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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 June 30, 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
- ----------------------------------------------------
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 39,284,760
- -------------------------------- -------------------------------
(Class) (Outstanding on 8/5/03)
INDEX
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 2003 and
December 31, 2002
Condensed consolidated statements of income - Three months
ended June 30, 2003 and 2002
Condensed consolidated statements of income - Six months ended
June 30, 2003 and 2002
Condensed consolidated statements of cash flows - Six months
ended June 30, 2003 and 2002
Notes to condensed consolidated financial statements -
June 30, 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)
June 30 December 31
2003 2002
---- ----
(unaudited) (see note 1)
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost $1,243,454 and $1,149,334, respectively) $ 1,333,094 $ 1,216,698
Equity securities, available for sale, at fair value
(cost $83,456 and $55,837, respectively) 88,656 53,710
Other invested assets, at fair value
(cost $8,303 and $1,857, respectively) 8,353 1,908
----------- -----------
Total investments 1,430,103 1,272,316
Cash and cash equivalents 39,787 96,048
Deferred policy acquisition costs 82,211 77,886
Accrued investment income and other assets 51,283 50,788
Due from affiliate 27,706 14,210
Net prepaid pension expense 46,773 46,690
Reinsurance recoverable on losses and loss expenses payable
(ceded to affiliates $10,414 and $4,286, respectively) 18,220 8,825
Prepaid reinsurance premiums
(ceded to affiliates $4,252 and $3,997, respectively) 8,362 7,695
Current federal income taxes 4,472 --
Deferred federal income taxes -- 5,796
Property and equipment, at cost, net of accumulated
depreciation of $4,186 and $3,915, respectively 12,518 12,741
----------- -----------
Total assets $ 1,721,435 $ 1,592,995
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable
(net assumed from affiliates $312,509 and $303,960, respectively) $ 639,765 $ 600,958
Unearned premiums
(net assumed from affiliates $129,175 and $133,130, respectively) 395,638 377,990
Notes payable (affiliates $60,500) 90,500 75,500
Postretirement benefit liabilities 70,042 66,763
Current federal income taxes -- 745
Deferred federal income taxes 5,018 --
Other liabilities 6,647 7,270
----------- -----------
Total liabilities 1,207,610 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;
43,864,684 and 43,525,774 shares issued, respectively, at
stated value of $2.50 per share 109,662 108,815
Less 4,585,337 and 4,524,475 treasury shares, respectively, at cost (55,273) (54,249)
Additional paid-in capital 52,908 50,354
Accumulated other comprehensive income 61,732 42,512
Retained earnings 344,796 316,337
----------- -----------
Total stockholders' equity 513,825 463,769
----------- -----------
Total liabilities and stockholders' equity $ 1,721,435 $ 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 June 30, 2003 and 2002
(dollars in thousands, except per share amounts)
(unaudited)
2003 2002
---- ----
Earned premiums
(ceded to affiliates $145,009 and $122,739, respectively) $ 241,693 $ 221,342
Net investment income 15,831 14,837
Net realized gain (loss) on investments 4,173 (1,156)
Other income (affiliates $934 and $712, respectively) 1,463 1,200
--------- ---------
Total revenues 263,160 236,223
--------- ---------
Losses and loss expenses
(ceded to affiliates $114,687 and $113,758, respectively) 182,770 176,500
Acquisition and operating expenses 68,164 63,956
Interest expense (affiliates $656 and $540, respectively) 823 540
Other expense, net 2,493 1,978
--------- ---------
Total expenses 254,250 242,974
--------- ---------
Income (loss) before federal income taxes 8,910 (6,751)
Federal income tax expense (benefit) 609 (5,366)
--------- ---------
Net income (loss) $ 8,301 $ (1,385)
========= =========
Earnings (loss) per share:
- basic $ 0.21 $ (0.04)
========= =========
- diluted $ 0.21 $ (0.04)
========= =========
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 INCOME
For the Six Months Ended June 30, 2003 and 2002
(dollars in thousands, except per share amounts)
(unaudited)
2003 2002
---- ----
Earned premiums
(ceded to affiliates $290,221 and $240,364, respectively) $ 474,068 $ 434,179
Net investment income 31,540 29,448
Net realized gain on investments 8,018 154
Other income (affiliates $1,824 and $1,434, respectively) 2,886 2,401
--------- ---------
Total revenues 516,512 466,182
--------- ---------
Losses and loss expenses
(ceded to affiliates $198,020 and $187,140, respectively) 332,339 323,740
Acquisition and operating expenses 139,852 126,393
Interest expense (affiliates $1,312 and $1,081, respectively) 1,567 1,081
Other expense, net 5,281 4,419
--------- ---------
Total expenses 479,039 455,633
--------- ---------
Income before federal income taxes 37,473 10,549
Federal income tax expense (benefit) 8,108 (1,230)
--------- ---------
Net income $ 29,365 $ 11,779
========= =========
Earnings per share:
- basic $ 0.75 $ 0.30
========= =========
- diluted $ 0.74 $ 0.29
========= =========
Dividends paid per common share $ 0.070 $ 0.065
========= =========
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(in thousands)
(unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 29,365 $ 11,779
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization, net 3,689 2,421
Net realized gain on investments (8,018) (154)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (4,325) (6,967)
Accrued investment income and other assets (39) (1,121)
Net prepaid pension expense (83) (2,277)
Postretirement health care benefits 3,279 7,263
Other liabilities and due to/from affiliate, net (14,119) (17,416)
Reinsurance receivable and prepaid reinsurance premiums (10,062) (2,137)
Losses and loss expenses payable 38,807 40,941
Unearned premiums 17,648 31,261
Federal income taxes (3,840) (7,229)
--------- ---------
Net cash provided by operating activities 52,302 56,364
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (302,788) (230,752)
Purchase of equity securities (29,935) (16,942)
Purchase of other invested assets (6,445) (1,548)
Maturities, calls and principal reductions of fixed maturities -
held to maturity -- 2,721
Maturities, calls and principal reductions of fixed maturities -
available for sale 35,994 16,802
Sale of fixed maturities - available for sale 178,468 177,157
Sale of equity securities 1,224 6,337
Net additions of property and equipment (52) --
--------- ---------
Net cash used in investing activities (123,534) (46,225)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt 15,000 --
Debt issuance costs (456) --
Net proceeds from issuance of common stock 2,062 1,541
Payments to acquire treasury shares (729) (2,423)
Payment of dividends (906) (827)
--------- ---------
Net cash provided by (used in) financing activities 14,971 (1,709)
--------- ---------
Net increase (decrease) in cash and cash equivalents (56,261) 8,430
Cash and cash equivalents at beginning of period 96,048 30,016
--------- ---------
Cash and cash equivalents at end of period $ 39,787 $ 38,446
========= =========
Supplemental disclosures:
Federal income taxes paid $ 11,950 $ 6,000
========= =========
Interest paid (affiliates $1,312 and $1,081, respectively) $ 1,470 $ 1,081
========= =========
See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(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 six month periods ended June 30,
2003 are 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.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with the Characteristics of Both Liabilities and Equity, effective
for reporting periods after July 1, 2003. This Statement establishes standards
for classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity. The Company has not yet determined the effect, if any the adoption
of this Statement will have on the earnings and financial position of the
Company.
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 Six Months ended
June 30 June 30
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Net income (loss) $ 8,301 $ (1,385) $ 29,365 $ 11,779
Unrealized holding gains, net of tax 20,636 14,849 19,220 12,119
-------- -------- -------- --------
Comprehensive income $ 28,937 $ 13,464 $ 48,585 $ 23,898
======== ======== ======== ========
The components of accumulated other comprehensive income, net of related tax,
included in stockholders' equity at June 30, 2003 and 2002 include unrealized
holding gains, net of tax.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(unaudited)
3. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
Three months ended Six months ended
June 30 June 30
------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars in thousands, except per share amounts)
Numerator:
Net income (loss) for basic and diluted
Earnings per share $ 8,301 $ (1,385) $ 29,365 $ 11,779
======== ======== ======== ========
Denominator:
Weighted average shares for
Basic earnings per share 39,200 39,007 39,137 38,987
Effect of dilutive stock options 806 -- 736 816
-------- -------- -------- --------
Adjusted weighted average shares
For diluted earnings per share 40,006 39,007 39,873 39,803
-------- -------- -------- --------
Basic earnings (loss) per share $ 0.21 $ (0.04) $ 0.75 $ 0.30
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.21 $ (0.04) $ 0.74 $ 0.29
======== ======== ======== ========
The following numbers of 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 Six months ended
June 30 June 30
------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Number of options 0 589 378 911
= === === ===
4. STOCK BASED COMPENSATION
At June 30, 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
non-employee director compensation.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(unaudited)
4. STOCK BASED COMPENSATION (CONTINUED)
Three months ended Six months ended
June 30 June 30
------------------------ -------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share amounts)
Net income (loss), as reported $ 8,301 $ (1,385) $ 29,365 $ 11,779
Deduct: Total stock-based employee and non-employee
director compensation expense determined under fair
value based method for all awards, net of related
tax effects (501) (397) (820) (773)
--------- -------- -------- --------
Pro forma net income (loss) $ 7,800 $ (1,782) $ 28,545 $ 11,006
========= ======== ======== ========
Earnings (loss) per share:
Basic--as reported $ 0.21 $ (0.04) $ 0.75 $ 0.30
========= ======== ======== ========
Basic--pro forma $ 0.20 $ (0.05) $ 0.73 $ 0.28
========= ======== ======== ========
Diluted--as reported $ 0.21 $ (0.04) $ 0.74 $ 0.29
========= ======== ======== ========
Diluted--pro forma $ 0.19 $ (0.05) $ 0.70 $ 0.27
========= ======== ======== ========
There were 442,371 and 375,910 options granted to employees and directors during
the three month and six month periods ended June, 2003 and 2002, respectively.
The fair value of options granted was estimated at the date of grant using the
Black-Scholes option-pricing model. The weighted average fair values and related
assumptions for options granted were as follows:
Three and six months
ended
June 30
--------------------
2003 2002
---- ----
Fair value $ 7.57 $ 6.94
Dividend yield .80% .92%
Risk free interest rate 2.89% 4.58%
Expected volatility factor 37.6% 34.8%
Expected life in years 7.8 7.8
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.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(unaudited)
4. STOCK BASED COMPENSATION (CONTINUED)
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.
The Non-employee Directors' Plan provides each non-employee director of the
Company an option to purchase (4,200 shares for 2003 and 1,500 shares for 2002)
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 $76,000 and
$73,000, and $133,000 and $94,000 for the three month and six month periods
ended June 30, 2003 and 2002, respectively, 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 are as follows:
Three and six months
ended
June 30
--------------------
2003 2002
---- ----
Fair value $12.41 $8.08
Dividend yield .82% .90%
Risk free interest rate 3.45% 5.30%
Expected volatility factor 36.9% 34.0%
Expected life in years 9.2 9.2
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.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(unaudited)
4. STOCK BASED COMPENSATION (CONTINUED)
A summary of the Company's stock option activity and related information for all
option plans for the three and six month periods ended June 30, 2003 and 2002 is
as follows:
Three months ended Six months ended
June 30 June 30
------------------------------------------------ ----------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
------- -------- ------- -------- ------- -------- ------- --------
(numbers in thousands, except per share figures)
Outstanding,
beginning of year 2,589 $11.53 2,768 $ 9.76 2,791 $10.98 2,797 $ 9.58
Granted 378 18.74 322 16.00 410 18.71 351 15.98
Exercised (58) 9.41 (135) 5.96 (274) 5.67 (193) 5.38
Cancelled (3) 16.24 -- -- (21) 16.24 -- --
----- ------ ----- ------ ----- ------ ----- ------
Outstanding,
end of period 2,906 $12.50 2,955 $10.64 2,906 $12.50 2,955 $10.64
===== ===== ===== =====
A summary of information pertaining to all options outstanding and exercisable
at June 30, 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 60 0.5 $ 4.17 60 $ 4.17
$5.01 - $10.00 754 2.6 6.63 754 6.63
Greater than $10.01 2,092 7.4 14.86 1,407 13.60
----- --- ------ ----- ------
2,906 6.0 $12.50 2,221 $10.98
===== =====
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(unaudited)
5. REINSURANCE
The following table provides a summary of the Company's reinsurance transactions
with other insurers and reinsurers, as well as reinsurance transactions with
affiliates:
Three months ended Six months ended
June 30 June 30
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Premiums earned:
Assumed from other insurers and reinsurers $ 1,232 $ 1,021 $ 2,468 $ 1,632
Assumed under State Auto Pool and 220,898 205,490 438,583 406,186
other affiliate arrangements
Ceded to other insurers and reinsurers 2,961 2,929 5,965 5,233
Ceded under State Auto Pool,
Stop Loss and other affiliate arrangements 145,009 122,739 290,221 240,364
Losses and loss expenses incurred:
Assumed from other insurers and reinsurers 781 582 1,534 797
Assumed under State Auto Pool and
other affiliate arrangements 172,423 170,730 306,319 308,177
Ceded to other insurers and reinsurers 4,054 259 4,541 1,344
Ceded under State Auto Pool,
Stop Loss and other affiliate arrangements $114,687 $113,758 $198,020 $187,140
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. 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 and six month periods ended June 30, 2002 have been restated to
reflect this change. Interim financial data by segment is as follows:
Three months ended Six months ended
June 30 June 30
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Revenues from external customers:
State Auto standard insurance $206,758 $175,629 $399,757 $344,396
State Auto nonstandard insurance 22,031 19,091 43,588 35,545
Meridian standard insurance 28,697 41,355 62,190 83,487
Investment management services 619 643 1,219 1,315
All other 832 656 1,682 1,276
-------- -------- -------- --------
Total revenues from external customers $258,937 $237,374 $508,436 $466,019
======== ======== ======== ========
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(unaudited)
6. SEGMENT INFORMATION (CONTINUED)
Three months ended Six months ended
June 30 June 30
------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Intersegment revenues:
State Auto standard insurance $ 39 $ 23 $ 75 $ 47
Investment management services 1,444 1,217 2,845 2,397
All other 446 552 922 1,135
----------- ----------- ----------- -----------
Total intersegment revenues $ 1,929 $ 1,792 $ 3,842 $ 3,579
=========== =========== =========== ===========
Segment profit (loss):
State Auto standard insurance $ 5,142 $ (348) $ 21,858 $ 14,165
State Auto nonstandard insurance 970 1,627 2,952 2,175
Meridian standard insurance (2,913) (8,195) 1,687 (8,562)
Investment management services 1,853 1,652 3,521 3,255
All other 573 345 1,109 716
----------- ----------- ----------- -----------
Total segment profit (loss) $ 5,625 $ (4,919) $ 31,127 $ 11,749
Reconciling items:
Corporate expenses $ (888) $ (676) $ (1,672) $ (1,354)
Net realized gains 4,173 (1,156) 8,018 154
----------- ----------- ----------- -----------
Total consolidated income (loss) before
federal income taxes $ 8,910 $ (6,751) $ 37,473 $ 10,549
=========== =========== =========== ===========
Segment assets:
Standard insurance $ 1,546,332 $ 1,339,503
Nonstandard insurance 110,143 86,408
Investment management services 4,590 8,121
All other 15,292 16,147
----------- -----------
Total segment assets $ 1,676,357 $ 1,450,179
=========== ===========
7. PREFERRED SECURITIES
On May 22, 2003, STFC Capital Trust I, State Auto Financial's Delaware business
trust subsidiary (the "Capital Trust"), issued $15,000,000 liquidation amount of
its capital securities (the "Trust Preferred Capital Securities") to a third
party. In connection with the Capital Trust's issuance of the Trust Preferred
Capital Securities and the related purchase by State Auto Financial of all of
the Capital Trust's common securities, State Auto Financial issued to the
Capital Trust $15,464,000 aggregate principal amount of Floating Rate Junior
Subordinated Debt Securities due 2033 (the "Subordinated Debentures"). The sole
assets of the Capital Trust are the Subordinated Debentures and any interest
accrued thereon. Interest on the Trust Preferred Capital Securities is payable
quarterly at a rate equal to the three-month LIBOR rate plus 4.20%, adjusted
quarterly (5.48% at June 30, 2003). Prior to May 2008, the interest rate may not
exceed 12.5% per annum. The interest rate and interest payment dates on the
Subordinated Debentures are the same as the interest rate and interest payment
dates on the Trust Preferred Capital Securities. The Subordinated Debentures and
the related income effects are eliminated in the accompanying consolidated
financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(unaudited)
7. PREFERRED SECURITIES (CONTINUED)
The Trust Preferred Capital Securities are mandatorily redeemable on May 23,
2033, and may be redeemed at any time on and after May 23, 2008, at 100% of the
principal amount thereof plus unpaid interest. The Trust Preferred Capital
Securities may be redeemed in whole, but not in part, at any time within 90 days
following the occurrence of a "Tax Event" or "Investment Company Event" (as
defined in the declaration of trust) at an amount equal to the greater of 100%
of the principal amount thereof plus accrued interest or a "make-whole" premium.
The Subordinated Debentures are subject to these same redemption terms. The
obligations under the Subordinated Debentures and related agreements, taken
together, constitute a full and unconditional guarantee of payments due on the
Trust Preferred Capital Securities.
State Auto Financial has the right, at any time, to defer payments of interest
on the Subordinated Debentures for up to 20 consecutive quarterly payment
periods. Consequently, distributions on the Trust Preferred Capital Securities
would be deferred (though such distributions would continue to accrue with
interest since interest would accrue on the Subordinated Debentures during any
such extended interest payment period). In no case may the deferral of payments
and distributions extend beyond the stated maturity dates of the respective
securities. During such deferments, State Auto Financial may not declare or pay
any dividends on, or purchase any of its capital stock, make any principal or
interest payments on debt securities, or make any payment of guarantees that
rank in all respects equally with or subordinated to the Trust Preferred Capital
Securities.
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 a 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
- ---------------------
State Auto Financial Corporation ("State Auto Financial" and, together with its
subsidiaries, the "Company") operates in three insurance segments: (i) State
Auto Financial's wholly owned insurance subsidiaries State Auto Property and
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") engage in the State Auto standard
segment of the Company's operations; (ii) 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,
engage in the State Auto nonstandard segment of the Company's operations; and
(iii) the Meridian standard segment consists of the standard insurance business
of the former Meridian Mutual Insurance Company ("Meridian Mutual"), which was
acquired and merged into State Automobile Mutual Insurance Company ("State Auto
Mutual") in June 2001. In addition to these segments, the Company previously
operated in a Meridian nonstandard segment. However, due to the integration
efforts that occurred within this segment during 2001 and 2002, beginning with
the first quarter of 2003, the Meridian nonstandard segment was included in the
State Auto nonstandard insurance segment. All prior period financial information
has been reclassified to reflect this segment combination.
An insurance pooling arrangement exists between State Auto P&C, Milbank, Farmers
Casualty, and SA Ohio (collectively referred to as the "Pooled Subsidiaries")
and State Auto Mutual and its subsidiaries, State Auto Insurance Company of
Wisconsin ("SA Wisconsin") and State Auto Florida Insurance Company ("SA
Florida" and, together with the Pooled Subsidiaries, State Auto Mutual, and SA
Wisconsin, the "Pooled Companies" or the "State Auto Pool"). Under this pooling
arrangement, premiums, losses and underwriting expenses are shared by the Pooled
Companies, with the Pooled Subsidiaries receiving 80% in the aggregate of this
underwriting pool and State Auto Mutual and its subsidiaries receiving 20% in
the aggregate of this underwriting pool.
As more fully described in the Company's December 31, 2002 Form 10-K, the
following summary will assist in the discussion of the Company's current period
financial results:
For the period October 1, 2001 through December 31, 2003, State Auto
Mutual entered into a stop loss reinsurance agreement (the "Stop Loss")
with the Pooled Subsidiaries. Under the Stop Loss, if the State Auto
Pool's quarterly statutory loss and loss adjustment expense ratio (the
"Pool loss and LAE ratio") is between 70.75% and 80%, State Auto Mutual
will reinsure the Pooled Subsidiaries 27% of the State Auto Pool's
losses in excess of a Pool loss and LAE ratio of 70.75% to 80%. The
Pooled Subsidiaries would be responsible for their share of the State
Auto Pool's losses over the 80% threshold. State Auto Mutual will have
the right to participate in the profits of the State Auto Pool. State
Auto Mutual will assume 27% of the State Auto Pool's underwriting
profits attributable to a Pool loss and LAE ratio less than 69.25% but
more than 50.99%. The Stop Loss expires December 31, 2003.
Net income for the Company increased $9.6 million to $8.3 million and $17.6
million to $29.3 million for the three month and six month periods ended June
30, 2003, respectively, from the same periods in 2002. Contributing to these
increases was an improvement in the Company's loss experience from 2002 along
with increased growth in earned premium. The Company's GAAP loss and LAE ratio
(defined below) reflected a 4.1 and 4.5 point improvement for the three and six
month periods ended June 30, 2003, respectively, from the same periods in 2002,
despite the largest catastrophe loss event in Company history occurring in May
2003. While all insurance segments, absent catastrophe losses, reflected an
improvement in underwriting results from the same 2002 periods, the most
significant improvement was within the State Auto standard segment.
Consolidated earned premiums increased to $241.7 million and $474.1 million for
the three and six month periods ended June 30, 2003, respectively. These totals
represent a $20.4 million (9.2%) and $39.9 million (9.2%) increase from the same
periods in 2002, respectively. These increases were primarily the result of
premium rate and policy count increases across most lines of business. The State
Auto standard segment contributed a 13.6% and 13.3% increase to consolidated
earned premiums for the three month and six month periods ended June 30, 2003,
respectively, from the same periods in 2002, while the State Auto non-standard
segment contributed a 1.3% and 1.9% increase, respectively, from the same
periods in 2002. Contributing also to the State Auto standard segment's
increases is the migration of the Meridian standard segment's policies to the
State Auto systems platform. The increases in the State Auto standard and
non-standard segments were offset by two factors: declines in the Meridian
standard segment and an increase in premiums ceded to State Auto Mutual under
the Stop Loss. The Meridian standard segment declined 5.7 points and 4.8 points
for the three and six month periods ending June 30, 2003, respectively.
Contributing to this segment's decreases are the following: policies migrating
on renewal to the State Auto systems platform as well as a loss of policy count
due to significant rate increases taken that management believed were necessary
to improve the underwriting performance of this segment's book of business. As
to the Stop Loss, $5.5 million was ceded from the Company to State Auto Mutual
in the first quarter of 2003, as compared with only $0.4 million having been
ceded in the same 2002 period. The effect of this increase in premiums ceded
reduced consolidated earned premium by 1.2 points for the six months ended June
30, 2003. See the Stop Loss discussion continued below regarding loss and loss
adjustments expense cession.
Net investment income increased $1.0 million (6.7%) to $15.8 million and
increased $2.1 million (7.1%) to $31.5, million for the three month and six
month periods ended June 30, 2003, respectively, from the same periods in 2002.
These increases were 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 June 30, 2003 and 2002
was $1,359.0 million and $1,200.8 million, respectively. Reflecting a decline in
the interest rate environment, the annualized investment yields based on
invested assets at cost decreased from 5.0% to 4.7% for the three month and six
month periods ended June 30, 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 75.6% and 79.7%, for the three
month periods ended June 30, 2003 and 2002, respectively and 70.1% and 74.6% for
the six month periods ended June 30, 2003 and 2002, respectively. During the
three month periods ended June 30, 2003 and 2002, the Pooled Companies produced
a Pool loss and LAE ratio that exceeded the 70.75% threshold, specified in the
Stop Loss reinsurance contract, resulting in a cession to State Auto Mutual of
$5.6 million and $6.4 million, respectively, in loss and loss adjustment
expenses. See the Stop Loss discussion above regarding earned premiums cessions.
The net effect of these Stop Loss cessions decreased the GAAP loss and LAE ratio
by 2.3 and 2.9 points, and 0.4 and 1.4 points, for the three month and six month
periods ended June 30, 2003 and 2002, respectively.
During the second quarters of 2003 and 2002, the Company was impacted by
significant catastrophe storm losses totaling $41.2 million (17.1 GAAP loss and
LAE points) and $29.8 million (13.5 GAAP loss and LAE points), respectively.
High winds, tornados, hail, lightning and resulting fires caused damage in 17 of
the Company's 26 operating states between May 2 and May 11, 2003 ("CAT 88").
Claims resulting from CAT 88 totaled $39.4 million or 16.3 GAAP loss and LAE
points, and now ranks as the most costly catastrophe loss event in State Auto
history. The second most costly catastrophe loss event occurred in the second
quarter of 2002, from a widespread series of storms that included a tornado in
the community of LaPlata, Maryland ("CAT 61"). While eventually totaling $26.9
million, CAT 61 impacted second quarter 2002 results by $24.5 million or 11.1
GAAP loss and LAE points. For the six months ended June 30, 2003 and 2002,
catastrophe claims contributed 10.0 and 8.1 points, respectively, to the
consolidated GAAP loss and LAE ratio. CAT 88 accounted for 8.3 points of the
2003 points while CAT 61 accounted for 5.6 points of the 2002 points. As
discussed below, each of the Company's insurance operating segments were
impacted by these catastrophe storm losses.
For discussion purposes, the following table provides comparative GAAP loss and
LAE ratios for the Company's insurance operating segments for the three month
and six month periods ended June 30, 2003 and 2002, respectively:
Three months ended Six months ended
------------------------- -------------------------
June 30 June 30
------- -------
GAAP Loss and LAE Ratio 2003 2002 Change 2003 2002 Change
---- ---- --------- ---- ---- ---------
inc (dec) inc (dec)
--------- ---------
State Auto standard segment 73.2 76.0 (2.8) 68.8 71.1 (2.3)
State Auto nonstandard segment 77.4 77.1 0.3 77.2 78.6 (1.4)
Meridian standard segment 92.1 96.6 (4.5) 73.6 86.9 (13.3)
---- ---- ----- ---- ---- ------
Total GAAP Loss and LAE Ratio 75.6 79.7 (4.1) 70.1 74.6 (4.5)
==== ==== ===== ==== ==== =====
The State Auto standard segment's GAAP loss and LAE ratio improved 2.8 and 2.3
points for the three month and six month periods ending June 30, 2003,
respectively, from the same 2002 periods, despite being impacted by the
significant catastrophe storm losses described above. Catastrophe losses
represent 18.6 and 13.1 points of this segment's GAAP loss and LAE ratio for the
three month periods ending June 30, 2003 and 2002, respectively, of which CAT 88
accounted for 17.8 points and CAT 61 10.9 points of the 2003 and 2002 total
catastrophe points, respectively For the six months ended June 30, 2003 and
2002, catastrophe losses represents 11.1 and 8.0 points, respectively, of which
CAT 88 accounted for 9.3 points and CAT 61 5.5 points of the 2003 and 2002 total
catastrophe points, respectively. Absent the impact of catastrophe losses, this
segment's GAAP loss and LAE ratio improved for the three month and six month
periods ending June 30, 2003, 8.3 and 5.4 points, respectively, from the same
2002 time periods. These improvements reflect the Company's continual emphasis
on strict underwriting, which includes taking necessary and appropriate rate
increases across most lines of business. The Company monitors the underwriting
and rate per exposure on all lines of business in this segment, particularly,
private passenger auto liability, homeowners and workers compensation.
The State Auto nonstandard segment's GAAP loss and LAE ratio increased 0.3
points and improved 1.4 points for the three month and six month periods ending
June 30, 2003, respectively, from the same 2002 periods. Catastrophe losses
represents 3.8 and 2.2 points of this segment's GAAP loss and LAE ratio for the
three month periods ending June 30, 2003 and 2002, respectively, of which CAT 88
accounted for 3.1 points and CAT 61 1.5 points of the 2003 and 2002 total
catastrophe points, respectively For the six months ended June 30, 2003 and
2002, catastrophe losses represent 2.3 and 1.3 points, respectively, of which
CAT 88 accounted for 1.6 points and CAT 61 0.8 points of the 2003 and 2002 total
catastrophe points, respectively. Absent the impact of catastrophe losses, this
segment's GAAP loss and LAE ratio improved for the three month and six month
periods ending June 30, 2003, 1.3 and 2.4 points, respectively, from the same
2002 time periods. These improvements have been primarily driven by significant
underwriting action and rate level improvement on the former Meridian
nonstandard segment book of business. Management implemented corrective rate
increases on the business that continued to renew on the Meridian systems
platform. In addition, all new nonstandard auto business produced by the former
Meridian Mutual agents was written through the State Auto 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. The
nonstandard automobile segment typically is a more volatile line of business
than the standard segment. Management continually monitors this segment's
underwriting performance, paying particular attention to rate adequacy and risk
selection in states and agencies with unusually high premium written growth.
Kentucky, this segment's largest state of operation, has experienced significant
written premium growth over the last year. The Company has terminated or
suspended several fast growing, but extremely unprofitable, agencies in
Kentucky. This action is expected to affect this segment's premium growth in the
future
The Meridian standard segment's GAAP loss and LAE ratio improved 4.5 points and
13.3 points for the three month and six month periods ended June 30, 2003,
respectively, from the same periods in 2002, despite also being impacted by the
significant catastrophe storm losses described above. Catastrophe losses
represents 16.2 and 19.4 points of this segment's GAAP loss and LAE ratio for
the three month periods ending June 30, 2003 and 2002, respectively, of which
CAT 88 accounted for 15.5 points and CAT 61 15.6 points of the 2003 and 2002
total catastrophe points, respectively. For the six months
ended June 30, 2003 and 2002, catastrophe losses represents 8.4 and 10.7 points,
respectively, of which CAT 88 accounted for 7.1 points and CAT 61 7.6 points of
the 2003 and 2002 total catastrophe points, respectively. Absent the impact of
catastrophe losses, this segment's GAAP loss and LAE ratio improved for the
three month and six month periods ending June 30, 2003, 1.3 and 11.0 points,
respectively, from the same 2002 time periods. During the three month and six
month periods ended June 30, 2003 this segment experienced several large
commercial losses. Despite these large losses, this segment continued to improve
from 2002 comparable periods. These continued improvements are a 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. 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 striving
to retain the risks that it believes have the greatest profit potential for the
Company. Over time, the historic Meridian segment premium will continue to
decrease to a point where 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 28.2% and 28.9% for the three month periods ended
June 30, 2003 and 2002, respectively, and 29.5% and 29.1% for the six month
periods ended June 30, 2003 and 2002, respectively. The decrease in the three
month GAAP expense ratio is due to a combination of the Company receiving a
refund in the current quarter from the Ohio Insurance Guaranty Association
relating to the PIE Mutual insolvency that improved the 2003 quarterly GAAP
expense ratio by 0.3 points as well as fixed costs comprising a lesser portion
of earned premiums in 2003 than the same 2002 period. The 0.4% increase in the
six month period GAAP expense ratio from the same 2002 period is due to a 0.5
point increase related to the Company's profit sharing plan called Quality
Performance Bonus or QPB that covers substantially all employees. The PIE Mutual
refund positively impacted the year to date ratio by 0.1 points. As noted above,
during the three months ended March 31, 2003, the Company ceded to State Auto
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
in 2003 increased the Company`s GAAP expense ratio by 0.3 points for the six
month period ended June 30, 2003.
Interest expense increased to $823,000 from $540,000 and to $1.6 million from
$1.1 million for the three month and six month periods ended June 30, 2003 from
the same periods in 2002. These increases were the result of the additional $30
million of debt obtained in the last six months of 2002 as well as an additional
$15 million of debt issued in May 2003 (see discussion included in Liquidity and
Capital Resources), partly offset by a decline in the interest rate on the $45.5
million line of credit with State Auto Mutual.
The effective tax expense rate for the three month and six month periods ended
June 30, 2003 were 6.8% and 21.6%, respectively, as compared to an effective tax
benefit rate of 79.5% and 11.7% for the same 2002 periods, respectively.
Improvement in the Company's 2003 underwriting results along with an increase in
net realized gain on investments and the gradual shift in increasing the fixed
maturity portfolio from tax-exempt to taxable securities from 2002 contributed
to these rate changes.
Liquidity and Capital Resources
- -------------------------------
For the six months ended June 30, 2003, net cash provided by operating
activities decreased to $52.3 million from $56.4 million for the same 2002
period. The decrease in cash flow from operations in 2003 is attributable to an
increase in cash paid on claims and estimated federal income taxes from 2002.
For the six months ended June 30, 2003, net cash used in investing activities
increased to $123.5 million from $46.2 million for the same 2002 period. This
increase is due to the Company investing a substantial amount of cash and cash
equivalents that existed at December 31, 2002, as well as cash flow generated
from financing activities. For the six months ended June 30, 2003, net cash
provided by financing activities was $15.0 million in comparison to the same
period in 2002 where $1.7 million was used in financing activities. The increase
in cash provided by financing activities was due to the Company issuing $15.0
million in Trust Preferred Capital Securities (as defined below) during May
2003.
In 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. No shares were repurchased
under this plan during the three months ended June 30, 2003. During the
six months ended June 30, 2003, 45,000 shares were repurchased for a total of
$727,000. As of June 30, 2003, the cumulative total shares repurchased were
441,000 for a total of $7.0 million.
On May 22, 2003, STFC Capital Trust I, State Auto Financial's Delaware business
trust subsidiary (the "Capital Trust"), issued $15.0 million liquidation amount
of its capital securities (the "Trust Preferred Capital Securities") to a third
party. In connection with the Capital Trust's issuance of the Trust Preferred
Capital Securities and the related purchase by State Auto Financial of all of
the Capital Trust's common securities, State Auto Financial issued to the
Capital Trust $15.5 million aggregate principal amount of Floating Rate Junior
Subordinated Debt Securities due 2033 (the "Subordinated Debentures"). The sole
assets of the Capital Trust are the Subordinated Debentures and any interest
accrued thereon. Interest on the Trust Preferred Capital Securities is payable
quarterly at a rate equal to the three-month LIBOR rate plus 4.20%, adjusted
quarterly (5.48% at June 30, 2003). Prior to May 2008, the interest rate may not
exceed 12.5% per annum. The interest rate and interest payment dates on the
Subordinated Debentures are the same as the interest rate and interest payment
dates on the Trust Preferred Capital Securities. The Subordinated Debentures and
the related income effects are eliminated in the accompanying consolidated
financial statements.
The Trust Preferred Capital Securities are mandatorily redeemable on May 23,
2033, and may be redeemed at any time on and after May 23, 2008, at 100% of the
principal amount thereof plus unpaid interest. The Trust Preferred Capital
Securities may be redeemed in whole, but not in part, at any time within 90 days
following the occurrence of a "Tax Event" or "Investment Company Event" (as
defined in the declaration of trust) at an amount equal to the greater of 100%
of the principal amount thereof plus accrued interest or a "make-whole" premium.
The Subordinated Debentures are subject to these same redemption terms. The
obligations under the Subordinated Debentures and related agreements, taken
together, constitute a full and unconditional guarantee of payments due on the
Trust Preferred Capital Securities.
State Auto Financial has the right, at any time, to defer payments of interest
on the Subordinated Debentures for up to 20 consecutive quarterly payment
periods. Consequently, distributions on the Trust Preferred Capital Securities
would be deferred (though such distributions would continue to accrue with
interest since interest would accrue on the Subordinated Debentures during any
such extended interest payment period). In no case may the deferral of payments
and distributions extend beyond the stated maturity dates of the respective
securities. During such deferments, State Auto Financial may not declare or pay
any dividends on, or purchase any of its capital stock, make any principal or
interest payments on debt securities, or make any payment of guarantees that
rank in all respects equally with or subordinated to the Trust Preferred Capital
Securities.
The Subordinated Debentures are unsecured and subordinated to all of the
Company's existing and future senior indebtedness. The security issuance cost of
these transactions were $456,000. In July 2003, State Auto Financial used the
proceeds from the Subordinated Debentures to make a $15.0 million cash capital
contribution to State Auto National (see discussion below).
At June 30, 2003, funds consisting of cash and cash equivalents were $39.8
million versus $38.4 million at June 30, 2002.
The Company continues to generate substantial earned premium growth which
requires capital resources. Earned premiums through the State Auto Pool
increased significantly beginning in July 2001 with the addition of the former
Meridian Mutual business. Also increasing earned premiums significantly was the
October 1, 2001 pooling change from 53% to 80%. Earned premiums increased 9.2%
and 110.0% for the six months ended June 30, 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 June 30, 2003, all of the Company's
insurance subsidiaries were in compliance with statutory requirements relating
to capital adequacy. The National Association of Insurance Commissioners
("NAIC") utilizes a collection of analytical tools designed to assist state
insurance departments with an integrated approach to screening and analyzing the
financial condition of insurance companies operating in their respective states.
One such set of analytical tools are 12 key financial ratios that have come to
be known in the insurance industry as the "IRIS" ratios. IRIS ratios are derived
from financial statements prepared on a statutory accounting basis, which are
accounting practices prescribed or permitted by the insurance department with
regulatory authority over the Company's insurance subsidiaries. A "usual range"
of results for each ratio has been established by the NAIC for solvency
monitoring. While management
utilizes each of these IRIS ratios in monitoring its operating performance on a
statutory accounting basis, the net written premium to statutory surplus ratio
(the "leverage ratio"), a non-GAAP financial measure, is monitored to ensure
that each of the Company's insurance subsidiaries continues to operate within
the "usual range" of 3.0 to 1.0. The higher the leverage ratio, the more risk a
company bears in relation to statutory surplus available to absorb losses. In
considering this range, management also considers the distribution of net
premiums between property and liability lines of business. A company with a
larger portion of net premiums from liability lines should generally maintain a
lower leverage ratio. In the case of State Auto National, a nonstandard auto
insurer, which writes lines of business that are generally short tail in nature
and with generally lower amounts of coverage applicable, there is relatively
less loss exposure to the premium than is generally the case with other lines of
business that are written for higher limits and for which losses develop over
long periods of time, such as workers compensation or other liability. In sum, a
higher premium surplus ratio with a non standard auto insurer is not necessarily
indicative of dangerous financial conditions as might be the case with another
type insurer. The leverage ratios for Milbank, State Auto P&C and State Auto
National improved at June 30, 2003 from December 31, 2002 as follows: Milbank -
2.1 vs. 2.4 to 1; State Auto P&C - 2.3 vs. 2.6 to 1; State Auto National 4.0 vs.
4.4 to 1. These improvements are due to a combination of improvement in the
underwriting operations for the six months ended June 30, 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. Subsequent to June 30, 2003,
State Auto Financial made a $15 million cash capital contribution to State Auto
National, which would have made its leverage ratio at June 30, 2003, 2.3 to 1.
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 and anticipates that there
will be an associated cost in obtaining additional capital. Management believes
the Company has sufficient capital, cash flow and potential capital resources to
meet its cash flow requirements.
Other Disclosures
- -----------------
Investments
Stateco Financial Services, Inc., the Company's wholly owned subsidiary
("Stateco"), performs investment management services (the investment management
services segment) on behalf of the Company and State Auto Mutual and its
subsidiaries. The Investment Committee of each insurer's Board of Directors sets
investment policies to be followed by Stateco.
At June 30, 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 June 30, 2003 and December 31, 2003:
June 30 December 31
2003 2002 Quality(1)
------- ----------- ----------
Corporate and Municipal Bonds 60.4% 72.0% AA+
U.S. Governments 2.5% 2.8% AAA
U.S. Government Agencies 37.1% 25.2% AAA
----- -----
Total 100.0% 100.0%
===== =====
- --------
(1) As rated by Moody's Investors Service
During the three month and six month periods ended June 30, 2003, the Company
increased its equity portfolio investments by investing an additional $17.2
million and $29.9 million, respectively, 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 June 30, 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 and
trust preferred securities 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 June 30, 2003 and December 31, 2002:
(dollars in thousands) June 30, 2003 December 31, 2002
------------- -----------------
Fixed maturities, at fair value $ 1,333,094 93.2% $ 1,216,698 95.6%
Equity securities, at fair value 88,656 6.2% 53,710 4.2%
Other invested assets, at fair value 8,353 0.6% 1,908 0.2%
----------- ------ ----------- ------
Total investments $ 1,430,103 100.0% $ 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 June 30, 2003, and, based on the factors
described above, determined no other than temporary impairment existed in the
gross unrealized holding losses, as provided in the table below. This
determination could change in the future as more information becomes known which
could negatively impact the amounts reported herein. At June 30, 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 June 30, 2003.
The following table provides detailed information on the Company's investment
portfolio for its gross unrealized gains and losses at June 30, 2003:
(dollars in thousands) Gross Gain Gross Loss
Cost or unrealized number unrealized number
June 30, 2003 amortized holding of holding of Fair value
Investment Category cost gains positions losses positions
---------- ---------- --------- --------- --------- ----------
Fixed Maturities
U.S. Treasury securities &
obligations $ 300,032 $ 16,041 87 $ 283 4 $ 315,790
States & political subdivisions 622,819 54,714 325 305 11 677,228
Corporate securities 115,719 12,248 53 -- -- 127,967
Mortgage-backed securities of
U.S. Gov. Agencies 204,884 7,396 135 171 5 212,109
---------- -------- --- ------ ---- ----------
Total fixed maturities 1,243,454 90,399 600 759 20 1,333,094
Equity Securities
Consumer 10,269 1,123 7 334 3 11,058
Technologies 7,944 459 3 211 3 8,192
Pharmaceuticals 11,447 1,756 6 345 3 12,858
Financial services 21,759 2,968 13 1,361 12 23,366
Manufacturing & other 32,037 3,463 13 2,318 20 33,182
---------- -------- --- ------ ---- ----------
Total equity securities 83,456 9,769 42 4,569 41 88,656
---------- -------- --- ------ ---- ----------
Other invested assets 8,303 50 1 -- -- 8,353
---------- -------- --- ------ ---- ----------
Total $1,335,213 $100,218 643 $5,328 61 $1,430,103
========== ======== === ====== ==== ==========
The amortized cost and fair value of fixed maturities at June 30, 2003, by
contractual maturity, are summarized as follows:
(dollars in thousands) Amortized Fair
June 30, 2003 Cost Value
---------- ----------
Due in 1 year or less $ 200 $ 201
Due after 1 year through 5 years 32,723 35,506
Due after 5 years through 10 years 299,422 321,089
Due after 10 years 706,225 764,189
---------- ----------
Subtotal 1,038,570 1,120,985
Mortgage-backed securities 204,884 212,109
---------- ----------
Total $1,243,454 $1,333,094
========== ==========
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.
Included in realized losses of equity securities below, was $254,000 recognized
related to other than temporary impairment on three equity positions for the
three month and six month periods ended June 30, 2003. The individual
circumstances generating the other than temporary impairments recognized during
2003 did not impact other investments. There were no individual material equity
securities for which the Company recognized other than temporary impairment.
There were no other than temporary impairments of equity securities for the same
periods in 2002. There were no other than temporary impairments of fixed
maturity securities for the three month and six month periods ended June 30,
2003 and 2002.
The securities sold during the three and six months ended June 30, 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
and six months ended June 30, 2003 are summarized as follows:
(dollars in thousands) Three months ended Six months ended
------------------------------ ------------------------------
June 30 June 30
------- -------
Realized Fair Value at Realized Fair Value at
Gains/Losses Sale Gains/Losses Sale
------------ ------------- ------------ -------------
Realized gains:
Fixed maturities $ 4,427 $ 96,484 $ 9,139 $176,335
Equity securities -- -- 16 196
-------- -------- -------- --------
Total realized gains 4,427 96,484 9,155 176,531
Realized losses:
Fixed maturities -- -- 29 2,133
Equity securities 254 -- 1,108 1,028
-------- -------- -------- --------
Total realized losses 254 -- 1,137 3,161
-------- -------- -------- --------
Net realized gains on investments $ 4,173 $ 96,484 $ 8,018 $179,692
======== ======== ======== ========
Loss and Loss Expenses Payable
The following table presents the loss and loss expenses payable by major line
of business at June 30, 2003 and December 31, 2002, respectively:
June 30 December 31
2003 2002 % Change
-------- ---------- --------
(dollars in thousands)
Automobile - personal (standard) $176,880 $181,778 -9.5%
Automobile - personal (nonstandard) 37,986 35,270 7.7%
Automobile - commercial 82,412 72,800 13.2%
Homeowners 50,439 45,850 10.0%
Commercial multi-peril 86,675 77,018 12.5%
Workers' compensation 75,484 77,801 -3.0%
Fire and allied lines 21,218 14,416 47.2%
Other/products liability 86,275 80,539 7.1%
Miscellaneous personal/commercial lines 4,176 6,661 -37.3%
-------- -------- ------
Total losses and loss expenses payable, net of
reinsurance recoverable on losses and loss expenses
payable of $18,220 and $8,825, respectively $621,545 $592,133 5.0%
======== ======== =====
Total net losses and loss expenses payable increased 5% from December 31, 2002
to June 30, 2003. This increase was consistent with that of a growing company
and resulting increased claims activity, as well as the outstanding catastrophe
claim activity relating to CAT 88 (see discussion above). Overall, management
does not believe there was a significant change in the total book of business at
June 30, 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 of pre-tax
income to changes in reserve estimates, for every 1% change in the ultimate
development of the June 30, 2003 total losses and loss expenses payable, the
effect on pre-tax income would be $6.2 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.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with the Characteristics of Both Liabilities and Equity, effective
for reporting periods after July 1, 2003. This
Statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. The Company has not yet
determined the effect, if any the adoption of this Statement will have on the
earnings and financial position of the Company.
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, have affected and in the future could affect
the Company's actual financial performance.
- In addition to the acquisition of the Meridian Insurers and State
Auto Mutual's merger with Meridian Mutual, during the past several
years, State Auto Mutual and the Company have acquired other insurance
companies, such as Milbank, Farmers Casualty, and SA Wisconsin, and it
is anticipated that State Auto 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,
particularly with respect to price. 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 State Auto 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) 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 (as
defined in Exchange Act Rule 13a-15 (e)) Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that, as
of the end of the period covered by this report, the Company's disclosure
controls and procedures were 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 has been no change in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 30, 2003, State Auto Financial Corporation ("State Auto
Financial") and State Automobile Mutual Insurance Company ("State Auto Mutual")
filed suit against Gregory M. Shepard, a 5% shareholder of State Auto Financial,
in the United States District Court, Southern District of Ohio, Eastern
Division, seeking injunctive relief to (i) enjoin Mr. Shepard from making
material misrepresentations and omissions in his Schedule 13D filings with the
Securities and Exchange Commission ("SEC") and from violating federal securities
laws, (ii) require Mr. Shepard to file an amended Schedule 13D with the SEC
correcting his material misrepresentations and omissions and (iii) enjoin Mr.
Shepard from purchasing any additional State Auto Financial shares, making any
further proposals to take over State Auto Mutual, State Auto Financial or any of
their affiliates and making an actual or proposed tender offer for any State
Auto Financial shares, until 30 days after Mr. Shepard files a curative Schedule
13D with the SEC that is approved by the federal court. This litigation related
to a series of press releases and Schedule 13D filings made by Mr. Shepard
regarding proposals or purported offers to purchase certain amounts of State
Auto Financial's common shares and to take control of State Auto Financial and
State Auto Mutual. Based upon the recommendation of a special committee of
outside directors, which was unanimously endorsed by the full board of
directors, State Auto Mutual has informed Mr. Shepard that it does not intend to
enter into discussions with him.
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
The annual meeting of shareholders of State Auto Financial Corporation
was held on May 23, 2003. The total shares represented at the meeting were
35,452,179 common shares. This constituted 90.5% of the Company's 39,162,572
common shares outstanding. At the meeting, the shareholders voted on the
following proposals:
1. The election of Urlin G. Harris, Jr and Richard K. Smith as Class III
Directors, each to hold office until the 2006 annual meeting of shareholders and
until a successor is elected and qualified, with each director nominee receiving
the votes indicated:
NUMBER OF VOTES
---------------
FOR WITHHELD
--- --------
Urlin G. Harris, Jr. 35,391,634 60,545
Richard K. Smith 35,360,224 91,955
On the basis of this vote, Urlin G. Harris and Richard K. Smith were
elected as Class III Directors to serve until the 2006 annual meeting and until
his successor is elected and qualified.
2. A proposal to amend the Company's 2000 Directors Stock Option Plan.
The Company's common shares were voted as follows with respect to such proposal:
For the Amendment Opposed to the Amendment Abstain
----------------- ------------------------ -------
34,880,121 465,589 106,469
On the basis of this vote, the amendment to the Company's 2000
Directors Stock Option Plan was adopted by the shareholders.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
No. Description of Exhibits
------- -----------------------
31.1 CEO certification required by Section 302 of Sarbanes
Oxley Act of 2002
31.2 CFO certification required by Section 302 of Sarbanes
Oxley Act of 2002
32.1 CEO certification required by Section 906 of Sarbanes
Oxley Act of 2002
32.2 CFO certification required by Section 906 of Sarbanes
Oxley Act of 2002
10(WW) Employment Agreement dated as of May 22, 2003,
between State Auto Financial Corporation and Robert
H. Moone
10(XX) Amended and Restated Declaration of Trust of STFC
Capital Trust I, dated as of May 22, 2003
10(YY) Indenture dated as of May 22, 2003, for Floating Rate
Junior Subordinated Debt Securities Due 2033
b. Reports on Form 8-K
On May 1, 2003, the Company filed a Form 8-K under Items 7 and
9 furnishing a copy of its 2003 first quarter earnings press
release.
On each of May 30, 2003, June 4, 2003, June 6, 2003, June 13,
2003, and June 30, 2003, the Company filed a Form 8-K under
Item 5.
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: August 12, 2003 /s/ Steven J. Johnston
-------------------------------------
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Exhibit
No. Description of Exhibits
- ------- -----------------------
31.1 CEO certification required by Section 302 of Sarbanes Oxley Act of 2002
31.2 CFO certification required by Section 302 of Sarbanes Oxley Act of 2002
32.1 CEO certification required by Section 906 of Sarbanes Oxley Act of 2002
32.2 CFO certification required by Section 906 of Sarbanes Oxley Act of 2002
10(WW) Employment Agreement dated as of May 22, 2003, between State Auto Financial Corporation
and Robert H. Moone
10(XX) Amended and Restated Declaration of Trust of STFC Capital Trust I, dated as of May 22,
2003
10(YY) Indenture dated as of May 22, 2003, for Floating Rate Junior Subordinated Debt
Securities Due 2033