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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 2002
------------------------------------------------
( ) Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the Transition period from to
------------------------ ----------------------
State Auto Financial Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1324304
- ------------------------------ -------------------
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
518 East Broad Street, Columbus, Ohio 43215-3976
- -------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(614) 464-5000
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares, without par value 38,971,714
- -------------------------------- ---------------------------
(CLASS) (OUTSTANDING ON 11/08/02)
INDEX
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30, 2002 and
December 31, 2001
Condensed consolidated statements of income - Three months
ended September 30, 2002 and 2001
Condensed consolidated statements of income - Nine months ended
September 30, 2002 and 2001
Condensed consolidated statements of cash flows - Nine months
ended September 30, 2002 and 2001
Notes to condensed consolidated financial statements -
September 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
September 30 December 31
ASSETS 2002 2001
---------- ----------
(unaudited) (see note 1)
Fixed maturities:
Held for investment, at amortized cost
(fair value $21,702 and $28,672 respectively) $20,310 $27,406
Available for sale, at fair value
(amortized cost $1,113,261 and $1,042,539, respectively) 1,195,111 1,051,405
Equity securities, at fair value (cost $60,095 and $50,361, respectively) 54,102 59,845
Other invested assets 1,549 -
---------- ----------
Total investments 1,271,072 1,138,656
Cash and cash equivalents 39,837 30,016
Deferred policy acquisition costs 77,991 67,087
Accrued investment income and other assets 48,276 38,908
Due from affiliate 38,839 -
Net prepaid pension expense 46,156 43,344
Reinsurance recoverable on losses and loss expenses payable 11,022 13,919
Prepaid reinsurance premiums 7,539 4,955
Federal income taxes:
Current 4,511 1,549
Deferred - 13,800
Property and equipment 12,852 13,250
Goodwill 2,012 2,012
---------- ----------
Total assets $1,560,107 $1,367,496
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable $589,776 $523,860
Unearned premiums 380,513 329,495
Notes payable to affiliates 60,500 45,500
Postretirement benefit liabilities 65,269 57,237
Other liabilities 11,508 5,059
Deferred federal income taxes 443 -
Due to affiliates - 6,152
---------- ----------
Total liabilities 1,108,009 967,303
---------- ----------
Commitments and contingencies - -
Stockholders' equity:
Class A Preferred stock (nonvoting), without par value. Authorized 2,500,000
shares; none issued - -
Class B Preferred stock, without par value. Authorized 2,500,000 shares;
none issued - -
Common stock, without par value. Authorized 100,000,000 shares;
43,389,838 and 43,045,320 shares issued, respectively, at stated
value of $2.50 per share 108,475 107,613
Less 4,421,974 and 4,108,230 treasury shares, respectively, at cost (52,646) (47,613)
Additional paid-in capital 49,444 47,106
Accumulated comprehensive income 49,374 12,030
Retained earnings 297,451 281,057
---------- ----------
Total Stockholders' equity 452,098 400,193
---------- ----------
Total liabilities and stockholders' equity $1,560,107 $1,367,496
========== ==========
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 2002 and 2001
(dollars in thousands, except per share amounts)
(unaudited)
2002 2001
------- -------
Earned premiums $230,059 $138,663
Net investment income 14,766 11,623
Management services income from affiliates 693 4,991
Net realized gain on investments 700 604
Other income (includes $233 and $366,
respectively, from affiliates) 744 790
------- -------
Total revenues 246,962 156,671
------- -------
Losses and loss expenses 170,009 105,684
Acquisition and operating expenses 68,816 40,203
Interest expense to affiliate 541 569
Other expense, net 2,468 2,186
------- -------
Total expenses 241,834 148,642
------- -------
Income before federal income taxes 5,128 8,029
Federal income tax expense (benefit) (757) 753
------- -------
Net income $5,885 $7,276
======= =======
Earnings per share:
- basic $0.15 $0.19
======= =======
- diluted $0.15 $0.18
======= =======
Dividends paid per common share $0.035 $0.033
======= =======
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2002 and 2001
(dollars in thousands, except per share amounts)
(unaudited)
2002 2001
------- -------
Earned premiums $664,238 $345,540
Net investment income 44,214 32,359
Management services income from affiliate 1,866 14,875
Net realized gains on investments 854 2,421
Other income (includes $493 and $1,273,
respectively, from affiliates) 1,972 2,510
------- -------
Total revenues 713,144 397,705
------- -------
Losses and loss expenses 493,749 249,173
Acquisition and operating expenses 195,209 102,090
Interest expense to affiliate 1,621 1,706
Other expense, net 6,887 5,481
------- -------
Total expenses 697,466 358,450
------- -------
Income before federal income taxes 15,678 39,255
Federal income tax expense (benefit) (1,986) 8,006
------- -------
Net income $17,664 $31,249
======= =======
Net earnings per share:
- basic $0.45 $0.80
======= =======
- diluted $0.44 $0.78
======= =======
Dividends paid per common share $0.100 $0.093
======= =======
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2002 and 2001
(in thousands)
(unaudited)
2002 2001
------- -------
Cash flows from operating activities:
Net income $17,664 $31,249
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization, net 4,075 1,985
Net realized gains on investments (854) (2,421)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (10,904) (4,361)
Accrued investment income and other assets (9,554) (9,705)
Net prepaid pension expense (1,603) (3,750)
Postretirement health care benefits 3,192 992
Other liabilities and due to/from affiliate, net (23,542) 1,038
Reinsurance receivable and prepaid reinsurance premiums 313 (1,434)
Losses and loss expenses payable 65,916 9,120
Unearned premiums 51,018 22,292
Federal income taxes (8,031) (1,694)
------- -------
87,690 43,311
Transfer of MIGI employee related net liabilities, effective 1/1/02 3,631 -
Cash provided from adding the former Meridian Mutual Insurance Company
business to the reinsurance pool, effective 7/1/01 - 6,380
------- -------
Net cash provided by operating activities 91,321 49,691
------- -------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (356,525) (184,414)
Purchase of equity securities (22,130) (15,709)
Purchase of other invested assets (1,549) -
Maturities, calls and principal reductions of fixed maturities -
held to maturity 7,017 9,970
Maturities, calls and principal reductions of fixed maturities -
available for sale 27,715 32,854
Sale of fixed maturities - available for sale 258,241 102,526
Sale of equity securities 9,778 8,138
Net additions of property and equipment - (677)
------- -------
Net cash used in investing activities (77,453) (47,312)
------- -------
Cash flows from financing activities:
Net proceeds from the sale of common stock 1,922 1,527
Payment of dividends (1,270) (1,155)
Payments to acquire treasury shares (4,699) -
------- -------
Net cash provided by (used in) financing activities (4,047) 372
------- -------
Net increase in cash and cash equivalents 9,821 2,751
Cash and cash equivalents at beginning of period 30,016 21,305
------- -------
Cash and cash equivalents at end of period $39,837 $24,056
======= =======
Supplemental disclosures:
Federal income taxes paid $6,000 $9,700
======= =======
Interest paid to affiliate $1,621 $1,706
======= =======
Fixed maturities - available for sale, provided from adding the former
Meridian Mutual Ins. Co., business to the reinsurance pool 7/1/01 - $109,699
======= =======
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(in thousands, except per share amounts)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of State
Auto Financial Corporation ("State Auto Financial" or the "Company") have been
prepared in accordance with Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the U.S. for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002. The balance sheet at December 31, 2001 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries' annual
report on Form 10-K for the year ended December 31, 2001. Capitalized terms used
herein and not otherwise defined shall have the meaning ascribed to them in the
foregoing Form 10K.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001 (Statements). Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. Effective January 1, 2002, the Company implemented the new rules
in accordance with the Statements. As part of the implementation, the Company
performed the requisite transitional impairment tests for goodwill. The adoption
of the Statements did not materially impact the Company's financial position or
results of operations.
Effective January 1, 2002, employees of the Meridian Insurance Group, Inc.
(MIGI), a subsidiary of the former Meridian Mutual, became employees of State
Auto P&C. In conjunction with this transaction approximately $3.6 million in net
plan benefit liabilities were transferred from MIGI to the Company.
2. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows:
Three months ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
------- ------- ------- -------
Net income $ 5,885 $ 7,276 $17,664 $31,249
Unrealized holding gains (losses), net of tax 25,225 (2,383) 37,344 1,686
------- ------- ------- -------
Comprehensive income $31,110 $ 4,893 $55,008 $32,935
======= ======= ======= =======
The components of accumulated other comprehensive income, net of related tax,
included in stockholders' equity at September 30, 2002 and December 31, 2001
include only unrealized holding gains (losses), net of tax.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(in thousands, except per share amounts)
(unaudited)
3. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
Three months ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
------- ------- ------- -------
Numerator:
Net income for basic and diluted
Earnings per share $ 5,885 $ 7,276 $17,664 $31,249
------- ------- ------- -------
Denominator:
Weighted average shares for
Basic earnings per share 38,993 38,460 38,989 38,737
Effect of dilutive stock options 729 878 787 927
Adjusted weighted average shares
For diluted earnings per share 39,722 39,725 39,776 39,664
------- ------- ------- -------
Basic earnings per share $ 0.15 $ 0.19 $ 0.45 $ 0.80
------- ------- ------- -------
Diluted earnings per share $ 0.15 $ 0.18 $ 0.44 $ 0.78
------- ------- ------- -------
The following options to purchase shares of common stock were not included in
the computation of diluted earnings per share because the exercise price of the
options was greater than the average market price:
Three months ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
------- ------- ------- -------
Number of options 911,175 536,400 911,175 536,400
======= ======= ======= =======
4. REINSURANCE
The following provides the income statement transactions for ceded reinsurance
information for transactions with other insurers and reinsurers as well as the
ceded reinsurance transaction for the Pooling Arrangement between the Company's
Pooled Subsidiaries and Mutual:
Three months ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
-------- -------- -------- --------
Premiums earned:
Other insurers and reinsurers $ 5,755 $ 3,730 $ 15,513 $ 9,814
Ceded under Pooling Arrangement 126,787 107,821 362,626 314,539
Losses and loss expenses incurred:
Other insurers and reinsurers $ 2,730 $ 1,216 $ 7,037 $ 3,750
Ceded under Pooling Arrangement 80,341 73,458 264,519 225,275
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(in thousands, except per share amounts)
(unaudited)
4. REINSURANCE - CONTINUED
Under the Stop Loss, for the three months ended September 30, 2002, the Pooled
Subsidiaries ceded to Mutual $2.4 million in losses and for the nine months
ended September 30, 2002, $8.8 million in losses and $0.4 million in premiums
earned.
5. SEGMENT INFORMATION
Effective October 1, 2001, the management agreement between State Auto P&C and
certain affiliate companies, including Mutual, was amended to eliminate the
management and operations service fee charged by State Auto P&C. As a result of
the loss of the management and operations services income under this management
agreement, substantially all of State Auto P&C's services income has been
eliminated. Consequently, beginning with the first quarter 2002, the management
and operations services segment will be included in the "all other" category for
segment reporting as the result of this segment no longer meeting the
quantitative thresholds for separate presentation as a reporting segment. The
segment disclosures for the three months and nine months ended September 30,
2001 have been restated to reflect this change.
Three months ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues from external customers:
State Auto standard insurance $ 184,851 $ 108,463 $ 529,247 $ 319,116
State Auto nonstandard insurance 18,167 9,856 47,797 26,540
Meridian standard insurance 39,915 28,917 123,402 28,917
Meridian nonstandard insurance 1,838 2,891 7,753 2,891
Investment management services 581 947 1,896 2,662
All other 902 4,975 2,178 15,121
--------- --------- --------- ---------
Total revenues from external customers 246,254 156,049 712,273 395,247
========= ========= ========= =========
Intersegment revenues:
Standard insurance $ 37 $ 23 $ 83 $ 104
Investment management services 1,278 923 3,675 2,497
All other 528 1,637 1,664 4,877
--------- --------- --------- ---------
Total intersegment revenues 1,843 2,583 5,422 7,478
========= ========= ========= =========
Segment profit (loss):
State Auto standard insurance $ 9,244 $ 8,969 $ 23,409 $ 25,565
State Auto nonstandard insurance (411) 215 1,288 989
Meridian standard insurance (5,866) (5,912) (14,429) (5,912)
Meridian nonstandard insurance (189) (2,016) 287 (2,016)
Investment management services 1,712 1,536 4,967 4,324
All other 576 5,485 1,292 16,104
--------- --------- --------- ---------
Total segment profit 5,066 8,276 16,814 39,054
Reconciling items:
Corporate expenses (638) (851) (1,990) (2,220)
Net realized gains 700 604 854 2,421
--------- --------- --------- ---------
Total consolidated income before
federal income taxes $ 5,128 $ 8,029 $ 15,678 $ 39,255
========= ========= ========= =========
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(in thousands, except per share amounts)
(unaudited)
5. SEGMENT INFORMATION - CONTINUED
September 30
------------
2002 2001
---------- ----------
Segment assets:
Standard insurance 1,415,812 997,021
Nonstandard insurance 96,756 60,438
Investment management services 7,168 10,632
All other 16,636 17,803
---------- ----------
Total segment assets $1,536,372 $1,085,894
========== ==========
6. TRANSACTIONS WITH AFFILIATES
Effective September 30, 2002 Milbank (a STFC subsidiary) entered into a $15.0
million surplus contribution note with Meridian Security Insurance Company, a
subsidiary of MIGI (a State Auto Mutual subsidiary). This note is to be funded
with cash during the fourth quarter of 2002. Subject to the condition described
below and the other terms of the note, the maturity date is September 30, 2012.
The interest rate is equal to the U.S. Treasury ten-year note yield at September
30, 2002 plus 100 basis points (total 4.59%) and is adjustable October 1, 2007
to the then current U.S. Treasury ten-year note yield plus 100 basis points for
the remaining term of the note. Interest is accrued, but all payments of
principal or interest may be made only with the prior written approval of the
South Dakota Director of Insurance. Interest is scheduled to be paid
semiannually in arrears starting March 30, 2003.
7. RECLASSIFICATIONS
Certain items in the 2001 condensed consolidated financial statements have been
reclassified to conform to the 2002 presentation.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For information regarding the Company's significant accounting policies as well
as discussion regarding its critical accounting policies, refer to the
Management's Discussion and Analysis of Financial Condition and Results of
Operations as well as the consolidated financial statements and footnotes
thereto included in the Company and Subsidiaries annual report on Form 10-K for
the year ended December 31, 2001.
Results of Operations
- ---------------------
As more fully described in the Company's December 31, 2001 Form 10-K, following
is a summary of several transactions that occurred in the second half of 2001
that will assist in the discussion of the Company's current period financial
results:
- Effective June 1, 2001, Mutual entered into an agreement with Meridian
Mutual Insurance Company ("Meridian Mutual"), pursuant to which
Meridian Mutual was merged with and into Mutual, with Mutual
continuing as the surviving corporation. With the merging of Meridian
Mutual into Mutual, all insurance business that had been written by
Meridian Mutual became, legally, Mutual business. Effective July 1,
2001, the insurance business of the former Meridian Mutual became part
of the Pooling Arrangement and the Pooled Subsidiaries assumed 53% of
the Meridian Mutual business on this same date. Concurrent with this
transaction, the Pooled Subsidiaries received cash of $6.4 million and
fixed maturities totaling $109.7 million, which related to the
additional net insurance liabilities assumed by the Pooled
Subsidiaries on July 1, 2001. This former Meridian Mutual business
assumed by the Pooled Subsidiaries comprises the Company's "Meridian
standard" and "Meridian nonstandard" segments.
- On October 24, 2001, the boards of directors of the Company and Mutual
and special independent committees thereof approved a resolution of
the disagreement between the Company and the Ohio Department of
Insurance ("ODI") regarding the service fee paid by Mutual to State
Auto P&C under the Mutual Management Agreement. The disagreement with
ODI was resolved and ODI expressly did not take issue with Mutual's
payment of the service fee for the first three quarters of 2001, nor
with Mutual's accounting for the service fee in each of those
quarters. The ODI also approved regulatory filings, effective October
1, 2001, which implemented a revised Mutual Management Agreement,
changed the Pooled Subsidiaries' aggregate pooling participation
percentage and implemented an inter-company stop loss reinsurance
arrangement. The following describes these changes, effective October
1, 2001:
- The Mutual Management Agreement was amended to eliminate the
management and operations services fee charged by State Auto P&C
to participants to the agreement, including Mutual. As a result
of the loss of the management and operations services income
under the Mutual Management Agreement, substantially all of State
Auto P&C's services income has been eliminated, effective October
1, 2001.
- The Pooling Arrangement was amended such that the Pooled
Subsidiaries' aggregate participation was increased from 53% to
80%. In conjunction with this change in pool participation, the
Pooled Subsidiaries received cash of $2.2 million and fixed
maturities totaling $236.3 million from Mutual, which related to
the additional net insurance liabilities assumed by the Pooled
Subsidiaries on October 1, 2001.
- For the period October 1, 2001 through December 31, 2003, Mutual
entered into a stop loss reinsurance arrangement (the "Stop
Loss") with the Pooled Subsidiaries. Under the Stop Loss, Mutual
has agreed to participate in the Pooling Arrangement's quarterly
underwriting losses and gains in the manner described. If the
Pooling Arrangement's quarterly statutory loss and loss
adjustment expense ratio (the "Pool
loss and LAE ratio") is between 70.75% and 80.00% (after the
application of all available reinsurance), Mutual will reinsure
the Pooled Subsidiaries 27% of the Pooling Arrangement's losses
in excess of a Pool loss and LAE ratio of 70.75% up to 80.00%.
The Pooled Subsidiaries would be responsible for their share of
the Pooling Arrangement's losses over the 80.00% threshold. Also,
Mutual will have the right to participate in the profits of the
Pooling Arrangement. Mutual will assume 27% of the Pooling
Arrangement's underwriting profits attributable to Pool loss and
LAE ratios less than 69.25%, but more than 59.99%.
Effective January 1, 2002, employees of the Meridian Insurance Group, Inc., a
subsidiary of the former Meridian Mutual, became employees of State Auto P&C. In
conjunction with this transaction approximately $3.6 million in net plan benefit
liabilities were transferred from MIGI to the Company.
Income before federal income taxes decreased $2.9 million to $5.1 million and
$23.5 million to $15.7 million for the three months and nine months ended
September 30, 2002, respectively, from the same 2001 periods. Contributing to
the quarterly and year to date decreases were the loss results of the former
Meridian Mutual business as well as an increase in the level of catastrophe
losses within the standard segment during 2002 as compared to the same periods
in 2001. Each of the events described above affects the period to period
comparison set forth in this paragraph.
Consolidated earned premiums during the quarter ended September 30, 2002,
increased $91.4 million or 65.9% to $230.1 million from the same 2001 period and
for the nine months ended September 30, 2002, increased $318.7 million or 92.3%
to $664.2 million from the same 2001 period. The three month increase was
largely the result of a change in the Pooled Subsidiaries aggregate pooling
participation from 53% to 80%, effective October 1, 2001. The nine month
increase was also impacted by the October 1, 2001 pooling participation change
as well as the addition of the former Meridian Mutual business to the Pooling
Arrangement, effective July 1, 2001. These actions increased consolidated earned
premiums 47.3% and 73.1% for the three months and nine months ended September
30, 2002, respectively, from the same 2001 periods.
The internal growth of the Company's State Auto standard segment's earned
premiums increased consolidated earned premiums 17.4% and 16.8% for the three
months and nine months ended September 30, 2002, respectively, from the same
2001 periods. This segment continued to experience an increase in production
levels in its commercial lines of business due to a combination of rate changes
as well as increased policy counts. The increased sales in its personal lines
business, which began in late 2001 have continued. This reflects changes in the
marketplace, which permitted rate increases, as well as the expansion of the new
personal lines sales specialist position, which has contributed to increased
policy counts. Production levels within the Company's State Auto nonstandard
segment continued to increase, due to a combination of rate changes as well as
increased policy counts. This segment's earned premiums increased consolidated
earned premiums 5.9% and 6.1% for the three months and nine months ended
September 30, 2002, respectively, from the same 2001 periods.
The internal growth of the Meridian standard and nonstandard segments decreased
consolidated earned premiums 2.9% and 2.2%, and 1.8% and 1.5% for the three
months and nine months ended September 30, 2002, respectively, from the same
2001 periods. These decreases are not unexpected, given the corrective actions
taken by management in both these segments, which actions include appropriate
and necessary rate increases in almost every line of business. Additionally, as
more fully described in the Company's December 31, 2001 Form 10-K and March 31,
2002 Form 10-Q, one of the more significant actions taken within the Meridian
standard segment, was the discontinuance of the Group Advantage(R) Program. At
the end of 2001, there were approximately 800 such policies in force. At
September 30, 2002, there were approximately 6 such policies in force. Regarding
the Meridian nonstandard segment, in addition to taking significant corrective
rate action, beginning in late 2001, the company implemented an integration plan
to write all new nonstandard auto business produced by the former Meridian
agents through the State Auto nonstandard segment, specifically through National
on the National system platform utilizing a more appropriate rating structure as
well as credit scoring and "point-of-sale" underwriting tools. The order of
integration had been prioritized such that the states with the most need for
profit improvement migrated to National first. For all Meridian nonstandard auto
states, all new business is now being written through the State Auto nonstandard
segment. The business that remains within the Meridian nonstandard segment is
expected to decrease given this segment's historical low retention rate as well
as the Company continuing to take appropriate rate increases.
Net investment income increased $3.1 million or 27.0% to $14.8 million and $11.9
million or 36.7% to $44.2 million for the three month and nine month periods
ended September 30, 2002, respectively, from the same 2001 periods. Invested
assets, at cost, at September 30, 2002 were $1,232.7 million versus $877.6
million at September 30, 2001. Invested assets increased primarily due to the
transfer of cash and fixed maturity securities from Mutual totaling $354.6
million to the Pooled Subsidiaries in conjunction with the Pooled Subsidiaries
assuming 53% of the former Meridian Mutual business on July 1, 2001 and the
change in the Pooled Subsidiaries aggregate pooling participation, effective
October 1, 2001, from 53% to 80%. Reflecting a decline in the interest rate
environment, the investment yield, based on fixed and equity securities at cost,
decreased from 5.3% to 4.9% and from 5.4% to 5.0% for the three month and nine
month periods ended September 30, 2002, respectively, from the same 2001
periods.
Net realized gain on investments was $0.7 million and $0.6 million, and $0.9
million and $2.4 million for the three month and nine month periods ended
September 30, 2002, respectively, from the same 2001 periods. Included in the
net gain on investments was $1.1 million realized loss recognized due to other
than temporary impairment of three equity securities for both the three month
and nine month periods ended September 30, 2002. The Company continually
monitors its investments that have fair value less than carrying amount for
signs of other than temporary impairment. Factors such as amount, timing, length
of decline in fair value, events impacting the issuer, among others, are
considered when determining its investment impairment.
Management services income decreased $4.3 million to $0.7 million and $13.0
million to $1.9 million for the three month and nine month periods ending
September 30, 2002, respectively, from the same 2001 periods. This decrease, as
discussed above, is largely the result of the resolution of the disagreement
between the Company and ODI regarding the service fee paid by Mutual to State
Auto P&C. The service fee under the 2000 Mutual Management Agreement paid by
Mutual for the three month and nine month periods ended September 30, 2001 was
approximately $4.2 million and $12.6 million, respectively.
Consolidated losses and loss expenses, as a percentage of earned premiums (the
"GAAP loss and LAE ratio"), was 73.9% for the three months ended September 30,
2002 and 76.2% for the same 2001 period and for the nine months ended September
30, 2001, was 74.3% and 72.1% for the same 2001 period. During the three months
ended September 30, 2002 and the three months ended June 30, 2002, the Pooled
Companies produced a Pool loss and LAE ratio under the Stop Loss (described
above) that exceeded the 70.75% threshold, thereby recovering $2.4 million and
$6.4 million, respectively, (total of $8.8 million for the nine months ended
September 30, 2002) from Mutual, while in the first quarter of 2002, the Pooled
Companies Pool loss and LAE ratio was less than 69.25%, but more than 59.99%,
thereby ceding to Mutual, under the Stop Loss $0.4 million in earned premiums.
The cession activity through the Stop Loss had the effect of lowering the
current three and nine-month GAAP loss and LAE ratios by 1.0 point and 1.3
points, respectively.
The decrease in the current three month period consolidated GAAP loss and LAE
ratio was largely the result of management's efforts over the last year to
improve the performance of the Meridian book of business. It should also be
noted that the third quarter of 2001, with which the current quarter is
compared, was adversely impacted by the loss results of the former Meridian
Mutual business assumed by the Pooled Subsidiaries, which included case reserve
strengthening on claims occurring in accident periods prior to the third quarter
2001. This case reserve strengthening contributed approximately 4.1 points to
the GAAP loss and LAE ratio for the third quarter of 2001. The third quarter
2002 GAAP loss and LAE ratio also reflects deterioration in the GAAP loss and
LAE ratio of the State Auto book of business. This is at least partly
attributable to the increase in new unit sales which helped drive the
significant premium growth this book of business has experienced over the last
twelve months, specifically on its commercial lines business.
The increase in the current nine month period consolidated GAAP loss and LAE
ratio was impacted by several factors. As noted above, during 2001 the former
Meridian Mutual business was added to the Pooling Arrangement effective July 1,
2001, which impacted the loss results of the Company for only three months out
of the nine month 2001 period, whereas in 2002, the former Meridian Mutual
business is included in the entire year to date results. While the Meridian
standard business has improved, as reflected below, this business continues to
produce loss results worse than that of the State Auto book of business,
thereby adversely impacting the overall Company GAAP loss and LAE ratio.
Additionally,
during 2002, catastrophe storm losses exceeded 2001 levels, increasing the GAAP
loss and LAE ratio by approximately 1.6 points.
For discussion purposes, the following table provides comparative GAAP loss and
LAE ratios for the Company's insurance operating segments for the three and nine
month periods ended September 30, 2002 and 2001, respectively:
Three months ended Nine months ended
September 30 September 30
------------ ------------
GAAP Loss and LAE Ratio 2002 2001 2002 2001
------ ------ ------ ------
Segments:
State Auto standard insurance 69.2 67.4 70.4 68.4
State Auto nonstandard insurance 88.6 77.3 82.2 75.3
Meridian standard insurance 88.8 102.5 87.5 102.5
Meridian nonstandard insurance 74.9 127.7 79.0 127.7
------ ------ ------ ------
Total GAAP Loss and LAE Ratio 73.9 76.2 74.3 72.1
====== ====== ====== ======
The State Auto standard segment GAAP loss and LAE ratios for the current three
month and nine month periods increased from the same 2001 periods. Catastrophe
losses represent 3.4 points and 6.4 points of this segment's loss results for
the three month and nine month periods ended September 30, 2002, respectively,
compared to 2.9 points and 5.6 points for the same periods ended September 30,
2001. Also contributing to the current periods' increases were adverse loss
results on workers' compensation, commercial multi peril and other liability
lines of business, which collectively represents approximately 18% of this
segment's business. Workers' compensation continues to be one of the most
volatile lines that the Company provides and for this reason the Company has
always maintained a conservative posture on pricing. The Company is in the
process of taking substantial and necessary increases in rate per exposure
across this entire line of business, including the Meridian standard segment.
The State Auto nonstandard segment GAAP loss and LAE ratios for the current
three month and nine month periods increased from the same 2001 periods. This
segment has been experiencing more volatility in its quarterly loss ratio,
especially in those states where it has been experiencing substantial top line
growth within the last year due to policy count increases. Management has been
monitoring the premium rate adequacy in these growth states, as well as risks
written in the growing agencies, and is reacting accordingly by increasing rates
and working with those agencies regarding risk selection. Contributing to the
year to date increase were several unusually large losses experienced by this
segment in the first quarter of 2002 as compared to the same time period in
2001.
The Meridian standard segment's GAAP loss and LAE ratios for the current three
month and nine month periods decreased from the three month period ended
September 30, 2001. Catastrophe losses represent 5.9 points and 9.7 points of
this segment's loss results for the three month and nine month periods ended
September 30, 2002, respectively, compared to 3.6 points for the three month
period ended September 30, 2001. As previously noted, both Meridian segments
were impacted in 2001 by case reserve strengthening that occurred during the
third quarter of 2001, totaling approximately $5.7 million. Despite the
significant improvements, the Meridian standard segment continues to produce
worse results than the State Auto standard segment. The Meridian non-standard
segment's GAAP loss and LAE ratio for the current three month and nine month
periods decreased from the three month period ended September 30, 2001. Largely
contributing to these improvements have been the substantial rate increases the
Company began rolling out in late 2001. Despite these improvements, the Company
continues to seek adequate cost-based rates on the entire Meridian book and is
still in the process of re-underwriting much of it to be certain risks written
fall within State Auto guidelines.
Acquisition and operating expenses, as a percentage of earned premiums (the
"expense ratio"), did not fluctuate significantly from the same 2001 time
periods. The expense ratio increased to 29.9% for the quarter ended September
30, 2002 from 29.0% for the same 2001 period and for the nine months ended
September 30, 2002, decreased to 29.4% from 29.5% for the same 2001 period. The
Company believes that the year to date expense ratio better reflects overall
performance and management's efforts to control expenses.
Interest expense relates to the Credit Agreement. Based on terms of the Credit
Agreement, the interest rate adjusts annually. In 2002 the interest rate is
4.75% compared to 5.0% in 2001. See additional
discussion in Liquidity and Capital Resources section regarding Mutual's
assignment of the Credit Agreement to State Auto P&C.
During the three month and nine month periods ended September 30, 2002, the
Company experienced an underwriting loss on its insurance operations, as
described above. This underwriting loss, coupled with net investment income
being largely comprised of tax-exempt income, produced an effective tax expense
(benefit) rate of (14.8%) and (12.7%) for the three month and nine month periods
ended September 30, 2002, respectively, compared to 9.4% and 20.4% for the same
2001 periods, respectively.
Liquidity and Capital Resources
- -------------------------------
Through the nine months ended September 30, 2002, net cash provided by operating
activities increased to $91.3 million from $49.7 million in 2001. The increase
in cash flow from operations in 2002 is largely attributable to an increase in
the Company's pool participation percentage, as described above. Net cash used
in investing activities increased to $77.5 million from $47.3 million. For both
time periods, the Company invested unallocated cash generated by operations to
long-term investments. Overall, net cash provided (used) in financing activities
decreased to ($4.0) million from $0.4 million in 2001. This change was primarily
due to cash used to acquire treasury shares under the Company's stock repurchase
plan. On March 1, 2002, the Board of Directors of State Auto Financial approved
a plan to repurchase up to 1.0 million shares of its common stock from the
public over a period extending to and through December 31, 2003. Through
September 30, 2002, 293,000 shares were repurchased under this plan at an
average price per share of $16.01 for a total $4,699,000.
As of September 30, 2002, funds consisting of cash and cash equivalents were
$39.8 million versus $24.1 million at September 30, 2001.
Effective September 30, 2002 Milbank (a STFC subsidiary) entered into a $15.0
million surplus contribution note with Meridian Security Insurance Company, a
subsidiary of MIGI (a State Auto Mutual subsidiary). This note is to be funded
with cash during the fourth quarter of 2002. Subject to the condition described
below and other terms of the note, the maturity date is September 30, 2012. The
interest rate is equal to the U.S. Treasury ten-year note yield at September 30,
2002 plus 100 basis points (total 4.59%) and is adjustable October 1, 2007 to
the then current U.S. Treasury ten-year note yield plus 100 basis points for the
remaining term of the note. Interest is accrued, but all payments of principal
or interest may be made only with the prior written approval of the Director.
Interest is scheduled to be paid semiannually in arrears starting March 30,
2003.
The purpose of this surplus contribution note is to lower Milbank's net written
premium to statutory surplus ratio. The increase in Milbank's ratio has resulted
from an unusual rate of premium written growth over the last twelve months due
to a combination of increased top line growth and an increase in the company's
pooling participation percentage, effective October 1, 2001 (Milbank's pooling
percentage increased from 10% to 17%), along with the addition of the former
Meridian Mutual business to the State Auto Pool, effective July 1, 2001. Also
affecting this ratio has been the increased losses sustained by the company
during the period of transition of the former Meridian Mutual book of business.
At September 30, 2002, National's and State Auto P&C's statutory net written
premium to surplus ratios were 3.94 to 1.00 and 2.96 to 1.00, respectively.
Management believes these statutory leverage ratios are higher than is optimal
and intends to address them. The increase in National's statutory net written
premium to surplus ratio in 2002 is a result of its unusually large increase in
top line growth. The increase in State Auto P&C's ratio has resulted from an
unusual rate of premium written growth over the last twelve months due to a
combination of increased top line growth and an increase in its pooling
participation percentage, effective October 1, 2001, from 39% to 49%, along
with the addition of the former Meridian Mutual business to the State Auto
Pool, effective July 1, 2001. Also affecting this ratio has been the increased
losses sustained by State Auto P&C during this period of transition of the
former Meridian Mutual book of business. To improve the statutory leverage
position of National and State Auto P&C, during the fourth quarter of 2002,
management anticipates State Auto Financial pursuing bank debt or other forms
of financing to infuse additional capital into these companies, in the amounts
of approximately $25.0 million and $95.0 million, respectively.
New Accounting Standards
- ------------------------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001 (Statements). Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. Effective January 1, 2002, the Company implemented the new rules
in accordance with the Statements. As part of the implementation, the Company
performed the requisite transitional impairment tests for goodwill. The adoption
of the Statements did not materially impact the Company's financial position or
results of operations.
Market Risk
- -----------
With respect to Market Risk, see the discussion regarding this subject in the
Company's December 31, 2001 Management's Discussion and Analysis of Financial
Condition and Results of Operations, included in the December 31, 2001 Form
10-K. There have been no material changes from the information reported
regarding Market Risk in the 2001 Form 10-K.
FORWARD-LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
Statements contained in this Form 10-Q or any other reports or documents
prepared by the Company or made by management may be "forward-looking" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause the Company's actual results to differ materially from those
projected. Forward-looking statements may be identified, preceded by, followed
by, or otherwise include, without limitation, words such as "plans," "believes,"
"expects," "anticipates," "intends," "estimates," or similar expressions. The
following factors, among others, in some cases have affected and in the future
could affect the Company's actual financial performance.
In addition to the acquisition of the Meridian Insurers and Mutual's merger with
Meridian Mutual as discussed above, during the past several years, Mutual and
the Company have acquired other insurance companies, such as Milbank, Farmers
Casualty, and Midwest Security, and it is anticipated that Mutual and the
Company will continue to pursue acquisitions of other insurance companies in the
future. Acquisitions involve numerous risks and uncertainties, including the
following: obtaining necessary regulatory approvals of the acquisition may prove
to be more difficult than anticipated; integrating the acquired business may
prove to be more costly or difficult than anticipated; integrating the acquired
business without material disruption to existing operations may prove to be more
difficult than anticipated; anticipated cost savings may not be fully realized
(or not realized within the anticipated time frame) or additional or unexpected
costs may be incurred; loss results of the Company acquired may be worse than
expected; and retaining key employees of the acquired business may prove to be
more difficult than anticipated. In addition, other companies in the insurance
industry have similar acquisition strategies. There can be no assurance that any
future acquisitions will be successfully integrated into the Company's
operations, that competition for acquisitions will not intensify or that the
Company will be able to complete such acquisitions on acceptable terms and
conditions. In addition, the costs of unsuccessful acquisition efforts may
adversely affect the Company's financial performance.
Other risk factors include, without limitation, the following:
- The Company's financial results are subject to the occurrence of
weather-related and other types of catastrophic events, none of which
are within the Company's control.
- The Company's operations are subject to changes occurring in the
legislative, regulatory and judicial environment. Risks and
uncertainties related to the legislative, regulatory, and judicial
environment include, but are not limited to, legislative changes at
both the state and federal level, state and federal regulatory
rulemaking promulgations and adjudications that may affect the Company
specifically, its affiliates or the industry generally, class action
and other litigation involving the Company, its affiliates, or the
insurance industry generally and judicial decisions affecting claims,
policy coverages and the general costs of doing business. Many of
these changes are beyond the Company's control.
- The laws of the various states establish insurance departments with
broad regulatory powers relative to approving intercompany
arrangements, such as management, pooling, and investment management
agreements, granting and revoking licenses to transact business,
regulating trade practices, licensing agents, approving policy forms,
setting reserve requirements, determining the form and content of
required statutory financial statements, prescribing the types and
amount of investments permitted and requiring minimum levels of
statutory capital and surplus. In addition, although premium rate
regulation varies among states and lines of insurance, such
regulations generally require approval of the regulatory authority
prior to any changes in rates. Furthermore, all of the states in which
the State Auto Group transacts business have enacted laws, which
restrict these companies' underwriting discretion. Examples of these
laws include restrictions on agency terminations and laws requiring
companies to accept any applicant for automobile insurance and laws
regulating underwriting "tools." These laws may adversely affect the
ability of the insurers in the State Auto Group to earn a profit on
their underwriting operations.
- The property and casualty insurance industry is highly competitive.
While prices have generally increased in most lines, price competition
continues. The Company competes with numerous insurance companies,
many of which are substantially larger and have considerably greater
financial resources. In addition, because the Company's products are
marketed exclusively through independent insurance agencies, most of
which represent more than one company, the Company faces competition
within each agency. The Company competes through underwriting
criteria, appropriate pricing, and quality service to the policyholder
and the agent and through a fully developed agency relations program.
See "Marketing" in the "Narrative Description of Business" in Item 1
of the Company's December 31, 2001 Form 10-K.
- The Company is subject to numerous other factors which affect its
operations, including, without limitation, the development of new
insurance products, geographic spread of risk, fluctuations of
securities markets, economic conditions, technological difficulties
and advancements, availability of labor and materials in storm hit
areas, late reported claims, previously undisclosed damage, utilities
and financial institution disruptions, and shortages of technical and
professional employees.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption "Market
Risk" under Item 2 - Management's Discussion and Analysis of Financial
Condition.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date of filing of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14.
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the evaluation described in (a), above, was carried out.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
INDEX TO EXHIBITS
Item 6. a. Exhibits
Exhibit No. Description of Exhibits
----------- -----------------------
10(MM) Surplus Contribution Note between Milbank Insurance Company
and Meridian Security Insurance Company dated September 30,
2002
10(NN) Management Services Agreement as of July 1, 2002 by and
among State Auto Property and Casualty Insurance Company,
Meridian Insurance Group, Inc., Meridian Security Insurance
Company, Meridian Citizens Mutual Insurance Company and
Meridian Citizens Security Insurance Company
99.1 CEO certification required by Section 906 of Sarbanes- Oxley
Act of 2002
99.2 CFO certification required by Section 906 of Sarbanes- Oxley
Act of 2002
b. Reports on Form 8-K: None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STATE AUTO FINANCIAL CORPORATION
Date: NOVEMBER 14, 2002 /s/ Steven J. Johnston
----------------- ----------------------------------------
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
CERTIFICATION
I, Robert H. Moone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of State Auto Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: NOVEMBER 14, 2002 /s/ Robert H. Moone
----------------- ---------------------------------
Robert H. Moone
Chief Executive Officer
(Duly Authorized Officer and
Principal Executive Officer)
CERTIFICATION
I, Steven J. Johnston, certify that:
1. I have reviewed this quarterly report on Form 10-Q of State Auto Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: NOVEMBER 14, 2002 /s/ Steven J. Johnston
----------------- --------------------------------------
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)