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State Auto Financial Reports Third Quarter 2012 Results

State Auto Financial Corporation (Nasdaq:STFC) today reported a third quarter 2012 net loss of $5.5 million, or $0.14 per diluted share, versus a net loss of $58.7 million 1, or $1.46 per diluted share 1, for the third quarter of 2011. Net loss from operations 2 per diluted share for the third quarter 2012 was $0.25 versus net loss from operations 2 of $1.62 for the same 2011 period 1.

STFC’s GAAP combined ratio for the third quarter 2012 was 110.2 versus 122.4 1 for the third quarter of 2011. Catastrophe losses, net of reinsurance recoveries, for the third quarter 2012 accounted for 2.8 points of the 77.1 total loss ratio points, or $7.2 million, versus 17.0 points of the total 88.4 loss ratio points, or $60.8 million, for the same period in 2011. Non-catastrophe losses included $19.5 million of loss and loss expense reserve increases for prior periods on program business written by Risk Evaluation & Design LLC (RED), a wholly owned subsidiary of State Automobile Mutual Insurance Company. The reserve increases related primarily to a large commercial auto trucking program that, as previously disclosed, was cancelled as of April 1, 2012.

The State Auto Group’s homeowners quota share reinsurance arrangement increased STFC’s underwriting loss by $13.1 million or 5.8 points on the combined ratio. Pursuant to the arrangement, STFC ceded $47.5 million of written premium, $42.4 million of earned premium, $0.1 million of catastrophe losses and $17.0 million of non-catastrophe losses, and recognized $12.2 million of ceded commissions. This cession increased STFC’s overall catastrophe loss ratio 0.4 points, increased the overall non-catastrophe loss ratio 4.8 points and increased the overall expense ratio 0.6 points.

Net written premium for the third quarter of 2012 decreased 29.1% over the same period in 2011. The homeowners’ quota share reinsurance arrangement and the year-end pooling change collectively contributed the entire amount of this decline. By segment, net written premium for the third quarter of 2012 decreased 42.2% for personal insurance, increased 0.5% for business insurance and decreased 29.0% for specialty insurance from the same period in 2011. Excluding the impact of the quota share reinsurance arrangement and pooling change, net written premium for the third quarter of 2012 increased 2.9% 3 from the same period in 2011, with the business insurance segment contributing primarily to the overall growth. The business segment growth was principally driven by higher average new business premium, increased renewal pricing and a recovering economy. Additionally, business segment net written premium includes $7.2 million of unearned premium transferred from terminating an umbrella quota share reinsurance arrangement effective July 1, 2012. Excluding the impact of the homeowners’ quota share and pooling change, net written premium for the third quarter decreased 0.8% 3 for the personal insurance segment, increased 23.7% 3 for the business insurance segment and decreased 12.6% 3 for the specialty insurance segment from the same period in 2011.

For the first nine months of 2012, STFC had a net loss of $10.2 million, or $0.25 per diluted share, compared to a loss of $260.0 million 1, or $6.47 per diluted share 1, for the same 2011 period. STFC’s GAAP combined ratio for the first nine months of 2012 was 110.0 compared to 124.3 1 for the same 2011 period. Catastrophe losses increased the loss ratio for the first nine months of 2012 by 7.9 points, or $61.2 million, compared to 22.0 points, or $232.9 million for the first nine months of 2011.

For the first nine months of 2012, the homeowners quota share reinsurance arrangement reduced STFC’s underwriting loss by $18.5 million or 0.7 points on the combined ratio. Pursuant to the arrangement, STFC ceded $131.4 million of written premium, $125.9 million of earned premium, $47.5 million of catastrophe losses and $60.4 million of non-catastrophe losses, and recognized $36.5 million of ceded commissions. This cession reduced STFC’s overall catastrophe loss ratio 4.2 points, increased the overall non-catastrophe loss ratio 2.9 points and increased the overall expense ratio 0.6 points.

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