Document:

Exhibit 10.49

 

EXHIBIT 10.49

FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT

      This FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT, dated as of May 2, 2005 (this
“Amendment”), by and among CERES GROUP, INC., a Delaware corporation (the “Borrower”), CERES
ADMINISTRATORS, LLC, a Delaware limited liability company, CERES HEALTH CARE, INC., a Delaware
corporation, CONTINENTAL GENERAL CORPORATION, a Nebraska corporation, and WESTERN RESERVE
ADMINISTRATIVE SERVICES, INC., an Ohio corporation (collectively, the “Subsidiary Guarantors”),
NATIONAL CITY BANK, in its capacity as successor in interest to The CIT Group/Equipment Financing,
Inc. (“CIT Group”) as a lender, in its capacity on its own behalf as a lender, and in its capacity
as agent under the Credit Agreement (defined below) (in all such capacities, the “Lender”).

W I T N E S S E T H :

      WHEREAS, the Borrower, the Subsidiary Guarantors, the National City Bank and CIT Group entered
into that certain Credit and Security Agreement, dated December 23, 2003 (the “Credit Agreement”),
pursuant to which the Borrower has issued (1) to Lender that certain Term Loan A Note, in the
principal amount of $4,000,000 and (2) to CIT Group that certain Term Loan B Note in the principal
amount of $9,000,000 (the “CIT Note”); and

      WHEREAS, CIT Group has assigned to Lender all of the rights of CIT Group under, and Lender has
assumed all of obligations of CIT Group under, the Credit Agreement and Loan Documents (as defined
in the Credit Agreement), including without limitation, the CIT Note; and

      WHEREAS, Section 7.3(f)(D) of the Credit Agreement currently prohibits certain redemptions of
capital stock of the Borrower and the Subsidiaries in excess of $2,000,000 in any calendar year;
and

      WHEREAS, the Borrower has requested the Lender to permit the Borrower to redeem up to
$10,000,000 of its currently outstanding capital stock;

      WHEREAS, the Lender has agreed to permit such redemption on the terms and conditions set forth
herein; and

      WHEREAS, the Borrower, the Subsidiary Guarantors and the Lender desire to modify the Credit
Agreement as provided herein.

      NOW, THEREFORE, in consideration of the foregoing and the mutual promises set forth herein,
the parties agree as follows:

Section 1. AMENDMENTS.

      1.1 The definition in Annex I to the Credit Agreement of the term “Term Loan Maturity Date” is
hereby deleted in its entirety and the following inserted in lieu thereof:

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	   	“Term Loan Maturity Date” means March 1, 2007, in the case of Term Loan A, and March 1,
2008, in the case of Term Loan B.

      1.2 Section 2.1(c)(ii) of the Credit Agreement regarding repayment of Term Loan B is hereby
deleted in its entirety and the following inserted in lieu thereof:

	   	"(ii) From the date hereof, Term Loan B shall be repaid in seventeen (17) quarterly
installments, commencing March 1, 2004, and continuing on the first Business Day of each
succeeding June, September, December and March thereafter. From March 1, 2004 through
December 1, 2004, each payment shall be in the principal amount of Three Hundred Twelve
Thousand Five Hundred Dollars ($312,500). On March 1, 2005, the payment shall be in the
principal amount of Three Hundred Seventy Five Thousand Dollars ($375,000). From June 1,
2005 through March 1, 2006, each payment shall be in the principal amount of Six Hundred
Eighty Seven Thousand Five Hundred Dollars ($687,500). From June 1, 2006 through December
1, 2006, each payment shall be in the principal amount of Three Hundred Seventy Five
Thousand Dollars ($375,000). From March 1, 2007 through December 1, 2007, each payment
shall be in the principal amount of Five Hundred Sixty Two Thousand Five Hundred Dollars
($562,500), with any remaining principal balance payable in full on March 1, 2008.”

      1.3 Section 7.3(f) of the Credit Agreement entitled “Dividends; Management Fee” is
hereby amended by inserting the following sentence at the end of such section:

	   	      “Notwithstanding anything to the contrary set forth in Section 7.3(f)(D), on and after
May 2, 2005, the Borrower shall be permitted to pay consideration of up to an aggregate
amount of $10,000,000 to redeem or otherwise purchase shares of its outstanding Capital
Stock; provided that, if at any time after May 2, 2005 the Borrower has paid consideration
in an aggregate amount of $10,000,000 for the redemption or other purchase of shares of its
Capital Stock, then all future redemptions and other purchases of its Capital Stock shall be
subject to the provisions set forth in Section 7.3(f)(D); provided further, that if during
any calendar year the Borrower has paid consideration pursuant to the provisions of this
sentence in an aggregate amount which is less than $2,000,000, then the amount of
consideration paid during such calendar year shall be included when calculating the
permitted redemptions under Section 7.3(f)(D) for the current calendar year; provided
further, that if during any calendar year the Borrower has paid consideration pursuant to
the provisions of this sentence in an aggregate amount which is equal to or greater than
$2,000,000, then neither the Borrower nor any of its Subsidiaries shall be permitted to make
any further redemptions during such calendar year.”

      1.4 Section 7.4(a) of the Credit Agreement entitled “Minimum Consolidated Fixed Charge
Coverage Ratio” is hereby deleted in its entirety and the following inserted in lieu thereof:

      "(a) Minimum Consolidated Fixed Charge Coverage Ratio.

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	   	      The Borrower shall not permit the Consolidated Fixed Charge Coverage Ratio as of the
end of any fiscal quarter to be less than 1.50 to 1.00, in each case, for the Testing Period
ending as of such fiscal quarter end.”

Section 2. REPRESENTATIONS AND WARRANTIES.

      To induce the Lender to enter into this Amendment, each of the Borrower and the Subsidiary
Guarantors hereby represents and warrants to the Lender that, on the date hereof and after giving
effect to this Amendment: (a) the Borrower and the Subsidiary Guarantors have the power and
authority, and the legal right, to make, deliver and perform under this Amendment, and have taken
all necessary action to authorize the execution, delivery and performance of this Amendment; (b)
this Amendment has been duly executed and delivered on behalf of the Borrower and the Subsidiary
Guarantors; (c) no consent or authorization of, filing with or other act by or in respect of any
Governmental Authority is required in connection with the execution, delivery, performance,
validity or enforceability of this Amendment; (d) this Amendment constitutes a legal, valid and
binding obligation of the Borrower and the Subsidiary Guarantors enforceable against them in
accordance with its terms, subject to the qualification that the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or
affecting the enforcement of creditors’ rights generally and by general equity principles (whether
such enforcement is sought by proceedings in law or equity); (e) no Event of Default or Default has
occurred and is continuing on the date hereof; and (f) the representations and warranties set forth
in the Loan Documents are true, correct and complete in all material respects on the date of this
Amendment to the same extent as though made on and as of such date, except for any representation
or warranty limited by its terms to a specific date and taking into account any amendments to the
Disclosure Schedule made after the Closing Date and prior to the date of this Amendment. This
Amendment shall constitute a “Loan Document” for purposes of the Credit Agreement.

Section 3. CONDITIONS PRECEDENT.

      The effectiveness of this Amendment is subject to the conditions precedent that the Lender
shall have received: (a) a fully executed copy of this Amendment; (b) from the Borrower, a fee in
the amount of Forty Thousand and No/100 Dollars ($40,000); and (c) from the Borrower and each
Subsidiary Guarantor, an officer certificate in a form reasonably satisfactory to the Lender.

Section 4. MISCELLANEOUS.

      4.1 All capitalized terms not otherwise defined herein shall have the meanings set forth in
the Credit Agreement.

      4.2 Except as expressly amended by this Amendment, all terms and conditions of the Credit
Agreement shall remain in full force and effect.

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      4.3 This Amendment may be executed in any number of counterparts each of which shall be
regarded as an original and all of which taken together shall constitute but one and the same
instrument.

      IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed
effective as of the day and year first above written.

	 	 	 	 	 
	 	CERES GROUP, INC.

 	 
	 	By:  	/s/ David I. Vickers
 	 
	 	 	Title: EVP and CFO 	 
	 	 	 	 
	 

	 	 	 	 	 
	 	NATIONAL CITY BANK,

as Agent and as Lender and successor in interest to

The CIT Group/Equipment Financing, Inc.

 	 
	 	By:  	/s/ Michael Kelley
 	 
	 	 	Title:  SVP 	 
	 	 	 	 
	 

	 	 	 	 	 
	 	CERES ADMINISTRATORS, LLC

 	 
	 	By:  	/s/ David I. Vickers
 	 
	 	 	Title:  CFO 	 
	 	 	 	 
	 

	 	 	 	 	 
	 	CERES HEALTH CARE, INC.

 	 
	 	By:  	/s/ David I. Vickers
 	 
	 	 	Title:  CFO 	 
	 	 	 	 
	 

	 	 	 	 	 
	 	CONTINENTAL GENERAL CORPORATION

 	 
	 	By:  	/s/ David I. Vickers
 	 
	 	 	Title:  CFO 	 
	 	 	 	 
	 

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	 	WESTERN RESERVE ADMINISTRATIVE SERVICES, INC.

 	 
	 	By:  	/s/ David I. Vickers
 	 
	 	 	Title:  CFO 	 
	 	 	 	 
	 

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Exhibit 10.56

Management and Operations Agreement

Amended and Restated

As of January 1, 2005

 

 

MANAGEMENT AND OPERATIONS AGREEMENT

AMENDED AND RESTATED

As of January 1, 2005

     This Management and Operations Agreement Amended and Restated effective as of 12:01 a.m.,
Eastern Standard Time, January 1, 2005 (the “Agreement”) is by and among State Automobile Mutual
Insurance Company, an Ohio corporation (“Mutual”), State Auto Financial Corporation, an Ohio
corporation (“State Auto Financial”), State Auto Property and Casualty Insurance Company, a South
Carolina corporation (“State Auto P&C”), State Auto National Insurance Company, an Ohio corporation
(“National”), Milbank Insurance Company, a South Dakota corporation (“Milbank”), State Auto
Insurance Company of Ohio, an Ohio corporation (“SA OH”), Meridian Security Insurance Company, an
Indiana corporation (“Meridian”), Meridian Citizens Mutual Insurance Company, an Indiana
corporation (“Citizens”), Meridian Insurance Group, Inc., an Indiana corporation (“MIGI”), Farmers
Casualty Insurance Company, an Iowa corporation (“Farmers”), Stateco Financial Services, Inc., an
Ohio corporation (“Stateco”), Strategic Insurance Software, Inc., an Ohio corporation (“S.I.S.”),
and 518 Property Management and Leasing, LLC, an Ohio limited liability company (“518 PML”).

Background Information

A. Mutual is a property and casualty insurance company which owns approximately 65% of the
outstanding common shares of State Auto Financial. MIGI is a holding company and a wholly owned
subsidiary of Mutual. Citizens, a property and casualty insurance company, is associated with
Mutual through Citizens’ affiliation agreement with MIGI. Mutual indirectly owns 100% of Meridian,
a property and casualty insurance company wholly owned by MIGI. For purposes of this Agreement,
Mutual, Meridian, Citizens and MIGI are hereinafter collectively referred to as the “Mutual Group.”
State Auto Insurance Company of Wisconsin, a Wisconsin domiciled property and casualty insurance
company (“SA WI”), and State Auto Florida Insurance Company, a Florida domiciled property and
casualty insurance company (“SA FL”), are wholly owned by Mutual, but each has signed its own
management agreement with Mutual and State Auto P&C.

B. State Auto P&C, Milbank, Farmers, SA OH, National, Stateco, and S.I.S. are wholly owned
subsidiaries of State Auto Financial. State Auto Financial also indirectly owns 518 PML, whose
sole members are Stateco and State Auto P&C. State Auto P&C, National, SA OH, Milbank, and Farmers
are property and casualty insurance companies. Stateco provides investment management services to
all its insurance company affiliates and STFC. 518 PML is engaged in the business of managing and
leasing real and personal property whose present customers are affiliated companies. S.I.S. is
engaged in the business of writing and servicing agency management software products, among other
software products. It derives revenue from sales of software products to third-party insurers,
agents, and one or more of its insurer affiliates. For purposes of this Agreement, State Auto P&C,
Milbank, Farmers, SA OH, National, Stateco, S.I.S. and 518 PML are hereinafter collectively
referred to as the “State Auto Financial Group.” The State Auto Financial Group and Mutual Group
are hereinafter collectively referred to as the “State Auto Companies” and individually as a “State
Auto Company.”

C. Mutual, Meridian, Citizens, SA WI, SA FL, State Auto P&C, Milbank, Farmers, and SA OH,
participate in the current pooling arrangement effected through the Reinsurance Pooling Agreement
Amended and Restated as of January 1, 2005 (the “2005 Pooling Agreement”). Pursuant to the 2005
Pooling Agreement, each of State Auto P&C, Milbank, Farmers, SA OH,

 

 

Meridian, Citizens, SA WI and SA FL cedes all of its insurance business to Mutual and in turn
assumes a percentage of the combined business of all those companies. Under the 2005 Pooling
Agreement the pool participants and their respective percentages are: Mutual – 19.5%, Meridian –
0.0%, Citizens – 0.5%, SA WI 0.0%, SA FL, 0.0%, State Auto P&C – 59%, Milbank – 17%, , Farmers -
3%, and SA OH- 1%.

D. Since January 1, 2000, there has been in place a Management and Operations Agreement (the “2000
Management and Operations Agreement”) under which State Auto P&C has provided “management and
operations services” as defined therein to State Auto Financial, Mutual, Milbank, SA OH, National,
Stateco, S.I.S., and 518 PML. Such management and operations services have been provided by
individuals who are employees of State Auto P&C. Under the 2000 Management and Operations
Agreement, Mutual has acted as common paymaster/common agent and provided certain facilities these
companies require to operate their businesses.

E. With this Agreement, Mutual, Meridian, Citizens, Milbank, Farmers, SA OH, National, State Auto
Financial, Stateco, S.I.S., 518 PML, and MIGI (collectively, the “Managed Companies,” individually,
a “Managed Company”) will require substantially all of the services of the employees of State Auto
P&C including without limitation, executive, managerial, supervisory, administrative, technical,
professional, and clerical services necessary or appropriate in the operation of their respective
businesses (collectively referred to hereafter as “Management and Operations Services”), and each
of the Managed Companies will rely on Mutual to provide certain facilities needed to conduct their
respective businesses. State Auto Financial, S.I.S., Stateco, MIGI and 518 PML, all the Managed
Companies that are not insurance companies under applicable law, are hereinafter collectively
referred to as the “Service Companies” and individually as a “Service Company.” The Service
Companies provide essential support services to the Managed Companies, the costs for which are
allocated as described in this Agreement.

F. With this Agreement, the parties hereto desire to amend and restate the 2000 Management and
Operations Agreement, in the form of this Agreement, and formalize the operating relationship with
those State Auto Companies that were not parties to the 2000 Management and Operations Agreement,
namely Meridian, Citizens, MIGI and Farmers. Upon the effectiveness of this Agreement, the
existing management and operations agreements for Meridian, Citizens, MIGI and Farmers shall
terminate, specifically the Farmers Casualty Insurance Company Mid-Plains Insurance Company
Management Agreement Amended and Restated as of January 1, 2000; the 2002 Management Services
Agreement among MIGI, Meridian, Citizens, and State Auto P&C; and the 2002 Sharing Agreement among
MIGI, Meridian, Citizens, State Auto P&C and Mutual.

STATEMENT OF AGREEMENT

     The parties hereby acknowledge the accuracy of the above Background Information and in
consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND, hereby
agree as follows:

1. Amendment and Restatement. - Upon this Agreement becoming effective, the 2000 Management
and Operations Agreement is amended and restated as set forth herein and the relationship among the
parties hereto shall be governed by this Agreement.

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2. Engagement and Term - On the terms and subject to the conditions described in this
Agreement, the Managed Companies hereby engage State Auto P&C, and State Auto P&C hereby accepts
such engagement, to provide Management and Operations Services to the Managed Companies as any of
such Managed Companies requires to operate its business.

     Any of State Auto P&C’s employees may also serve as directors or officers of any of the State
Auto Companies, notwithstanding that such persons may also be officers or directors of State Auto
P&C or other affiliates. State Auto P&C shall also be entitled to continue using its employees to
conduct all of its business operations, notwithstanding that such persons will be performing
services for other State Auto Companies as well.

     To the extent reasonably possible, the parties shall jointly utilize State Auto P&C’s
employees in a cooperative manner and consistent with the business interests and needs of the State
Auto Companies. State Auto P&C shall direct its employees performing such services for each of the
Managed Companies to use their best efforts to promote the general interests and economic welfare
of each of the Managed Companies to the same extent as such employees provide to State Auto P&C.

     The term of State Auto P&C’s engagement under this Agreement shall begin on the date of this
Agreement and shall end, unless sooner terminated in accordance with the provisions of Section 9
below, on the tenth anniversary of this Agreement. This Agreement shall be automatically renewed
for successive ten-year periods upon the same terms and conditions contained in this Agreement,
unless and until terminated as described in Section 9 below.

3. Authority and Duties of State Auto P&C - In providing Management and Operations
Services, State Auto P&C, acting through its employees, shall be responsible for performing all
organizational, operational, and management functions of each of the Managed Companies. State Auto
P&C shall use its reasonable efforts to operate each Managed Company’s business efficiently and in
accordance with the reasonable guidelines and policies which may be established from time to time
by the board of directors of each of the Managed Companies. State Auto P&C shall have all
authority necessary to carry out its duties under this Agreement and shall act as an agent of each
of the Managed Companies. Without limiting the generality of the foregoing, State Auto P&C’s
duties under this Agreement shall include the following:

     (a) Management and Administration of Insurance Operations - State Auto P&C shall
operate, administer, and manage the day-to-day insurance business operations of each of the Managed
Companies engaged in the insurance business, in accordance with the underwriting, claims and any
other reasonable guidelines of such companies which may be in effect or established from time to
time by the board of directors of such companies. The management and administration of each such
insurer’s business operations by State Auto P&C shall include, without limitation, appointment and
termination of agencies, underwriting of insurance risks, investigation and settlement of claims
and arrangement of reinsurance. State Auto P&C shall use the same degree of care in acting on
behalf of such insurers as the degree of care it uses in connection with the conduct of its
insurance business operations.

     (b) Management and Administration of Non-Insurance Operations of the Service Companies
- State Auto P&C through its employees, will perform Management and Operations Services for
each of the other Managed Companies which are Service Companies in accordance with the policies and
guidelines which each of such companies’ board of directors may establish from time to time. State
Auto P&C will use the same degree of care in acting on

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behalf of these companies as it uses in connection with the conduct of its own business
operations.

     (c) Employees - State Auto P&C shall provide each Managed Company with all executive,
managerial, supervisory, administrative, technical, clerical, professional, and other personnel as
may be necessary or desirable for the operation and administration of each Managed Company’s
business. State Auto P&C shall direct its employees, in performing such services for each Managed
Company, to use their best efforts to promote the general interests and economic welfare of each
Managed Company, in the same manner as such employees utilize when providing service to State Auto
P&C.

     (d) Employees and Payroll - The employees provided by State Auto P&C to each Managed
Company under this Agreement shall be employed as employees of State Auto P&C and not of any of the
Managed Companies. Notwithstanding the foregoing, Mutual shall continue to act as the common
paymaster of all such employees providing services to any State Auto Company. As common paymaster,
Mutual shall be responsible for filing information and tax returns and issuing tax and other
payroll forms and reports with respect to wages paid to the employees employed by State Auto P&C
and provided to each Managed Company.

4. Provision of Facilities and Expense Payments - During the term of this Agreement, Mutual
shall provide State Auto P&C and each of the other Managed Companies with such data processing
equipment, office supplies and equipment, furniture and fixtures, automobiles and such other items
of tangible personal property as each of such Managed Companies may require or desire for the
operation of its business. Utilizing the employees of State Auto P&C, Mutual shall act as agent
for each of the Managed Companies and, to the extent necessary for the purposes of its business, in
collecting and disbursing funds due to any Managed Company, and in paying expenses and other
operating costs of the facilities used by such parties except for those expenses paid directly by
any such Managed Company from its own accounts.

5. Board of Directors’ Control - The officers of State Auto P&C and of each of the Managed
Companies shall be subject to the authority of their respective boards of directors, provided,
however, it is understood that such officers have contractual obligations under this Agreement to
State Auto P&C and the other Managed Companies party to this Agreement. Each Managed Company and
State Auto P&C may appoint or elect as its officers those persons who hold offices in any other
State Auto Company or any other affiliate, subject at all times to the power of each company’s
respective board of directors to appoint, elect, or remove its officers in accordance with its
respective articles or certificate of incorporation, code of regulations or by-laws, and other
governing documents, statutes, or rules of law applicable to each respective company.

6. Allocation of Costs and Expenses - All out-of-pocket expenses incurred for goods or
services from third-party vendors or other unrelated parties which are identifiable to a particular
State Auto Company, including without limitation, director’s fees, legal fees, audit fees, stock
transfer expenses, travel expenses, stationery, supplies and items of a similar nature, shall be
charged to the State Auto Company for whose benefit such costs or expenses were incurred, and to
the extent any of these expenses are subject to the 2005 Pooling Agreement, they shall be shared
among the parties to the 2005 Pooling Agreement in accordance with its terms. Expenses shall be
apportioned in accordance with SSAP No. 70 “Allocation of Expenses.” The books, accounts, and
records shall be so maintained as to clearly and accurately disclose the nature and details of the
transactions including such accounting information as is necessary to support the expenses
apportioned to the respective parties.

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All costs and expenses incurred by State Auto P&C for the employees, equipment, facilities and
other items shared by the parties pursuant to this Agreement shall be allocated among the parties
to this Agreement as follows:

     (a) Insurance Losses, Loss Adjustment Expenses and Underwriting Expenses of Mutual,
Meridian, Citizens, State Auto P&C, Milbank, Farmers, and SA OH - All insurance losses, loss
adjustment expenses and underwriting expenses of Mutual, Meridian, Citizens, State Auto P&C,
Milbank, Farmers, and SA OH (hereafter the “Pooled Companies”), as computed under the statutory
accounting principles used by State Auto P&C from time to time, including, but not limited to, all
related claim adjustment services, commissions and brokerage expenses, salaries and employee
relations and welfare expenses and all other loss adjustment and other underwriting expenses to be
reflected in the annual statement to be filed with state insurance authorities, shall be shared by
each of the Pooled Companies in accordance with the provisions of the pooling arrangement as in
effect through the 2005 Pooling Agreement. It is understood and acknowledged that the percentages
by which such losses and expenses are shared under the 2005 Pooling Agreement and other provisions
of the 2005 Pooling Agreement may be changed from time to time under procedures outlined in the
2005 Pooling Agreement. It is further understood and agreed that while SA WI and SA FL are parties
to the 2005 Pooling Agreement, each is a party to a separate management agreement with State Auto
P&C and State Auto Mutual, each of which contains provisions substantially similar to this section
6(a).

     (b) Expenses of State Auto Financial, Stateco, S.I.S., 518 PML and MIGI, - The salary
expenses attributable to State Auto P&C employees performing services for the Service Companies, in
the course of such Service Company providing services to any Managed Company under this Agreement,
shall be reimbursed to State Auto P&C by each of these companies based on an allocation of the time
these individuals spend on behalf of each of the Service Companies. In addition, each of the
Service Companies shall reimburse State Auto P&C for the expense of services provided to it by
State Auto P&C including, without limitation, payroll taxes, benefits, overhead, and rent based on
a percentage of the aforesaid salary expenses to be determined annually by State Auto P&C in an
amount that reasonably reflects the actual costs of the aforesaid items. The expense of such
services performed by S.I.S. shall be allocated pursuant to SSAP #70, as described above. The
parties understand and agree Stateco has in place Investment Management Agreements with the
insurers party to this Agreement.

     (c) Insurance Losses, Loss Adjustment Expenses and Underwriting Expenses of National -
All insurance losses, loss adjustment expenses and underwriting expenses of National, as computed
under the statutory accounting principles used by National from time to time shall be paid by
National. Underwriting expenses include, without limitation, expenses for State Auto P&C employees
providing services on behalf of National for only part of their time, which expenses shall be
allocated to National in proportion to the amount of time those employees spend on National’s
behalf in accordance with statutory accounting principles used by National from time to time.

     (d) Pension and Benefit Expenses - Each of the members of State Auto Financial Group
and the Mutual Group, is designated as a participating company under the State Auto Insurance
Companies Employees’ Retirement Plan, and any other applicable benefit plans provided by any State
Auto Company for the employees of State Auto P&C (the “Plans”). Each of the Pooled Companies share
of pension and benefit expenses under the Plans for employees of State Auto P&C providing services
to each of such insurers shall be allocated and paid

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pursuant to the 2005 Pooling Agreement and their percentage shares of all obligations of the
Plans’ sponsors under the Plans shall equal their percentage shares under the 2005 Pooling
Agreement, as changed from time to time. State Auto Financial’s, Stateco’s, S.I.S.’, 518 PML’s,
MIGI’s and National’s share of pension and benefit expenses under the Plans for employees of State
Auto P&C shall be allocated to the respective company based on the percentage of payroll expenses
attributable to each such company.

     (e) Real Estate Expenses - State Auto P&C, National, MIGI, State Auto Financial,
Stateco, and 518 PML currently are provided office space by Mutual in offices located at 518 East
Broad Street, Columbus, OH, and 2955 North Meridian Street, Indianapolis, IN. In addition, State
Auto P&C and National are provided office space in Milbank’s office at 107 Flynn Drive, Milbank,
SD. National, State Auto Financial, Stateco, and 518 PML are charged for part of the rent expense
for Milbank’s office. The amount of rent Mutual and Milbank charge National, MIGI, State Auto
Financial, Stateco, and 518 PML shall be based upon the percentage that the total salaries
(including a benefits factor) paid to individuals performing services for any of such entities
bears to the aggregate of all salaries for State Auto P&C times the total rent expenses for the
State Auto Companies for the location at 518 East Broad Street, Columbus, OH, 2955 North Meridian
Street, Indianapolis, IN, and Milbank, SD, as aforesaid, in accordance with statutory accounting
principles. The rent expense incurred by each of the Pooled Companies for other office locations
owned by Mutual (Indianapolis, IN, Cincinnati, OH and Cleveland, OH) and for the Milbank office is
an underwriting expense subject to the 2005 Pooling Agreement.

     Notwithstanding the foregoing allocations to the contrary, if a State Auto Company which is
not currently participating in the 2005 Pooling Agreement, hereafter begins participating in such
2005 Pooling Agreement as amended from time to time, then expenses subject to the 2005 Pooling
Agreement shall be allocated among that company and the other pooling arrangement participants in
the same manner as expenses are allocated between the Pooled Companies as set forth above.

7. Payments for Services - All amounts due under this Agreement shall be due and payable by
the respective company within fifteen days after request for payment from the party to be paid.

8. Conflicts of Interest - The parties hereby acknowledge that, due to the common
management of the Mutual Group and the State Auto Financial Group, conflicts of interest may arise
with respect to business opportunities available to such companies. In order to deal with such
conflicts of interest on an equitable basis, the guidelines incorporated in the Charter of the
Mutual Independent Committee (as defined below) and the Financial Independent Committee (as defined
below), which respective Charters are hereby incorporated by this reference, shall be used to
determine which company may avail itself of a business opportunity.

     (a) As used herein, Mutual Independent Committee shall mean a committee established by the
Board of Directors of Mutual and comprised solely of persons who are not, and during the past three
years have not been, directors, officers or employees of companies in the State Auto Financial
Group or employees of Mutual or any wholly owned subsidiary of Mutual. The Mutual Independent
Committee members shall also represent the interests of all wholly owned subsidiaries of Mutual
(together with Mutual, each “a Mutual Company” and, collectively, the “Mutual Companies”).

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     (b) As used herein, Financial Independent Committee shall mean a committee established by the
Board of Directors of State Auto Financial and comprised solely of persons who are not, and during
the past three years have not been, directors, officers or employees of Mutual or any wholly owned
subsidiary of Mutual or employees of any company in the State Auto Financial Group. The Financial
Independent Committee members shall also represent the interests of all subsidiaries of Financial
(together with Financial, each “a Financial Company” and, collectively, the “Financial Companies”).

9. Termination – This Agreement may be terminated prior to the end of the initial term, or
any renewal thereof, as follows:

     (a) By any of the Managed Companies, at its option, at any time after a “Change in Control” or
“Potential Change in Control” (as defined below) of State Auto Financial.

     (b) At the end of the term then in effect by any of the parties upon advance written notice to
the other parties at least two years prior to the end of the term then in effect (provided that
such termination shall only relate to the Company giving notice and shall not terminate the
Agreement with respect to any of the other parties unless they also give notice of termination of
at least two years prior to the end of the term then in effect).

     (c) Automatically, with respect to a party, if that party files a voluntary petition in
bankruptcy, applies for or consents to the appointment of a receiver, makes a general assignment
for the benefit of creditors, admits in writing its inability to pay debts as they mature, files a
petition or answer seeking a reorganization or arrangement with creditors under any insolvency law,
files an answer admitting the material allegations of a petition filed in any bankruptcy or
reorganization proceeding, or if a decree of any court is entered adjudging the party to be
bankrupt or approving a reorganization or arrangement under any insolvency law (which decree is not
set aside within ninety days after it is entered), (provided that such termination shall only
relate to the Company subject to the foregoing event or action and shall not terminate the
Agreement with respect to any of the other parties unless they also give notice of termination
within thirty days of the event that causes the automatic termination for another party).

     For purposes of this section, a “Change in Control” means the happening of any of the
following:

     (i) When any “person” as defined in Section 3 (a)(9) of the Securities Exchange Act of
1934 (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 State Auto Financial
and any subsidiary and any employee benefit plan sponsored or maintained by State Auto
Financial or any subsidiary (including any trustee or such plan acting as trustee) and
excluding Mutual, directly or indirectly, becomes the “beneficial owner” (as defined in Rule
13(d)(3) under the Exchange Act, as amended from time to time), of securities of State Auto
Financial representing 20% or more of the combined voting power of the then outstanding
securities;

     (ii) When, during any period of twenty-four consecutive months during the effectiveness
of this Agreement, the individuals who, at the beginning of such period, constitute the
board of directors of State Auto Financial (the “Incumbent Directors”) cease for any reason
other than death to constitute at least a majority thereof; provided, however, that a
director who was not a director at the beginning of such twenty-four

7

 

month period shall be deemed to have satisfied such twenty-four 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 twenty-four
month period) or by prior operation of this paragraph; or

     (iii) The occurrence of a transaction requiring shareholder approval for the
acquisition of State Auto Financial by an entity other than Mutual or a subsidiary of State
Auto Financial through purchase of assets, by merger or otherwise.

     For purposes of this section, a “Potential Change in Control” means the happening of any one
of the following:

     (i) The approval by shareholders of an Agreement by State Auto Financial, the
consummation of which would result in a Change in Control of State Auto Financial as defined
above; or

     (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity,
person or group other than State Auto Financial or a subsidiary or any employee benefit plan
sponsored or maintained by State Auto Financial or any subsidiary (including any trustee of
such plan acting as such trustee) of securities of State Auto Financial representing 5% or
more of the combined voting power of State Auto Financial’s outstanding securities and the
adoption by the board of directors of State Auto Financial of a resolution to the effect
that a Potential Change in Control of State Auto Financial has occurred for purposes of this
Agreement.

10. Arbitration - Any and all disagreements or controversies arising with respect to this
Agreement, whether during or after the term of State Auto P&C’s engagement under this Agreement,
shall be settled by binding arbitration by a panel of three arbitrators, one selected by Mutual on
behalf of any member of the Mutual Group, one selected by State Auto Financial on behalf of any
member of the State Auto Financial Group, and the third to be selected by the mutual agreement of
the first two arbitrators. The arbitration shall be held, and the award made, in Franklin County,
Ohio, pursuant to the Ohio Arbitration Law (Ohio Revised Code Chapter 2711 or any law of similar
tenor or effect that hereafter is enacted). All fees of the arbitrators shall be borne equally by
the parties to the arbitration.

11. Complete Agreement – This document contains the entire amended and restated agreement
between the parties and supersedes all prior or contemporaneous discussions, negotiations,
representations, or agreements relating to the subject matter, including without limitation, the
2000 Management and Operations Agreement and all previous amendments thereto. No changes to this
Agreement shall be made or be binding on any party unless made in writing and signed by each party
to this Agreement.

12. No Third Party Benefit - This Agreement is intended for the exclusive benefit of the
parties to this Agreement and their respective successors and assigns, and nothing contained in
this Agreement shall be construed as creating any rights or benefits in or to any third party.

13. Captions - The captions of the various sections of this Agreement are not part of the
content or context of this Agreement, but are only labels to assist in locating those sections, and
shall be ignored in construing this Agreement.

8

 

14. Force Majeure - Notwithstanding any provision of this Agreement to the contrary, any
party’s obligations under this Agreement shall be excused if and to the extent that any delay or
failure to perform such obligations is due to fire or other casualty, material shortages, strikes
or labor disputes, acts of God, or other causes beyond the reasonable control of such party.

15. Amendments - This Agreement may be amended by the parties, upon authority of their
officers without specific director approval, if such amendment is solely for the purpose of
clarification and does not change the substance of this Agreement and the parties have obtained an
opinion of legal counsel to that effect. Additionally, any present or future subsidiary or
affiliate of Mutual or State Auto Financial may be added as a party to this Agreement by an
amendment entered into by Mutual, State Auto Financial and the new party, after approval of the
Independent Committee of each of Mutual and State Auto Financial and the directors of each and of
the new party. Except as otherwise specifically provided in this section of the Agreement, all
other amendments to this Agreement must be presented to the Independent Committee of Mutual and of
State Auto Financial and be approved by the directors of each Company pursuant to the procedures
set forth in Section 8.

16. Successors - No party may assign any of its rights or obligations under this Agreement
without the written consent of all other parties to this Agreement, which consent may be
arbitrarily withheld by any such party. This Agreement shall be binding upon, inure to the benefit
of, and be enforceable by and against the respective successors and assigns of each party to this
Agreement.

17.  Access to Records –  The parties hereto understand and agree that each shall
have such access to the records of the other as is necessary to confirm that this Agreement is
being properly administered and applied, provided that such access is achieved in compliance with
laws protecting the privacy of insureds and claimants. It is further understood and agreed that
the parties will permit regulators with jurisdiction to have such access to such records, as and to
the extent required by law.

In Witness whereof, each of the parties hereto has subscribed its name below.

Date   May 3,
2005  

	 	 	 	 	 
	 	 	STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	STATE AUTO FINANCIAL CORPORATION
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President

9

 

	 	 	 	 	 
	 	 	STATE AUTO PROPERTY AND CASUALTY INSURANCE
	 	 	COMPANY
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	STATE AUTO NATIONAL INSURANCE COMPANY
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	STATE AUTO INSURANCE COMPANY OF OHIO
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	FARMERS CASUALTY INSURANCE COMPANY
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	MERIDIAN SECURITY INSURANCE COMPANY
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	MERIDIAN CITIZENS MUTUAL INSURANCE COMPANY
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	MERIDIAN INSURANCE GROUP, INC.
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	STATECO FINANCIAL SERVICES, INC.
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President

10

 

	 	 	 	 	 
	 	 	MILBANK INSURANCE COMPANY
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	STRATEGIC INSURANCE SOFTWARE, INC.
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President
	 
	 	 	 	 
	 	 	518 PROPERTY AND MANAGEMENT LEASING, LLC
	 
	 	 	 	 
	

	 	By:
	 	 /s/ Robert H. Moone
	

	 	 	 	 
	

	 	 	 	Robert H. Moone, President

11

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