“We’ve completed the transformation of our claim  operations by redesigning businesses processes,  restructuring the organization, reducing reliance  on third-party vendors, and implementing a new  technology platform.” Personal Insurance  Specialty Insurance  Our homeowners remediation efforts targeted improved loss  ratios, higher prices, and fewer agency partners. All of this took its  toll on production. We have plans underway to stabilize produc- tion and resume normal marketing to our “prime of life” target  market. Despite agency terminations, retention has held up well  and is a testimony to our strong agency relationships.  Our issue is new business. We have a number of marketing  initiatives underway to reposition us with our agency partners and  regain “shelf space” with the customer service representatives  who quote new business for prospective customers. We’re also  attempting to take advantage of some disruptions in the market- place for book transfers from some of our competitors. Despite  these efforts, we don’t anticipate resuming normal growth until  2016. Once this happens, we expect to regain our position in per- sonal lines as a top quartile market for our independent agency  partners.  In the meantime, we expect strong underwriting profitability  driven by adequate prices and industry leading performance  in our claim organization. Our loss adjustment expense is com- petitive with anyone. Our disciplined underwriting, responsive  pricing and claim indemnity management are also significant  contributors to our excellent underwriting results in the personal  insurance segment.  Specialty insurance has achieved top quartile status. Since  adding Rockhill’s business to the intercompany pooling arrange- ment, we’ve seen a steady premium growth rate and, excluding  RED, excellent underwriting results. We expect to benefi t in the  future as we build out our specialty claim capability, handle more  claims in-house, and better manage relationships with third party  claim administrators and vendors.  Our specialty segment consists of E&S property, E&S casual- ty, workers’ compensation and programs. E&S property’s results  have been exceptional, benefi tting from strong underwriting  performance and low catastrophe levels, particularly in Florida  where a signifi cant amount of this business is written.  E&S casualty has produced strong and consistent under- writing profi ts with a focus on umbrella and casualty excess,  environmental liability, healthcare (both professional and general  liability), and non-admitted general liability lines such as that  written through Partners General, a managing general under- writer acquired by our parent, State Auto Mutual, in 2014.  Our workers’ compensation niche strategy focuses on our  two-pronged “barbell” strategy. Approximately 50% of our  premium is in the specialty “debit mod” market, which targets  businesses with policies of at least $100,000 in annual premi- ums, where we work to reduce a client’s workers’ compensation  costs through our superior nurse consulting claim capability and  rigorous return to work programs. The other half of our premium in this specialty unit is small  workers’ compensation policies under $25,000 in premium,  although most of what we write is under $10,000. We market to  “four wall” classes such as manufacturing, healthcare, hospital- ity, retail and wholesale. These types of risks generally do not  have catastrophic claims and benefi t from our return to work  claims programs. Our strategy continues to produce strong  profi ts, and we see opportunities for continued growth and profit  as we expand to new states and broaden distribution.  In 2014, the program business, excluding the impact of RED,  came close to achieving targeted returns as we gained scale.  This is a business that should be consistently profi table given  our niche marketing orientation, strong underwriting and claim  controls, and rigorous pricing discipline. With RED behind us,  and a new management team in place, we expect programs to  be an important part of our specialty profi t and growth plans for  the future. Claim We remain very pleased with our claim performance, which is  critical to achieving superior loss ratios and maintaining high levels of customer service. Our loss adjustment expense ratio Commercial lines growth is above average, but profi tability is  mixed. As with personal insurance, all lines benefi t from strong  claim performance. Automobile and liability lines have excellent  loss ratios. In the fi rst half of 2014 our Business Owners Policy  (BOP) results were impacted by harsh weather and an increased  frequency in large fi re losses. In the second half of 2014 large  losses returned to a more normal level. However, we identifi ed a  handful of classes and larger premium accounts that have dispro- portionately hurt loss ratio performance. Specifi cally, some class- es such as grocery and convenience stores have experienced  a higher frequency and severity of property and liability losses.  We’ve eliminated several classes from eligibility and reduced  marketing the BOP to accounts exceeding $25,000 in premium. Our biggest constraint to improving our business insurance  combined ratio relates to our expense ratio. Service levels are  excellent, but we have a high touch/high cost service model. In  2015, we’ll begin making technology investments to improve  productivity, organizational changes to more effi ciently process  smaller accounts, and refi nements to our underwriting appetite to  focus on accounts over $10,000 that currently have acceptable  expense ratios. We anticipate that expense ratios will improve  over the next several years as we implement these steps.  Business Insurance Page 2 State Auto Financial Corporation