<PAGE> 1
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, 1996
-------------------------------------------------
( ) Transition report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Transition period from to
----------------------- ------------------------
State Auto Financial Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Ohio 31-1324304
- ---------------------------------------------- ----------------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
518 East Broad Street, Columbus, Ohio 43215-3976
- ---------------------------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(614) 464-5000
- ---------------------------------------------------------------------------------------------------
Registrant's telephone number, including area code
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares, without par value 18,086,712
- -------------------------------- ---------------------------------
(CLASS) (OUTSTANDING ON 08/01/96)
<PAGE> 2
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Number
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<S> <C>
PART I - Financial Information
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Earnings -
For the three months ended June 30, 1996 and 1995 4
For the six months ended June 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of Operations
and Financial Condition 8-9
PART II - Other Information 10
</TABLE>
2
<PAGE> 3
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1996 1995
------------ ------------
(unaudited) (Note 1)
<S> <C> <C>
Fixed maturities:
Held for investment, at amortized cost $ 90,312,388 $ 91,528,968
(fair value $89,944,050 and $93,939,778, respectively)
Available for sale, at fair value 270,130,723 278,318,510
(amortized cost $266,230,668 and $263,820,502, respectively)
------------ ------------
Total investments 360,443,111 369,847,478
Cash and cash equivalents 22,078,888 11,227,375
Deferred policy acquisition costs 16,449,283 15,866,092
Accrued investment income and other assets 13,474,123 13,167,739
Net prepaid pension expense 9,935,880 9,384,680
Reinsurance recoverable 8,937,213 9,277,494
Prepaid reinsurance premiums 3,397,239 3,169,925
Deferred federal income taxes 1,398,958 --
Property and equipment, net 2,601,912 2,555,376
------------ ------------
Total assets $438,716,607 $434,496,159
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable $167,482,416 $170,575,325
Unearned premiums 92,343,476 90,107,566
Current federal income taxes 192,041 565,431
Deferred federal income taxes -- 2,334,170
Due to affiliates 4,970,042 795,696
Other liabilities 1,721,548 1,865,599
------------ ------------
Total liabilities 266,709,523 266,243,787
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, without par value. Authorized 30,000,000
shares; 18,086,863 and 18,025,375 shares issued and outstanding,
respectively, at stated value of $5 per share 90,434,318 90,126,878
Additional paid-in capital 1,057,438 681,672
Net unrealized holding gains 3,023,480 9,964,824
Retained earnings 77,491,848 67,478,998
------------ ------------
Stockholders' equity 172,007,084 168,252,372
------------ ------------
Total liabilities and stockholders' equity $438,716,607 $434,496,159
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Earned premiums (net of ceded earned premiums of
$2,769,194 and $2,976,745 respectively) $59,861,465 $ 58,185,303
Net investment income 5,925,574 5,704,772
Management services income 2,000,020 1,887,145
Net realized gains on investments 587,854 585,399
----------- ------------
Total revenues 68,374,913 66,362,619
----------- ------------
Losses and loss expenses (net of ceded losses and loss
expenses of $1,198,968 and $1,410,280, respectively) 44,326,383 40,280,987
Acquisition and operating expenses 16,582,300 16,855,767
Other expense, net 799,109 330,629
----------- ------------
Total expenses 61,707,792 57,467,383
----------- ------------
Earnings before federal income taxes 6,667,121 8,895,236
Federal income tax expense (benefit):
Current 1,704,645 2,815,444
Deferred 112,410 (154,299)
----------- ------------
Total federal income taxes 1,817,055 2,661,145
----------- ------------
Net earnings $ 4,850,066 $ 6,234,091
=========== ============
Weighted average common shares outstanding 18,057,291 17,938,791
=========== ============
Net earnings per common share $ 0.27 $ 0.35
=========== ============
Dividends paid per common share $ 0.037 $ 0.033
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ -------------
(unaudited) (unaudited)
<S> <C> <C>
Earned premiums (net of ceded earned premiums of
$5,481,073 and $5,581,471, respectively) $118,795,552 $ 115,235,189
Net investment income 11,867,066 11,013,409
Management services income 4,007,035 3,740,376
Net realized gains on investments 1,037,237 821,024
------------ -------------
Total revenues 135,706,890 130,809,998
------------ -------------
Losses and loss expenses (net of ceded losses and loss
expenses of $2,237,105 and $2,936,803, respectively) 86,968,743 77,850,037
Acquisition and operating expenses 32,926,823 33,791,408
Other expense, net 1,463,261 870,357
------------ -------------
Total expenses 121,358,827 112,511,802
------------ -------------
Earnings before federal income taxes 14,348,063 18,298,196
Federal income tax expense (benefit):
Current 3,885,716 6,298,646
Deferred 5,073 (1,125,689)
------------ -------------
Total federal income taxes 3,890,789 5,172,957
------------ -------------
Net earnings $ 10,457,274 $ 13,125,239
============ =============
Weighted average common shares outstanding 18,043,820 17,926,875
============ =============
Net earnings per common share $ 0.58 $ 0.73
============ =============
Dividends paid per common share $ 0.073 $ 0.067
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
STATE AUTO FINANCIAL CORPORATION AND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 10,457,274 $ 13,125,239
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization, net 376,142 234,761
Change in deferred policy acquisition costs (583,191) (167,384)
Change in accrued investment income and other assets (306,384) (2,013,356)
Change in net prepaid pension expense (551,200) (358,702)
Change in other liabilities and due to/from affiliate, net 4,029,865 (2,497,503)
Change in reinsurance recoverable and prepaid reinsurance premiums 112,967 (260,661)
Change in losses and loss expenses payable (3,092,909) 2,092,620
Change in unearned premiums 2,235,910 3,072,850
Change in federal income taxes (368,318) (2,577,043)
Net realized gains on investments (1,056,640) (821,024)
------------ ------------
11,253,516 9,829,797
Cash provided from the change in the reinsurance pool participation
percentages -- 46,061,226
------------ ------------
Net cash provided by operating activities 11,253,516 55,891,023
------------ ------------
Cash flows from investing activities:
Purchase of fixed maturities - held to maturity (6,058,920) (7,797,775)
Purchase of fixed maturities - available for sale (60,866,146) (92,089,573)
Maturities, calls and principal reductions of fixed maturities -
held to maturity 7,109,710 1,907,636
Maturities, calls and principal reductions of fixed maturities -
available for sale 2,020,000 571,474
Sale of fixed maturities - available for sale 57,256,234 36,370,806
Net additions of property and equipment (101,663) --
------------ ------------
Net cash used in investing activities (640,785) (61,037,432)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 683,206 515,468
Payment of dividends (444,424) (396,422)
------------ ------------
Net cash used in financing activities 238,782 119,046
------------ ------------
Net increase (decrease) in cash and cash equivalents 10,851,513 (5,027,363)
Cash and cash equivalents at beginning of period 11,227,375 11,955,234
------------ ------------
Cash and cash equivalents at end of period $ 22,078,888 $ 6,927,871
============ ============
Supplemental disclosures:
Federal income taxes paid $ 4,259,106 $ 7,750,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1996
(unaudited)
1. BASIS OF PRESENTATION
The financial statements for the interim periods included herein have been
prepared by the Company without audit; however, such information reflects all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended December 31,
1995 included in the Company's 1995 Annual Report filed with the Securities and
Exchange Commission on Form 10-K.
The results of operations for the interim periods presented are not necessarily
indicative of the operating results that may be expected for the full fiscal
year ending December 31, 1996.
2. NET EARNINGS PER COMMON SHARE
Net earnings per common share is computed on the basis of the weighted average
number of common shares outstanding during each of the respective periods
presented. Additional shares arising from the assumed exercise of employee and
director stock options were not included in the computations as the dilutive
effect was not material.
3. STOCK SPLIT
On May 30, 1996, the Board of Directors of the Company authorized a
three-for-two stock split to be effected in the form of a stock dividend,
payable July 8, 1996 to shareholders of record on June 17, 1996. The stated
value for the additional shares issued was transferred from additional paid-in
capital and retained earnings to common stock and is reflected retroactively in
the accompanying condensed consolidated financial statements. Common shares
issued and outstanding, weighted average shares and per share data have been
restated for periods presented in the accompanying condensed consolidated
financial statements.
4. RECLASSIFICATIONS
Certain items in the 1995 condensed consolidated financial statements have
been reclassified to conform with the 1996 presentation.
7
<PAGE> 8
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Earnings before Federal income taxes decreased $2.2 million to $6.7 million for
the three months ended June 30, 1996 from the same 1995 period. Severe spring
tornadoes and hailstorms, that struck many of the Company's mid-west operating
states, generated property claims that contributed to this decrease. For the six
months ended June 30, 1996, earnings before Federal income taxes decreased $3.9
million to $14.3 million from the same 1995 period. Winter-weather related
catastrophe claims experienced in most of the Company's operating states during
the first quarter of 1996, as well as the second quarter claims resulting from
the spring storms contributed to the six month decrease. In spite of these
catastrophe claims experienced during the first six months of 1996, the positive
performance of the underlying book of business helped temper the impact of these
storms. The GAAP combined ratio, i.e., losses and loss expenses plus acquisition
and operating expenses, as a percentage of earned premiums, increased to 101.7%
for the quarter ended June 30, 1996 from 98.2% for the same period in 1995 and
for the six months ended June 30, 1996, increased to 100.9% from 96.9% for the
same period in 1995.
Earned premiums increased $1.7 million to $59.9 million for the quarter ended
June 30, 1996 and $3.6 million to $118.8 million for the six months ended June
30, 1996, from the same 1995 periods. Direct written premiums for commercial
lines of business increased approximately 10.7% and 9.7% from the same three
month and six month periods, respectively, in 1995. Personal lines of business,
except for State Auto National's nonstandard auto products, experienced nominal
declines in direct written premiums for the first and second quarters of 1996.
Management is continually reviewing current strategies and developing new ones
to enhance personal lines sales without adversely affecting the Company's book
of business which has improved as a result of actions undertaken by management.
State Auto National's direct written premiums increased approximately 38% for
the quarter ended June 30, 1996 from the same 1995 period and 49% for the six
months ended June 30, 1996 from the same 1995 period. State Auto National
currently operates in five states and anticipates entering two additional states
in late 1996.
Net investment income increased $0.2 million to $5.9 million for the quarter
ended June 30, 1996 and $0.9 million to $11.9 million for the six months ended
June 30, 1996, from the same 1995 periods. An increase in invested assets over
the same 1995 periods contributed to these increases. Total amortized cost of
invested assets at June 30, 1996 was $356.5 million compared to $338.6 million
at June 30, 1995. The investment yield decreased to 6.22% and 6.24% for the
quarter and six months ended June 30, 1996 compared to 6.57% and 6.47% for the
same 1995 periods, respectively.
Management services revenue increased $0.1 million to $2.0 million for the
quarter ended June 30, 1996 and $0.3 million for the six months ended June 30,
1996 from the same 1995 periods. These increases are due to increases in the
fees generated from both investment and management services from the same
periods in 1995.
Losses and loss expenses, as a percentage of earned premiums, increased to 74.0%
for the quarter ended June 30, 1996 from 69.2% for the same 1995 period and for
the six months ended June 30, 1996, increased to 73.2% from 67.6% for the same
1995 period. As previously discussed, the Company experienced property damage
claims resulting from severe tornadoes and hailstorms in many of its mid-western
operating states during the second quarter of 1996. The losses resulting from
these catastrophe claims exceeded the amount of 1995 catastrophe claims thereby
increasing the GAAP loss ratio in the current quarter by 4.6 percentage points.
For the six months ended June 30, 1996, winter storm losses from the first
quarter of 1996, combined with the storm activity of the second quarter of 1996,
8
<PAGE> 9
exceeded the amount of 1995 comparable period catastrophe claims increasing the
1996 six month ratio by 5.4 percentage points.
In spite of the increased storm activity experienced by the Company during the
current quarter and first half of 1996, the underlying book of business remains
strong and profitable. The Company's largest line of business, automobile,
continued to improve compared to the same period one year ago. Management
continues to stress the importance of careful risk selection and pricing to its
agents and field personnel.
Acquisition and operating expenses, as a percentage of earned premiums,
decreased to 27.7% for the quarter ended June 30, 1996 from 29.0% for the same
1995 period and for the six months ended June 30, 1996, decreased to 27.7% from
29.3% for the same 1995 period. The decrease in these ratios for 1996 is due
primarily to the decrease in the amount of Quality Performance Bonus earned by
employees of the State Auto Group in 1996 compared to the same periods in 1995.
Additionally, the Company continues to experience a positive impact on its
underwriting expenses due to reinsurance transactions on an involuntary pool
compared to the same periods in 1995. The Company cannot anticipate that similar
reinsurance transactions will occur in future periods.
Federal income taxes decreased $0.8 million to $1.8 million for the quarter
ended June 30, 1996 and $1.3 million to $3.9 million for the six months ended
June 30, 1996 from the same periods in 1995. These decreases are due to the
decrease in taxable income as a result of the increased levels of catastrophe
losses in 1996 compared to the same periods in 1995.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities decreased to $11.3 million for the six
months ended June 30, 1996 from $55.9 million for the same 1995 period. This
decrease is primarily due to the fact that on January 1, 1995, $46.0 million was
transferred to State Auto P&C, in connection with the amended pooling
arrangement while no pooling change took place in this 1996 period. This
similarly affected net cash used in investing activities which decreased to $0.6
million for the six months ended June 30, 1996 from $61.0 million for the same
1995 period. As of June 30, 1996, funds consisting of cash and cash equivalents
available for general operations were $22.1 million compared to $6.9 million at
June 30, 1995. No long-term fixed maturities were required to be sold to meet
financial obligations during the first six months of 1996.
Effective April 15, 1996, the Board of Directors of State Auto Financial
Corporation and State Auto National approved a capital contribution to State
Auto National in the amount of $5.0 million. This action contributed to State
Auto National maintaining the A.M. Best (Best) rating of A+ for 1995. State Auto
National, which formerly received a "group" Best rating, will be rated
independently of the pooled companies' (State Automobile Mutual Insurance
Company, State Auto P&C Insurance Company and Milbank Insurance Company)
operations by Best in the future.
The Company is currently negotiating a structured contingent financing
transaction with Chase Manhattan Bank as a form of "nontraditional" reinsurance
to provide up to $100,000,000 to use to pay catastrophe losses in the event a
catastrophic loss event causes losses to the State Auto Group in excess of
$120,000,000. The transaction has not been completed as it is subject to
regulatory approval in Ohio, South Carolina and South Dakota, which has not been
obtained as of this writing.
The Board of Directors declared a quarterly cash dividend of $0.037 (adjusted
for 3-for-2 stock split) per common share payable on June 28, 1996, to
shareholders of record on June 10, 1996. Additionally, at its May 30, 1996,
Annual Meeting, the Board of Directors declared a three-for-two stock split,
effected in the form of a stock dividend, payable July 8, 1996, to shareholders
of record on June 17, 1996. All per share figures have been adjusted to reflect
the stock split.
The Company had no material commitments for capital expenditures as of June 30,
1996.
9
<PAGE> 10
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
The annual meeting of shareholders of State Auto Financial Corporation
was held on Thursday, May 30, 1996. The total shares represented at the meeting
were 16,294,995. This constituted 90.32% of the Company's 18,040,225.5 shares
outstanding. At the meeting, the shareholders voted on two resolutions and the
following is the result of that vote.
Regarding the resolution to elect Robert L. Bailey, William J. Lhota
and David J. D'Antoni as Class II Directors, each to hold office until the 1999
annual meeting of shareholders and until a successor is elected and qualified,
each director nominee received the votes indicated:
<TABLE>
<CAPTION>
NUMBER OF VOTES
---------------
FOR WITHHELD
--- --------
<S> <C> <C>
Robert L. Bailey 16,242,798 52,197
William J. Lhota 16,243,470 51,525
David J. D'Antoni 16,245,903 49,092
</TABLE>
On the basis of this vote, Robert L. Bailey, William J. Lhota and David
J. D'Antoni were elected as Class II Directors to serve until the 1999 annual
meeting and until a successor is elected and qualified.
Regarding the resolution to approve Amendment No. 1 to the 1991
Employee Stock Purchase and Dividend Reinvestment Plan increasing the number of
shares available to be purchased pursuant to the plan from 600,000 to 1,200,000,
the resolution received the vote indicated:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
16,177,575 103,665 13,755
</TABLE>
On the basis of this vote, the resolution approving Amendment No. 1 to
the 1991 Employee Stock Purchase and Dividend Reinvestment Plan was adopted by
the shareholders.
All above share figures have been adjusted for a three-for-two stock
split which was paid in the form of a stock dividend on July 8, 1996.
Item 5. Other Information - None
10
<PAGE> 11
INDEX TO EXHIBITS
Item 6. a. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits Page No.
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<S> <C> <C>
27 Financial data schedules
</TABLE>
b. Reports on Form 8-K - None
<PAGE> 12
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 9, 1996 /s/ Urlin G. Harris, Jr.
-------------- ------------------------
Urlin G. Harris, Jr.
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATE AUTO
FINANCIAL CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE INTERIM PERIOD
ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 270,130,723
<DEBT-CARRYING-VALUE> 90,312,388
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 360,443,111
<CASH> 22,078,888
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 16,449,283
<TOTAL-ASSETS> 438,716,607
<POLICY-LOSSES> 158,545,203
<UNEARNED-PREMIUMS> 88,946,237
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 90,434,318
0
0
<OTHER-SE> 81,572,766
<TOTAL-LIABILITY-AND-EQUITY> 438,716,607
118,795,552
<INVESTMENT-INCOME> 11,867,066
<INVESTMENT-GAINS> 1,037,237
<OTHER-INCOME> 4,007,035
<BENEFITS> 86,968,743
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 32,926,823
<INCOME-PRETAX> 14,348,063
<INCOME-TAX> 3,890,789
<INCOME-CONTINUING> 10,457,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,457,274
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
