<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 March 31, 1997
----------------------------------------
( ) Transition report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Transition period from to
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State Auto Financial Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1324304
- --------------------------------- ----------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
518 East Broad Street, Columbus, Ohio 43215-3976
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(Address of principal executive offices) (zip code)
(614) 464-5000
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares, without par value 18,151,775
-------------------------------- -----------------------
(Class) (Outstanding on 5/1/97)
<PAGE> 2
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1997 1996
-------- -----------
(unaudited) (Note 1)
<S> <C> <C>
Fixed maturities:
Held for investment, at amortized cost
(fair value $87,997,005 and $91,058,485, respectively) $ 88,572,879 $90,251,124
Available for sale, at fair value
(amortized cost $293,996,277 and $286,790,650, respectively) 296,482,237 294,056,432
------------ ------------
Total investments 385,055,116 384,307,556
Cash and cash equivalents 14,212,734 12,867,968
Deferred policy acquisition costs 16,583,088 15,711,347
Accrued investment income and other assets 15,373,880 13,845,107
Net prepaid pension expense 10,939,508 10,622,708
Reinsurance recoverable 9,564,909 9,691,202
Prepaid reinsurance premiums 2,954,172 3,379,741
Deferred federal income taxes 1,509,863 153,984
Property and equipment, net 2,511,831 2,540,526
------------ ------------
Total assets $458,705,101 $453,120,139
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable $166,445,161 $165,874,707
Unearned premiums 94,864,461 93,883,927
Current federal income taxes 2,553,515 2,076,374
Due to affiliates 1,805,926 2,903,548
Other liabilities 2,231,422 1,920,655
------------ ------------
Total liabilities 267,900,485 266,659,211
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, without par value. Authorized 30,000,000
shares; 18,151,775 and 18,135,526 shares issued and outstanding,
respectively, at stated value of $5 per share 90,758,875 90,677,630
Additional paid-in capital 1,556,854 1,456,083
Net unrealized holding gains 2,055,451 5,179,126
Retained earnings 96,433,436 89,148,089
------------ ------------
Stockholders' equity 190,804,616 186,460,928
------------ ------------
Total liabilities and stockholders' equity $458,705,101 $453,120,139
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 3
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
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(unaudited) (unaudited)
<S> <C> <C>
Earned premiums (net of ceded earned premiums of
$2,747,392 and $2,711,879, respectively) $62,250,671 $58,934,087
Net investment income 6,235,524 5,941,492
Management services income 2,207,053 2,007,015
Net realized gains on investments 238,382 449,383
----------- -----------
Total revenues 70,931,630 67,331,977
----------- -----------
Losses and loss expenses (net of ceded losses and loss
expenses of $1,034,489 and $1,038,137, respectively) 41,940,316 42,642,360
Acquisition and operating expenses 18,094,503 16,344,523
Other expense, net 551,566 664,152
----------- -----------
Total expenses 60,586,385 59,651,035
----------- -----------
Earnings before federal income taxes 10,345,245 7,680,942
Federal income tax expense:
Current 2,487,295 2,181,071
Deferred 326,532 (107,337)
----------- -----------
Total federal income taxes 2,813,827 2,073,734
----------- -----------
Net earnings $7,531,418 $5,607,208
=========== ===========
Weighted average common shares outstanding 18,145,036 18,028,371
=========== ===========
Net earnings per common share $0.42 $0.31
=========== ===========
Dividends paid per common share $0.040 $0.037
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1997
(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,
1996 included in the Company's 1996 Form 10-K filed with the Securities and
Exchange Commission.
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, 1997.
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.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded, and is not expected to be material to the Company. The Company has
not yet determined what the impact of Statement 128 will be on the calculation
of fully diluted earnings per share, but it is not expected to be material.
<PAGE> 5
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 increased $2.6 million to $10.3 million
for the three months ended March 31, 1997 from the same 1996 period. This
increase is due to a combination of earned premium growth and an improvement in
the losses and loss expenses of the Company from the same 1996 period. The GAAP
combined ratio, i.e., losses and loss expenses plus acquisition and operating
expenses, as a percentage of earned premiums, decreased to 96.5% for the
quarter ended March 31, 1997 from 100.1% for the same 1996 period.
Earned premiums, during the quarter ended March 31, 1997, increased $3.3
million (5.6%) to $62.3 million from the same 1996 period. The Company's
principal insurance subsidiary, State Auto P&C, increased its earned premiums
approximately 2.8% from the same 1996 period. Approximately 1.3 percentage
points of this increase is due to the catastrophe reinsurance agreement,
effective July 1, 1996, between State Auto P&C and its insurance affiliates
whereby State Auto P&C became the catastrophe reinsurer for the State Auto
Insurance Companies (State Auto P&C, Mutual, Milbank and National) for $100.0
million excess of $120.0 million, pursuant to a catastrophe assumption
reinsurance agreement. While the pooled companies' (State Auto P&C, Mutual and
Milbank) personal lines continue to experience no growth, commercial lines
direct written premiums continue to increase at comparable 1996 levels of 10%
per quarter. National, the Company's non-standard automobile subsidiary,
increased its earned premium 58.8% from the same 1996 period, while its net
written premiums increased 92.7% from the same 1996 period. Contributing to
these increases was National's entry into three new states of operation in late
1996. Currently, National plans entry into two to three states during 1997.
Net investment income increased $0.3 million (4.9%) to $6.2 million from the
same 1996 period. An increase in invested assets over the same 1996 period
contributed to this increase. Total amortized cost of investable assets at
March 31, 1997 was $396.8 million compared to $374.3 million at March 31, 1996.
The investment yield increased slightly to 6.27% from 6.26% for the same period
in 1996.
Management services income increased $0.2 million (10.0%) to $2.2 million from
the same 1996 period. This change is due to an increase in insurance management
fee income of approximately $0.2 million over the same period in 1996.
Losses and loss expenses, as a percentage of earned premiums, decreased to
67.4% for the quarter ended March 31, 1997 from 72.4% for the same 1996 period.
While catastrophe losses for these two periods were comparable, the Company
continues to record improvements in its underlying book of business. For the
first quarter of 1997, nearly all lines of business recorded an improvement in
their statutory loss ratio over the same period in 1996.
Acquisition and operating expenses, as a percentage of earned premiums,
increased to 29.1% for the quarter ended March 31, 1997 from 27.7% for the same
1996 period. The increase in expense is primarily due to the following:
beginning with the first quarter of 1997, the Companies began amortizing costs
associated with the development of its claims and billing processing system
that began a little over two years ago. The amortization period of these costs
will be approximately three years. Also beginning in the first quarter of 1997,
the Company began to incur costs associated with the internal maintenance and
support of these new systems. Additionally, there was an increase over the same
period in 1996 of the Quality Performance Bonus (the Bonus) earned by nearly
all permanent employees. Performance is measured quarterly and the Bonus is
earned if the State Auto Insurance Companies' quarterly direct statutory
combined ratio is better than predetermined targets set at the beginning of
each fiscal year.
<PAGE> 6
Federal income taxes increased $0.7 million to $2.8 million due to an increase
in taxable income over the same period in 1996. Effective tax rates remained
comparable for the two periods.
Liquidity and Capital Resources
Net cash provided by operating activities decreased to $6.9 million for the
quarter ended March 31, 1997 from $7.5 million for the same 1996 period. Net
cash used in investing activities increased to $5.5 million from $2.0 million
for the same 1996 period. Net cash used in financing activities remained
somewhat comparable to the 1996 period. As of March 31, 1997, funds consisting
of cash and cash equivalents available for general operations were $14.2
million compared to $16.7 million at March 31, 1996. No long-term fixed
maturities were required to be sold to meet obligations during the first three
months of 1996.
The Board of Directors declared a quarterly cash dividend of $0.04 per common
share payable on March 31, 1997, to shareholders of record on March 13, 1997.
The Company had no material commitments for capital expenditures as of March
31, 1997.
In April 1997, the Company entered into a contract to acquire land on which it
plans to build an office building to use as a new office for the State Auto
Insurance Companies' Nashville Regional Office (NRO) when the lease for the
current NRO office expires in 1999. The Company currently plans to build a
building of approximately 35,000 square feet for which it currently estimates
$5.5 million to develop and build.
The State Auto Insurance Companies, like most owners and users of computer
software, are required to modify significant portions of its software so that
it will function properly in the Year 2000. The Companies have dedicated
resources in order to achieve Year 2000 compliance.
New Accounting Standards
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded, and is not expected to be material to the Company. The Company has
not yet determined what the impact of Statement 128 will be on the calculation
of fully diluted earnings per share, but it is not expected to be material.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995
Statements contained herein expressing the beliefs of management and the other
statements which are not historical facts contained in this report are forward
looking statements that involve risks and uncertainties. These risks and
uncertainties include but are not limited to: legislative, judicial, and
regulatory changes, the impact of competitive products and pricing, product
development, geographic spread of risk, weather and weather-related events,
other types of catastrophic events, fluctuations of securities markets, and
technological difficulties and advancements.
<PAGE> 7
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
Item 5. Other Information - None
Item 6. a. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits Reference
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<S> <C> <C>
27 Financial Data Schedules Included herein
</TABLE>
b. Reports on Form 8-K - None
<PAGE> 8
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
State Auto Financial Corporation
Date: May 13, 1997 /s/ STEVEN J. JOHNSTON
-------------------------------------
Steven J. Johnston
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 CORPORATIONS
QUARTERLY REPORT ON FORM 10-Q FOR THE INTERIM PERIOD
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 296,482,237
<DEBT-CARRYING-VALUE> 88,572,879
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 385,055,116
<CASH> 14,212,734
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 16,583,088
<TOTAL-ASSETS> 458,705,101
<POLICY-LOSSES> 156,880,252
<UNEARNED-PREMIUMS> 91,910,289
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 90,758,875
<OTHER-SE> 100,045,741
<TOTAL-LIABILITY-AND-EQUITY> 458,705,101
62,250,671
<INVESTMENT-INCOME> 6,235,524
<INVESTMENT-GAINS> 238,382
<OTHER-INCOME> 2,207,053
<BENEFITS> 41,940,316
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 18,094,503
<INCOME-PRETAX> 10,345,245
<INCOME-TAX> 2,813,827
<INCOME-CONTINUING> 7,531,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,531,418
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
