A.M. Best Revises Outlook to Negative for State Auto Insurance Companies and Its Members

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of State Auto Insurance Companies (State Auto) and its members. Concurrently, A.M. Best has revised the outlook to negative from stable and affirmed the ICR of “a-” and debt rating of “a-” on $100 million 6.25% senior unsecured notes, due 2013 issued by State Auto Financial Corporation (STFC) (NASDAQ: STFC). All the above named companies are headquartered in Columbus, OH. (See below for a detailed listing of the companies.)

The negative outlook reflects State Auto’s recent surplus declines and deterioration in underwriting and operating earnings. Factors contributing to this result include increased frequency and severity of catastrophe losses and unrealized capital losses in recent years.

The affirmation is supported by State Auto’s strong capitalization, generally favorable operating results and excellent regional market franchise. These attributes reflect its long-standing regional market presence, well-established agency relationships, strong brand name recognition, diversified product offerings and adherence to sound underwriting fundamentals.

Somewhat offsetting these positive rating factors are the group’s exposure to localized tornado/hail storms and hurricane activity. These exposures historically have been mitigated through comprehensive reinsurance programs and available credit facilities, as well as underwriting initiatives aimed at reducing catastrophe exposures. However, the increased frequency of storm losses in recent years has dampened State Auto’s underwriting profitability and overall capital position. Furthermore, State Auto has debt servicing requirements due to the above mentioned debt issuance and trust preferred securities, which could potentially place a strain on future earnings. However, disciplined underwriting, consistent investment income, expanded pricing models, as well as solid enterprise risk management capabilities have contributed to the group’s historical results. First quarter 2010 earnings were favorably impacted by growth in personal lines, a decrease in catastrophe losses and realized gains from the investment segment.

The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed for State Auto Insurance Companies and its following members:

• State Auto Florida Insurance Company
• Patrons Mutual Insurance Company of Connecticut
• Litchfield Mutual Fire Insurance Company
• Beacon National Insurance Company
• Beacon Lloyds Insurance Company
• Farmers Casualty Insurance Company
• Milbank Insurance Company
• State Auto Property and Casualty Insurance Company
• State Auto Insurance Company of Wisconsin
• State Auto National Insurance Company
• State Automobile Mutual Insurance Company
• State Auto Insurance Company of Ohio
• Meridian Citizens Mutual Insurance Company
• Meridian Security Insurance Company

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.