State Auto Financial CORP (Form: 8-K, Received: 05/10/2012 16:32:20)

STATE AUTO FINANCIAL CORPORATION

Date: May 10, 2012

/s/ Steven E. English

Vice President and Chief Financial Officer

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 10, 2012 (May 8, 2012)

STATE AUTO FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Ohio	000-19289	31-1324304
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS 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

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 7. Regulation FD

Item 7.01.

Regulation FD Disclosure.

The management of State Auto Financial Corporation (the “ Company ”) conducted a conference call on May 8, 2012, at approximately 10:00 a.m., ET, to review the Company’s financial results for the three-month period ended March 31, 2012, and to respond to questions from interested investors and financial analysts. A transcript of the conference call is furnished as Exhibit 99.1 to this Current Report on Form 8-K.

Section 9. Financial Statements and Exhibits

Item 9.01.

Financial Statements and Exhibits.

(c)

Exhibits.


Exhibit No.		Description

10.1		Restricted Stock Agreement under the 2009 Equity Incentive Compensation Plan dated as of March 1, 2012, between State Auto Financial Corporation and Robert P. Restrepo, Jr.

10.2		Second Amendment to the State Auto Financial Corporation Leadership Bonus Plan (amendment effective January 1, 2012)

10.3		Third Amendment to the State Auto Financial Corporation Long-Term Incentive Plan (amendment effective January 1, 2012)

99.1		Transcript of conference call held by management of State Auto Financial Corporation on May 8, 2012.

SIGNATURES

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.

EXHIBIT INDEX


Exhibit No.		Description

10.1		Restricted Stock Agreement under the 2009 Equity Incentive Compensation Plan dated as of March 1, 2012, between State Auto Financial Corporation and Robert P. Restrepo, Jr.

10.2		Second Amendment to the State Auto Financial Corporation Leadership Bonus Plan (amendment effective January 1, 2012)

10.3		Third Amendment to the State Auto Financial Corporation Long-Term Incentive Plan (amendment effective January 1, 2012)

99.1		Transcript of conference call held by management of State Auto Financial Corporation on May 8, 2012.

EXHIBIT 10.1

STATE AUTO FINANCIAL CORPORATION

RESTRICTED STOCK AGREEMENT

UNDER THE

2009 EQUITY INCENTIVE COMPENSATION PLAN

This Restricted Stock Agreement (this “ Agreement ”) is made as of March 1, 2012 (the “ Award Date ”). The Compensation Committee of the Board of Directors of State Auto Financial Corporation, an Ohio corporation (the “ Company ”), hereby awards to Robert P. Restrepo, Jr. (the “ Awardee ”) 21,526 common shares, without par value, of the Company (the “ Restricted Shares ”). The Restricted Shares are awarded pursuant to the terms of the Company’s 2009 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 purchase price for the Restricted Shares shall be zero. Following the execution and delivery of this Agreement by the Awardee, the Company shall cause a share certificate evidencing the Restricted Shares to be issued in the Awardee’s name (the “ Share Certificate ”).

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

§3. 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.

§4. Acceptance of Award . The award of the Restricted Shares must be accepted by the Awardee within 30 days after the Award Date by executing this Agreement. The Awardee shall not have any rights with respect to the Restricted Shares awarded under this Agreement unless and until the Awardee 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.

§5. Rights As Shareholder . Subject to the terms of this Agreement, on and after the issuance of the Share Certificate to the Awardee, the Awardee 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 Fidelity, or its successor, under the Awardee’s name. Until the Lapse Date, the Dividend Shares shall be subject to the restrictions on transfer set forth in §3, above. However, the Dividend Shares shall not be subject to any risk of forfeiture.

§6. 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 the Awardee concurrently with the execution of this Agreement, until the earlier of the Lapse Date or the termination of the Awardee’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 the Awardee.

§7. Tax Consequences . The Awardee understands that the Awardee (and not the Company) shall be responsible for the federal, state, local or foreign tax liability and any 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 ” and the “ Code ”, respectively), if the Awardee deems it to be appropriate. The Awardee shall rely solely on the determinations of the Awardee’s tax advisors or the Awardee’s own determinations, and not on any statements or representations by the Company or any of its agents, with regard to all such tax matters. The Awardee shall notify the Company in writing if the Awardee files the 83(b) Election with the Internal Revenue Service within 30 days from the date of the execution of this Agreement. The Company intends, in the event it does not receive from the Awardee evidence of the 83(b) Election filing by the Awardee, to claim a tax deduction for any amount which would be taxable to the Awardee 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, the Awardee shall pay to the Company the amount of such required withholding or payment promptly following the Company’s request.

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

§9. Vesting . The terms of this Agreement specifically amend the provisions of Section 11(B) of the Plan as follows: In the event of a Change in Control or a Potential Change in Control, as defined in the Plan, the accelerated vesting of the Restricted Shares subject to this Agreement shall occur only if the Awardee’s employment with the Company and any related entity is terminated within one year of the Change in Control or Potential Change in Control; provided, however, that if the Change in Control or Potential Change in Control involves a change in ownership of the Company and the successor entity does not provide Restricted Shares or similar benefits of equal or greater value at the time of the transaction, the Restricted Shares subject to this

Agreement shall automatically vest upon the close of the Change in Control or Potential Change in Control transaction. “Termination of Employment” means a separation from service as defined in Code Section 409A. The percentage change required in Section 11(B)(3)(b) of the Plan is 30% or more.

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/ Lori Siegworth
		Lori Siegworth, Vice President and Chief Strategy and Organization Effectiveness Officer (as authorized and approved by the Compensation Committee of the Board of Directors)

Acceptance of Agreement

Robert P. Restrepo, Jr., the Awardee, hereby: (a) acknowledges receiving a copy of the Plan and represents that the Awardee 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/ Robert P. Restrepo, Jr.

Signature

Robert P. Restrepo, Jr.

Printed Name

Dated as of: March 22, 2012

EXHIBIT 10.2

SECOND AMENDMENT

TO THE

STATE AUTO FINANCIAL CORPORATION

LEADERSHIP BONUS PLAN

Background Information

A.	State Auto Financial Corporation (“STFC”) previously adopted and maintains the State Auto Financial Corporation Leadership Bonus Plan (the “Plan”) for the benefit of identified executive officers and other key management employees, managers and professionals.

B.	STFC desires to amend the Plan to add change of control provisions.

C.	STFC also desires to amend the Plan to expand the list of performance criteria available in determining an award under the Plan.

D.	STFC further desires to amend the Plan to clarify the treatment of prorated awards upon a participant’s termination of employment due to death, disability or retirement prior to the end of the applicable performance period.

E.	STFC also desires to amend the Plan to clarify the definition of retirement as used in the Plan and the timing of distributions from the Plan.

F.	Article 9 of the Plan permits the Compensation Committee of the Board of Directors of STFC to amend the Plan.

Amendment of the Plan

The Plan is hereby amended effective January 1, 2012 as follows:

1.	Article 2 of the Plan is hereby amended by adding a new Section 2.5, “Change of Control or Potential Change of Control,” with all subsequent Sections of Article 2 renumbered sequentially, to read as follows:

2.5 “Change of Control” means the happening of any of the following:

(a) when any “person” as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored or maintained by the Company (including any trustee of such plan acting as trustee) and excluding State Automobile Mutual Insurance Company,

directly or indirectly, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding securities; or

(b) when, during any period of 24 consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the “ Incumbent Directors ”) cease for any reason other than death to constitute at least a majority of the Board; provided, however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of, or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 2.5(b); or

(c) the occurrence of a transaction requiring shareholder approval for the acquisition of the Company by an entity other than the Company through purchase of assets, by merger or otherwise; or

(d) the occurrence of a “Rule 13e-3 transaction” (as defined in Rule 13e-3 under the Exchange Act) requiring approval by the shareholders of the Company.

A “Potential Change in Control” means the happening of any one of the following:

(a) the approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 2.5 above; or

(b) the acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or any Company employee benefit plan (including any trustee of such plan acting as such trustee) and other than State Automobile Mutual Insurance Company) of securities of the Company representing 30% or more of the combined voting power of the Company’s outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan.

2.	Section 4.1 of the Plan is hereby amended in its entirety to read as follows:

4.1 Performance Criteria . As to each Performance Period, the Administrator will establish in writing Performance Criteria based on one or more of the following performance measures of the State Auto Group over the Performance Period: (i) earnings; (ii) return on capital; (iii) return on equity; (iv) return on assets; (v) rate change; (vi) revenue; (vii) premiums; (viii) net income; (ix) earnings per share; (x) combined ratio; (xi) loss ratio; (xii) expense ratio; (xiii) assets; (xiv) equity; (xv) cash flow; (xvi) stock price; (xvii) total shareholders’ return; (xviii) premium growth; (xix) corporate surplus growth (defined as growth in State Auto Mutual’s surplus less the impact of the value of its

holdings of the Company); (xx) economic profit and (xxi) individual performance related to personal goals. The Administrator may, in its discretion, measure any of such Performance Criteria on an absolute or relative basis. Performance Criteria applicable to Covered Employees will not include item (xxi) above (individual performance related to personal goals), unless a separate Award is issued specific to such goals. Any Award issued to a Covered Employee that includes item (xxi) as a Performance Criteria will not be performance-based compensation governed by Code Section 162(m). Except as otherwise provided herein, the extent to which the Performance Criteria are satisfied will determine the amount, if any, of the Award that will be earned by each Participant. The Performance Criteria may vary for different Performance Periods and need not be the same for each Participant eligible for an Award for a Performance Period.

3.	Article 4 of the Plan is hereby amended by adding a new Section 4.5, “ Change of Control ,” to read as follows:

4.5 Change of Control or Potential Change of Control . If a Change of Control or Potential Change of Control, as defined in Section 2.5 of the Plan, occurs prior to the end of a specified Performance Period, the Administrator shall determine the Final Bonus in accordance with Section 4.4 of the Plan; provided, however, that such Final Bonus shall be determined based on the achievement of the Performance Criteria up to the date of the Change of Control or Potential Change of Control and then prorated based upon the length of time that the Participant was employed by the Company during the applicable Performance Period. The Final Bonus, thus determined, shall be paid per the terms of the Plan.

4.	Section 6.1 of the Plan is hereby amended in its entirety to read as follows:

6.1 Termination of Employment Due to Death, Disability or Retirement . In the event a Participant’s employment is terminated during the applicable Performance Period by reason of death, Disability or retirement upon the attainment of early or normal retirement age as defined in the State Auto Insurance Companies Employee Retirement Plan (the “Retirement Plan”) (regardless of whether such Participant is eligible to retire from the Retirement Plan), the Final Bonus determined in accordance with Section 4.4 herein shall be reduced to reflect participation prior to termination only.

(a) Death or Disability . If the Participant’s employment is terminated due to death or Disability, the Final Bonus, if any, shall be equal to 100% of the Participant’s target bonus, prorated by multiplying the Final Bonus by a fraction, the numerator of which is the number of days of employment in the Performance Period through the date of employment termination, and the denominator of which is the number of days in the Performance Period. In the case of a Participant’s Disability, the employment termination shall be deemed to have occurred as of the date that the Administrator determines was the date on which the definition of Disability was satisfied. Notwithstanding the foregoing, if the Participant is a Covered Employee, the Final Bonus, if any, shall be based upon the achievement of the Performance Criteria during the applicable portion of the Performance Period and then prorated as described above.

(b) Retirement . If the Participant’s employment is terminated due to retirement (as defined above), the Final Bonus, if any, shall be based upon the achievement of the Performance Criteria during the applicable Performance Period and then prorated based upon the length of time that the Participant was employed by the Company during the Performance Period.

The Final Bonus thus determined shall be paid as soon as practicable and reasonable following the Participant’s death, Disability or retirement unless otherwise elected by the Participant as provided by the State Auto Property & Casualty Insurance Company Amended and Restated Incentive Deferred Compensation Plan (the “Deferred Compensation Plan”), as the same may be amended from time to time. The Administrator may establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant’s death are to be paid. If no beneficiary is designated, the right of the Participant to receive any payment under this Plan will pass to the Participant’s estate.

5.	The third sentence of Section 6.2 of the Plan is hereby amended in its entirety to read as follows:

The Final Bonus thus determined shall be paid as soon as practicable and reasonable following the end of the Performance Period in which employment termination occurs, and shall be made at the same time payments are made to Participants who did not terminate employment during the applicable Performance Period unless otherwise elected by the Participant as provided in the Deferred Compensation Plan, as the same may be amended from time to time.

6.	All other provisions of the Plan shall remain in full force and effect.

EXHIBIT 10.3

THIRD AMENDMENT

TO THE

STATE AUTO FINANCIAL CORPORATION

LONG-TERM INCENTIVE PLAN

Background Information

A.	State Auto Financial Corporation (“STFC”) previously adopted and maintains the State Auto Financial Corporation Long-Term Incentive Plan (the “Plan”) for the benefit of its executive officers and other key management employees, managers and professionals.

B.	STFC desires to amend the Plan to expand the list of qualifying performance criteria available in determining an award under the Plan.

STFC also desires to amend the Plan to clarify the definition of retirement as used in the Plan and the timing of distributions from the Plan and the treatment of prorated awards upon a participant’s termination of employment due to death, disability or retirement prior to the end of the applicable performance period.

D.	Article 9 of the Plan permits the Compensation Committee of the Board of Directors of STFC to amend the Plan.

Amendment of the Plan

The Plan is hereby amended effective January 1, 2012 as follows:

1.	The first paragraph of Section 4.1 of the Plan is hereby amended in its entirety to read as follows:

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

2.	The fourth sentence of Section 6.1 of the Plan is hereby amended in its entirety to read as follows:

The Final Award thus determined shall be paid as soon as practicable and reasonable following the Participant’s death or Disability unless otherwise elected by the Participant as provided by the State Auto Property & Casualty Insurance Company Amended and Restated Incentive Deferred Compensation Plan (the “Deferred Compensation Plan”), as the same may be amended from time to time.

3.	Section 6.1 of the Plan is hereby further amended by adding a new last sentence to read as follows:

Notwithstanding the foregoing, if the Participant is a Covered Employee, the Final Award, if any, shall be based upon the achievement of the Qualifying Performance Criteria during the applicable portion of the Performance Period and then prorated as described above.

4.	The first sentence of Section 6.2 of the Plan is hereby amended in its entirety to read as follows:

In the event a Participant’s employment is terminated due to retirement upon the attainment of early or normal retirement age as defined in the State Auto Insurance Companies Employee Retirement Plan (the “Retirement Plan”) (regardless of whether such Participant is eligible to retire from the Retirement Plan), at any time during the applicable Performance Period, the Final Award determined in accordance with Section 4.3 herein shall be reduced to reflect participation prior to termination only.

5.	The last sentence of Section 6.2 of the Plan is hereby amended in its entirety to read as follows:

The Final Award thus determined shall be paid as soon as practicable and reasonable following the end of the Performance Period in which employment termination occurs, and shall be made at the same time payments are made to Participants who did not terminate employment during the applicable Performance period unless otherwise elected by the Participant as provided in the Deferred Compensation Plan, as the same may be amended from time to time.

6.	All other provisions of the Plan shall remain in full force and effect.

EXHIBIT 99.1

THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPT

STFC - Q1 2012 State Auto Financial Earnings Conference Call

EVENT DATE/TIME: MAY 08, 2012 / 02:00PM GMT

CORPORATE PARTICIPANTS

Steve English State Auto Financial Corporation - VP, CFO

Bob Restrepo State Auto Financial Corporation - President, CEO, Chairman

CONFERENCE CALL PARTICIPANTS

Larry Greenberg, Langen McAlenney - Analyst

Paul Newsome Sandler O’Neill Asset Management - Analyst

PRESENTATION

Operator

Welcome, and thank you for standing by. (Operator Instructions). Now, I would like to introduce your host for today’s conference Chief Financial Officer, Steve English. Sir, you may begin.

Steve English - State Auto Financial Corporation - VP, CFO

Thank you, Melissa. Good morning and welcome to our first quarter 2012 earnings conference call. Today I am joined by several members of STFC senior management team our Chairman, President and CEO, Bob Restrepo; Chief Investment Officer, Scott Jones; Chief Actuarial Officer, Matt Mrozek; and our Chief Accounting Officer and Treasurer, Cindy Powell. Today’s call will include prepared remarks by our CEO, Bob Restrepo and me after which we will open the line for questions.

Please note our comments today may include forward-looking statements, which by their nature involve a number of risk factors and uncertainties which may affect future financial performance. Such risk factors may cause actual results to differ materially from those contained in our projections or forward-looking statements. These type of factors are discussed at the end of our press release as well as in our annual and quarterly filings with the Security and Exchange Commission to which I refer you.

A financial packet containing reconciliations of certain non-GAAP measures along with supplemental financial information was distributed to registered participants prior to this call and made available to all interested parties at our website www.stateauto.com under the Investor section as an attachment to the press release. Now I will turn the call over to STFC’s Chairman, President and CEO, Bob Restrepo.

Bob Restrepo - State Auto Financial Corporation - President, CEO, Chairman

Thank you, Steve, and good morning. Despite solid ex-catastrophe in most lines, we are disappointed with our combined ratio of 109.4% and the modest loss of $2 million or $0.05 a share. State Auto Financial Corporation’s book value settled in at $18.16 a share which is an increase of $0.21 from our restated book value at year end. Our current book value includes a reduction of $2.49 a share for the deferred tax asset valuation allowance which we continue to carry. The first quarter is shaping up as a relatively light catastrophe quarter for the industry and for State Auto with one significant exception. The rash of tornadoes, wind, and hail losses that hit the Midwest in March 2nd and 3rd had a significant impact on our first quarter results and caused wide spread damage in 4 of our 5 largest states, Kentucky, Indiana, Ohio, and Tennessee.

For State Auto this catastrophe was similar to the storm that devastated Tuscaloosa, Alabama last year. First, it was wide spread and had a high frequency of severe tornadoes with accompanying wind and hail. Second, it caused a much higher frequency of commercial property losses resulting in greater overall loss severity. And third, it triggered a recovery under our property catastrophe treaty. As a reminder, our attachment point under the treaty is $55 million. All in, this event which the Property Claims Services Organization or PCS identified as Cat number 67 resulted in a $21.6 million loss for STFC net of recoveries from both our homeowners quota share treaty and the catastrophe treaty. The quota share treaty operated as intended by minimizing the impact on our earnings in capital reducing our overall underwriting loss by $7.1 million and producing a net benefit to our combined ratio of 1.1%. The catastrophe loss ratio improved 4.8 percentage points, but our non-cat loss ratio results were up 2.9 percentage points due to the ceded premium impact on our overall results. It also added another 8/10ths of a point to our expense ratio.

Catastrophe results masked a generally solid quarterly . It was marred only by reserve strengthening in the specialty segment to cover runoff of a terminated commercial automobile program written by our managing general underwriting affiliate, RED. Business from this program began running off on April 1.

In personal insurance, personal auto results remain profitable despite a higher frequency of bodily injury loss. We expect results to improve. We are getting price increases in excess of loss cause trend and retention of sound all of which will improve margins in our largest line. Production is down a bit primarily in our core states of Indiana, Kentucky, Ohio, and Tennessee. As we reported previously our personal lines business is heavily cross-sold. Homeowners actions have affected personal auto production particularly in catastrophe prone states. We also have terminated relationship with underperforming personal line agencies in our core states . This will effect both our retention and new business for the rest of the year.

Outside of cat prone states, personal auto is good, and we continue to diversify our geographic footprint beyond the Midwest.

In homeowners we continue to improve our ex-catastrophe results despite elevated trends of non-catastrophe weather related losses in the quarter. We are on track to exceed our rate plan of 15% for the year. Price increases vary by state with the largest increases targeted at our most unprofitable state. Prices will increase at least 20% in most of our core states where we have had the poorest results. We are also filing for higher mandatory wind and hail deductibles. We previously implemented $1,000 deductible in 16 states which account for over 75% of our wind and hail losses. We are now increasing those deductible in 11 of our most cat prone states to 1% of the building replacement value subject to a maximum of a $2,500 deductible. Addressing homeowners results remain a difficult and long-term effort. We knew it would be a 3 year fix when we began these efforts at the end of 2008. Given the more severe weather patterns and elevated loss cause trends it is taking another year or 2 to complete. The actions we are taking to increase prices and deductible and to reduce our exposure through agency termination will pay off over time. The homeowners quota share reinsurance treaty provides us added protection as we complete the fix. Ex-catastrophe results in our standard business insurance segment were very good.

We are very pleased with the improvement following last year’s completion of several casualty claim initiatives. Underwriting quality remains good, prices are increasing, and the short-term impact on casualty case reserves has abated, significantly improving results in our commercial auto and general liability lines. Large losses are down and we are getting price increases particularly in the middle market where pricing is up in the 10% to 15% range.

Setting aside the pooling change impacts business insurance had a solid first quarter production wise. Retention improved, new business is up, and prices have turned positive. Other than RED, specialty results are good. Specialty is key to our diversification strategy to write more commercial and more casualty business. Rockhill continues to grow and produce strong underwriting profits. Commission are up as standard markets tighten, and we are getting healthy price increases. We continue to manage expenses well. The modest increase in our expense ratio was completely driven by the homeowners quota share reinsurance treaty. With that, I will turn it over to Steve English before we open up for your questions.

Steve English - State Auto Financial Corporation - VP, CFO

Thank you, Bob. My comments today will touch upon the impact of adopting the accounting guidance for deferred acquisition cost, investment results, the homeowner quota share treaty, and taxes. Effective January 1, 2012, we have adopted retrospectively the FASB guidance “Accounting for Costs associated with acquiring or renewing insurance contracts”. The cumulative effect of this retrospective adoption reduced stockholders equity by $20.5 million after tax at January 1, 2010. The impact as of December 31, 2011, was to reduce stockholder equity by $34.5 million. $26.4 million of this was a reduction of deferred policy acquisition cost while $8.1 million relates to deferring reinsurance ceding commissions receive in excess of DAC and classified as other liabilities. In total, the adoption of this new guidance reduced our previously reported book value per share as of December 31, 2011, of $18.81 per share by $0.86 or $17.95 per share on a restated basis. All previous periods have been restated to conform to this new accounting standard.

As Bob mentioned, our book value per share ended the quarter at $18.16 per share, up 1.2% from year end driven by market gains in our equity securities and other invested asset portfolios. Net investment income totaled $17.5 million for the quarter ended March 31, 2012, compared to $21 million for the same period in 2011. Lower overall levels of invested assets in 2012 due to the pooling change and quota share treaty contributed to this decline. In addition, book yields continue to be negatively impacted by call, pay down and maturities of fixed income securities. $1.1 million of the decline is attributable to CPI adjustments on our TIPS which make up about 11% of our total investment portfolio.

We included a new Schedule 2 in our investor packet to assist you in understanding the impact of the quota share treaty on our overall financial results. The treaty provided an overall benefit of $7.1 million to underwriting results. As you can see from Schedule 2 we ceded cat losses at a rate well in excess of our overall cat loss ratio, and we ceded non-cat losses at a rate well below our overall non-cat loss ratio. As a result, the quota share treaty results in a reduced overall cat loss ratio while resulting in an increased overall non-cat loss ratio. Similarly as ceding commission is lower than our expense ratio, it results in a higher overall expense ratio. All in our combined ratio was improved by 1.1 points due to the treaty.

This quarter you will notice we did not provide intraperiod income tax expense as we have done in the past 2 quarters since establishing the valuation allowance for net deferred tax asset. Presently, we believe we will not fall in the exception under ASC740 and have determined that a zero effective tax rate is appropriate. As always we will reevaluate this each reporting period throughout 2012. With that, we would like to open the line up for any questions you may have.

QUESTION AND ANSWER

Operator

Yes, sir, thank you. (Operator Instructions). And our first question comes from Larry Greenberg from Langen McAlenney. Your line is open

Larry Greenberg - Langen McAlenney - Analyst

Hi, good morning. I am just wondering if you can quantify the reserve strengthening in the commercial auto program, and give us some indication of — I assume that is an annual runoff period on that business and what kind of underwriting is that being booked at over the runoff?

Steve English - State Auto Financial Corporation - VP, CFO

Sure , Larry. In terms of the amounts of reserve strengthening on a dollar basis it was about $3.6 million. So you can divide that through and see the impact. In terms of a prospective basis we are booking the 2012 loss pick at a higher rate. We don’t have it historically disclosed on a separate basis, but I can tell you we intend to book that through the balance of the year at a stronger rate here in 2012 to protect the balance sheet. With nonrenewal at April 1st, on our premium result will runoff through the balance of the year and a little bit into the first quarter of 2013

Larry Greenberg - Langen McAlenney - Analyst

Okay. And is there any reason that you can give that would lend confidence that this reserve strengthening in the first quarter got everything that you need to get there?

Steve English - State Auto Financial Corporation - VP, CFO

Well, two-thirds through the 2011 year we made some significant underwriting actions within that program. Ultimately decided that it made sense to terminate the program. We had already shed some amount of business in some of the problematic areas at increased prices, and we believe at this point that by providing at the higher loss picks we are accomplishing what you are asking about, but I can’t say for sure we caught it all but that is certainly our intent.

Larry Greenberg - Langen McAlenney - Analyst

Okay. If we backed out the $3.6 million of strengthening and looked at the adjusted loss ratio, is that a reasonable level that we should be assuming going forward , or is there anything — I know there are some other programs.

Steve English - State Auto Financial Corporation - VP, CFO

No, that would we be a reasonable approach given the magnitude of that particularly program to the total.

Larry Greenberg - Langen McAlenney - Analyst

Okay. And then RED’s volume was up in the quarter. What is going on there?

Steve English - State Auto Financial Corporation - VP, CFO

Yes. When we started RED, some of the business was reported on a 1 month lag, and we have for those programs recognized that lag in 2012, so that truck program was one of them since it is terminated at April 1st, we have caught up on that lag in here the first quarter. So some of that growth is due to that accounting change.

Larry Greenberg - Langen McAlenney - Analyst

So you don’t think there was any last minute effort to —

Steve English - State Auto Financial Corporation - VP, CFO

Get in the door?

Larry Greenberg - Langen McAlenney - Analyst

Yeah.

Steve English - State Auto Financial Corporation - VP, CFO

No.

Larry Greenberg - Langen McAlenney - Analyst

Okay. And then just finally, the unallocated lost adjustment ratio in the quarter , is that a good run rate for what we should be using over the balance of the year.

Steve English - State Auto Financial Corporation - VP, CFO

Yes, it is. And I will point out you can see from some of our disclosures, because of the mechanics in the quota share, that is about 1 point higher than what it would normally run. Obviously, since the quota share is in place, that is a good representative number.

Larry Greenberg - Langen McAlenney - Analyst

Okay. Thank you.

Operator

(Operator Instructions).

Steve English - State Auto Financial Corporation -VP, CFO

Well, thank you, Melissa. And we want to thank all of you for participating in our conference call.

Operator

Sir, we do have one question.

Steve English - State Auto Financial Corporation - VP, CFO

Okay ,

Operator

Okay, thank you. The question comes from Paul Newsome Sandler O’Neill. Your line is open.

Paul Newsome - Sandler O’Neill Asset Management - Analyst

Sorry to extend the call. Can you folks remind us of some of the underlying efforts to reduce the cat losses. I would like to go specifically what we saw this quarter that in your view extends it a couple of years? What are those kind of factors?

Bob Restrepo - State Auto Financial Corporation - President, CEO, Chairman

This is Bob Restrepo, Paul. Since the end of 2008, 2008 included Ike and it also included unusually heavy first quarter wind and hail losses. What we saw in the pure premium trends, primarily driven by the cost of repairing and replacing buildings, we saw a real spike relative to normal trends that wasn’t anticipated in our pricing. We normally expected the inflation related to building supplies and labor to be in the low single digit. It went up to the high single digits, actually 10%. The term we use it was Ike, and it stayed at those level for each of the last 3 years. It has been running 8% to 10%, primarily driven by a surge in demand for building supplies and also exacerbated by the price of oil, which obviously effects the cost of shingles and siding. So we have accelerated our price increases, but we weren’t able to get the margin improvement because the pure premium trends were much higher than what we had ordinarily seen.

One thing we did in our pricing was rather than look at 20 years of history we have increasingly shortened our experience base that we use to determine price increases to 5 years to recognize a change in weather patterns that we have not seen over the last 15 to 20 years, but obviously we have seen over the past 5 years. We have accelerated our recognition of these increased loss costs in pricing going forward, and we have continued to do that.

The second thing is that in order to ensure regulatory approval of our rate increases, we often cap those rate increases at 20% to 25% with the idea that we would get the marginal increase the following years. So we have removed those cap over the last 18 months and just frankly let everything flow-through. As those increases continue to earn out, we expect to see margin improvement and on a direct bases we are seeing it now. We are getting significant improvements in our ex-catastrophe homeowners margin. The second thing is, as you know, is really deductibles sharing more of the risk with the policy holders.

We started out with $1,000 deductible. We were ahead of the market that has obviously effected in a significant way, retention and most significantly new business in the core states in the Midwest and Southeast, where we have rolled those deductibles off ahead. As I mentioned in my prepared remarks, we are now increasing those deductible from a $1,000 to 1% what we call Coverage A. Coverage A is the real property value, the replacement cost value of the home.

The percentage deductibles have been in play for some time for earthquake, some time for hurricane along in coastal exposed areas. They have existed for some time in places like Texas, Oklahoma, Kansas that have experienced well known catastrophes for a long time, but they are relatively new here in the Midwest, so we are definitely ahead of the market and that is definitely going to affect our production going forward.

The third big thing that we don’t see as much in our current results, but we are starting to see in April and we will see for the rest of the year, is the impact of agency termination. We have been thinning our representation, thinning the herd in geographic areas where we felt we didn’t have good balance between our totaled insured values and our annual allocated loss expectations within specific areas. Areas like Minneapolis St. Paul, Louisville, and Northeastern Arkansas where we have terminated agencies going back several years.

But the frequency and severity of storms in places like Huntsville, Alabama and Tennessee almost everywhere in Tennessee, Kentucky, parts of Ohio and Indiana really caused us to further accelerate those agency terminations. They all took place last year. It takes at least 6 months between the time you act on the termination and when it becomes effective and the business starts rolling off. So we have seen some effect of that late last year in the first quarter, but the impact of those exposure reductions is going to accelerate throughout the rest of this year. exposure to, the wind, hail and tornadoes.

We are in the third year of completing an insurance valuation program. We have gotten healthy price increases from that. Our annualized run rate is in excess of 3% of a price increase there. We have institutionalized our pricing sophistication with our new bi-peril product, which is now in place with all of our cat exposed areas. As you will remember, the bi-peril pricing really assesses the risks of each peril rather than lumping them together whether it be fire or wind or hail or tornadoes or liability and several others, theft, water damage. I think there is about 13 perils that we price separately.

So that allows us to get more pricing precision particularly in geographic areas that are more exposed to wind, hail, and tornadoes which have been our biggest problem. So we are getting significant price increases well in excess of the 20% in parts of states that seem to have the greatest exposure to wind, hail and tornadoes.

Paul Newsome - Sandler O’Neill Asset Management - Analyst

Do you think you are technically correctly priced on your new business?

Bob Restrepo - State Auto Financial Corporation - President, CEO, Chairman

Yes.

Paul Newsome - Sandler O’Neill Asset Management - Analyst

Great, thank you.

Operator

Once again we have Larry Greenberg for a question.

Larry Greenberg - Langen McAlenney - Analyst

Yes, just following up on RED. If memories service me, the commercial auto program was about half of the volume of RED. Could you just talk about how the other business is doing within RED?

Bob Restrepo - State Auto Financial Corporation - President, CEO, Chairman

I will ask Steve to comment it on it again. Because one we can comment on the other business which Steve will say on balance is performing much better than the transportation program. But secondly, we have taken some restructuring actions that will skinny down the size of RED, and impact on the overall book and will allow us to more effectively integrate it with the Rockhill operations which has a different management team and has been significantly more profitable than our RED program.

Steve English - State Auto Financial Corporation - VP, CFO

Larry, we have not been pleased with the underwriting results and the truck program being half of the book materially impacts the result of that overall book. The second largest program is a restaurant program which is approximately, this is a group number, but approximately about $50 million or so in premiums. That program has actually – we are in our third year I believe on that program and over the 3 year cycle has actually performed well. We did at the end of 2011 see a slight uptick in that program, so that is being addressed. As Bob mentioned we have made a decision to change management, and that is now effective and we are reorganizing that organization and it will be integrated beneath Jessica Buss as part of the overall strategy in the specialty segment. We are going to right size the goals of that book of business given the results in our current capital base.

Larry Greenberg - Langen McAlenney - Analyst

Okay. Thank you.

Operator

Sir, with that, I am showing no further questions.

Steve English - State Auto Financial Corporation - VP, CFO

Well, thank you, Melissa. And I said a moment ago we would like to thank all of you for participating in our conference call and for your continued interest in and support of State Auto Financial Corporation. We look forward to speaking with you again on our second quarter call which is currently schedule for the second of August 2012. Thank you, and everyone have a good day.

Operator

Thank you. This does conclude today’s conference. All parties may disconnect.

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