State Auto Group Members Assigned ‘A’ Ratings; Outlook Stable

Standard & Poor’s has assigned its ‘A’ counterparty credit and financial strength ratings to State Automobile Mutual Insurance Co. and the other members of the State Auto Group. In addition, Standard & Poor’s assigned its ‘BBB’ rating to State Auto Financial Corp.’s proposed $100 million senior unsecured notes, which will be sold under Rule 144A with registration rights. The outlook is stable.

The ratings reflect the operating companies’ good franchise in the personal property/casualty insurance industry, very strong capitalization, and moderate to strong governance profile.

Partially offsetting State Auto Group’s strengths are its recently weak, but improving, underwriting results and its strategy of expansion through acquisition, which exposes the organization to operation and integration issues.

Outlook
Standard & Poor’s expects the group to continue to make headway in its existing markets through organic growth, and it does not expect any acquisitions over the medium term. In addition, Standard & Poor’s expects the group to continue to monitor and manage it catastrophe exposure proactively and maintain a capital adequacy ratio at a very strong level based on Standard & Poor’s model.

Standard & Poor’s expects State Auto Financial Corp.’s debt-to-capital ratio to remain less than 25 percent. Similarly, interest coverage, excluding realized capital gains, is expected to remain strong at 6x-8x. The use of the debt issuance is expected to pay down outstanding debt, with the remainder will be used strengthen various operating companies’ capital bases.

Major Rating Factors

— Moderate acquisition strategy. Since the formation of State Auto Financial Corp. in 1991, the State Auto Group franchise expanded – largely through acquisitions – from a predominantly Ohio-based insurance operation led by State Auto Mutual Insurance Co. to a combination of 12 property/casualty companies servicing 26 states. Overall, Standard & Poor’s believes that this strategy has strengthened the franchise. Nevertheless, management’s acquisitive nature, which will likely be important in achieving its strategic growth goals, will continue to expose the company to operation and integration issues.

— Moderate to strong governance profile. The organization operates under an uncommon – but not unique – corporate structure, making use of two separate boards of directors that oversee the management of State Auto Mutual and State Auto Financial. Robert Moone, president and CEO, serves on both boards. Standard & Poor’s believes State Auto Group’s boards’ governance and audit practices are evolving in compliance with the Sarbanes-Oxley legislation, and the role of both boards appears to be strengthening. Standard & Poor’s analysis suggests that governance in the State Auto Group is an exercise in managing the interests of the whole to enhance the value of the listed company while preserving the fundamental stability of the mutual company.

— Good business position. Standard & Poor’s believes the group maintains a good business position as a middle-tier insurer. Over the course of 12 years, the Columbus, Ohio-based insurer continues to expand its presence and currently writes personal (62% of direct premiums written) and commercial (38%) insurance coverage in 26 states. Generating about 70 percent of its premium volume within its top 10 states, the company ranks at or better than the top 26 insurance providers in six states. Nevertheless, as a provider of commodity-type products and positioned as the 53rd largest insurer in the U.S., it is at a relative market disadvantage compared with larger and more-established competitors.

— Recent underwriting performance improving. For 1995-2000, the company produced underwriting profits five of the years and broke even once. However, over the past two years, the organization did not achieve underwriting gains because of the relatively poor loss ratios produced by the Meridian Group, which was acquired in 2001. State Auto Group’s underwriting performance is improving and expected to produce a combined ratio of no more than 100 percent for year-end 2003. The single largest catastrophe loss in the company’s history in the second quarter of 2003 resulted in State Auto Financial Corp. posting about $41.2 million pretax in catastrophe losses. Third-quarter underwriting results continue to improve, with State Auto Group earning a combined ratio of about 98 percent.

— Very strong capitalization. As of year-end 2002, the consolidated capital adequacy ratio, as measured by Standard & Poor’s capital adequacy model, was considered very strong at about 215 percent. However, capital across each of the individual companies in the group is inconsistent; five companies’ capital is below the group’s consolidated capital adequacy ratio, with a combined capital adequacy ratio at 140 percent. Standard & Poor’s expects that these companies’ capital levels will be enhanced in the short term to a level more in line with the rating level, following the expected debt offering at State Auto Financial Corp.Ratings List State Auto Financial Corp. Counterparty credit rating BBB/Stable/– Senior debt rating BBB State Automobile Mutual Insurance Co. State Auto Property & Casualty Insurance Co. Milbank Insurance Co. Farmers Casualty Insurance Co. State Auto Insurance Co. of Wisconsin State Auto Insurance Co. of Ohio State Auto Florida Insurance Co. State Auto National Insurance Co. Mid-Plains Insurance Co. Counterparty credit rating A/Stable/– Financial strength rating A/Stable