or State Auto Mutual.

(B)

As to Executive.

This Agreement shall also inure to the benefit of and be binding on Executive, his heirs, successors, and legal representatives.

Article IX COBRA Continuation Coverage .

Notwithstanding any provision of this Agreement to the contrary, in the event of any “qualifying event,” as defined in Section 4980B(f) of Code, Executive and his qualifying beneficiaries shall be entitled to continuation of health care coverage, as provided under Section 4980B(f) of the Code. The foregoing is intended as a statement of Executive’s continuation coverage rights and is in no way intended to limit any greater rights of Executive or his qualified beneficiaries under this Agreement. If a greater benefit is available to Executive or his qualifying beneficiaries under this Agreement or otherwise, Executive or his qualified beneficiaries may forego continuation coverage and elect instead such greater benefit.

Article X Indemnification .

State Auto, as provided for in its Amended and Restated Articles of Incorporation, its Amended and Restated Bylaws, and its Indemnification Agreement with Executive, shall indemnify Executive to the full extent of the general laws of the State of Ohio, now or hereafter in force, including the advance of expenses under procedures provided by such laws.

Article XI General Provisions .

(A)

Entire Agreement.

This Agreement, together with the A&R Executive Agreement, contains the entire agreement of the parties hereto with respect to the employment of Executive by State Auto, and completely supersedes any prior verbal or written employment agreements, executive agreements or arrangements between the parties hereto. The parties hereto agree that this Agreement cannot be hereafter amended, modified, or supplemented in any respect, except by a subsequent written agreement signed by both parties hereto. The parties also agree that this Agreement shall be amended and/or modified as necessary to comply with Section 409A of the Code or regulations issued thereunder.

(B)

Applicable Law.

This Agreement shall be governed in all respects by the laws of the State of Ohio, without giving effect to any of its conflict of law provisions.

(C)

Notices.

All notices under this Agreement shall be in writing and will be duly given if sent by registered or certified mail to the respective parties to the addresses set forth below or such other addresses as the parties may hereafter designate in writing for such purpose:

(1)	If to either State Auto Financial, State Auto P&C or State Auto Mutual, to 518 East Broad Street, Columbus, Ohio 43215, Attention: Corporate Secretary; and

(2)	If to Executive, to the address set forth in the attached Exhibit A .

(D)

Assignment.

Except as expressly provided herein, neither this Agreement nor any rights, benefits, or obligations hereunder may be assigned by Executive without the prior written consent of State Auto Mutual and State Auto Financial.

(E)

Capacity.

State Auto Financial, State Auto P&C and State Auto Mutual represent and warrant to Executive that they have the capacity and right to enter into this Agreement and perform all of their obligations under this Agreement without any restriction by any agreement, document, restrictive covenant, or otherwise.

2.	Executive represents and warrants to State Auto Financial, State Auto P&C and State Auto Mutual that he has the capacity and right to enter into this Agreement and perform

all of his services and other obligations under this Agreement without any restriction by any agreement, document, restrictive covenant, or otherwise.

(F)

Waiver.

The failure by a party to exercise or enforce any of the terms or conditions of this Agreement will not constitute or be deemed a waiver of that party’s rights hereunder to enforce each and every term of this Agreement. The failure by a party to insist upon strict performance of any of the terms and provisions herein will not be deemed a waiver of any subsequent default in the terms or provisions herein.

(G)

Rights and Remedies Cumulative.

All rights and remedies of the parties hereunder are cumulative.

(H)

Divisibility.

The provisions of this Agreement are divisible. If any such provision shall be deemed invalid or unenforceable, it shall not affect the applicability or validity of any other provision of this Agreement, and if any such provision shall be deemed invalid or unenforceable as to any periods of time, territory, or business activities, such provision shall be deemed limited to the extent necessary to render it valid and enforceable.

(I)

Captions and Titles.

Captions and titles have been used in this Agreement only for convenience and in no way define, limit, or describe the meaning of any Article or any part thereof.

THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK


STATE AUTO FINANCIAL CORPORATION

By	/s/ Robert P. Restrepo, Jr.	/s/ Mark A. Blackburn
	Robert P. Restrepo, Jr., Chairman,	MARK A. BLACKBURN
	President and Chief Executive Officer


STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

By		/s/ Robert P. Restrepo, Jr.
		Robert P. Restrepo, Jr., Chairman,
		President and Chief Executive Officer


STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY

By		/s/ Robert P. Restrepo, Jr.
		Robert P. Restrepo, Jr., Chairman,
		President and Chief Executive Officer

Exhibit 10.70

AMENDED AND RESTATED

EXECUTIVE AGREEMENT

This Amended and Restated Executive Agreement (this “ Agreement ”) is made as of October 4, 2007 (the “ Commencement Date ”), by and among State Auto Financial Corporation, an Ohio corporation (“ State Auto Financial ”), State Automobile Mutual Insurance Company, an Ohio domiciled mutual insurance company (“ State Auto Mutual ”), and Mark A. Blackburn (“ Executive ”). State Auto Financial, State Auto Mutual and each of their respective insurer subsidiaries and affiliates, present and future, are hereinafter collectively referred to as “ State Auto .”

Background Information

Executive and State Auto Financial are parties to an Executive Agreement dated as of March 2, 2001 (the “ Original Executive Agreement ”), which, among other things, addresses Executive’s continued service to State Auto in the event of an actual or threatened change of control of State Auto Financial or State Auto Mutual (collectively, the “ Companies ”).

Concurrently with the execution of this Agreement, Executive is entering into an Employment Agreement (the “ Employment Agreement ”) with the Companies to reflect his duties, responsibilities and compensation arrangements. The terms and conditions of the Employment Agreement are incorporated in this Agreement by reference.

C.	The Employment Agreement does not address the impact of a Change of Control (as defined below), except to incorporate by reference the terms and conditions of this Agreement.

State Auto Financial is a majority owned, publicly traded holding company subsidiary of State Auto Mutual, which is the ultimate controlling person of the State Auto holding company system. The Companies consider the establishment and maintenance of a sound and vital management to be an important part of their overall corporate strategy and to be essential to protecting and enhancing the interests of the Companies and their respective owners. As part of this corporate strategy, the Companies wish to act to retain their well-qualified executive officers notwithstanding any actual or threatened change of control of State Auto Financial or State Auto Mutual.

Executive’s services, experience and knowledge of the business of the Companies, along with his reputation and contacts within the insurance industry, are extremely valuable to the Companies, and Executive’s continued dedication, availability, advice and counsel to the Companies are deemed important to the Companies, the Boards of Directors of State Auto Financial and State Auto Mutual (collectively, the “ Board ”), and their shareholders and policyholders, respectively, and therefore it is in the best interests of the Companies to secure the continued services of Executive notwithstanding any actual or threatened change of control of the Companies.

Statement of Agreement

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

1.	Replacement Agreement; Term of Agreement . This Agreement shall supercede and replace the Original Executive Agreement in its entirety, and on and after the Commencement Date, the Original Executive Agreement shall be of no further force or effect.

The term of this Agreement shall be for a three-year period commencing on the Commencement Date and ending on the third anniversary thereof, both dates inclusive. The term of this Agreement shall be renewed at the end of any term hereof for additional one-year terms unless one party notifies the other, in writing, of the intent not to renew at least 90 days prior to the end of the current term; and provided further, that the term of this Agreement shall terminate concurrently with the termination of the term of the Employment Agreement. Notwithstanding the above, if a “ Change of Control ” (as defined herein) of the Companies occurs during the term of this Agreement, the term of this Agreement will be extended for the lesser of 36 months beyond the end of the month in which any such Change of Control occurs, or the number of months beyond the end of the month in which any such Change of Control occurs until Executive attains age 65.

2.	Definitions. As used in this Agreement, the following defined terms shall have the meanings set forth below:

(a)

Annual Award. “Annual Award” means the cash payment paid or payable to Executive with respect to a fiscal year pursuant to the Short Term Incentive Plans.

(b)

Annual Base Salary. “Annual Base Salary” means the greater of (1) the highest annual rate of base salary in effect for Executive during the 12-month period immediately prior to a Change of Control, or (2) the annual rate of base salary in effect at the time Notice of Termination is given (or on the date employment is terminated if no Notice of Termination is required).

(c)

Cause. “Cause” shall be given the meaning used in the Employment Agreement.

(d)

Change of Control. “Change of Control” means the occurrence of any of the following:

(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 (A) any acquisition by State Auto Financial or any Subsidiary; (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by State

Auto Financial, a Subsidiary or State Auto Mutual; or (C) 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:

(A)

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) more than 50% of the combined voting power of State Auto Financial or surviving entity immediately after the merger or consolidation with another entity;

(B)

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;

(C)

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

(D)

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

(5)

As respects State Auto Mutual, any of the following occurs:

(A)

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

(B)

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.

(6)

Robert P. Restrepo, Jr. ceases for any reason to be employed as the chief executive officer of State Auto Mutual or State Auto Financial.

Notwithstanding the foregoing, for purposes of this Change of Control definition, the percentage of securities ownership listed under subsection (d)(1) above (i.e.,

25%) shall increase or decrease, as the case may be, such that the percentage of securities ownership is consistent with any future changes to the percentage of securities ownership represented in the Change of Control definition in Section 11(B)(2)(a) (or any successor Section) of the State Auto Financial Corporation Amended and Restated Equity Incentive Compensation Plan, as amended from time to time.

(e)

Change Year. “Change Year” means the fiscal year in which a Change of Control occurs.

(f)

Continuing Director. “Continuing Director” of State Auto Financial or State Auto Mutual, as the case may be, means a director who was either (A) first elected or appointed as a director on or prior to the Commencement Date; or (B) subsequent to the Commencement Date was elected or appointed as a director if such director was nominated by the Nominating Committee of State Auto Financial or State Auto Mutual, as the case may be, or appointed by at least two thirds of the total number of then Continuing Directors of State Auto Financial or State Auto Mutual, as the case may be.

(g)

Disability. “Disability” shall be given the meaning used in the Employment Agreement.

(h)

Employee Benefits. “Employee Benefits” means the benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs, or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital, or other insurance (whether funded by actual insurance or self-insured by the Companies), disability, salary continuation, expense reimbursement, and other employee benefit policies, plans, programs, or arrangements that may now exist or any equivalent successor policies, plans, programs, or arrangements that may be adopted hereafter, providing benefits at least as great in a monetary equivalent as are payable thereunder prior to a Change of Control.

(i)

Employment Agreement. “Employment Agreement” has the meaning set forth in the Background section of this Agreement.

(j)

Good Reason. “Good Reason” means the occurrence of any one or more of the following:

(1)

The assignment to the 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 reduction in Executive’s authority and responsibility as a senior executive officer of the Companies;

(2)

A reduction by the Companies in Executive’s Annual Base Salary in place as of the day immediately prior to a Change of Control, or after a Change

of Control the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of the Companies, or a reduction of Executive’s most recent Potential Annual Award prior to such Change of Control;

(3)

After a Change of Control, a demand by the Companies that Executive relocate to a location in excess of 35 miles from the location where Executive is based as of the day immediately prior to a Change of Control, or in the event of any such relocation with Executive’s express written consent, the failure of the Companies or a Subsidiary 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);

(4)

The failure of the Companies to obtain a satisfactory agreement from any successor to the Companies to assume and agree to perform this Agreement, as contemplated in Section 17 of this Agreement;

(5)

The failure of the Companies 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

(6)

Any material reduction in Executive’s compensation or benefits or material adverse change in Executive’s location or duties, if such material reduction or material adverse change occurs at any time after the commencement of any discussion with a third party relating to a possible Change of Control of the Companies involving such third party, if such material reduction or material 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 material reduction or material adverse change.

The existence of Good Reason shall not be affected by Executive’s subsequent incapacity due to physical or mental illness. Executive’s continued employment shall not constitute a waiver of Executive’s rights with respect to any circumstance constituting Good Reason under this Agreement. Executive’s determination of Good Reason shall be conclusive and binding upon the parties to this Agreement provided such determination has been made in good faith. Executive shall provide the Companies with written notice of his intent to terminate with Good Reason within a period not to exceed 90 days of the initial existence of the condition constituting Good Reason. The Companies shall have a period of 30 days in which it may remedy the condition and prevent Executive’s termination for Good Reason.

(k)

Notice of Termination. “Notice of Termination” means a written notice indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment under the provision so indicated.

(l)

Potential Annual Award. “Potential Annual Award” means the maximum possible Annual Award Executive could receive for the fiscal year immediately preceding the Change Year or the fiscal year that is the Change Year, whichever is higher, assuming that (1) the parameters for the maximum Annual Award were met (whether or not such parameters for such maximum Annual Award actually were or could be met) and (2) Executive’s Annual Base Salary is used to determine the Potential Annual Award. Notwithstanding the foregoing, the Potential Annual Award in the event of a Change of Control as defined in Section 2(d)(6) shall mean the average of the annual aggregate bonus under the Short Term Incentive Plans (or its successors) earned by Executive in each of the two calendar years immediately preceding the calendar year in which the Change of Control occurs.

(m)

Retirement. “Retirement” means having reached normal retirement age of 65 as defined in the State Auto Insurance Companies Employee Retirement Plan (“ State Auto Pension Plan ”) or taking early retirement in accordance with the terms of the State Auto Pension Plan.

(n)

Severance Benefits. “Severance Benefits” means the benefits described in Section 4 of this Agreement, as adjusted by the applicable provisions of Section 5 of this Agreement.

(o)

Short Term Incentive Plans. “Short Term Incentive Plans” shall be given the meaning used in the Employment Agreement.

(p)

Subsidiary. “Subsidiary” means any corporation, insurance company, or other entity a majority of the voting control of which is directly or indirectly owned or controlled at the time by State Auto Financial.

3.	Eligibility for Severance Benefits. The Companies, or their respective successors, shall pay or provide to Executive the Severance Benefits in the event that, during the term of this Agreement:

(a)

One or both of the Companies terminates the Executive’s employment for any reason other than for Cause, the death or Disability of Executive or Executive’s mandatory retirement at age 65, as permitted under regulations Section 1625.12 of the Age Discrimination in Employment Act of 1967, within 24 months after a Change of Control; or

(b)

Executive terminates his employment for Good Reason within 24 months after a Change of Control; or

(c)

One or both of the Companies terminates the Executive’s employment for any reason other than for Cause or the death or Disability of Executive after an agreement has been reached with an unaffiliated third party, the performance of which agreement would result in a Change of Control involving such third party, if

such Change of Control is actually consummated within 12 months after the date of such termination; or

(d)

Robert P. Restrepo, Jr. ceases for any reason to be employed as the chief executive officer of State Auto Mutual or State Auto Financial, and Executive remains employed by the Companies or their respective successors, if applicable, for a period of two years after Mr. Restrepo’s change in status in order to assist in such transition. Executive must give the Companies or their respective successors, if applicable, advance written notice of Executive’s intent to terminate employment and request Severance Benefits under this provision. Such notice shall be given no later than forty-five days before the end of the two-year transition period. Should Executive give no notice or not provide notice to the Companies or their respective successors, if applicable, according to the terms of this subsection (d) and Section 19 of the Agreement, no Severance Benefits shall be paid under this provision. In the event Executive dies or incurs a Disability during the two-year transition period, the Severance Benefits shall be paid to Executive or his beneficiary, as applicable; provided, however, that no benefits shall be paid under this provision if such disability or death results from a self-inflicted injury or event, while sane or insane. Further, if, after Mr. Restrepo’s departure, the Companies or their respective successors, if applicable, make an offer, in good faith, to Executive to become the chief executive officer of State Auto Mutual, Severance Benefits shall not be payable under this provision (it being understood and agreed that if Executive declines such offer and elects to remain employed by the Companies, the Employment Agreement shall remain in effect).

4.	Severance Benefits. Executive, if eligible under Section 3, shall receive the following Severance Benefits, adjusted by the applicable provisions of Section 5 (in addition to accrued compensation and bonuses);

(a)

Annual Base Salary. In addition to any accrued compensation payable as of Executive’s termination of employment (either by reason of Executive’s Employment Agreement or otherwise), a lump sum cash amount equal to Executive’s Annual Base Salary multiplied by three, unless at the time of such employment termination Executive is within three years of age 65, in which case the benefit due under this Section 4(a) shall not exceed Executive’s Annual Base Salary multiplied by a factor equal to the number of months remaining until Executive attains age 65 presented as a whole integer and a fraction of a partial year (e.g., 15 months equals 1.25).

(b)

Annual Incentive Compensation. In addition to any compensation otherwise payable pursuant to Executive’s bonus arrangements, a lump sum cash amount equal to Executive’s Potential Annual Award multiplied by three, unless at the time of such employment termination Executive is within three years of age 65, in which case the benefit due under this Section 4(b) shall not exceed Executive’s Potential Annual Award multiplied by a factor equal to the number of months remaining until Executive attains age 65 presented as a whole integer and a fraction of a partial year (e.g., 15 months equals 1.25).

(c)

Outplacement. The Companies shall pay all fees for outplacement services incurred by Executive up to a maximum equal to 15% of Executive’s Annual

Base Salary, plus provide a travel expense account of up to $5,000 to reimburse job search travel. Such expenses and reimbursements shall be limited to those expenses incurred within the two calendar years following the calendar year of Executive’s separation from service and paid no later than December 31 ^st of the third calendar year following the calendar year of Executive’s separation from service.

(d)

Stock Options. Stock Options held by Executive become exercisable upon a Change of Control according to the terms of the Companies’ Stock Option Plans and any option agreements affecting outstanding option grants, as interpreted by the Companies’ Stock Option Committee as such Committee existed immediately prior to the Change of Control.

In computing and determining Severance Benefits under Sections 4(a) and (b), above, a decrease in Executive’s salary or incentive bonus potential shall be disregarded if such decrease occurs within six months before a Change of Control, is in contemplation of such Change of Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change of Control. In such event, the salary and incentive bonus potential used to determine Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this Section 4.

Unless Executive elects to defer the receipt of any applicable Severance Benefits in accordance with the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) and related Treasury Regulations, the Severance Benefits provided in Sections 4(a) and (b) above shall be paid not later than 45 business days following the date Executive’s employment terminates. Notwithstanding the foregoing, in the event Executive is a “specified employee” as defined in Section 409A of the Code, any payments under this Agreement due to a separation from service and subject to Section 409A of the Code shall be delayed until a date that is six months after the date of separation from service (or, if earlier, the date of death of Executive). Payments to which a “specified employee” would otherwise be entitled during the first six months following the date of separation shall be accumulated and paid as of the first day of the seventh month following the date of separation from service.

Executive acknowledges and agrees that the Severance Benefits provided in this Section 4 shall be the sole benefits payable to Executive in the event of any “change of control” (under any definition) of the Companies, and Executive hereby waives and relinquishes any and all rights or benefits under any other “change of control” provision applicable to Executive with respect to his employment by State Auto. Executive also acknowledges and agrees that receipt of any Severance Benefits provided in this Section 4 shall be subject to and conditioned on Executive executing a general release and waiver of any claims against the Companies.

Tax Gross-Up. If any Severance Benefit or other benefit paid or provided under Section 4, or the acceleration of stock option vesting, or the payment or distribution of any Employee Benefit or similar benefit is subject to excise tax pursuant to Section 4999 of the Code (or any similar federal or state excise tax), the Companies 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 (the “ Tax Gross-Up ”). The Companies shall pay such additional compensation at the time when the Companies withhold such excise tax from any payments to Executive. The calculation of the Tax Gross-Up shall be approved by the Companies’ independent certified public accounting firm engaged by the Companies immediately prior to the Change of Control 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 Executive rejects the Tax Gross-Up calculation and the parties are thereafter unable to agree within an additional 45 days, the arbitration provisions of Section 13 shall control. The Companies shall reimburse Executive for all reasonable legal and accounting fees incurred with respect to the calculation of the Tax Gross-Up and any disputes related thereto. Any payments owed to Executive under this Section 5 for Tax Gross-up or reasonable legal and accounting fees related to the calculation of the same, which are subject to the rules under Section 409A of the Code and related regulations, shall be made to Executive no later than the end of the calendar year following the calendar year in which the taxes are remitted to the taxing authority.

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.

Notwithstanding anything to the contrary in this Section 5, if any Severance Benefit or other benefit paid or provided under Section 4, or the acceleration of stock option vesting, or the payment or distribution of any Employee Benefits or similar benefits 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 Companies 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 Benefit that would be payable to or for the benefit of Executive under this Agreement must be modified or reduced to comply with this provision, they shall be modified or reduced on a pro-rata basis. In no event shall the total payments be reduced by more than 10% in order to avoid treatment as an Excess Severance Payment.

6.	Withholding of Taxes. The Companies may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as required by law; provided, however, that such payment may not exceed the amount of such taxes due as a result of the payments due under this Agreement.

Payments of Employment Taxes and Upon Violation of Code Section 409A. In accordance with Code Section 409A and the regulations issued thereunder, this Agreement shall permit the payment of amounts necessary to (a) satisfy the employment tax withholding obligations that arise under this Agreement prior to the date that payment may otherwise be made under this Agreement and/or (b) satisfy the excise tax or

underpayment penalties owed under Section 409A of the Code in the event of a violation of Section 409A of the Code under this Agreement.

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

Acknowledgement. The Companies hereby acknowledges that it will be difficult and may be impossible for Executive to find reasonably comparable employment, or to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the Severance Benefits by the Companies to Executive in accordance with the terms of this Agreement is hereby acknowledged by the Companies to be reasonable and will be liquidated damages, and Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of Executive hereunder or otherwise. The Companies shall not be entitled to set off or counterclaim against amounts payable hereunder with respect to any claim, debt, or obligation of Executive.

10.

Enforcement Costs; Interest. The Companies are aware that, upon the occurrence of a Change of Control, the Board or a shareholder or policyholder of the Companies, as the case may be, may then cause or attempt to cause the Companies to refuse to comply with their obligations under this Agreement, or may cause or attempt to cause the Companies to institute, or may institute, litigation, arbitration, or other legal action seeking to have this Agreement declared unenforceable, or may take, or attempt to take, other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Companies that Executive not be required to incur the expenses associated with the enforcement of Executive’s rights under this Agreement by litigation, arbitration, or other legal action nor be bound to negotiate any settlement of Executive’s rights hereunder under threat of incurring such expenses because the cost and expense thereof would substantially detract from the benefits intended to be extended to Executive under this Agreement. Accordingly, if following a Change of Control it should appear to Executive that the Companies has failed to comply with any of their obligations under this Agreement, including the proper calculation of the Tax Gross-Up, or in the event that the Companies or any other person takes any action to declare this Agreement void or unenforceable, or institute any litigation or other legal action designed to deny, diminish or to recover from Executive, the benefits intended to be provided to Executive hereunder, the Companies irrevocably authorizes Executive from time to time to retain counsel (legal and accounting) of Executive’s choice at the expense of the Companies as provided in this Section 10 to represent Executive in connection with the calculation of the Tax Gross-Up, or the initiation or defense of any litigation or other legal action, whether by or against the Companies or any director, officer, stockholder, or other person affiliated with the Companies. Notwithstanding any existing or prior attorney-client relationship between the Companies and such counsel, the Companies irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection the Companies and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of

counsel selected from time to time by Executive as provided in this Section 10 shall be paid or reimbursed to Executive by the Companies on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with their customary practices. In any action involving this Agreement, Executive shall be entitled to prejudgment interest on any amounts found to be due him from the date such amounts would have been payable to Executive pursuant to this Agreement at an annual rate of interest equal to the prime commercial rate in effect at the corporation’s principal bank or their successor from time to time during the prejudgment period plus 4 percent.

11.

Forfeiture Events. The Board may, in its discretion, require that all or any portion of the Severance Benefits defined under Section 4 above is subject to an obligation of repayment to the Companies upon the violation of any non-competition and confidentiality covenant applicable to the Executive, including such covenants in Article VII of the Employment Agreement. The Board may, in its discretion, also require Executive to repay the Companies all of any portion of the Severance Benefits if (i) the amount of Executive’s Severance Benefits were calculated based upon the achievement of certain financial results that were subsequently the subject of a financial statement restatement; (ii) Executive engaged in fraudulent misconduct that caused or substantially contributed to the need for the financial statement restatement; and (iii) the amount of Executive’s Severance Benefits would have been lower than the amount actually awarded to such Executive had the financial results been properly reported. This Section 11 shall not be the Companies’ exclusive remedy with respect to such matters.

12.

Indemnification. From and after the earliest to occur of a Change of Control or termination of employment, the Companies shall (a) for a period of five years after such occurrence, provide Executive (including Executive’s heirs, executors, and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at the Companies’ expense, and (b) indemnify and hold harmless Executive, to the fullest extent permitted or authorized by the law of the State of Ohio as it may from time to time be amended, if Executive is (whether before or after the Change of Control) 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 is or was a director, officer, or employee of the Companies or any Subsidiary, or is or was serving at the request of the Companies or any Subsidiary, as a director, trustee, officer, or employee of an insurance company, corporation, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 12 shall not be deemed exclusive of any other rights to which Executive may be entitled under the charter or bylaws of the Companies or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in Executive’s official capacity and as to action in another capacity while holding such office, and shall continue as to Executive after Executive has ceased to be a director, trustee, officer, or employee and shall inure to the benefit of the heirs, executors, and administrators of Executive.

13.

Arbitration. The initial method for resolving any dispute arising out of this Agreement shall be nonbinding arbitration in accordance with this Section. Except as provided otherwise in this Section, arbitration pursuant to this Section shall be governed by the Commercial Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a description of the issue to be arbitrated. Within 15 days after either party demands

arbitration, the Companies and Executive shall each appoint an arbitrator. Within 15 additional days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within this 15 day period, then the third arbitrator shall be selected promptly pursuant to the rules of the American Arbitration Association for Commercial Arbitration. The arbitration panel shall hold a hearing in Columbus, Ohio, within 90 days after the appointment of the third arbitrator. The fees and expenses of the arbitrator, and any American Arbitration Association fees, shall be paid by the Companies. Both the Companies and Executive may be represented by counsel (legal and accounting) and may present testimony and other evidence at the hearing. Within 90 days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall not be binding on the parties, and the parties may pursue other available legal remedies if the parties are not satisfied with the majority decision of the arbitrator, however, the Companies are no longer obligated to reimburse Executive’s legal expenses if the arbitration award is appealed by Executive, as described in this sentence. Executive shall be entitled to seek specific performances of the executive’s rights under this Agreement during the pendency of any dispute or controversy arising under or in connection with this Agreement.

14.

Employment Rights. This Agreement sets forth the Severance Benefits payable to Executive in the event Executive’s employment with the Companies is terminated under certain conditions specified in Section 3. This Agreement is not an employment contract nor shall it confer upon Executive any right to continue in the employ of the Companies or their Subsidiaries and shall not in any way affect the right of the Companies or their Subsidiaries to dismiss or otherwise terminate Executive’s employment at any time with or without cause.

15.

Arrangements Not Exclusive. The specific benefit arrangements referred to in this Agreement are not intended to exclude Executive from participation in or from other benefits available to executive personnel generally or to preclude Executive’s right to other compensation or benefits as may be authorized by the Board at any time. The provisions of this Agreement and any payments provided for hereunder shall not reduce any amounts otherwise payable, or in any way diminish Executive’s existing rights, or rights which would accrue solely as the result of the passage of time under any compensation plan, benefit plan, incentive plan, stock option plan, employment agreement, or other contract, plan, or arrangement except as may be specified in such contract, plan or arrangement. Notwithstanding anything to the contrary in this Section 15, the Severance Benefits provided in Section 4 are in lieu of any benefits to which Executive would be entitled following the termination of his or her employment pursuant to any Employment Agreement with the Companies, if the termination is due to a Change of Control.

16.

Termination. This Agreement shall terminate if the employment of Executive with the Companies shall terminate prior to a Change of Control; provided, however, that this Agreement shall not terminate upon Executive’s termination of employment in the event of a pending Change of Control event as described in Section 3(c) above.

17.

Successors; Binding Agreements. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. Executive’s rights and benefits under this Agreement may not be assigned, except that if Executive

dies while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid to the beneficiary indicated on the Beneficiary Designation attached as Exhibit A or, if there is no such beneficiary, to Executive’s estate. The Companies will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Companies (or of any division or Subsidiary thereof employing Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Companies would be required to perform it if no such succession had taken place. Failure of the Companies to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Companies in the same amount and on the same terms to which Executive would be entitled hereunder if Executive terminated employment for Good Reason following a Change of Control.

18.	No Vested Interest. Neither Executive nor Executive’s beneficiaries shall have any right, title, or interest in any benefit under this Agreement prior to the occurrence of the right to the payment of such benefit.

19.

Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to such addresses as each party may designate from time to time to the other party in writing in the manner provided herein. Unless designated otherwise, notices to the Companies should be sent to the Companies at:

State Auto Financial Corporation

518 East Broad Street

Columbus, Ohio 43215

Attention: General Counsel

Until designated otherwise, notices shall be sent to the employee at the address indicated on the Beneficiary Designation and Notice form attached hereto as Exhibit A . If the parties by mutual agreement supply each other with telecopier numbers for the purposes of providing notice by facsimile, such notice shall also be proper notice under this Agreement. Notice sent by certified or registered mail shall be effective two days after deposit by delivery to the U.S. Post Office.

20.	Savings Clause. If any payments otherwise payable to Executive under this Agreement are prohibited or limited by any statute or regulation in effect at the time the payments would otherwise be payable (any such limiting statute or regulation a “ *Limiting Rule* ”):

(a)

Companies will use their best efforts to obtain the consent of the appropriate governmental agency to the payment by Companies to Executive of the maximum amount that is permitted (up to the amounts that would be due to Executive absent the Limiting Rule); and

(b)

Executive will be entitled to elect to have apply, and therefore to receive benefits directly under, either (i) this Agreement (as limited by the Limiting Rule) or (ii) any

generally applicable Companies severance, separation pay, and/or salary continuation plan that may be in effect at the time of Executive’s termination.

Following any such election, Executive will be entitled to receive benefits under this Agreement or plan elected only if and to the extent the Agreement or plan is applicable and subject to their specific terms.

21.

Amendment; Waiver. This Agreement may not be amended or modified and no provision may be waived unless such amendment, modification, or waiver is agreed to in writing and signed by Executive and the Companies; provided, however, that this Agreement shall be amended and/or modified as necessary to comply with Section 409A of the Code or regulations issued thereunder.

22.	Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

23.	Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.

24.	Governing Law. Except as otherwise provided, this Agreement shall be governed by the laws of the State of Ohio, without giving effect to any conflict of law provisions.

THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK


STATE AUTO FINANCIAL CORPORATION

By	/s/ Robert P. Restrepo, Jr.	/s/ Mark A. Blackburn
	Robert P. Restrepo, Jr., Chairman,	MARK A. BLACKBURN
	President and Chief Executive Officer


STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

By		/s/ Robert P. Restrepo, Jr.
		Robert P. Restrepo, Jr., Chairman,
		President and Chief Executive Officer

Exhibit 10.71

STATE AUTO FINANCIAL CORPORATION

RESTRICTED STOCK AGREEMENT

UNDER THE

AMENDED AND RESTATED EQUITY INCENTIVE COMPENSATION PLAN

This Restricted Stock Agreement (this “ Agreement ”) is made as of October 4, 2007 (the “ Award Date ”). The Compensation Committee of State Auto Financial Corporation, an Ohio corporation (the “ Company ”), hereby awards to Mark A. Blackburn (“ Mr. Blackburn ”) 25,000 common shares, without par value, of the Company (the “ Restricted Shares ”). The Restricted Shares are awarded pursuant to the terms of the Company’s Amended and Restated Equity Incentive Compensation Plan (the “ Plan ”) and shall be subject to all of the provisions of the Plan, which are hereby incorporated herein by reference, and shall be subject to the following provisions of this Agreement. Capitalized terms used in this Agreement which are not otherwise defined herein shall have the meanings ascribed to such terms in the Plan.

§1. Award of Restricted Shares . The Restricted Shares are awarded to Mr. Blackburn in connection with, and as additional consideration for, his entering into an Employment Agreement with the Company dated as of the Award Date. The purchase price for the Restricted Shares shall be zero. Following the execution and delivery of this Agreement by Mr. Blackburn, the Company shall cause a share certificate evidencing the Restricted Shares to be issued in Mr. Blackburn’s name (the “ Share Certificate ”).

§2. Forfeiture . The Restricted Shares shall be forfeited to the Company if Mr. Blackburn’s employment with the Company terminates for any reason, (other than death or disability), prior to the third anniversary of the Award Date (the “ Lapse Date ”), or if Mr. Blackburn violates any provision of this Agreement.

§3. Vesting . Notwithstanding the provisions of the Plan to the contrary, if Mr. Blackburn’s employment with the Company terminates due to death, disability, involuntary termination without cause or a change of control prior to the Lapse Date, the Restricted Shares shall be fully vested; provided, however, that the Restricted Shares shall not vest prior to the Lapse Date if such death or disability results from a self-inflicted injury or event, while sane or insane. For purposes of this Agreement, “disability” and involuntary “termination without cause” shall be given the meanings provided in Article V, sections (A) and (D), respectively, of the Employment Agreement entered into by Mr. Blackburn concurrently with the execution of this Agreement. Further, “change of control” shall be given the meaning provided in Section 2(d) of the Amended and Restated Executive Agreement entered into by Mr. Blackburn concurrently with the execution of this Agreement. For purposes of vesting upon a change of control, if the change of control event is as defined in Section 2(d)(6) of the Amended and Restated Executive Agreement, Mr. Blackburn must remain employed by the Company or its respective successor, if applicable, for a period of two years after the change of control in order for the Restricted Shares to be fully vested prior to the Lapse Date, unless his employment terminates sooner due to death or disability which does not result from a self-inflicted injury or event, while sane or insane.

§4. Transfer Restrictions . None of the Restricted Shares, nor any beneficial interest therein, shall be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily,

prior to the Lapse Date. Thereafter, the Restricted Shares may be transferred only in compliance with all applicable federal and state securities laws. Any transfer or attempted transfer in violation of the foregoing restrictions shall be null and void.

§5. Acceptance of Award . The award of the Restricted Shares must be accepted by Mr. Blackburn within 30 days after the Award Date by executing this Agreement. Mr. Blackburn shall not have any rights with respect to the Restricted Shares awarded under this Agreement unless and until Mr. Blackburn has executed this Agreement, delivered a fully executed copy thereof to the Secretary of the Company, and otherwise complied with the applicable terms and conditions of the award of the Restricted Shares.

§6. Rights As Shareholder . Subject to the terms of this Agreement, on and after the issuance of the Share Certificate to Mr. Blackburn, Mr. Blackburn shall have all of the rights of a shareholder of the Company with respect to the Restricted Shares, including the right to vote the Restricted Shares and the right to receive any dividends or other distributions with respect to the Restricted Shares, but subject, however, to the restrictions on transfer set forth in this Agreement. Notwithstanding the foregoing, any cash dividends or other cash distributions paid on the Restricted Shares prior to the Lapse Date shall be automatically reinvested in common shares of the Company (the “ Dividend Shares ”) pursuant to the terms of the Company’s dividend reinvestment and stock purchase plan and shall be held in an account with National City Bank, or its successor, under Mr. Blackburn’s name. Until the Lapse Date, the Dividend Shares shall be subject to the restrictions on transfer set forth in §4, above. However, the Dividend Shares shall not be subject to any risk of forfeiture.

§7. Escrow of Shares . The Share Certificate shall be held by the Company, together with a stock power endorsed in blank, which shall be executed by Mr. Blackburn concurrently with his execution of this Agreement, until the earlier of the Lapse Date or the termination of Mr. Blackburn’s employment with the Company. If the Restricted Shares are forfeited to the Company under §2, above, then the Company shall cause the Restricted Shares to be transferred to the Company. If the Restricted Shares are not forfeited to the Company, then the Company shall deliver the Share Certificate and stock power to Mr. Blackburn.

§8. Tax Consequences . Mr. Blackburn understands that he (and not the Company) shall be responsible for his own federal, state, local or foreign tax liability and any of his other tax consequences that may arise as a result of the transactions contemplated by this Agreement, including without limitation filing an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the “ 83(b) Election ”), if he deems it to be appropriate. Mr. Blackburn shall rely solely on the determinations of his tax advisors or his own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters. Mr. Blackburn shall notify the Company in writing if Mr. Blackburn files the 83(b) Election with the Internal Revenue Service within 30 days from the date of his execution of this Agreement. The Company intends, in the event it does not receive from Mr. Blackburn evidence of the 83(b) Election filing by Mr. Blackburn, to claim a tax deduction for any amount which would be taxable to Mr. Blackburn in the absence of such an election. If the Company is required to withhold or pay any taxes with respect to the issuance or vesting of the Restricted Shares, Mr. Blackburn shall pay to the Company the amount of such required withholding or payment promptly following the Company’s request.

§9. Compliance with Securities Laws . No Restricted Shares shall be deliverable under this Agreement or the Plan except in compliance with all applicable federal and state securities laws and regulations. The Company may require Mr. Blackburn (a) to represent and

warrant to and agree with the Company in writing that Mr. Blackburn is acquiring the Restricted Shares without a view to distribution thereof, and (b) to make such additional representations, warranties and agreements with respect to the investment intent of Mr. Blackburn as the Company may reasonably request.

The Share Certificate shall be subject to such stop-transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Company’s common shares are then listed, and any applicable federal or state securities laws, and the Company may cause a legend or legends to be put on the Share Certificate to make appropriate reference to such restrictions.


STATE AUTO FINANCIAL CORPORATION

By		/s/ Robert P. Restrepo, Jr.
		Robert P. Restrepo, Jr., Chairman, President and Chief Executive Officer, ( as authorized and approved by the Compensation Committee of the Board of Directors )

Acceptance of Agreement

Mr. Blackburn hereby: (a) acknowledges receiving a copy of the Plan and represents that Mr. Blackburn is familiar with all provisions of the Plan; and (b) accepts this Agreement and the award of the Restricted Shares under this Agreement subject to all terms, provisions, and restrictions of both the Plan and this Agreement.

/s/ Mark A. Blackburn

MARK A. BLACKBURN

Dated as of October 4, 2007

Exhibit 10.72

State Auto Financial Corporation

Supplemental Executive Retirement Plan

Effective January 1, 2007

TABLE OF CONTENTS


		Page
1	INTRODUCTION	2

2	DEFINITIONS AND GENERAL PROVISIONS	3

3	PLAN PARTICIPATION	6

4	BENEFITS PAYABLE	7

5	CHANGE OF CONTROL	12

6	PLAN ADMINISTRATION	13

7	MISCELLANEOUS PROVISIONS	14

Supplemental Executive Retirement Plan

1	INTRODUCTION

State Auto Financial Corporation (the “Company”), hereby adopts this State Auto Financial Corporation Supplemental Executive Retirement Plan (the “Plan”) to read in its entirety as set forth in this document, effective January 1, 2007. The Plan is established by the Company for the benefit of a select group of management and highly compensated employees of the Company.

The purpose of the Plan is to supplement benefits payable to, and on behalf of, covered employees by the State Auto Insurance Companies Employees’ Retirement Plan (the “Retirement Plan”) and the State Auto Insurance Companies Capital Accumulation Plan (the “CAP”), both tax-qualified retirement plans maintained by the Company, and not otherwise provided by the Supplemental Retirement Plan for Executive Employees of State Auto Insurance Company (the “Supplemental Retirement Plan”) or the State Auto Property & Casualty Insurance Company Amended and Restated Incentive Deferred Compensation Plan (the “IDC Plan”). In general, the Plan provides covered employees with additional benefits they would have earned or accumulated under the Pension Plan and/or the CAP, by reason of their Company-related employment, in the absence of the annual compensation, contribution and maximum benefit limits imposed by Sections 401(a)(17), 401(k), 401(m), 402(g) and 415 of the Internal Revenue Code of 1986, as amended (the “Code”) and which are not otherwise provided by the Supplemental Retirement Plan and/or the IDC Plan.

The Plan is intended to constitute an unfunded deferred compensation plan for a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Plan is also intended to comply with the requirements of The American Jobs Creation Act of 2004 and Code Section 409A and the regulations and guidance issued thereunder.

Supplemental Executive Retirement Plan

2	DEFINITIONS AND GENERAL PROVISIONS

The terms defined in this Article shall have the meanings set forth below unless the context clearly requires another meaning. When the defined meaning is intended, the term is capitalized:

2.1

“Adjusted Annual Compensation” means a Covered Employee’s total annual cash compensation (i.e., base pay plus any amounts paid as short-term or long-term incentive compensation or bonuses) paid in the Covered Employee’s tax year, but determined without regard to any limitations imposed by reason of Section 401(a)(17) of the Code on the maximum amount that may recognized as annual compensation.

2.2

“Approved Leave of Absence” means any absence from work granted by the Company and recognized by the Plan Administrator under uniform rules.

2.3

“Beneficiary” means any person or persons so designated in accordance with the provisions of Article 4.

2.4

“CAP” means the document entitled State Auto Insurance Companies Capital Accumulation Plan, as the same may be amended and restated from time to time.

2.5

“Change of Control” means a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company determined in accordance with Code Section 409A and the regulations thereunder and any applicable guidance issued with respect to Code Section 409A by the Treasury Department or the Internal Revenue Service.

2.6

“Code” means the Internal Revenue Code of 1986, as amended.

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.

2.8

“Covered Employee” means any employee who is among a select group of management or highly compensated employees (within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA) of the Company (i) whose retirement benefits under the Retirement Plan are limited by reason of Code Sections 401(a)(17) and/or 415, (ii) whose benefits under the CAP are limited by reason of Code Sections 401(a)(17), 401(k), 401(m), 402(g) and/or 415, and (iii) who is designated by the Plan Administrator as eligible to participate in the Plan.

2.9

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

2.10

“IDC Plan” means the non-qualified deferred compensation plan document entitled State Auto Property and Casualty Insurance Company Amended and Restated Incentive Deferred Compensation Plan, as the same may be amended and restated from time to time.

Supplemental Executive Retirement Plan

2.11

“Participant” means any Covered Employee who meets the eligibility requirements for participation in the Plan as set forth in Article 3 and who has an accrued Plan Benefit.

2.12

“Plan” means the State Auto Financial Corporation Supplemental Executive Retirement Plan, as set forth herein, and as the same may be amended from time to time.

2.13

“Plan Administrator” means the Compensation Committee (the “Committee”) of the Board of Directors of State Auto Financial Corporation or such other authorized officers or officer of the Company to whom the power to administer the Plan has been delegated by the Committee.

2.14

“Plan Benefit” means the benefits payable under the Plan to or on behalf of a Participant.

2.15

“Plan Year” means the fiscal year of the Plan, which is the twelve consecutive-month period beginning January 1 and ending December 31.

2.16

“Retirement Plan” means the document entitled State Auto Insurance Companies Employees’ Retirement Plan, as the same may be amended and restated from time to time.

2.17

“Separation from Service” or “Separate from Service” means a Participant’s termination from employment with the Company on account of such Participant’s death, retirement, or other such termination of employment. A Participant will not be deemed to have experienced a Separation from Service if such Participant is on military leave, sick leave, or other bona fide Approved Leave of Absence, to the extent such leave does not exceed a period of six months or, if longer, such longer period of time as is protected by either statute or contract. A Participant will not be deemed to have experienced a Separation from Service if such Participant continues to provide “significant services” to the Company (whether as an employee or independent contractor). For purposes of the preceding sentence, a Participant will be considered to provide “significant services” if such Participant provides continuing services that average more than 20% of the services provided by such Participant to the Company during the immediately preceding three full calendar years of employment (or, if less, the period of employment).

2.18

“Service” means the years and months of employment (including an Approved Leave of Absence, if any) with the Company, where any partial month shall constitute a complete month. Such years and months shall be calculated from the Participant’s date of employment to the Participant’s termination date. Notwithstanding the foregoing, if a Participant is absent from work due to any reason other than quit, discharge, retirement or death, the period up to the first anniversary of the first day of such absence (or up to the date of quit, discharge, retirement or death, if earlier), shall be counted as Service for all purposes under the Plan.

2.19

“Supplemental Retirement Plan” means the document entitled Supplemental Retirement Plan for Executive Employees of State Auto Insurance Companies, as the same may be amended and restated from time to time.

Supplemental Executive Retirement Plan

2.20

“Total Cash Compensation” means a three-year final average of the Participant’s Adjusted Annual Compensation.

2.21

“Totally Disabled” or “Total Disability” means “Disabled” as such term is defined in Code Section 409A(a)(2)(C).

2.22

Whenever appropriate, words used herein in the singular may be read as the plural and the plural may be read as the singular. Unless otherwise clear from the context, words used herein in the masculine shall also be deemed to include the feminine.

Supplemental Executive Retirement Plan

3	PLAN PARTICIPATION

An individual must be a Covered Employee in order to participate in the Plan. Once a Covered Employee becomes a Participant, such individual shall continue to be a Participant until such individual ceases: (i) to be described as a Covered Employee, and (ii) to have any vested interest in the Plan (as a result of distributions made to such Participant or his/her Beneficiary, if applicable, or otherwise).

Supplemental Executive Retirement Plan

4	BENEFITS PAYABLE

4.1

Amount and Payment of Benefits . A Participant shall be entitled to receive the benefits described in this Article 4, payable as described herein.

4.2

Amount of Plan Benefit . The Plan Benefit shall be calculated as follows:

Plan Benefit = SERP Target minus (A + B + C + D), where:

SERP Target = 50% x the Participant’s Total Cash Compensation x (Z/20);

Z = the Participant’s Service with the Company at age 65, to a maximum of 20.0 years;

A = the benefits payable under the Retirement Plan at age 65;

B = the benefits payable under the CAP at age 65 which are attributable to Company matching contributions only;

C = the benefits payable under the IDC Plan at age 65, if any, which are attributable to excess Company matching contributions only; and

D = the benefits payable under the Supplemental Retirement Plan at age 65, if any.

The benefits calculated above for A, B, C and D shall be in the form of a single life annuity paid at age 65.

Notwithstanding the foregoing, if the current Chief Executive Officer of the Company terminates employment with the Company at any time after the effective date of this Plan, the value of Z in the formula above shall be increased by up to three years (not to exceed maximum credit available at age 65) for each Participant in the Plan who remains actively employed with the Company for a period of two years after the current Chief Executive Officer terminates such employment; provided, however, that such increase shall not apply to any Participant holding the title of Chief Executive Officer, or any Participant named as Chief Executive Officer. Further, if a Participant dies or becomes Totally Disabled at any time during the two-year service period after the current Chief Executive Officer terminates his employment, such increase in the years of service shall apply to the Participant; provided, however, that the increase in years of service shall not apply if the Participant’s employment terminates due to death or disability which results from a self-inflicted injury or event, while sane or insane.

4.3

Vesting of Plan Benefits . Except as otherwise provided in Article 5, a Participant’s Plan Benefit shall vest after the completion of five consecutive years of Service.

Supplemental Executive Retirement Plan

4.4

Payment of Plan Benefits .

(a)

General Timing and Form of Payment Rules . Unless a Participant elects another time and/or form of payment, as of the later of the date the Participant commences participation in the Plan or within 30 days after such date, on the distribution election form provided by the Plan Administrator to the Participant, the Participant’s vested Plan Benefit will be funded by a single life annuity payable at age 65. Notwithstanding the foregoing sentence, no payment shall be made until the Participant has a Separation from Service.

(b)

Alternate Time and Form of Distribution . Subject to Sections 4.4(a) and 4.4(c) of the Plan, a Participant may elect one of the following alternate forms of distribution:

(i)

Single lump sum distribution;

(ii)

Joint and survivor annuity with a 50% annuity benefit to the beneficiary;

(iii)

Joint and survivor annuity with a 100% annuity benefit to the beneficiary;

(iv)

Monthly installments paid for 120 months. The calculation of such monthly benefit payments shall be made by using the actuarial factors in the Retirement Plan for determining actuarial equivalency of various forms of benefit payment.

Any election to change the timing and/or form of benefit distribution from the Plan shall apply to all Plan Benefits available under the Plan.

(c)

Change in the Time or Form of Payment . Prior to the date a Participant commences payment of his/her vested Plan Benefit as elected under Section 4.4(a) or Section 4.4(b), the Participant may delay the timing of payment and/or change the form of payment in accordance with the following restrictions:

(i)

A Participant may not elect a new date or form of payment that would result in the acceleration of the time or schedule of any payment of the Participant’s vested Plan Benefit, except as provided in guidance and/or regulations issued by the Secretary of the Treasury;

(ii)

The election may not take effect until at least 12 months after the date on which the election is made;

(iii)

Except with respect to payments made on account of death or Total Disability, the first payment with respect to such election shall be deferred for at least five years from the date payment would otherwise have been made, or in the case of a life annuity or installment payments treated as a single payment, five years from the date the first amount was scheduled to be paid; and

Supplemental Executive Retirement Plan

(iv)

If the Participant elected to receive payment at a specified time, the new election must be made at least 12 months before the date of the payment scheduled to be paid, or in the case of a life annuity or installment payments treated as a single payment, 12 months prior to the date the first amount was scheduled to be paid.

4.5

Exceptions to the General Timing and Distribution Rules .

(a)

Distributions to Key Employees . A Participant who is a “specified employee” (as defined in Code Section 409A and the regulations thereunder) and is entitled to a distribution due to a Separation from Service may not receive a distribution under the Plan until a date that is at least six months after the date of his/her Separation from Service. If the Participant elects payment in the form of an annuity or installments, such payment form is treated as a single payment (as opposed to separate and individual payments) and the first payment shall be paid according to the six-month delay rule as described above.

(b)

Domestic Relations Order . A payment of all or part of a Participant’s vested Plan Benefit may be made to a spouse, former spouse or other dependent under the terms of a qualified domestic relations order (as defined in Code Section 414(p)(1)(B)). The Plan Administrator shall determine whether a payment should be made pursuant to the terms of a qualified domestic relations order and the time and form of such payment.

(c)

Conflict of Interest . A payment of all or part of a Participant’s vested Plan Benefit may be made if necessary to comply with a certificate of divestiture (as defined in Code Section 1043(b)(2)).

(d)

Employment Taxes . A Participant may receive a payment of his/her vested Plan Benefit before the date set forth in Section 4.4(a) to the extent necessary to pay the Federal Insurance Contributions Act (“FICA”) tax imposed under Code Sections 3101 and 3121(v)(2) on amounts deferred under the Plan (the “FICA Amount”). In addition, a Participant may receive a payment of his/her vested Plan Benefit before the payment date under Section 4.4(a) or Section 4.4(c), as applicable, to pay the income tax at source on wages imposed under Code Section 3401 on the FICA Amount, and to pay the additional income tax at source on wages attributable to the pyramiding Code Section 3401 wages and taxes. The payment under this Section 4.5(e) shall not exceed the aggregate of the FICA Amount and the income tax withholding related to such FICA Amount.

(e)

Delay of Payment . A payment of benefits otherwise payable in accordance with Section 4.4(a) or Section 4.4(b), as applicable, will be delayed to a date after the payment date under any of the following circumstances:

(i)

where the Company reasonably anticipates that its deduction with respect to such payment otherwise would be limited or eliminated by Code Section 162(m); provided, however, that payment will be made or

Supplemental Executive Retirement Plan

commence at the earliest date at which the Company reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by Code Section 162(m) or the calendar year in which the Participant Separates from Service;

(ii)

where the Company reasonably anticipates that the making of such payment will violate a term of a loan agreement or other similar contract to which the Company is a party, and such violation will cause material harm to the Company; provided, however, that payment will be made or commence at the earliest date at which the Company reasonably anticipates that the making of the payment will not cause material harm to the Company;

(iii)

where the Company reasonably anticipates that the making of such payment will violate federal securities laws or other applicable law within the meaning of Code Section 409A and the regulations thereunder; provided, however, that payment will be made or commence at the earliest date at which the Company reasonably anticipates that the making of the payment will not cause such violation; or

(iv)

upon such other events and conditions as the Commissioner of the Internal Revenue Service may prescribe in generally applicable guidance published in the Code.

(f)

Payments upon Income Inclusion Under Code Section 409A; Plan Termination . The Plan shall permit the payment of vested Plan Benefits to a Participant prior to the Participant’s payment date under Section 4.4(a) or Section 4.4(c), as applicable:

(i)

if the Plan fails to meet the requirements of Code Section 409A and the regulations thereunder, but only to the extent that such payment does not exceed the amount required to be included in the Participant’s income as a result of the failure to comply with the requirements of Code Section 409A and the regulations thereunder; or

(ii)

upon the termination of the Plan requiring the complete distribution of all vested Plan Benefits.

(g)

Disputed Payments . In the event of a genuine dispute regarding the amount or timing of payments under the Plan, a delay in the payment of Plan Benefits shall not cause a violation of Code Section 409A to the extent such delay satisfies the conditions set forth in Code Section 409A and the regulations thereunder.

4.6

Death Benefit . If a Participant dies prior to the commencement of the distribution of his/her vested Plan Benefit, the actuarial equivalent present value of the Participant’s vested Plan Benefit will be paid per the Participant’s prior election to his/her Beneficiary as soon as administratively possible after the Participant’s death. The actuarial

Supplemental Executive Retirement Plan

equivalent present value shall be determined by using the applicable interest rate and applicable mortality table identified in Code Section 417(e)(3).

4.7

Disability Benefit . If a Participant becomes Totally Disabled prior to the commencement of the distribution of his/her vested Plan Benefit, the actuarial equivalent present value of the Participant’s vested Plan Benefit will be paid per the Participant’s prior election as soon as administratively possible after his/her Total Disability. The actuarial equivalent present value shall be determined by using the applicable interest rate and applicable mortality table identified in Code Section 417(e)(3).

4.8

Beneficiaries . Each Participant from time to time may designate any person or persons (who may be named contingently or successively) to receive such benefits as may be payable under the Plan upon or after the Participant’s death, and such designation may be changed from time to time by the Participant by filing a new designation. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Plan Administrator, and will be effective only when filed in writing with the Plan Administrator or its designee during the Participant’s lifetime.

In the absence of a valid Beneficiary designation, or if, at the time any benefit payment is due a Beneficiary, there is no living Beneficiary validly named by the Participant, then any such benefit payment shall be made to the Participant’s spouse, if then living, but, if none, to the Participant’s estate. In determining the existence or identity of anyone entitled to a benefit payment, the Plan Administrator may rely conclusively upon information supplied by the Participant’s personal representative, executor, or administrator. If a question arises as to the existence or identity of anyone entitled to receive a benefit payment as aforesaid, or if a dispute arises with respect to any such payment, then, notwithstanding the foregoing, the Plan Administrator, in its sole discretion, may cause such payment to be made to the Participant’s estate without liability for any tax or other consequences that might flow therefrom or may take such other action as the Plan Administrator deems to be appropriate.

Supplemental Executive Retirement Plan

5	CHANGE OF CONTROL

5.1

Vesting . Upon a Change of Control, all Participants shall become vested in their right to receive Plan Benefits.

5.2

Termination and Amendment of the Plan . After a Change of Control, the Plan may not be terminated without the written consent of any person affected by the termination until all accrued Plan Benefits are paid out, and no amendments may be made to the Plan without the written consent of any person affected by the amendment, unless such amendment enhances the Plan Benefits of the Participants.

Supplemental Executive Retirement Plan

6	PLAN ADMINISTRATION

The Plan shall be administered by the Plan Administrator. The Plan Administrator shall have full power and authority to interpret, construe and administer the Plan, and the Plan Administrator’s interpretation and construction thereof and actions thereunder, including any valuation of a Participant’s benefits and the determination of the amount or recipient of payments to be made with respect thereto, shall be binding and conclusive on all persons for all purposes. No trustee, employee or agent of the Plan Administrator or the Company shall be liable to any person for any actions taken or omitted in connection with the interpretation and administration of this Plan. The Plan Administrator shall be entitled to rely conclusively on all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, counsel or other person employed or engaged by the Plan Administrator or the Company with respect to this Plan.

Without limiting the generality of the foregoing, and subject to the provisions of the Plan, the Plan Administrator shall have discretionary authority to (i) interpret the Plan, (ii) determine all questions relating to the rights and status of Participants and their Plan Benefits, and (iii) make such rules and regulations for the administration of the Plan as are not inconsistent with its express terms and provisions.

Supplemental Executive Retirement Plan

7	MISCELLANEOUS PROVISIONS

7.1

ERISA and Governing Law . The Plan is a combination of an excess benefit plan, as defined in Sections 3(36) and 4(b)(5) of ERISA, and an unfunded deferred compensation plan for a select group of management or highly compensated employees, as defined in Section 201(2), 301(a)(3) and 401(a)(1) of ERISA. None of the statutory rights and protections conferred on Participants by ERISA are conferred under the terms of this Plan, except as expressly noted or required by operation of law. To the extent not superseded by federal law, the laws of the State of Ohio shall control in any and all matters relating to the Plan.

7.2

Claims and Appeals Procedure . Any Participant or any other person claiming a Plan Benefit under a deceased Participant, such as a Beneficiary, may submit a written application or request to the Plan Administrator for the payment of any Plan Benefit asserted to be due to him/her under the Plan. Such application or request shall set forth the nature of the claim and such other information as the Plan Administrator may reasonably request. Promptly after the receipt of any application or request, the Plan Administrator shall determine whether or not the Participant or Beneficiary is entitled to a Plan Benefit hereunder, and if so, the amount thereof and shall notify the claimant of its findings.

If a claim is wholly or partially denied, the Plan Administrator shall notify the Participant or Beneficiary in writing within 90 days after receipt of the claim by the Plan Administrator, unless special circumstances require an extension of time. If such an extension of time is required, written notice of the extension shall be furnished to the Participant or Beneficiary prior to the end of the initial 90-day period. In no event shall the extension exceed a period of 90 days from the end of the initial period.

If an application or request for Benefits is denied, in whole or in part, the Participant or Beneficiary shall have the right to request the review of his/her claim by submitting a written request to the Plan Administrator within 60 days of the receipt of the initial denial issued by the Plan Administrator. Such request for review may contain any additional information and comments as the Participant or Beneficiary may wish to present. Within 60 days of the receipt of the appeal request, the Plan Administrator shall reconsider the Participant’s or Beneficiary’s application. Notice of the Plan Administrator’s final determination shall be furnished to the Participant or Beneficiary in writing, and such determination shall be binding and conclusive on all parties.

7.3

Benefits Are Nonassignable . No Plan Benefit may be pledged, assigned, anticipated or alienated in any way by any Participant or Beneficiary or personal representative of the foregoing. Moreover, no Participant, Beneficiary or personal representative of the foregoing shall have any right to cause benefits otherwise payable under this Plan to be accelerated or paid on any basis or in any form other than on the bases and in the forms provided for under Article 4 hereof.

7.4

Amendment of Plan . The Plan Administrator hereby reserves the right and power to amend the Plan, in whole or in part, at any time and from time to time; provided,

Supplemental Executive Retirement Plan

however, that in no event shall the Plan Administrator have the right to eliminate or reduce any Plan Benefit which has already become vested prior to such amendment, or to accelerate the obligation to make payments to any person not otherwise currently entitled to payments under the Plan, unless otherwise specifically so determined by the Plan Administrator and permitted by applicable law. All actions pursuant to this Section shall be set forth in a written instrument executed by the Plan Administrator. Notwithstanding anything in the Plan to the contrary, the Plan may be amended at any time, if necessary, to conform or comply with provisions or requirements of the Code or any applicable laws.

7.5

No Guarantee of Employment . Nothing contained herein shall be construed as a contract of employment between the Company and any employee, or as a right of any employee to continue in the employment of the Company, or as a limitation of the right of the Company to discharge any of its employees, with or without cause, at any time.

7.6

Severability. If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein.

7.7

Facility of Payments . Whenever, in the opinion of the Plan Administrator, a person entitled to receive any payment, or installment thereof, is under a legal disability or is unable to manage his/her financial affairs, the Plan Administrator shall have the discretionary authority to direct payments to such person’s legal representative or to a relative or friend of such person for his/her benefit; alternatively, the Plan Administrator may in its discretion apply the payment for the benefit of such person in such manner as the Plan Administrator deems advisable. Any such payment or application of benefits made in good faith in accordance with the provisions of this Section shall be a complete discharge of any liability of the Company and the Plan Administrator with respect to such payment or application of benefits.

7.8

Funding . All benefits under the Plan are unfunded and the Company shall not be required to establish any special or separate fund or to make any other segregation of assets in order to assure the payment of any amounts under the Plan; provided, however, that in order to provide a source of payment for its obligations under the Plan, the Company may establish a trust fund. The right of a Participant or his/her Beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Company, and neither the Participant nor his/her Beneficiary shall have any rights in or against any amounts credited under the Plan or any other specific assets of the Company.

7.9

Taxes . The Company shall be entitled to withhold any taxes from any distribution hereunder or from other compensation then payable, as it believes necessary, appropriate, or required under relevant law.

7.10

Payments Not Salary for Certain Purposes . Any amounts payable under the Plan shall not be considered salary or other compensation to the Participant for the purpose of

Supplemental Executive Retirement Plan

computing benefits to which a Participant may be entitled under any retirement plan or other arrangement of the Company for the benefit of its employees.

7.11

Section 409A . The Plan is intended to be operated in compliance with the requirements of Code Section 409A. The Plan shall be construed in a manner so as to comply with the requirements of Code Section 409A.

IN WITNESS WHEREOF , the Company acting by and through its duly authorized officer, hereby adopts this Supplemental Executive Retirement Plan this 4th day of October, 2007.


STATE AUTO FINANCIAL CORPORATION

By:		/s/ Robert P. Restrepo, Jr.
Title:		Chairman, President and Chief Executive Officer

Exhibit 10.73

STATE AUTO FINANCIAL CORPORATION

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

DISTRIBUTION ELECTION FORM

This form is an election form governing benefit distributions from the State Auto Financial Corporation Supplemental Executive Retirement Plan (the “SERP”). Capitalized terms, if not defined herein, are as defined in the SERP document.

Please complete the following:

Name: __________________________________________________________________________________________________

Soc. Sec. No.: ______________________________________________ Date of Birth: __________________________________

Address: _________________________________________________________________________________________________

_________________________________________________________________________________________________________

ELECTION INSTRUCTIONS

Select a time and form of distribution for your SERP benefits. Also select a form of distribution for any death or disability benefits payable from the SERP. Complete the Beneficiary Designation portion of the form.

A.	TIME AND FORM OF PAYMENT OF SERP BENEFITS

Complete this payment election section to indicate the time and form of payment of your SERP benefits.

NOTE: Changes to the form and/or time of payment after an initial election will be effective for all benefits payable to you under the SERP (not including death or disability benefits) AND will require a delay in the timing of your payment(s) (as described below).

This is (check one):

¨ an initial election

¨ a modified election

(I understand that my payments will be delayed as required by law as described below***)

[1]

TIME OF PAYMENT

I elect payment of my SERP benefits to commence as of my Separation from Service ¹ with the Company and: ( select one )

my attainment of age ___, ( any age other than 65 )

my attainment of age 65, or

__________________________________ ( Insert a specific date for a later payment of your SERP benefits. )

[2]

FORM OF PAYMENT

¹	If you are a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended, payment of your SERP benefits will be delayed for a period of at least six months after the date of your Separation from Service, as required by Code Section 409A.

I elect payment of my SERP benefits as: ( select one )

monthly installment payments for a period 120 months, as calculated under the SERP,

a joint and survivor annuity with a 50% annuity benefit paid to my beneficiary,

a joint and survivor annuity with a 100% annuity benefit paid to my beneficiary,

a single life annuity, or

a lump sum payment.

NOTE: If you make no election under the Form of Payment, the automatic form of payment (a single life annuity payable upon Separation of Service and attainment of age 65) under the SERP will apply.

***IMPORTANT INFORMATION ABOUT CHANGES TO PAYMENT TIMING AND FORM***

I F YOU ELECT TO CHANGE THE FORM OR TIMING OF PAYMENT UNDER THE SERP AFTER YOUR INITIAL ELECTION , YOUR CHANGES WILL NOT BE EFFECTIVE UNTIL 12 MONTHS FROM THE DATE OF THE CHANGE . IN ADDITION , YOUR DISTRIBUTIONS MUST BE DELAYED FOR AT LEAST 5 YEARS AFTER THE DATE YOU ORIGINALLY ELECTED TO BEGIN PAYMENT UNDER THE SERP.

(F OR EXAMPLE , IF YOUR INITIAL ELECTION WAS TO RECEIVE A DISTRIBUTION FROM THE SERP UPON S EPARATION FROM S ERVICE AND ATTAINMENT OF AGE 62 AND YOU NOW WISH TO DELAY THE TIMING TO A LATER DATE , YOU MUST ELECT A DATE THAT IS AT LEAST 5 YEARS AFTER THE DATE OF YOUR S EPARATION FROM S ERVICE AND ATTAINMENT OF AGE 62.)

I F YOU HAVE ANY QUESTION REGARDING THE DELAY REQUIREMENTS FOR CHANGES TO PAYMENT TIMING AND FORM ELECTIONS , PLEASE CONTACT THE P LAN A DMINISTRATOR .

B.	FORM OF PAYMENT FOR DEATH OR DISABILITY BENEFITS

Complete this payment election section to indicate the form of payment of any death or disability benefits payable from the SERP. NOTE: Changes to the form of payment after an initial election will require a delay in the effective date of your election for a period of 12 months from the date of change. In the event you die or become disabled within 12 months of your election change, the change will not be effective and your prior distribution election will be administered.

This is (check one):

¨ an initial election

¨ a modified election

(I understand that my payments will be delayed as required by law as described above)

[1]

FORM OF PAYMENT – DEATH BENEFITS

I elect payment of my death benefits to my beneficiary as: ( select one )

monthly installment payments for a period 120 months, as calculated under the SERP, or

a lump sum payment.

[2]

FORM OF PAYMENT – DISABILITY BENEFITS

I elect payment of my disability benefits as: ( select one )

monthly installment payments for a period 120 months, as calculated under the SERP, or

a lump sum payment.

BENEFICIARY DESIGNATION

Complete this Beneficiary Designation to designate a beneficiary to receive any death benefits payable under the SERP. Any beneficiary designation will remain in effect until modified by you and filed with the Plan Administrator or its designee during your lifetime. (Please Print:)


Name: _______________________________________________				SSN: ____________________________________

Relationship : _________________________________________				Benefit Percent ² : __________________________

Address: __________________________________________________________________________________________________

__________________________________________________________________________________________________________

Name: _______________________________________________				SSN: _____________________________________

Relationship : _________________________________________				Benefit Percent: ____________________________

Address: __________________________________________________________________________________________________

__________________________________________________________________________________________________________

If additional or contingent beneficiary designations are desired, please submit the necessary information to the Plan Administrator.

ACKNOWLEDGEMENT AND SIGNATURE

By signing this form, I acknowledge that:

[1]

I have received and read a copy of the SERP document;

[2]

I understand the conditions applicable to any changes I may make in the timing or form of distribution of my SERP benefits, including the specified employee 6-month delay rule and change in election 5-year delay rule, if applicable;

[3]

I am solely responsible for maintaining my current address and a Beneficiary Designation on file with the Plan Administrator; and

[4]

I agree to be bound by the terms and conditions of the SERP and any changes thereunder necessary to comply with the law (including Code Section 409A).

Signature: ______________________________________________

Name (please print): _______________________________ Date: ____________

²	If more than one beneficiary is listed, the total benefit percentages must equal 100%. If no benefit percentages are listed, any benefit payments to multiple beneficiaries will be paid on an equivalent basis.

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: November 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: November 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 September 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

November 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 September 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

November 7, 2007