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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 March 31, 2003
or
( ) Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the Transition period from _______________________ to _____________________
Commission File Number 0-19289
State Auto Financial Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1324304
---------------------------------------------- ----------------
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
518 East Broad Street, Columbus, OH 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
(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 39,166,472
- -------------------------------- -------------------------
(CLASS) (OUTSTANDING ON 05/05/03)
INDEX
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - March 31, 2003 and
December 31, 2002
Condensed consolidated statements of income - Three months
ended March 31, 2003 and 2002
Condensed consolidated statements of cash flows - Three months
ended March 31, 2003 and 2002
Notes to condensed consolidated financial statements -
March 31, 2003
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 share data)
March 31 December 31
ASSETS 2003 2002
----------- -----------
(unaudited) (see note 1)
Fixed maturities, available for sale, at fair value
(amortized cost $1,235,225 and $1,149,334, respectively) $ 1,301,860 $ 1,216,698
Equity securities, available for sale, at fair value
(cost $68,538 and $55,837, respectively) 64,981 53,710
Other invested assets, at fair value (cost $1,857) 1,908 1,908
----------- -----------
Total investments 1,368,749 1,272,316
Cash and cash equivalents 40,121 96,048
Deferred policy acquisition costs 79,161 77,886
Accrued investment income and other assets 52,132 50,788
Due from affiliate 16,075 14,210
Net prepaid pension expense 46,732 46,690
Reinsurance recoverable on losses and loss expenses payable
(ceded to affiliates $3,624 and $4,286, respectively) 8,642 8,825
Prepaid reinsurance premiums
(ceded to affiliates $4,489 and $3,997, respectively) 8,323 7,695
Deferred federal income taxes 4,679 5,796
Property and equipment, at cost, net of accumulated
depreciation of $4,034 and $3,915, respectively 12,660 12,741
----------- -----------
Total assets $ 1,637,274 $ 1,592,995
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable
(net assumed from affiliates $302,658 and $303,960, respectively) $ 604,494 $ 600,958
Unearned premiums
(net assumed from affiliates $128,969 and $133,130, respectively) 382,846 377,990
Note payable (affiliates $60,500) 75,500 75,500
Postretirement benefit liabilities 68,403 66,763
Current federal income taxes 5,224 745
Other liabilities 16,879 7,270
----------- -----------
Total liabilities 1,153,346 1,129,226
----------- -----------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Class A Preferred stock (non voting), 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;
43,741,724 and 43,525,774 shares issued, respectively, at
stated value of $2.50 per share 109,354 108,815
Less 4,579,152 and 4,524,475 treasury shares, respectively, at cost (55,139) (54,249)
Additional paid-in capital 51,667 50,354
Accumulated other comprehensive income 41,096 42,512
Retained earnings 336,950 316,337
----------- -----------
Total stockholders' equity 483,928 463,769
----------- -----------
Total liabilities and stockholders' equity $ 1,637,274 $ 1,592,995
=========== ===========
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2003 and 2002
(dollars in thousands, except per share amounts)
(unaudited)
2003 2002
-------- --------
Earned premiums
(ceded to affiliates $145,212 and $117,625, respectively) $232,375 $212,836
Net investment income 15,709 14,611
Net realized gains on investments 3,845 1,310
Other income (affiliates $890 and $722, respectively) 1,424 1,202
-------- --------
Total revenues 253,353 229,959
-------- --------
Losses and loss expenses
(ceded to affiliates $83,333 and $78,382, respectively) 149,569 147,240
Acquisition and operating expenses 71,688 62,437
Interest expense (affiliates $656 and $540, respectively) 744 540
Other expense, net 2,789 2,441
-------- --------
Total expenses 224,790 212,658
-------- --------
Income before federal income taxes 28,563 17,301
Federal income tax expense 7,499 4,136
-------- --------
Net income $ 21,064 $ 13,165
======== ========
Earnings per share:
- basic $ 0.54 $ 0.34
======== ========
- diluted $ 0.53 $ 0.33
======== ========
Dividends paid per common share $ 0.0350 $ 0.0325
======== ========
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2003 and 2002
(in thousands)
(unaudited)
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 21,064 $ 13,165
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization, net 1,647 1,154
Net realized gains on investments (3,845) (1,310)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (1,276) (2,598)
Accrued investment income and other assets (1,343) (3,680)
Net prepaid pension expense (41) (1,744)
Postretirement health care benefits 1,640 5,918
Other liabilities and due to/from affiliate, net 7,743 (22,438)
Reinsurance receivable and prepaid reinsurance premiums (444) 4,806
Losses and loss expenses payable 3,536 13,712
Unearned premiums 4,856 10,637
Federal income taxes 7,148 4,136
--------- ---------
Net cash provided by operating activities 40,685 21,758
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (185,733) (104,303)
Purchase of equity securities (14,762) (9,291)
Purchase of other invested assets -- (1,549)
Maturities, calls and principal reductions of fixed maturities -
held to maturity -- 1,528
Maturities, calls and principal reductions of fixed maturities -
available for sale 17,498 6,777
Sale of fixed maturities - available for sale 85,537 72,185
Sale of equity securities 1,224 4,305
Net additions of property and equipment (40) --
--------- ---------
Net cash used in investing activities (96,276) (30,348)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 844 79
Payments to acquire treasury shares (729) --
Payment of dividends (451) (413)
--------- ---------
Net cash used in financing activities (336) (334)
--------- ---------
Net decrease in cash and cash equivalents (55,927) (8,924)
Cash and cash equivalents at beginning of period 96,048 30,016
--------- ---------
Cash and cash equivalents at end of period $ 40,121 $ 21,092
========= =========
Supplemental disclosures:
Federal income taxes paid $ 350 --
========= =========
Interest paid (affiliates $829 and $540, respectively) $ 910 $ 540
========= =========
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2003
(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 month period ended March 31, 2003 is
not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. The balance sheet at December 31, 2002 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, 2002. Capitalized terms used
herein and not otherwise defined shall have the meaning ascribed to them in the
foregoing Form 10K.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure, an amendment of SFAS Statement No. 123
Accounting for Stock-Based Compensation. This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, this Statement requires
more prominent disclosures in both the annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has adopted the
disclosure provisions of this Statement and will adopt a transition method at
the time when a consistent fair value measurement and recognition provision is
determined by the FASB and is required to be adopted.
Certain items in the 2002 condensed consolidated financial statements have been
reclassified to conform to the 2003 presentation.
2. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows:
Three months ended
March 31
2003 2002
-------- --------
Net income $ 21,064 $ 13,165
Unrealized holding losses, net of tax (1,416) (2,730)
-------- --------
Comprehensive income $ 19,648 $ 10,435
======== ========
The components of accumulated other comprehensive income, net of related tax,
included in stockholders' equity at March 31, 2003 and 2002 include only
unrealized holding gains (losses), net of tax.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
March 31, 2003
(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
March 31
2003 2002
------- -------
Numerator:
Net income for basic and diluted
Earnings per share $21,064 $13,165
======= =======
Denominator:
Weighted average shares for
Basic earnings per share 39,073 38,966
Effect of dilutive stock options 659 802
------- -------
Adjusted weighted average shares
For diluted earnings per share 39,732 39,768
======= =======
Basic earnings per share $ 0.54 $ 0.34
======= =======
Diluted earnings per share $ 0.53 $ 0.33
======= =======
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
March 31
2003 2002
---- ---
Number of options 550 610
==== ===
4. STOCK BASED COMPENSATION
At March 31, 2003, the company has stock-based employee and non-employee
compensation plans, which are described more fully below. The company accounts
for the employee and non-employee director plans using the intrinsic value
method under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee and director compensation cost is reflected in net income,
as substantially all options granted under these plans have an exercise price
equal to the market value of the underlying common stock on the date of grant.
The company accounts for the remaining non-employee plans using the fair value
method under the recognition and measurement principles of FASB Statement No.
123, Accounting for Stock-Based Compensation, and related interpretations.
Non-employee stock-based compensation cost is reflected in net income. The
following table illustrates the effect on net income and earnings per share if
the company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee and
director compensation.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
March 31, 2003
(in thousands, except per share amounts)
(unaudited)
4. STOCK BASED COMPENSATION (CONTINUED)
Three months ended
March 31
2003 2002
---------- ----------
Net income, as reported $ 21,064 $ 13,165
Deduct: Total stock-based employee and director
compensation expense determined under fair value based
method for all awards, net of related tax effects
(319) (357)
---------- ----------
Pro forma net income $ 20,745 $ 12,808
========== ==========
Earnings per share:
Basic--as reported $ 0.54 $ 0.34
========== ==========
Basic--pro forma $ 0.53 $ 0.33
========== ==========
Diluted--as reported $ 0.53 $ 0.33
========== ==========
Diluted--pro forma $ 0.52 $ 0.32
========== ==========
There were no options granted to employees and directors during the three months
ended March 31, 2003 and 2002. The fair value of options granted during calendar
year 2002 was estimated at the date of grant using the Black-Scholes
option-pricing model. See the 2002 Form 10K for the weighted average fair values
and related assumptions for options granted in calendar year 2002.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and director stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee and director stock options.
The Company has stock option plans for certain key employees, all Company
employees, non-employee directors and certain independent insurance agencies.
The Key Employee's Plan provides that qualified stock options may be granted at
an option price not less than common stock fair market value at date of grant
and that nonqualified stock options may be granted at any price determined by
the Compensation Committee of the Board of Directors. The Company has reserved 5
million shares of common stock under this plan. These options typically vest
over a three year period with one-third vesting at each anniversary date.
Normally, these options are exercisable up to ten years from the date of grant.
The Company has an employee stock purchase plan with a dividend reinvestment
feature, under which employees of the Company may choose at two different
specified time intervals each year to have up to 6% of their annual base
earnings withheld to purchase the Company's common stock. The purchase price of
the stock is 85% of the lower of its beginning-of-interval or end-of-interval
market price. The Company has reserved 2.4 million shares of common stock under
this plan.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
March 31, 2003
(in thousands, except per share amounts)
(unaudited)
4. STOCK BASED COMPENSATION (CONTINUED)
The Non-employee Directors' Plan provides each non-employee director of the
Company an option to purchase (1,500 shares for 2002 and 4,200 shares for 2003)
shares of common stock following each annual meeting of the shareholders at an
option price equal to the common stock fair market value at the close of
business on the last trading day immediately prior to the date of the annual
meeting. The Company has reserved 300,000 shares of common stock under this
plan. These options vest upon grant and are exercisable up to 10 years from the
date of grant.
The company accounts for the remaining non-employee plans described below using
the fair value method under the recognition and measurement principles of FASB
Statement No. 123, Accounting for Stock-Based Compensation, and related
interpretations. Non-employee stock-based compensation cost of $57,000 and
$21,000, respectively for the three month periods ended March 31, 2003 and 2002
is reflected in net income.
The fair value of non-employee options granted was estimated at the reporting
date or vesting date using the Black-Scholes option-pricing model. The weighted
average fair value and related assumptions for the three month periods ended
March 31, 2003 and 2002 are as follows:
Three months ended
March 31
2003 2002
-------- --------
Fair value $ 7.93 $ 6.38
Dividend yield 0.9% 0.9%
Risk free interest rate 3.8% 5.3%
Expected volatility factor 35.3% 34.0%
Expected life in years 9.3 9.4
The Company has a stock option incentive plan for certain designated independent
insurance agencies that represent the Company and its affiliates. The Company
has reserved 400,000 shares of common stock under this plan. The plan provides
that the options become exercisable on the first day of the calendar year
following the agency's achievement of specific production and profitability
requirements over a period not greater than two calendar years from the date of
grant or a portion thereof in the first calendar year in which an agency
commences participation under the plan. Options granted under this plan have a
ten year term.
A summary of the Company's stock option activity and related information for all
option plans for the three month periods ended March 31, 2003 and 2002 is as
follows:
Three months ended
March 31
2003 2002
---- ----
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
(numbers in thousands, except per share figures)
Outstanding, beginning of year 2,791 $10.98 2,797 $ 9.58
Granted 32 15.50 29 16.24
Exercised (216) 4.65 (58) 3.95
Cancelled (18) 16.24 - -
----- -----
Outstanding, end of period 2,589 $11.53 2,768 $ 9.76
===== =====
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
March 31, 2003
(in thousands, except per share amounts)
(unaudited)
4. STOCK BASED COMPENSATION (CONTINUED)
A summary of information pertaining to all options outstanding and exercisable
at March 31, 2003 is as follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
------ ---- ----- ------ -----
(numbers in thousands, except per share figures)
Less than $5.00 67 0.7 $ 4.19 67 $ 4.19
$5.01 - $10.00 775 2.8 6.61 775 6.61
Greater than $10.01 1,747 7.1 13.99 1,142 13.27
----- -----
2,589 5.7 $11.53 1,985 $10.36
===== =====
5. 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
March 31
2003 2002
---- ----
Premiums earned:
Assumed from other insurers and reinsurers $ 1,236 $ 611
Assumed under Pooling Arrangement and
affiliates 217,685 200,696
Ceded to other insurers and reinsurers 3,004 2,304
Ceded under Pooling Arrangement,
Stop Loss and affiliates 145,212 117,625
Losses and loss expenses incurred:
Assumed from other insurers and reinsurers 753 215
Assumed under Pooling Arrangement and
affiliates 133,896 137,447
Ceded to other insurers and reinsurers 487 1,085
Ceded under Pooling Arrangement,
Stop Loss and affiliates $ 83,333 $ 78,382
6. SEGMENT INFORMATION
As the former Meridian Mutual standard and nonstandard business continues to be
written and processed through the Meridian underwriting and claims system
platform, management has monitored this business as separate segments from the
State Auto standard and nonstandard processed business. Monitoring of these
segments separately has been necessary in order to facilitate the integration of
the business as it migrates through new policies and renewals to the State Auto
systems platform in which State Auto policies, pricing, underwriting, and claims
philosophies are fully reflected.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
March 31, 2003
(in thousands, except per share amounts)
(unaudited)
6. SEGMENT INFORMATION (CONTINUED)
Over time, it is anticipated that the Meridian operating segments will decrease
and eventually disappear as they become fully integrated on to the State Auto
systems platform. Due to the integration efforts that occurred within the
Meridian nonstandard segment during 2001 and 2002, beginning with the first
quarter of 2003, the Meridian nonstandard business is included in the State Auto
nonstandard segment.
The segment disclosures for the three month period ended 2002 have been restated
to reflect this change. Interim financial data by segment is as follows:
Three months ended
March 31
2003 2002
-------- ---------
Revenues from external customers:
State Auto standard insurance $ 192,999 $ 168,767
State Auto nonstandard insurance 21,558 16,455
Meridian standard insurance 33,493 42,132
Investment management services 600 672
All other 848 619
---------- ----------
Total revenues from external customers $ 249,498 $ 228,645
========== ==========
Intersegment revenues:
State Auto standard insurance $ 37 $ 23
Investment management services 1,400 1,180
All other 476 584
---------- ----------
Total intersegment revenues $ 1,913 $ 1,787
========== ==========
Segment profit (loss):
State Auto standard insurance $ 16,726 $14,513
State Auto nonstandard insurance 1,982 549
Meridian standard insurance 4,600 (367)
Investment management services 1,668 1,603
All other 535 370
---------- ----------
Total segment profit 25,511 16,668
Reconciling items:
Corporate expenses (793) (677)
Net realized gains 3,845 1,310
Total consolidated income before
federal income taxes $ 28,563 $ 17,301
========== ==========
Segment assets:
Standard insurance $1,499,415 $1,279,012
Nonstandard insurance 107,275 74,838
Investment management services 5,727 9,776
All other 12,813 15,993
---------- ----------
Total segment assets $1,625,230 $1,379,619
========== ==========
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's Annual Report on Form 10-K for the year ended
December 31, 2002.
Results of Operations
This discussion pertains to the following companies: State Auto Financial
Corporation (the "Company") and its wholly owned insurance subsidiaries State
Auto Property & Casualty Insurance Company ("State Auto P&C"), Milbank Insurance
Company ("Milbank"), Farmers Casualty Insurance Company ("Farmers Casualty") and
State Auto Insurance Company of Ohio ("SA Ohio"); which engage in the State Auto
standard insurance segment of the Company's operations, as well as the Meridian
standard insurance segment (defined below). The Company's State Auto nonstandard
segment of operations is conducted through State Auto National Insurance Company
("State Auto National"), a wholly owned subsidiary of the Company and Mid-Plains
Insurance Company ("Mid-Plains") a wholly owned subsidiary of Farmers Casualty.
State Auto P&C, Milbank, Farmers Casualty and SA Ohio are collectively referred
to below as the "Pooled Subsidiaries", while the Pooled Subsidiaries, State
Automobile Mutual Insurance Company ("Mutual") and its wholly owned
subsidiaries, State Auto Insurance Company of Wisconsin and State Auto Florida
Insurance Company are collectively referred to below as the "Pooled Companies"
or the "State Auto Pool". Due to the integration efforts that occurred within
the Meridian nonstandard segment during 2001 and 2002, beginning with the first
quarter of 2003, the Meridian nonstandard business is now included in the State
Auto nonstandard segment. All prior period financial information has been
reclassified to reflect this segment combination.
Net income for the Company increased $7.9 million (60.0%) to $21.1 million for
the three months ended March 31, 2003 from the same period in 2002. Contributing
to the increase was a 9.2% increase in earned premium as well as an improvement
in the Company's loss experience. The Company's GAAP combined ratio reflected a
3.3 point improvement from the same 2002 time period. This improvement was
driven mainly by a significant improvement in the underwriting results of the
former Meridian book of business. Also contributing to the increase in net
income was a $1.1 million increase in net investment income due to increased
invested assets from the same 2002 time period, as well as a $2.5 million
increase in net realized gains on investments. See additional discussion at
"Other Disclosures - Investments."
Consolidated earned premiums increased $19.5 million (9.2%) to $232.4 million
for the three months ended March 31, 2003 from the same period in 2002. This
increase was primarily the result of premium rate and policy count increases
across most lines of business. The State Auto standard segment and non-standard
segment contributed a 12.9% and 2.4% increase to consolidated earned premiums,
respectively. The Meridian standard segment contributed a 3.8% decrease to
consolidated earned premiums. Beginning in late 2001, management began taking
corrective action in this segment which included appropriate and necessary rate
increases in almost every line of business which had the effect of decreasing
policy counts. Also partly offsetting the increase in consolidated earned
premiums was a 2.4% decrease in earned premium due to the $5.1 million increase
in cession to Mutual under the Stop Loss (see discussion below). During the
three month period ended March 31, 2003, the Company ceded $5.5 million in
premiums to Mutual under the Stop Loss versus $426,000 for the same 2002 time
period.
Net investment income increased $1.1 million (7.5%) to $15.7 million for the
three months ended March 31, 2003 from the same period in 2002. This increase
was primarily the result of an increase in invested assets generated by cash
flow provided from operations, partly offset by a decline in the investment
yield. Total cost of invested assets at March 31, 2003 and 2002 was $1,344.6
million and $1,169.6 million, respectively. Reflecting a decline in the interest
rate environment, the annualized investment yields, based on invested assets at
cost were 4.8% and 5.0% for the three month periods ended March 31, 2003 and
2002, respectively. See further discussion regarding investments at the
"Liquidity and Capital Resources", "Investments" and "Market Risk" sections,
included herein.
Consolidated losses and loss adjustment expenses, as a percentage of earned
premiums (the "GAAP loss and LAE ratio"), were 64.4% and 69.2% (4.8 point
improvement) for the three months ended March 31, 2003 and 2002, respectively.
During the first quarter of 2003 and 2002, the Pooled Companies produced a
statutory loss and LAE ratio under the Stop Loss that was less than 69.25%, but
more than 59.99%, thereby ceding to Mutual, under the Stop Loss, $5.5 million
and $426,000, respectively, in earned premiums. Absent the impact of the Stop
Loss, the GAAP loss and LAE ratio for the three month period ended March 31,
2003 and 2002 was 62.9% and 69.0%, respectively. For the three month periods
ended March 31, 2003 and 2002, catastrophe claims were $6.1 million and $5.3
million, respectively which contributed 2.6 and 2.5 points to consolidated GAAP
loss and LAE ratio, respectively.
For discussion purposes, the following table provides comparative GAAP loss and
LAE ratios, net of the Stop Loss, for the Company's insurance operating segments
for the three months ended March 31, 2003 and 2002, respectively:
March 31
--------
GAAP Loss and LAE Ratio 2003 2002 Change
---- ---- ------
State Auto standard segment 64.0 66.0 (2.0)
State Auto nonstandard segment 77.0 80.4 (3.4)
Meridian standard segment 57.9 77.5 (19.6)
---- ---- ------
Total GAAP Loss and LAE Ratio 64.4 69.2 (4.8)
==== ==== =======
The State Auto standard segment GAAP loss and LAE ratio improved 2.0 points for
the three months ended March 31, 2003 from the same 2002 period. Partly
offsetting the improvement, catastrophe claims in this segment increased 0.2
point representing 3.0 and 2.8 points of the total GAAP loss and LAE ratio for
the three month periods ended March 31, 2003 and 2002, respectively.
Contributing to the decrease was an improvement in the personal and commercial
automobile lines experience, partly offset by deterioration in results of the
homeowners and workers' compensation lines of business. The Company continues to
monitor the underwriting and rate per exposure on all lines of business in this
segment and in particular homeowners and workers compensation lines. The Company
is taking substantial and necessary rate increases across most lines of
business. Workers' compensation continues to be one of the most volatile lines
that the Company provides and for this reason the Company continues to maintain
a conservative position in underwriting and pricing this line of business.
The State Auto nonstandard segment GAAP loss and LAE ratio improved 3.4 points
for the three months ended March 31, 2003 from the same 2002 period. Partly
offsetting the improvement, catastrophe claims in this nonstandard segment
increased 0.7 point representing 0.8 and 0.1 point of the total GAAP loss and
LAE ratio for the three month periods ended March 31, 2003 and 2002,
respectively. The overall decrease in the GAAP loss and LAE ratio is primarily
driven by significant underwriting and rate level improvement on the former
Meridian nonstandard segment book of business. The Meridian nonstandard segment
business written on the Meridian system platform historically produced higher
loss results than the nonstandard business processed through the National
systems platform. Along with corrective rate increases on the business that
continued to renew on the Meridian systems platform, all new nonstandard auto
business produced by the former Meridian Mutual agents was written through the
State Auto nonstandard platform, specifically on the National system platform
utilizing a more appropriate rating structure as well as credit scoring (as
permitted by local law) and "point-of-sale" underwriting tools. These corrective
actions implemented over the last 18 months have resulted in improved loss
results on this segment's operations. The nonstandard business that continues to
be processed through the Meridian nonstandard system platform for the three
month time period ended March 31, 2003 represents approximately 0.3% of the
Company's consolidated earned premium or 3.5% of the State Auto nonstandard
segment earned premium versus 1.5% and 19.8%, respectively, for the same 2002
time period. Despite the overall improvement in this segment's GAAP loss and LAE
ratio from the same 2002 time period, the nonstandard automobile segment
typically is a more volatile line of business than the standard segment.
Management therefore continually monitors this segment's premium rate adequacy
in particular paying attention to the rate adequacy and risk selection in states
and agencies with unusually high premium written growth.
The Meridian standard segment GAAP loss and LAE ratio improved 19.6 points for
the three months ended March 31, 2003 from the same period in 2002. This
significant improvement is the direct result of
management's efforts that began in 2001 to obtain adequate cost based rates,
re-underwrite the business within the State Auto underwriting guidelines and
terminate unprofitable programs. During the three month period ended March 31,
2003 all lines of business improved over the same prior year period, except fire
and allied lines, which represents less than 1% of this segment's earned
premium. The Meridian integration is proceeding according to plan. The business
written on the historic Meridian platform is being systematically renewed on the
State Auto platform. Management is retaining the risks that it believes have the
greatest profit potential for the Company. Over time, the historic Meridian
segment premium will converge to zero and all the business will be included in
the State Auto segment.
Acquisition and operating expenses, as a percentage of earned premiums (the
"GAAP expense ratio"), was 30.8% and 29.3% for the three months ended March 31,
2003 and 2002, respectively. The 1.5 point increase in the GAAP expense ratio
from the same period in 2002 was primarily driven by a 1.0 point increase in
expense related to the Company's profit sharing plan called Quality Performance
Bonus or QPB that covers substantially all employees. Also, as noted above, the
Company ceded to Mutual $5.5 million in earned premium under the Stop Loss
versus $426,000 in the same 2002 time period. This increased earned premium
cession under the Stop Loss indirectly increased the Company GAAP expense ratio
by 0.7 point.
Interest expense increased $204,000 to $744,000 for the three months ended March
31, 2003 from the same period in 2002. This increase was primarily the result of
the additional $30 million of debt obtained in the last three months of 2002,
partly offset by a decline in the interest rate on the $45.5 million line of
credit with Mutual.
The effective Federal tax rate was 26.3% and 23.9% for the three months ended
March 31, 2003 and 2002, respectively.
Liquidity and Capital Resources
For the three months ended March 31, 2003, net cash provided by operating
activities increased to $40.7 million from $21.8 million for the same 2002
period. The increase in cash flow from operations in 2003 is primarily
attributable to the underwriting profit increase, growth in premiums written, as
well as an increase in net investment income over the same 2002 period. For the
three months ended March 31, 2003, net cash used in investing activities
increased to $96.3 million from $30.3 million for the same 2002 period. This
increase is due to the Company investing cash flow generated from operations as
well as, investing a substantial amount of cash and cash equivalents that
existed at December 31, 2002. For the three months ended March 31, 2003, net
cash used in financing activities increased slightly to $336,000 from $334,000
for the same 2002 period.
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. During the three months
ended March 31, 2003, 45,000 shares were repurchased under this plan for a total
of $727,000. As of March 31, 2003, the cumulative total repurchased under this
plan was 441,000 shares for a total of $7.0 million.
At March 31, 2003, funds consisting of cash and cash equivalents were $40.1
million versus $21.1 million at March 31, 2002.
The Company continues to generate substantial earned premium growth which
requires capital resources. Earned premiums through the State Auto Pool
increased significantly starting in July 2001 with the addition of the former
Meridian Mutual business. Also increasing earned premiums of the Company
significantly was the October 1, 2001 pooling change from 53% to 80%. Earned
premiums increased 9.2% and 110.0% for the three months ended March 31, 2003 and
2002, respectively, from the same prior year periods. For the year ended
December 31, 2002, earned premiums increased 61.5% from 2001. At March 31, 2003,
all of the Company's insurance subsidiaries are in compliance with statutory
requirements relating to capital adequacy. The net premium written to surplus
ratio (the "leverage ratio") at March 31, 2003 improved from December 31, 2002
for Milbank, State Auto P&C and National as follows: Milbank - 2.2 vs. 2.4 to 1;
State Auto P&C - 2.3 vs. 2.6 to 1; National 4.3 vs. 4.4 to 1. These improvements
are due to a combination of improvement in the underwriting operations for the
quarter ended March 31, 2003 of each company, as well as effective January 1,
2003, the reserving process for statutory reporting began anticipating salvage
and subrogation recoverable. Under generally
accepted accounting principles, the reserving process has historically
anticipated salvage and subrogation recoverable. Despite these improvements,
management continues to believe these leverage ratios are higher than optimal
and is considering possibilities to obtain additional capital to support the
Company's growth. Management of the Company anticipates that there will be an
associated cost in obtaining additional capital, however, no additional capital
has been arranged as of May 12, 2003. Management believes the Company has
sufficient capital, cash flow and potential capital resources to meet its cash
flow requirements.
Other Disclosures
Investments
Stateco performs investment management services (the investment management
services segment) on behalf of the Company and Mutual and its subsidiaries. The
Investment Committee of each insurer's Board of Directors sets investment
policies to be followed by Stateco.
At March 31, 2003, the Company had no fixed maturity investments rated below
investment grade, nor any mortgage loans. The following table provides
information regarding the quality distribution of the Company's fixed maturity
portfolio at March 31, 2003 and December 31, 2002:
March 31 December 31
2003 2002 Quality(1)
---- ----
Corporate and Municipal Bonds 65.3% 72.0% AA+
U.S. Governments 2.6% 2.8% AAA
U.S. Government Agencies 32.1% 25.2% AAA
------ ------
Total 100.0% 100.0%
====== ======
(1) As rated by Moody's Investors Service
During the three months ended March 31, 2003, the Company increased its equity
portfolio investments by investing an additional $12.7 million (22.7%) to
enhance growth of statutory surplus over the long term. The Company's current
investment strategy does not rely on the use of derivative financial
instruments.
At March 31, 2003 all investments in fixed maturity and equity securities were
held as available for sale and therefore are carried at fair value. Other
invested assets are comprised of limited liability partnership investments that
are carried at fair value. The unrealized holding gains or losses, net of
applicable deferred taxes, are shown as a separate component of stockholders'
equity as "accumulated other comprehensive income" and as such are not included
in the determination of net income.
The following table provides the composition of the Company's investment
portfolio at March 31, 2003 and December 31, 2002:
(dollars in thousands) March 31, 2003 December 31, 2002
-------------- -----------------
Fixed maturities, at fair value $1,301,860 95.1% $1,216,698 95.6%
Equity securities, at fair value 64,981 4.8% 53,710 4.2%
Other invested assets, at fair value 1,908 0.1% 1,908 0.2%
---------- ----- ---------- -----
Total investments $1,368,749 100.0% $1,272,316 100.0%
========== ====== ========== ======
The Company regularly monitors its investment portfolio for declines in value
that are other than temporary, an assessment which requires significant
management judgment. Among the factors that management considers are market
conditions, the amount, timing and length of decline in fair value, and events
impacting the issuer. When a security in the Company's investment portfolio has
a decline in fair value which is other than temporary, the Company adjusts the
cost basis of the security to fair value. This results in a charge to earnings
as a realized loss, which is not changed for subsequent recoveries in fair
value. Future increases or decreases in fair value, if not other than temporary,
are included in other comprehensive income.
The Company reviewed its investments at March 31, 2003, and determined no other
than temporary impairment exists in the gross unrealized holding losses, as
provided in the table below. This is based on
evidence that exists indicating temporary impairment which includes, market
conditions, amount, timing and length of decline, as well as events impacting
the issuer, among other factors. The evaluation of investments for other than
temporary impairment requires management to make judgments and estimates
regarding the evidence known. Such judgments and estimates could change in the
future as more information becomes known which could negatively impact the
amounts reported herein. At March 31, 2003, there were no investments reflected
in the table below with an unrealized holding loss that had a fair value
significantly below cost continually for more than one year. There are no
individually material securities with an unrealized holding loss at March 31,
2003.
The following table provides detailed information on the Company's investment
portfolio for its gross unrealized gains and losses at March 31, 2003:
(dollars in thousands) Gross Gain Gross Loss
Cost or unrealized number unrealized number
March 31, 2003 amortized holding of holding of Fair
Investment Category cost gains positions losses positions value
-------------- ------------- ------------ -------------- ------------ --------------
Fixed Maturities
U.S. Treasury securities &
obligations $ 250,853 $10,601 78 $314 7 $ 261,140
States & political subdivisions 676,635 42,354 343 508 11 718,481
Corporate securities 122,189 9,245 55 15 1 131,419
Mortgage-backed securities of
U.S. Gov. Agencies 185,548 5,408 61 136 5 190,820
---------- ------- --- ------ -- ----------
Total fixed maturities 1,235,225 67,608 537 973 24 1,301,860
Equity Securities
Technologies 5,053 0 0 659 4 4,394
Pharmaceuticals 8,186 1,079 4 579 2 8,686
Financial services 17,581 1,454 9 2,629 14 16,406
Manufacturing & other 37,718 2,169 15 4,392 29 35,495
---------- ------- --- ------ -- ----------
Total equity securities 68,538 4,702 28 8,259 49 64,981
---------- ------- --- ------ -- ----------
Other invested assets 1,857 51 1 0 0 1,908
---------- ------- --- ------ -- ----------
Total $1,305,620 $72,361 566 $9,232 73 $1,368,749
========== ======= === ====== == ==========
The amortized cost and fair value of fixed maturities at March 31, 2003, by
contractual maturity, are summarized as follows:
(dollars in thousands) Amortized Fair
March 31, 2003 Cost Value
---------------------- ---------- ----------
Due after 1 year or less $ 1,200 $ 1,205
Due after 1 year through 5 years 32,817 35,528
Due after 5 years through 10 years 297,409 314,178
Due after 10 years 718,251 760,129
---------- ----------
Subtotal 1,049,677 1,111,040
Mortgage-backed securities 185,548 190,820
---------- ----------
Total $1,235,225 $1,301,860
========== ==========
Expected maturities may differ from contractual maturities as the issuers may
have the right to call or prepay the obligations with or without call or
prepayment penalties.
The securities sold during the three months ended March 31, 2003, were sold to
either recognize the gain available, to dispose of the security because of the
Company's opportunity to invest in securities with greater potential return
considering capital preservation, or to reposition the taxable/tax-exempt fixed
maturity position of the Company. Realized gains and losses for the three months
ended March 31, 2003 are summarized as follows:
(dollars in thousands) Realized Fair Value at
Three months ended March 31, 2003 Gains/Losses Sale
------------ -----
Realized gains:
Fixed maturities $4,712 $79,851
Equity securities 16 196
------ -------
Total realized gains 4,728 80,047
Realized losses:
Fixed maturities 29 2,133
Equity securities 854 1,028
------ -------
Total realized losses 883 3,161
------ -------
Net realized gains on investments $3,845 $83,208
====== =======
Loss and Loss Expenses Payable
The following table presents the loss and loss expenses payable by major line
of business at March 31, 2003 and December 31, 2002, respectively:
March 31 December 31
2003 2002 % Change
---- ---- --------
(dollars in thousands)
Automobile - personal (standard) $172,323 $181,778 (5)%
Automobile - personal (nonstandard) 35,967 35,270 2%
Automobile - commercial 81,788 72,800 12%
Homeowners 46,916 45,850 2%
Commercial multi-peril 79,424 77,018 3%
Workers' compensation 76,823 77,801 (1)%
Fire and allied lines 17,572 14,416 22%
Other/products liability 82,132 80,539 2%
Miscellaneous personal/commercial lines 2,907 6,661 (56)%
Total losses and loss expenses payable, net of -------- -------- -----
reinsurance recoverable on losses and loss expenses
payable of $8,642 and $8,825, respectively $595,852 $592,133 1%
======== ======== =====
Total net losses and loss expenses payable increased 1% from December 31, 2002
to March 31, 2003. This increase is consistent with a growing company and
resulting increased claims activity during the three months ended March 31,
2003. Overall, management does not believe there is a significant change in the
total book of business at March 31, 2003 compared to December 31, 2002.
The Company's management conducts periodic reviews of loss development reports
and makes judgments in determining the reserves for ultimate losses and loss
expenses payable. Several factors are considered by management in estimating
ultimate liabilities including consistency in relative case reserve adequacy,
consistency in claims settlement practices, recent legal developments,
historical data, actuarial projections, accounting projections, exposure growth,
current business conditions, catastrophe developments, late reported claims,
entry errors, and other reasonableness tests.
The risks and uncertainties inherent in the estimates include, but are not
limited to, actual settlement experience different from historical data, trends,
changes in business and economic conditions, court decisions creating
unanticipated liabilities, ongoing interpretation of policy provisions by the
courts, inconsistent decisions in lawsuits regarding coverage and additional
information discovered before settlement of claims. The Company's results of
operations and financial condition could be impacted, perhaps significantly, in
the future if the ultimate payments required to settle claims vary from the
liability currently recorded. To provide a measure of sensitivity to pre-tax
income as a result of changes in
reserve estimates, for every 1% change in the ultimate development of the March
31, 2003 total losses and loss expenses payable, the effect on pre-tax income
would be $6.0 million.
New Accounting Standards
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure, an amendment of SFAS Statement No. 123
Accounting for Stock-Based Compensation. This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, this Statement requires
more prominent disclosures in both the annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has adopted the
disclosure provisions of this Statement and will adopt a transition method at
the time when and if a consistent fair value measurement and recognition
provision is determined by the FASB and is required to be adopted.
Market Risk
With respect to Market Risk, see the discussion regarding this subject in the
Company's December 31, 2002 Management's Discussion and Analysis of Financial
Condition and Results of Operations, included in the December 31, 2002 Form
10-K. There have been no material changes from the information reported
regarding Market Risk in the 2002 Form 10-K.
FORWARD-LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
Statements contained in this Form 10Q 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 elsewhere in
this Form 10Q, during the past several years, Mutual and the
Company have acquired other insurance companies, such as
Milbank, Farmers Casualty, and SA Wisconsin, 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.
- 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 some
lines, price competition continues to be intense. 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 Form 10-K.
- The Company is subject to numerous other factors which effects
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 and unexpected challenges to the
control of the Company by Mutual.
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
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
b. Reports on Form 8-K
On May 1, 2003, the Company filed a Form 8-K relating to its
2003 first quarter earnings press release.
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: MAY 12, 2003 /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: MAY 12, 2003 /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: MAY 12, 2003 /s/ Steven J. Johnston
------------------- ---------------------------------------
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
STATE AUTO FINANCIAL CORPORATION
Form 10-Q
For Quarterly Period Ended March 31, 2003
EXHIBIT INDEX
Exhibit No. Description of Exhibits
----------- -----------------------
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