<PAGE> 1
================================================================================
SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
STATE AUTO FINANCIAL CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
================================================================================
<PAGE> 2
[State Auto Financial Corporation Logo]
STATE AUTO FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of
STATE AUTO FINANCIAL CORPORATION:
Notice is hereby given that the Annual Meeting of Shareholders of State
Auto Financial Corporation (the "Company") will be held at the Company's
principal executive offices located at 518 East Broad Street, Columbus, Ohio, on
Thursday, May 29, 1997, at 10:00 A.M., EDST, for the following purposes:
1. To elect three Class III directors, each to hold office for a three
year term and until a successor is elected and qualified;
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The close of business on April 7, 1997, has been fixed as the record date
for the determination of shareholders entitled to notice of and to vote at the
meeting and any adjournment thereof.
In order that your shares may be represented at this meeting and to assure
a quorum, please sign and return the enclosed proxy promptly. A return addressed
envelope, which requires no postage, is enclosed. In the event you are able to
attend and wish to vote in person, at your request we will cancel your proxy.
By Order of the Board of Directors
JOHN R. LOWTHER
Secretary
Dated: April 21, 1997
<PAGE> 3
STATE AUTO FINANCIAL CORPORATION
PROXY STATEMENT
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of State Auto Financial Corporation (the
"Company") to be used at its Annual Meeting of Shareholders to be held May 29,
1997. Shares represented by properly executed proxies will be voted at the
meeting in accordance with the choices indicated on the proxy. Any proxy may be
revoked at any time, insofar as it has not been exercised, by delivery to the
Company of a subsequently dated proxy or by giving notice of revocation to the
Company in writing or in open meeting. A shareholder's presence at the Annual
Meeting does not by itself revoke the proxy.
The mailing address of the principal executive offices of the Company is
518 East Broad Street, Columbus, Ohio 43215. The approximate date on which this
Proxy Statement and the form of proxy are first being sent or given to
shareholders is April 21, 1997.
The close of business on April 7, 1997, has been fixed as the record date
for the determination of shareholders entitled to notice of and to vote at the
meeting and any adjournment thereof. On the record date there were outstanding
and entitled to vote 18,151,775 of the Company's Common Shares, without par
value. Each Common Share is entitled to one vote.
ELECTION OF DIRECTORS
The number of directors currently is fixed at nine. The board of directors
is divided into three classes, Class I, Class II and Class III, with three
directors in each Class. The terms of office of directors in one Class expire
annually at each annual meeting of shareholders at such time as their successors
are elected and qualified. Directors in each Class are elected for three year
terms. The term of office of the Class III directors expires concurrently with
the holding of the Annual Meeting, and the three incumbent directors in such
Class have been nominated for re-election.
At the Annual Meeting, it is the intention of the persons named in the
accompanying form of proxy, unless a contrary position is indicated on such
proxy, to vote the proxy for the election of the three nominees named in the
following table as Class III directors, each to hold office until the 2000
annual meeting of shareholders and until a successor is elected and qualified.
There is no cumulative voting in the election of directors and those nominees
receiving the highest number of votes will be elected. Abstentions and broker
non-votes will not be counted in determining the votes cast in the election of
directors and will not have a positive or negative effect on the election. In
the event that any nominee named in the table as a Class III director is unable
to serve (which is not anticipated), the persons named in the proxy may vote it
for another nominee of their choice.
<PAGE> 4
Set forth below is information about each of the Class III director
nominees:
CLASS III DIRECTOR NOMINEES
(TERMS EXPIRING IN 2000)
<TABLE>
<CAPTION>
COMMON
NAME OF A DIRECTOR SHARES OWNED
NOMINEE/DIRECTOR PRINCIPAL OCCUPATION(S) OF THE BENEFICIALLY AS %
AND POSITION(S) DURING THE COMPANY OF APRIL 7, OF
WITH COMPANY AGE PAST FIVE YEARS SINCE 1997(1)(2) CLASS
- --------------------------- --- ----------------------------------- ----------- ----------------- -----
<S> <C> <C> <C> <C> <C>
Urlin G. Harris, Jr........ 60 Retired effective April 1, 1997, as 1991 72,300 *
Retired Executive Vice an officer of the Company, State
President, Treasurer and Auto Property and Casualty
Chief Financial Officer Insurance Company, a wholly-owned
subsidiary of the Company ("State
Auto P&C"), and State Automobile
Mutual Insurance Company, the
Company's parent and owner of 66%
of the common shares of the Company
("Mutual"); Executive Vice
President, Treasurer, and Chief
Financial Officer of the Company,
11/93 to March 31, 1997; Senior
Vice President, Treasurer, and
Chief Financial Officer of the
Company, 5/91 to 11/93; Executive
Vice President, Treasurer and Chief
Financial Officer of State Auto P&C
and Mutual, 11/93 to 3/31/97; and
prior thereto, Senior Vice
President, Treasurer and Chief
Financial Officer of State Auto P&C
and Mutual.
David L. Bickelhaupt(3).... 67 Retired Professor, The Ohio State 1991 10,560 *
Director University, College of Business,
where he taught for more than five
years. Principal of David L.
Bickelhaupt, Inc., a writing and
consulting business.
George R. Manser(4)........ 66 Chairman of the Board, Uniglobe 1991 32,775 *
Director Travel (Capital Cities) Inc., a
travel agency franchisor, for more
than five years. Mr. Manser is also
a director of Cardinal Health,
Inc., a wholesale pharmacuetical
distributor, AmeriLink Corporation,
a telecommunications business,
Hallmark Financial Services, Inc. a
nonstandard, Texas only, auto
insurer, and Checkfree Corporation
a business facilitating electronic
commerce. Prior to 7/94, Mr. Manser
was also Chairman of North American
National Corporation.
</TABLE>
2
<PAGE> 5
Set forth below is information about the directors whose terms of office
continue after the Annual Meeting.
CLASS I DIRECTORS
(TERMS EXPIRING IN 1998)
<TABLE>
<CAPTION>
COMMON
NAME OF A DIRECTOR SHARES OWNED
DIRECTOR PRINCIPAL OCCUPATION(S) OF THE BENEFICIALLY AS %
AND POSITION(S) DURING THE COMPANY OF APRIL 7, OF
WITH COMPANY AGE PAST FIVE YEARS SINCE 1997(1)(2) CLASS
- --------------------------- --- ----------------------------------- ----------- ----------------- -----
<S> <C> <C> <C> <C> <C>
John R. Lowther............ 46 Vice President, Secretary and 1991 35,990 *
Vice President, Secretary General Counsel of the Company,
and General Counsel 5/91 to present; Vice President,
Secretary and General Counsel of
State Auto P&C and Mutual 8/89 to
present.
Robert J. Murchake(5)...... 72 Retired, formerly a Consultant to 1991 11,500 *
Director Ernst & Young LLP for more than
five years.
Paul W. Huesman(6)......... 61 President, Huesman-Schmid Insurance 1991 21,647 *
Director Agency, Inc., an insurance agency,
for more than five years.
</TABLE>
CLASS II DIRECTORS
(TERMS EXPIRING IN 1999)
<TABLE>
<CAPTION>
COMMON
NAME OF A DIRECTOR SHARES OWNED
DIRECTOR PRINCIPAL OCCUPATION(S) OF THE BENEFICIALLY AS %
AND POSITION(S) DURING THE COMPANY OF APRIL 7, OF
WITH COMPANY AGE PAST FIVE YEARS SINCE 1997(1)(2) CLASS
- --------------------------- --- ----------------------------------- ----------- ----------------- -----
<S> <C> <C> <C> <C> <C>
Robert L. Bailey(7)........ 63 Chairman of the Board of the 1991 237,362 1.3%
Chairman of the Board Company, 3/93 to present; Chief
and Chief Executive Officer Executive Officer of the Company,
5/91 to present; President of the
Company 5/91 to 5/96; Chairman of
the Board of State Auto P&C and of
Mutual 3/93 to present; Chief
Executive Officer, 5/89 to present;
President of State Auto P&C and
Mutual for more than five years
prior to 5/96.
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
COMMON
NAME OF A DIRECTOR SHARES OWNED
DIRECTOR PRINCIPAL OCCUPATION(S) OF THE BENEFICIALLY AS %
AND POSITION(S) DURING THE COMPANY OF APRIL 7, OF
WITH COMPANY AGE PAST FIVE YEARS SINCE 1997(1)(2) CLASS
- --------------------------- --- ----------------------------------- ----------- ----------------- -----
<S> <C> <C> <C> <C> <C>
William J. Lhota........... 57 Executive Vice President, American 1994 9,000 *
Director Electric Power ("AEP"), an
investor-owned electric utility,
and President and Chief Operating
Officer, Appalachian Power Company,
Columbus Southern Power Company,
Indiana Michigan Power Company,
Kentucky Power Company, Kingsport
Power Company, Ohio Power Company
and Wheeling Power Company, all of
which are subsidiaries of AEP, 1/96
to present; Executive Vice
President, American Electric Power
Service Corporation 7/93 to 1/96;
Executive Vice President,
Operations, American Electric Power
Service Corporation, 10/89 to 7/93.
Mr. Lhota is also a director of
Huntington Bancshares, Inc., a bank
holding company, and AEP Generating
Company, Appalachian Power Company,
Columbus Southern Power Company,
Indiana Michigan Power Company,
Kentucky Power Company, and Ohio
Power Company.
David J. D'Antoni.......... 52 Senior Vice President, Ashland, 1995 9,500 *
Director Inc.; President, Ashland Chemical,
a division of Ashland, Inc., 7/88
to present, a chemical
manufacturing and a chemical and
plastics distribution business. Mr.
D'Antoni is also a director of
Melamine Chemicals, Inc., a
specialty chemical producer.
</TABLE>
- ---------------
* Less than one (1%) percent.
(1) Except as indicated in the notes to this table, each person named in the
table has voting and investment power with respect to all Common Shares
shown as beneficially owned by him and such voting and investment power is
exercised solely by the named person or shared with that person's spouse.
With respect to stock options, this table includes only stock options for
Common Shares which are currently exercisable or exercisable within 60 days
of April 7, 1997. The Common Shares have been adjusted to reflect the
three-for-two stock split, effected in the form of a stock dividend,
effective July 8, 1996.
(2) The amount reported includes Common Shares attributable to options granted
under the 1991 Stock Option Plan for Messrs. Bailey (153,936), Harris
(53,250), and Lowther (30,450) and Common Shares attributable to options
granted under the 1991 Directors' Stock Option Plan for Messrs. Lhota
(3,000), D'Antoni (3,000), Bickelhaupt (8,600), Manser (9,000), Murchake
(6,000), and Huesman (9,000).
4
<PAGE> 7
(3) Includes 60 Common Shares held by Dr. Bickelhaupt's spouse, of which he
disclaims beneficial ownership.
(4) Includes 4,500 Common Shares held by Mr. Manser's spouse, of which he
disclaims beneficial ownership.
(5) Includes 5,500 Common Shares owned of record by a trust, the trustees of
which are Robert J. Murchake and his spouse.
(6) Includes 5,539 Common Shares owned by the Huesman-Schmid Insurance Agency,
Inc.'s Profit Sharing Plan and 4,001 Common Shares owned by the
Huesman-Schmid Insurance Agency, Inc. Defined Benefit Pension Plan as to
which Mr. Huesman shares voting and investment power with the other trustee
of these plans.
(7) Includes 35,026 Common Shares held directly by Mr. Bailey, 22,150 Common
Shares held by his spouse, of which he disclaims beneficial ownership, and
26,250 Common Shares held by Bailey Enterprises, a family partnership of
which he is a member. Mr. Bailey exercises voting power and investment power
as to the Common Shares owned by Bailey Enterprises.
In addition to the Common Shares owned beneficially by Messrs. Bailey and
Harris, as set forth above, Robert H. Moone, Michael F. Dodd and David A.
Dunlevy, the other named executive officers in the Summary Compensation Table
set forth below, owned beneficially 63,492 Common Shares, 50,908 Common Shares,
and 56,916 Common Shares, respectively, of the Company as of April 7, 1997, each
of which represents less than 1% of the Company's outstanding Common Shares.
These amounts include Common Shares attributable to options which are currently
exercisable or exercisable within 60 days of April 7, 1997, granted under the
1991 Stock Option Plan in the amounts of 41,850, 40,650, and 34,050 for Messrs.
Moone, Dodd and Dunlevy, respectively. As of April 7, 1997, all directors and
executive officers of the Company as a group (21 persons) owned beneficially
866,131 (4.8%) Common Shares of the Company, which included options for 576,950
Common Shares.
In addition to the Common Shares of the Company owned beneficially by
Messrs. Lowther, Harris, Bailey and Moone, as described above, each of these
individuals beneficially owns and exercises sole voting and investment power as
to the following number of shares of common stock of Strategic Insurance
Software, Inc., a majority-owned (91%) subsidiary of the Company engaged in the
software business:
<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY
OWNED AS OF
NAME OF BENEFICIAL OWNER APRIL 7, 1997 % OF CLASS
---------------------------------------------------------- --------------- -----------
<S> <C> <C>
Robert L. Bailey.......................................... 20,000 Shares *
Urlin G. Harris, Jr. ..................................... 20,000 Shares *
John R. Lowther........................................... 10,000 Shares *
Robert H. Moone........................................... 5,000 Shares *
</TABLE>
- ---------------
* Less than one percent
As of April 7, 1997, all directors and executive officers of the Company,
as a group, owned 60,000 (2.9%) shares of common stock of Strategic Insurance
Software, Inc.
5
<PAGE> 8
MEETINGS OF THE BOARD OF DIRECTORS AND BOARD COMMITTEES
During the fiscal year ended December 31, 1996, the Company's Board of
Directors held five meetings. No incumbent director attended fewer than 75% of
the aggregate of the meetings of the Board and the meetings of all committees on
which he served.
The Board has an Audit Committee charged with several responsibilities,
including: 1) reviewing the Company's accounting functions, operations, and
management; 2) considering the adequacy and effectiveness of the internal
controls and internal auditing methods and procedures of the Company; 3) meeting
and consulting with the Company's independent auditors and with the Company's
financial and accounting personnel concerning the foregoing matters; 4)
reviewing with the Company's independent auditors the scope of their audit of
the Company and the results of their examination of its financial statements for
its then current fiscal year; and 5) considering the selection and recommending
to the Board of Directors a firm of certified public accountants to be appointed
as the independent auditors of the Company for its then current fiscal year.
Present members are Robert J. Murchake, George R. Manser and David L.
Bickelhaupt. The Audit Committee held two meetings during the Company's fiscal
year ended December 31, 1996.
The Board also has a 1991 Stock Option Plan Committee (the "Options
Committee") charged with the responsibility of administering the Company's 1991
Stock Option Plan. Present members of such committee, who also serve as the
Executive Compensation Committee, are George R. Manser, Robert J. Murchake and
William J. Lhota. The Executive Compensation Committee held one meeting during
the Company's fiscal year ended December 31, 1996, while the Options Committee
held two meetings during 1996.
COMPENSATION OF DIRECTORS
Directors of the Company, who are not also officers of the Company, receive
from the Company an annual fee of $20,000 plus travel expenses incurred in
attending directors meetings and a fee of $500, plus travel expenses, for each
committee meeting attended. In addition, directors of the Company who are not
full-time employees of the Company or its parent or subsidiary corporations
receive stock options pursuant to the 1991 Directors' Stock Option Plan. Under
this plan, promptly following each annual meeting of shareholders of the
Company, each eligible director is granted a non-qualified option to purchase
1,000 Common Shares of the Company at the fair market value of such shares on
the last trading day prior to the annual meeting immediately preceding the date
of grant. Options are immediately exercisable in whole or in part and must be
exercised within ten years of the date of grant.
COMPENSATION OF EXECUTIVE OFFICERS
Pursuant to an Amended and Restated Management Agreement among Mutual, the
Company, State Auto P&C and State Auto National Insurance Company ("National"),
a wholly-owned subsidiary of the Company, and other affiliated companies, the
executive officers of the Company, State Auto P&C, and National are employees of
State Auto P&C and the Company rather than Mutual, while Mutual acts as the
common paymaster. The costs and expenses associated with these employees of
State Auto P&C and the Company are reimbursed to Mutual, as paymaster, in
accordance with the terms of the Amended and Restated Management Agreement. See
"Certain Transactions" below.
6
<PAGE> 9
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
Set forth below is information concerning the compensation paid or accrued
by, or reimbursed to, Mutual for the Company's fiscal years ended December 31,
1996, 1995, and 1994, to each of the five most highly compensated executive
officers of the Company who received compensation in excess of $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-----------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
----------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) GRANTED(3)(4) COMPENSATION(5)
- ----------------------------------- ---- -------- -------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert L. Bailey................... 1996 $374,000 $ 6,688 25,000 $13,845
Chairman and 1995 $340,000 $245,013 22,700 $13,113
Chief Executive Officer 1994 $309,045 $ 11,833 0 $12,575
Robert H. Moone.................... 1996 $224,000 $ 3,338 13,440 $ 8,117
President and 1995 $169,693 $ 49,816 9,700 $ 6,051
Chief Operating Officer 1994 $154,266 $ 5,709 0 $ 6,221
Urlin G. Harris, Jr.(6)............ 1996 $210,881 $ 50,698 11,250 $ 7,602
Executive Vice President 1995 $193,469 $ 63,830 9,700 $ 7,699
Treasurer and Chief Financial 1994 $182,518 $ 6,945 0 $ 7,404
Officer
Michael F. Dodd.................... 1996 $148,125 $ 2,769 4,500 $ 6,207
Senior Vice President 1995 $143,810 $ 32,984 4,500 $ 6,068
1994 $142,387 $ 5,554 0 $ 6,055
David A. Dunlevy(7)................ 1996 $131,857 $ 22,333 0 $ 6,239
Vice President 1995 $131,857 $ 30,729 4,500 $ 6,008
1994 $124,983 $ 4,821 0 $ 5,767
</TABLE>
- ---------------
(1) Includes amounts deferred pursuant to the State Auto Insurance Companies
Capital Accumulation Plan (the "CAP") and the Non-Qualified Incentive
Deferred Compensation Plan (the "Deferred Compensation Plan"). The CAP is a
defined contribution plan (within the meaning of the Employee Retirement
Income Security Act of 1974) ("ERISA") and is intended to be a qualified
plan under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"). Under the CAP, each participant is eligible to
enter into a written salary reduction agreement with his employer whereby
the participant's salary will be reduced by a whole percentage from 1% to
16%, as elected by the participant, in accordance with the rules governing
cash or deferred arrangements under Section 401(k) of the Code. The amount
deferred by a participant is contributed by his employer to the trust fund
for the CAP and invested in accordance with the election of the participant
from among investment funds established under the trust agreement. The
Deferred Compensation Plan is a non-qualified, unfunded deferred
compensation plan for eligible, key employees who are legally precluded from
contributing a full 6% of compensation to the CAP or who choose to defer a
portion of their salary beyond the amount matched by the CAP. Under the
Deferred Compensation Plan, such employees are eligible to enter into a
salary reduction agreement to defer payment of an additional portion of the
employee's salary as the employee prescribes on an election form executed
annually in advance of the year in which such compensation would be earned.
Deferred amounts, along with the Company matching amounts on that portion
deferred that is eligible for the match (see footnote (5), below), are
invested by Mutual in a variety of investment options made available to
participants in the Deferred Compensation Plan, pursuant to the terms of
such plan.
7
<PAGE> 10
(2) The amounts appearing in this column represent bonuses paid pursuant to the
State Auto Quality Performance Bonus Plan (the "QPB") and for 1996 special
incentive bonuses pursuant to incentive bonus plans put into place by the
CEO for the benefit of Messrs. Harris and Dunlevy to be earned in 1996. Mr.
Bailey and Mr. Moone were also subject to a special incentive bonus plan put
into place for them by the Executive Compensation Committee; however, no
amount for this bonus is included for either Mr. Bailey or Mr. Moone for
1996 as it has not been determined at this time by the Executive
Compensation Committee. While $204,000 of the amount shown in this column
for 1995 was paid pursuant to Mr. Bailey's bonus plan in 1996, it was earned
in 1995. (See "Report of Executive Compensation Committee"). Under the QPB,
quarterly bonuses are paid to employees who have completed two full calendar
quarters of service, if the direct statutory combined ratio for such quarter
was 101% or less for the insurers whose results are pooled (see "Certain
Transactions").
(3) In 1996 and 1995, the persons listed in the Summary Compensation Table were
granted options to purchase the number of Common Shares of the Company set
forth in this column pursuant to the 1991 Stock Option Plan, all of which
were non-qualified stock options except one-half of the options granted to
Mr. Moone, which were incentive stock options.
(4) Adjusted to reflect a three-for-two common stock split declared in May 1996
effected in the form of a stock dividend paid on July 8, 1996.
(5) The amounts appearing in this column represent the Company's contributions
and credits on behalf of each named person under the CAP or the Deferred
Compensation Plan. Each participant in the CAP is credited annually with his
allocable share of employer matching contributions made to the CAP from the
consolidated net accumulated or current earnings of Mutual and its
subsidiaries. A participant's share of the matching contribution equals 75%
of his salary reduction contributions up to 2% of compensation, plus 50% of
his salary reduction contributions from 3% to 6% of compensation. While a
participant is always vested in his own salary reduction contributions, the
rights of a participant to amounts credited to his account as matching
contributions vest as follows: (a) one-third of matching contributions
allocated for the plan year preceding the plan year in which termination of
employment occurs, two-thirds of matching contributions allocated for the
second plan year before the plan year in which termination of employment
occurs, and 100% of the matching contributions allocated for the third and
earlier plan years before the plan year in which termination of employment
occurs; and (b) notwithstanding the foregoing, after the participant has
five or more years of service with Mutual and its subsidiaries, all matching
contributions become vested. The following are the amounts of the Company
matching contributions under the CAP for 1996 for the officer indicated: Mr.
Dodd -- $5,092; and Mr. Dunlevy -- $4,846. Each employee who is eligible to
participate in the Deferred Compensation Plan is credited annually with his
allocable share of Company matching contributions on the same basis that
contributions are matched under the CAP, provided that no more than 6% of
any employee's salary is subject to being matched under either the CAP or
the Deferred Compensation Plan. The following amounts reflect the Company's
contribution to the Deferred Compensation Plan for 1996: Mr.
Bailey -- $13,526; Mr. Moone -- $7,287; and Mr. Harris -- $7,381. The
amounts appearing in this column also represent the premiums for policies of
whole life insurance purchased on behalf of the officers of the Company,
including the executive officers named above, from State Auto Life Insurance
Company ("State Auto Life"), a wholly-owned subsidiary of Mutual. The
following amounts represent the premiums paid for whole life insurance for
1996: Mr. Bailey -- $319; Mr. Moone -- $830; Mr. Harris -- $221; Mr.
Dodd -- $1,116; and Mr. Dunlevy -- $1,393.
(6) Mr. Harris retired effective April 1, 1997.
(7) Mr. Dunlevy retired effective February 1, 1997.
8
<PAGE> 11
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows the number of options granted in 1996 to the
individuals named in the Summary Compensation Table and estimates the potential
realizable value of these option grants.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL POTENTIAL
-------------------------------------------------- REALIZABLE VALUE REALIZABLE VALUE
% OF TOTAL AT ASSUMED AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE STOCK PRICE
UNDERLYING EMPLOYEES OR BASE APPRECIATION FOR APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM OPTION TERM
NAME GRANTED#(1) YEAR ($/SH)(2) DATE 5%($)(3) 10% ($)(3)
- ------------------------ ------------ ---------- -------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Bailey........ 25,000 11.5% $14.625 08/14/2006 $229,938 $582,711
Robert H. Moone......... 13,440 6.2% $14.625 08/14/2006 $123,614 $313,264
Urlin G. Harris, Jr..... 11,250 5.2% $14.625 08/14/2006 $103,472 $262,220
Michael F. Dodd......... 4,500 2.1% $14.625 08/14/2006 $ 41,388 $104,888
David A. Dunlevy........ -- -- -- -- -- --
</TABLE>
- ---------------
(1) Options were granted effective August 15, 1996. Each option is fully
exercisable after a one year vesting period expires, so long as employment
with the Company or its subsidiaries or its parent continues. There are no
stock appreciation rights, performance units, or other instruments granted
in tandem with these options, nor are there any reload provisions, tax
reimbursement features or performance based conditions to exercisability.
(2) The option exercise price is the closing price of the Company's shares on
the NASDAQ National Market System on the day of the grant.
(3) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates dictated by the Securities and Exchange Commission when the
"Potential Realizable Value" alternative is used, and are not intended to be
a forecast of the Company's stock price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table shows the number of Common Shares represented by both
exercisable and non-exercisable stock options held by each of the named
executive officers as of December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END(#) FY-END($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(1)(2) UNEXERCISABLE(2)
- --------------------------------- ------------ ----------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Robert L. Bailey................. 0 0 158,250/25,000(3) $1,586,324/$84,375
Robert H. Moone.................. 0 0 41,850/13,440 $404,244/$45,360
Urlin G. Harris, Jr.............. 0 0 53,250/11,250(3) $533,454/$37,968
Michael F. Dodd.................. 0 0 40,650/4,500 $425,246/$15,187
David A. Dunlevy................. 0 0 34,050/0 $349,644/$-0-
</TABLE>
- ---------------
(1) The number of securities underlying exerciseable options was adjusted to
reflect a three-for-two common stock split declared in May 1996 effected in
the form of a stock dividend, paid on July 8, 1996.
9
<PAGE> 12
(2) The value of in-the-money options was determined by subtracting the exercise
price from the market value of the Company's Common Shares as of December
31, 1996 ($18.00), based on the closing price of the Company's Common shares
on the NASDAQ National Market System on that date, the last trading day of
1996. The exercise price for exercisable options was adjusted to reflect a
three-for-two common stock split declared in May 1996 effected in the form
of a stock dividend and paid on July 8, 1996.
(3) Includes the following stock options which have been gifted to family
members under the terms of the 1991 Stock Option Plan: (a) for Mr. Bailey,
exercisable stock options for 4,314 Common Shares and non-exercisable stock
options for 25,000 Common Shares; and (b) for Mr. Harris, non-exercisable
stock options for 5,000 Common Shares.
EMPLOYEES' RETIREMENT PLAN
The executive officers referred to in the Summary Compensation Table, as
well as substantially all other employees of Mutual and its subsidiaries, are
eligible to participate in the State Auto Insurance Companies' Employee
Retirement Plan (the "Retirement Plan"). The Retirement Plan is a defined
benefit plan (within the meaning of ERISA) which is intended to be a qualified
plan under Section 401(a) of the Code, and is subject to the minimum funding
standards of Section 412 of the Code. Benefits payable under the Retirement Plan
are funded through employer contributions to a trust fund.
In addition, the executive officers identified in the Summary Compensation
Table benefit from a non-qualified Supplemental Executive Retirement Plan (the
"Supplemental Plan"). The Supplemental Plan is intended to offset the impact of
the Code's and ERISA's limitations on retirement benefits available under the
Retirement Plan by providing for a lump sum or deferred cash payments in an
actuarially determined amount upon retirement of officers whose participation in
the Supplemental Plan is approved by the Board of Directors of Mutual.
The table below shows estimated annual benefits payable under the
Retirement Plan and the Supplemental Plan to a participant upon retirement at
age 65 with indicated average annual compensation and period of service:
ESTIMATED ANNUAL RETIREMENT BENEFIT
<TABLE>
<CAPTION>
ANNUAL ANNUAL RETIREMENT BENEFIT BASED ON YEARS OF SERVICE
AVERAGE ------------------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000 $ 44,360 $ 58,757 $ 73,154 $ 87,551 $101,888
$150,000 $ 52,433 $ 69,885 $ 87,337 $104,789 $122,174
$175,000 $ 59,816 $ 80,323 $100,829 $121,336 $141,772
$200,000 $ 67,199 $ 90,760 $114,322 $137,883 $161,371
$225,000 $ 74,581 $101,198 $127,814 $154,460 $180,969
$250,000 $ 76,532 $103,955 $131,378 $158,801 $186,147
$300,000 $ 76,532 $116,328 $131,378 $158,801 $186,147
$400,000 $ 77,706 $146,021 $160,218 $180,461 $214,713
$450,000 $ 83,867 $160,868 $176,839 $199,669 $238,270
$500,000 $ 90,028 $175,715 $193,461 $218,877 $261,827
</TABLE>
Benefits shown above are computed as a straight single life annuity
beginning at age 65. Such amounts are not subject to offset for Social Security
benefits or other amounts payable to participants in the Retirement Plan. As of
December 31, 1996, the years of credited service to the nearest whole year and
annual average
10
<PAGE> 13
compensation for each of the individuals named in the Summary Compensation Table
actively participating in the Retirement Plan on such date were as follows:
<TABLE>
<CAPTION>
NAME OF YEARS OF CURRENT ANNUAL AVERAGE COMPENSATION
INDIVIDUAL CREDITED SERVICE FOR PURPOSES OF RETIREMENT PLAN
-------------------------------------- ----------------- -----------------------------------
<S> <C> <C>
Robert L. Bailey...................... 25 $ 150,000
Urlin G. Harris, Jr................... 34 $ 150,000
Robert H. Moone....................... 26 $ 150,000
Michael F. Dodd....................... 35 $ 148,125
David A. Dunlevy...................... 19 $ 138,450
</TABLE>
EMPLOYMENT CONTRACT
In November 1995, the Company's Board of Directors approved an employment
agreement with Robert L. Bailey, Chairman and CEO of the Company, State Auto
P&C, and Mutual and the Company's other principal operating affiliates and
subsidiaries. Pursuant to this Agreement, the Company agreed to employ Mr.
Bailey until December 31, 2000, with an optional two year renewal with mutual
consent, at such compensation as may be determined by the Executive Compensation
Committee. Under the contract, Mr. Bailey shall be entitled to fringe benefits
available to other officers of State Auto, including, as applicable,
those made available to employees age 65 or older. Under the contract, Mr.
Bailey is entitled to receive a special supplemental retirement benefit equal to
60% of his highest salary during the term of the agreement less sums payable to
Mr. Bailey as of his retirement date under the State Auto Insurance Companies'
retirement plan calculated on the basis of a straight life annuity, provided
that the special supplemental retirement benefit shall not be less than $100,000
annually for the remainder of his life following his retirement. In addition,
under the agreement a special succession committee was created which was charged
with the task of selecting a person as President and Chief Operating Officer for
State Auto with the expectation that this person would become Chief Executive
Officer on Mr. Bailey's retirement. This Committee has been discontinued since
it completed its assignment, nominating Robert H. Moone as President and Chief
Operating Officer, who took office May 30, 1996.
No other employee of the Company works pursuant to an employment agreement.
COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee currently consists of the following
three members of the Company's Board of Directors: George R. Manser, Robert J.
Murchake and William J. Lhota, who also make up the Options Committee. None of
the members of the Executive Compensation Committee is, or was, an officer or
employee of the Company, any of its subsidiaries, or of Mutual. Also, no
executive officer of the Company served during 1996 as a member of a
compensation committee or as a director of any entity of which any of the
Company's Executive Compensation Committee members served as an executive
officer with the exception of James E. Duemey, Vice President--Chief Investment
Officer, who served as a director of Uniglobe Travel (Capital Cities), Inc., for
which Mr. Manser served as chairman of the board during 1996.
11
<PAGE> 14
EXECUTIVE COMPENSATION COMMITTEE AND OPTIONS COMMITTEE REPORT
The following is the report of the Executive Compensation Committee and the
Options Committee, whose members are identified below, with respect to
compensation reported for 1996 as reflected in the compensation tables above.
Pursuant to the Amended and Restated Management Agreement, the Chief
Executive Officer and the other named executive officers are employees of State
Auto P&C. When the salaries noted in the compensation tables above were set, the
Company's Executive Compensation Committee determined the compensation of the
Chief Executive Officer, while the Chief Executive Officer fixed the
compensation of the other named executive officers, all of whom reported to him
at that time. Since Mr. Robert Moone's election as President of the Company,
State Auto P & C and Mutual, in May 1996, he has become responsible for
administering the base salary component of the cash compensation paid to the
other named executive officers, all of whom reported to him after May 1996 and
he makes recommendations to the Chief Executive Officer with respect to
incentive bonuses for certain of the other named executive officers. For years
after 1996, the Executive Compensation Committee will fix Mr. Moone's base
salary in addition to Mr. Bailey's, although it will determine the incentive
bonus Messrs. Moone and Bailey earned for 1996.
The Executive Compensation Committee's policies as to base salary of the
Chief Executive Officer, which the Chief Executive Officer utilized and now the
President follows in determining the salaries of the named executive officers,
and the Options Committee's policies as to stock options are as follows:
The compensation policies applied by the Chief Executive Officer in setting
base salaries earned by the named executive officers in 1996 mirror those
applied in the Company at large. This compensation system is intended to reward
individuals based on their performance, to encourage a focus on underwriting
profit, to provide for competitive levels of compensation necessary to attract
and retain executive officers, and to create an understanding of the importance
of achieving company-wide goals over the long term. The Options Committee grants
options on a periodic basis as an additional, long-term inducement to the
executive officers to improve the Company's performance and enhance the value of
the Company's Common Shares.
For 1996, compensation for the named executive officers, other than the
Chief Executive Officer, had three components as to which discretion is
exercised: annual base salary, stock options, and incentive bonus arrangements.
The Chief Executive Officer reviewed the named executive officers' base salary
approximately every 12 months. Merit raises granted each year reflect the Chief
Executive Officer's assessment of the individual officer's performance in
achieving division-wide goals set at the beginning of the year. The overall
performance of the Company's operating units is also considered. In individual
cases, raises may also reflect a named executive officer's assumption of
additional duties and responsibilities. Annual salary reviews also reflect the
fact that some of the named executive officers had an opportunity to earn an
additional incentive bonus for superior performance.
The Executive Compensation Committee and Options Committee believe that
stock options and individual stock purchases by executive officers create a
mutuality of interest between the shareholders and management. This is believed
to be desirable and in the best interests of the shareholders as it focuses
management's attention on the importance of long term appreciation in the price
of the Company's common stock. In that regard, as of December 31, 1996, the
Options Committee imposed stock ownership guidelines on the Chief Executive
Officer, the President, the other named executive officers, and all other option
recipients under the 1991 Stock Option Plan. Compliance with these guidelines,
which require affected employees to own Common Shares of the Company equal to
percentages of base salary depending on the person's position within the
Company, is intended to be a condition precedent to receipt of future option
grants.
The Options Committee awarded option grants in August 1996 which was
approximately eighteen months after the last grant of options to the named
executive officers and the Chief Executive Officer, which is
12
<PAGE> 15
consistent with the Committee's policy and practice of granting options. The
option grants made in August 1996 were consistent with those granted in March
1995 with the exception that another tier for the new President was added, which
tier equaled 90% of his base salary. The Committee did not increase the
percentage of salary applicable to any of the grant tiers except for adding a
new tier for the President. The top three tiers of option grants, which affected
the Chief Executive Officer, the President and the Executive Vice President
reflected, respectively, 100%, 90% and 80% of each person's base salary,
respectively. They also determined that the fourth tier of option grants, which
affected two other named executive officers, should continue at 60% of base
salary. The Options Committee also determined that within each tier, each
recipient in that tier would receive an equal number of options notwithstanding
salary differences. Hence, the number of options each named executive officer
and the Chief Executive Officer received was determined by multiplying his
salary by the indicated percentage, then dividing that result by $15.00, a then
recent per share price for the Company's Common Shares.
There are two forms of cash bonus available to the named executive
officers. The Company's QPB is intended to provide a more short term incentive
to the employees to generate underwriting profits on a quarterly basis. Under
the QPB, quarterly bonuses are paid to all employees who have completed two full
calendar quarters of service, if the pooled companies' direct statutory combined
ratio for such quarter was 101% or less (see "Certain Transactions").
In addition, the Chief Executive Officer developed individualized incentive
compensation plans for Mr. Harris and Mr. Dunlevy, while Mr. Moone became
subject to the discretion of the Executive Compensation Committee on being
elected President in May 1996 for the purposes of incentive bonus earned for
1996. Each such plan thus applicable to such named executive officers provided
for objective measures of performance, which measures were originally designed
by the Chief Executive Officer to focus the attention and effort of these
individuals on the success and profitability of the Company. One half of such
incentive bonus available depended upon the Company's meeting profit and growth
objectives and earnings per share targets. The other half was driven by the same
objective measures set forth in Mr. Bailey's and Mr. Moone's incentive plan
described below.
There are four components to the Company's compensation arrangements with
the Chief Executive Officer -- base salary, incentive compensation arrangements,
QPB, and stock options.
For 1996, the Chief Executive Officer received a cash raise equal to
$34,000 or 10%. The salary for 1996 was set in the fall of 1995. Comparison
salary data that was available to the Committee was dated August 1995.
The Committee evaluated his performance and his compensation level based on
both objective and subjective measures. The Chief Executive Officer's salary
ranked 9th out of 17 companies of similar size included in an annual salary
survey conducted by the National Association of Independent Insurers, which is
Mutual's and State Auto P&C's national trade association. These survey
participants are not necessarily reflected in the group of companies included in
the NASDAQ insurance stocks index reflected on the performance graph below. Of
seventeen companies in this NAII salary survey, Mr. Bailey's salary for 1995 was
approximately 86% of the mean base salary for Chief Executive Officers of
companies in the same size category as the Company and Mutual. The Executive
Compensation Committee believed a 10% raise was appropriate in part to keep Mr.
Bailey's salary moderately competitive in the marketplace based on this NAII
salary survey.
The Committee also considered the Company's performance, in 1994 and for
the first three quarters of 1995 comparing it to several industry wide averages
as compiled by A.M. Best Company, to the extent these averages were available
for the first three quarters of 1995. These measures included combined loss and
expense ratio, increases to policyholders surplus, and asset growth. While
premium revenues were lower than
13
<PAGE> 16
industry averages, the Committee believed that the Company's "bottom line"
through the first three quarters of 1995 also merited favorable consideration.
In addition to these objective performance criteria, the decision to grant
Mr. Bailey the aforesaid raise was based on subjective considerations, also. The
Committee believed that Mr. Bailey's careful control on the management of the
company was a key factor in the success of the Company that had been apparent to
that time.
In addition, in October 1995, the Executive Compensation Committee created
a cash Incentive Compensation Plan for Mr. Bailey that should result in a
greater percentage of Mr. Bailey's cash compensation being "at risk." The
Committee recognized that according to the Conference Board's publication, "Top
Executive Compensation: 1994 Edition," the amount of Mr. Bailey's incentive
compensation payable through the QPB was dramatically lower than the bonus
typically available for CEO's of Company's with similar amounts of written
premium to the Company and Mutual. As originally conceived, the incentive bonus
plan for Mr. Bailey depended on the Company's performance in three objectively
verifiable areas as compared with a set of five insurers deemed by the Committee
to constitute a fair peer group, which are not necessarily the same as those in
the NAII salary survey data or the NASDAQ insurance stocks index referred to in
the performance graph below. The three measures were expense ratio, combined
ratio and total shareholder return over a running 36-month period. However, it
was determined during 1996 that the expense ratio parameter in the formula
proved to be unworkable because the information on that parameter was not
available from the peer companies in a timely manner. Hence, in July 1996, the
Committee modified the incentive plan for Mr. Bailey by eliminating the expense
ratio parameter and instead relying on the combined ratio parameter which
includes the expense ratio within it and the total shareholder return over the
running 36 month period. Each of the peer companies and State Auto will be
ranked from 6 to 1 (6 being the best) for each of these criteria and the rank
equates to a point level. Thus, the highest point total attainable is 12, the
lowest 2. The CEO's total bonus will depend in part on the points State Auto
earns based on the following:
<TABLE>
<CAPTION>
TOTAL POINTS EARNED PERCENT OF BONUS EARNED
- -------------------- -----------------------
<S> <C>
12-11 100%
10-9 80%
8-7 60%
6-5 20%
4-0 0%
</TABLE>
Mr. Bailey's targeted bonus available equals 40% of his annual salary. In
addition, the Committee reserved the discretion to award Mr. Bailey a bonus
equal to up to 150% of the bonus target or 60% of his annual salary based on a
subjective evaluation of his performance in addition to the objective criteria
noted above. Based on the Company's performance in 1995, the Committee awarded
Mr. Bailey a bonus equal to 60% of his base salary or $204,000. This is the
result of the Company's performance achieving the maximum number of points
available under the formula described and an additional bonus based on the
committee's subjective judgment of his and the Company's performance during
1995.
EXECUTIVE COMPENSATION COMMITTEE/STOCK OPTIONS COMMITTEE
--------------------------------------------------------
Robert J. Murchake
George R. Manser
William J. Lhota
14
<PAGE> 17
PERFORMANCE GRAPH
The line graph below compares the total return on $100 invested on December
31, 1991, in the Company's shares, the CRSP Total Return Index for the NASDAQ
Stock Market ("NASDAQ Index"), and the CRSP Total Return Index for NASDAQ
insurance stocks ("NASDAQ Ins. Index"), with dividends reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
STFC 100.000 152.125 181.397 197.746 364.490 382.171
NASDAQ Index 100.000 116.378 133.595 130.587 184.674 227.164
NASDAQ Ins. Index 100.000 135.344 144.759 139.784 193.561 220.567
</TABLE>
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth certain information as of April 7, 1997,
with respect to the only shareholder known by the Company to be the beneficial
owner of more than 5% of any class of the Company's outstanding Common Shares:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
---------------------------------------------------------- ----------------- --------
<S> <C> <C>
State Automobile Mutual Insurance Company................. 12,012,649 66%
518 East Broad Street
Columbus, OH 43215
</TABLE>
- ---------------
1) Mutual exercises sole voting and investment power with respect to such
shares.
15
<PAGE> 18
CERTAIN TRANSACTIONS
Since January 1987, State Auto P&C and Mutual have participated in an
intercompany pooling arrangement. Under the terms of the pooling arrangement,
State Auto P&C cedes all of its insurance business to Mutual. All of Mutual's
property and casualty insurance business is also included in the pooled
business. Mutual then cedes a percentage of the pooled business to State Auto
P&C and retains the balance. Effective January 1, 1995, the pooling arrangement
was amended to add Milbank Insurance Company ("Milbank"), a wholly-owned
subsidiary of Mutual, as a party to the arrangement and to allocate the pooling
percentages as follows: Mutual -- 55%; State Auto P&C -- 35%; and
Milbank -- 10%. Effective July 1, 1996, the pooling arrangement was amended in
the manner described below, without changing the pooling percentages.
The Company and its subsidiaries, State Auto P&C and National, operate and
manage their businesses in conjunction with Mutual under a Management Agreement
(the "Management Agreement"). Effective April 1, 1994, the Management Agreement
was amended and restated (the "Amended and Restated Management Agreement"). The
Amended and Restated Management Agreement effected a restructuring of executive
management. Previously, all employees were employees of Mutual. As of April 1,
1994, several members of executive management became employees of State Auto
P&C. These individuals include the named executive officers, Messrs. Bailey,
Moone, Harris, Dodd, and Dunlevy, among others. Under the Amended and Restated
Management Agreement, State Auto P&C has the responsibility to oversee its own
operations and all operations of National and Mutual and its insurance
subsidiaries, State Auto Life and Milbank. It is believed that this change
better positions the Company for future growth and development of its business.
In addition, some of the same individuals became employees of the Company and
are responsible for managing its affairs. At the same time, Mutual continues to
provide facilities, services and non-executive employees to all companies in the
group for which Mutual is reimbursed by the company for whose benefit the
expense of the facilities, services and employees was incurred in a manner
similar to the way they were shared under the management agreement prior to
amendment. In addition, at a closing on March 11, 1997, Mutual acquired 100% of
the outstanding common shares of Midwest Security Insurance Company ("Midwest"),
a Wisconsin domiciled property casualty insurer, which acquisition was effective
as of January 1, 1997. In conjunction with this transaction, State Auto P&C
entered into a Management Agreement with Midwest in which State Auto P&C
receives a management fee of 0.75% of Midwest's direct written premium, subject
to Midwest's performance meeting the performance standard set forth in the
agreement. In addition, Stateco Financial Services, Inc. ("Stateco") has entered
into an investment management agreement with Midwest in which Stateco will
provide investment management services to Midwest on the same basis as it
provides services to the other insurers within the State Auto Group.
In return for the executive management services it provides, except as set
forth above, State Auto P&C receives an annual fee equal to 2% of the five year
average annual statutory surplus of each insurance company managed (less
statement valuations for managed subsidiaries). However, the management fee from
a managed insurer can be withheld if that company does not meet the standards of
performance described or incorporated in the Amended and Restated Management
Agreement, as approved by the boards of directors of the insurers that are a
party to it. During 1996, the following companies incurred the following
executive management fees to State Auto P&C: Mutual -- $4,043,000;
Milbank -- $792,000; State Auto Life -- $122,000; and National -- $127,000.
Based on a review by the Company of other similar arrangements, the Company
believes the amount of the management fee charged to each company is similar to
what would be charged by an independent third party performing the same service.
The Amended and Restated Management Agreement also addresses procedures for
potential conflicts of interest. Generally, business opportunities presented to
the common officers of the companies, other than
16
<PAGE> 19
business opportunities that meet certain criteria, must be presented to the
Coordinating Committee. This committee reviews and evaluates the business
opportunity using such factors as it considers relevant. Based upon such review
and evaluation, this committee then makes recommendations to each respective
board of directors as to whether or not such business opportunities should be
pursued and, if so, by which company. The boards of directors of Mutual or any
of its subsidiaries and of the Company or any of its subsidiaries must then act
on the recommendation of the committee after considering all other factors
deemed relevant to them.
The Amended and Restated Management Agreement has a ten-year term and
automatically renews for an additional ten-year term, provided that any party to
the agreement can terminate its own participation at the end of the term then in
effect by giving at least two years' advance written notice of nonrenewal to the
other parties, with the exception that Milbank may terminate its participation
on 120 days notice. Any party may also terminate its participation upon events
constituting a change of control or potential change of control (as defined in
the Amended and Restated Management Agreement) of the Company, or upon agreement
of the parties. The agreement is automatically terminated with respect to a
party (and only that party) if such party is subject to insolvency proceedings.
Stateco provides insurance premium finance services to certain
policyholders of Mutual, State Auto P&C, and Milbank. Premiums for property and
casualty insurance are typically payable at the time a policy is placed in force
or renewed. On certain large commercial policies, the premium cost may be
difficult for a policyholder to pay in one sum. Stateco makes loans to
policyholders for the term of an insurance policy to enable them to pay the
insurance premium in installments over the term of the policy, and retains a
contractual right to cancel the insurance policy if the loan installment is not
paid on a timely basis.
In 1993, Stateco expanded its business activities to include a broader
range of financial services. It now undertakes on behalf of Mutual, State Auto
P&C, Milbank, State Auto Life, and National the responsibility of managing those
companies' investable assets. In consideration of this service, Stateco charges
such companies an annual fee, paid quarterly, based on a percentage of the
average investable assets of each company. The percentage currently set is .4%
for bonds and .5% for equities, with a .1% bonus available if the stock
portfolio return exceeds that of the S&P 500 for the same period. During 1996,
the following companies incurred the following fees to Stateco:
Mutual -- $2,513,000; State Auto P&C -- $1,447,000; Milbank -- $475,000; State
Auto Life -- $75,000 and National -- $59,500. The Company believes the fees
charged are comparable to those charged by independent investment managers.
In July 1995, a new majority-owned subsidiary of the Company known as
Strategic Insurance Software, Inc. ("SIS") began operations. SIS develops and
sells software for use by insurance companies and insurance agencies. SIS sells
its software and software support services to Mutual and State Auto P&C and to
nonaffiliated entities. In 1996, State Auto P&C and Mutual paid $1,562,000 to
SIS for its services and products.
Mutual has guaranteed the adequacy of State Auto P&C's loss and loss
expense reserves as of December 31, 1990. Pursuant to the guarantee, Mutual has
agreed to reimburse State Auto P&C for any losses and loss expenses in excess of
State Auto P&C's December 31, 1990 reserves ($65,463,732) that may develop from
claims that have occurred on or prior to that date. This guarantee ensures that
any deficiency in the reserves of State Auto P&C as of December 31, 1990, under
the pooling arrangement percentages effective on December 31, 1990, will be
reimbursed by Mutual.
Paul W. Huesman, a director of the Company, is the president and a majority
owner of The Huesman-Schmid Insurance Agency, an independent insurance agency
licensed to sell insurance products for State Auto P&C, Mutual and National.
During 1996, State Auto P&C, Mutual and National paid such insurance
17
<PAGE> 20
agency and its affiliated agencies commissions in the amount of $291,000. Such
commissions were determined in the same manner as commissions are determined for
other agencies of State Auto P&C, Mutual and National.
Effective July 1, 1996, the Company and Mutual negotiated a change in their
catastrophe reinsurance program and as part of this change, State Auto P&C has
become the catastrophe reinsurer for itself, Mutual, Milbank and National as
described below. The amount retained by State Auto P&C, Mutual, Milbank and
National (collectively the "State Auto Group") is $40.0 million for each
occurrence, an increase of $20.0 million over the prior program. For up to $80.0
million in losses, excess of $40.0 million, traditional reinsurance coverage is
provided. In the event the State Auto Group incurs catastrophe losses in excess
of $120.0 million, STFC entered into a structured contingent financing
transaction with Chase Manhattan Bank ("Chase") to provide up to an additional
$100.0 million to be used to cover catastrophe losses. Under this arrangement,
in the event of such a loss, STFC would sell redeemable preferred shares to SAF
Funding Corporation, a special purpose company ("SPC"), which will borrow the
money necessary for such purchase from Chase and a syndicate of other lenders.
STFC will contribute to State Auto P&C the proceeds from the sale of its
preferred shares. State Auto P&C has assumed catastrophe reinsurance from
Mutual, Milbank and National pursuant to a Catastrophe Assumption Agreement in
the amount of $100.0 million excess of $120.0 million. State Auto P&C will use
the contributed capital to pay its direct catastrophe losses and losses assumed
under the Catastrophe Assumption Agreement. State Auto Financial is obligated to
repay the SPC (which will repay the lenders) by redeeming the preferred shares
over a six year period. This layer of $100.0 million in excess of $120.0 million
has been excluded from the pooling arrangement as well by virtue of an Amended
and Restated Reinsurance Pooling Agreement, effective July 1, 1996. In addition,
State Auto Financial's obligation to repay Chase has been secured by a Put
Agreement among State Auto Financial, Mutual and the Lenders, under which, in
the event of a default by STFC as described in the Credit Agreement or in the
Put Agreement, Mutual would be obligated to put either the preferred shares or
the loan(s) outstanding.
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP served as the independent public accountants for the
Company for its fiscal year ended December 31, 1996, which was the last year of
a three year commitment entered into between the Company and Ernst and Young
LLP. Ernst & Young LLP has been retained by the Company as its independent
public accountants for the fiscal year ending December 31, 1997. It is expected
that a representative of Ernst & Young LLP will be present at the shareholders'
meeting and will be given an opportunity to make a statement, if such
representative desires, and to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Annual Meeting of
Shareholders to be held in May 1998 must be received by the Company for
inclusion in the Proxy Statement and form of Proxy on or prior to December 22,
1997.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who own more than 10% of a
registered class of the Company's equity securities to file statements of
beneficial ownership of the Company's Common Shares. Based solely on a review of
copies of
18
<PAGE> 21
the forms filed under Section 16(a) and furnished to the Company, the Company
believes that all applicable Section 16(a) filing requirements were complied
with during 1996 with the following exceptions: Mr. John B. Melvin an executive
officer of Mutual filed an amended Form 3 in January 1997 correcting an original
miscalculation of his shares reported on his original Form 3. The error amounted
to 10 shares. Mr. Steven J. Johnston, an officer of the Company, filed an
amended Form 3 in January 1997 to correct a misreporting of his original Form 3
involving 27 shares.
OTHER MATTERS
Management does not know of any other matters which may come before the
meeting. However, if any other matters properly come before the meeting, it is
the intention of the persons named in the accompanying form of proxy to vote the
proxy in accordance with their judgment on such matters.
The Company will bear the cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by officers, directors, and
regular employees, personally or by telephone or telegraph, and the Company will
reimburse banks, brokers, and nominees for their out-of-pocket expenses incurred
in sending proxy material to the beneficial owners of shares held by them. If
there are follow-up requests for proxies, the Company may employ other persons
for such purpose.
JOHN R. LOWTHER
Secretary
19
<PAGE> 22
DETACH CARD
- --------------------------------------------------------------------------------
STATE AUTO FINANCIAL CORPORATION ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned hereby appoints Robert L. Bailey, and in the event he is unable
to so act, Robert H. Moone and any one or more of them, Proxies, with full power
of substitution, to represent and vote all common shares, without par value, of
State Auto Financial Corporation (the "Company") which the undersigned would be
entitled to vote if personally present at the Annual Meeting of Shareholders to
be held at the Company's principal executive offices located at 518 East Broad
Street, Columbus, Ohio on Thursday, May 29, 1997, at 10:00 A.M., E.D.S.T., and
at any and all adjournments thereof, as specified on this Proxy.
<TABLE>
<S> <C>
1. ELECTION OF TRUSTEES AS CLASS III DIRECTORS: WITHHOLD [ ]
FOR all Nominees [ ] for all Nominees
(except as marked to the contrary)
</TABLE>
Urlin G. Harris, Jr., David L. Bickelhaupt and George R. Manser
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S) PRINT THE NAME IN
THE SPACE BELOW
-----------------------------------------------------------------------------
2. In the discretion of the named proxies, to vote on all other matters that
may properly come before the meeting or at any adjournment thereof.
(CONTINUED, AND TO BE SIGNED ON OTHER SIDE)
<PAGE> 23
DETACH CARD
- --------------------------------------------------------------------------------
PROXY NO. SHARES
(Continued from the other side)
The shares represented by this Proxy will be voted as directed by the
shareholder. IF NO DIRECTION IS GIVEN WHEN THE DULY EXECUTED PROXY IS RETURNED,
SUCH SHARES WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1.
[ ] I PLAN TO ATTEND MEETING
Date................., 1997
...........................
Signature
...........................
Signature
...........................
Title
Please mark, date and sign
as your name appears on
this Proxy and return in
the enclosed envelope. If
acting as executor,
administrator, trustee,
guardian, etc., you should
so indicate when signing.
If the signer is a
corporation, please sign
the full corporate name by
a duly authorized officer.
If shares are held jointly,
each stockholder named
should sign.
