<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) July 7, 1998
STATE AUTO FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-19289 31-1324304
- --------------------------------- ---------------------------------
(Commission File No.) (IRS Employer Identification No.)
518 East Broad Street, Columbus, Ohio 43215-3976
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (614) 464-5000
- --------------------------------------------------------------------------------
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
In the current report on Form 8-K filed by State Auto
Financial Corporation (the "Company") on July 20, 1998, the Company indicated it
would file Financial Statements of the Milbank Insurance Company ("Milbank")
required by this item to be filed by amendment. The financial statements of
Milbank, which reflect the financial positions and results of operations are
filed herewith as Exhibit A.
1. Independent Auditor's report on Financial Statements.
2. Balance Sheet (audited) as of the end of the most
recent fiscal year (year ended December 31, 1997).
3. Statement of Income (audited) for the fiscal year
preceding December 31, 1997.
4. Statement of Stockholder's Equity (audited) for the
year ended December 31, 1997.
5. Statement of Cash Flows (audited) for the fiscal year
preceding December 31, 1997.
6. Notes to Financial Statements.
7. Interim Balance Sheet (unaudited) as of June 30,
1998.
8. Interim Statement of Income (unaudited) for the six
months ended June 30, 1998 and 1997.
9. Interim Statement of Cash Flows (unaudited) for the
six months ended June 30, 1998 and 1997.
10. Statement of Stockholder's Equity (unaudited) for the
six months ended June 30, 1998.
11. Notes to Financial Statements (unaudited).
(b) Pro Forma Financial Information.
In the Form 8-K filed by the Company on July 20, 1998, the
Company indicated that it would file Pro forma financial information required by
this item by amendment. The following Pro forma financial information is filed
herewith as Exhibit B:
1. State Auto Financial Corporation and Subsidiaries Unaudited
Pro Forma Balance Sheet as of June 30, 1998.
2. State Auto Financial Corporation and Subsidiaries Unaudited
Pro Forma Statements of Income for the six months ended June 30, 1998 and each
of the preceding three years in the period ended December 31, 1997.
3. Notes to Unaudited Pro Forma Financial Statements.
<PAGE> 3
(c) Exhibits.
The Option Agreement is filed with the Commission as Exhibit
10 with the Form 10-K Annual Report dated December 31, 1993.
Exhibit 10(JJ): The Agreement and Plan of Reorganization dated
July 7, 1998, by and among State Auto Financial Corporation, SAF Acquisition
Corp., State Automobile Mutual Insurance Company, and Milbank Insurance Company
and the Closing Agreement dated July 7, 1998. The disclosure schedules are not
included with this exhibit. State Auto Financial agrees to furnish
supplementally a copy of such schedules to the Commission upon its request. *
Exhibit 10(JJ) was formerly identified as Exhibit 10(II) on the Form 8-K filed
on July 7, 1998. Please refer to the 7/8/98 Form 8-K for the copy of the
Exhibit.
* Previously filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this amendment to be signed on its behalf
by the undersigned, thereto duly authorized.
STATE AUTO FINANCIAL CORPORATION
Date: September 16, 1998 By: /s/ Steven J. Johnston
-----------------------------------
Steven J. Johnston
Vice President, Treasurer and
Chief Financial Officer
<PAGE> 4
Exhibit A
Independent Auditor's report on Financial Statements.
Balance Sheet (audited) as of the end of the most recent fiscal year
(year ended December 31, 1997).
Statement of Income (audited) for the fiscal year preceding December
31, 1997.
Statement of Stockholder's Equity (audited) for the year ended December
31, 1997.
Statement of Cash Flows (audited) for the fiscal year preceding
December 31, 1997.
Notes to Financial Statements.
Balance Sheet (unaudited) as of June 30, 1998.
Statement of Income (unaudited) for the six months ended June 30, 1998
and 1997.
Statement of Cash Flows (unaudited) for the six months ended June 30,
1998 and 1997.
Statement of Stockholder's Equity (unaudited) for the six months ended
June 30, 1998.
Notes to Financial Statements (unaudited).
<PAGE> 5
Milbank Insurance Company
Financial Statements
December 31, 1997
CONTENTS
Report of Independent Auditors................................................1
Balance Sheet.................................................................2
Statement of Income...........................................................3
Statement of Stockholder's Equity.............................................4
Statements of Cash Flows......................................................5
Notes to Financial Statements.................................................6
<PAGE> 6
Report of Independent Auditors
The Board of Directors and Stockholder
Milbank Insurance Company
We have audited the accompanying balance sheet of Milbank Insurance Company (the
"Company"), a wholly-owned subsidiary of State Automobile Mutual Insurance
Company, as of December 31, 1997, and the related statements of income,
stockholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Milbank Insurance Company as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
July 10, 1998
<PAGE> 7
<TABLE>
Milbank Insurance Company
Balance Sheet
December 31, 1997
<CAPTION>
(Dollars in thousands)
<S> <C>
ASSETS
Fixed maturities, available for sale, at fair value (amortized cost $98,226) $100,695
Equity securities, available for sale, at fair value (cost $14,833) 21,489
--------
Total investments 122,184
Cash and cash equivalents 7,012
Deferred policy acquisition costs 4,751
Accrued investment income and other assets 1,657
Net prepaid pension expense 2,475
Reinsurance recoverable on losses and loss expenses payable 2,224
Prepaid reinsurance premiums 572
Property and equipment, at cost, net of accumulated depreciation of $394 2,087
Due from affiliates 631
Goodwill 2,078
--------
Total assets $145,671
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Losses and loss expenses payable $ 43,803
Unearned premiums 25,588
Federal income taxes:
Current 2,263
Deferred 2,238
--------
Total liabilities 73,892
Commitments and contingencies --
Stockholder's equity:
Common stock ($100 par value; authorized, issued
and outstanding 25,000 shares) 2,500
Additional paid-in capital 47,588
Net unrealized gains on investments 5,931
Retained earnings 15,760
--------
Total stockholder's equity 71,779
--------
Total liabilities and stockholder's equity $145,671
========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 8
Milbank Insurance Company
Statement of Income
Year ended December 31, 1997
(Dollars in thousands)
Earned premiums $65,368
Net investment income 5,548
Net realized gains on investments 2,500
-------
Total revenues 73,416
Losses and loss expenses 42,444
Acquisition and operating expenses 21,130
Other expense, net 288
-------
Total expenses 63,862
-------
Income before federal income taxes 9,554
Federal income tax expense:
Current 2,242
Deferred 273
-------
Total federal income taxes 2,515
=======
Net income $ 7,039
=======
See accompanying notes to financial statements.
3
<PAGE> 9
Milbank Insurance Company
Statement of Stockholder's Equity
Year ended December 31, 1997
(Dollars in thousands)
Common stock:
Beginning of year $ 2,500
Issuance of common stock --
-------
End of year 2,500
-------
Additional paid-in capital:
Beginning of year 47,588
Issuance of common stock --
-------
End of year 47,588
-------
Net unrealized holding gains:
Beginning of year 2,350
Change in net unrealized gains on investments 3,581
-------
End of year 5,931
-------
Retained earnings:
Beginning of year 8,721
Net income 7,039
-------
End of year 15,760
-------
Total stockholder's equity $71,779
=======
See accompanying notes to financial statements.
4
<PAGE> 10
<TABLE>
Milbank Insurance Company
Statement of Cash Flows
Year ended December 31, 1997
<CAPTION>
(Dollars in thousands)
<S> <C>
Cash flows from operating activities:
Net income $ 7,039
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 973
Net realized gains on investments (2,500)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (429)
Accrued investment income and other assets (162)
Net prepaid pension expense (380)
Reinsurance receivable on losses and loss
expenses payable and prepaid reinsurance premiums 248
Other liabilities and due to/from affiliates, net (1,439)
Losses and loss expenses payable (1,933)
Unearned premiums 924
Federal income taxes 1,696
--------
Net cash provided by operating activities 4,037
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (39,809)
Purchase of equity securities (8,591)
Sales and maturities, calls and principal reductions of
fixed maturities - available for sale 39,385
Sale of equity securities 9,122
Net additions of property and equipment (109)
--------
Net cash used in investing activities (2)
Net increase in cash and cash equivalents 4,035
Cash and cash equivalents at beginning of year 2,977
--------
Cash and cash equivalents at end of year $ 7,012
========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 11
Milbank Insurance Company
Notes to Financial Statements
December 31, 1997
(Dollars in Thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements include the accounts of Milbank Insurance Company (the
Company). The Company, a South Dakota corporation, is a wholly-owned subsidiary
of State Automobile Mutual Insurance Company (Mutual).
(A) DESCRIPTION OF BUSINESS
The Company provides personal and commercial insurance to its policyholders,
primarily in the states of North and South Dakota, Minnesota and Utah through an
independent insurance agency system. The Company's principal lines of business
include personal and commercial automobile, homeowners, commercial multi-peril
and general liability insurance. The Company is chartered and licensed as a
property and casualty insurer in the state of South Dakota and is licensed in
various other states. As such it is subject to the regulations of the Department
of Insurance of the state of South Dakota (the "Department") and the regulations
of each state in which it operates. The Company undergoes periodic financial
examination by the Department and insurance regulatory agencies of the states
that choose to participate.
(B) BASIS OF PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles, which vary in certain respects from statutory
accounting practices followed by the Company that are prescribed or permitted by
the Department.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted
codified statutory accounting practices ("Codification"). Codification will
change, to some extent, prescribed statutory accounting practices and may result
in changes to the accounting practices that the Company uses to prepare its
statutory basis financial statements. Codification will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, South Dakota must
6
<PAGE> 12
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) BASIS OF PRESENTATION (CONTINUED)
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory basis results to the Department. At this
time, it is unknown when or if South Dakota will adopt Codification. However,
management believes that the impact of Codification will not be material to the
Company's statutory basis financial statements.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet, revenues and expenses for the period then ended
and the accompanying notes to the financial statements. Such estimates and
assumptions could change in the future as more information becomes known which
could impact the amounts reported and disclosed herein.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of losses and loss expenses payable
and the recoverability of deferred policy acquisition costs. In connection with
the determination of these items, management uses historical data and current
business conditions to formulate estimates including assumptions related to the
ultimate cost to settle claims. These estimates by their nature are subject to
uncertainties for various reasons. The Company's results of operations and
financial condition could be impacted in the future should the ultimate payments
required to settle claims vary from the liability currently provided.
(C) PREMIUM REVENUES
Premiums are recognized as earned using the monthly pro rata method over the
contract period.
(D) DEFERRED POLICY ACQUISITION COSTS
Acquisition costs, consisting of commissions, premium taxes, and certain
underwriting expenses related to the production of property and casualty
business, are deferred and amortized ratably over the contract period. The
method followed in computing deferred policy acquisition costs limits the amount
of such deferred costs to their estimated realizable value. In determining
estimated realizable value, the computation gives effect to the premium
7
<PAGE> 13
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
to be earned, losses and loss expenses to be incurred, and certain other costs
expected to be incurred as premium is earned, without credit for anticipated
investment income. These amounts are based on estimates and accordingly, the
actual realizable value may vary from the estimated realizable value.
Net deferred policy acquisition costs were:
YEAR ENDED
DECEMBER 31,
1997
------------
Balance, beginning of year $ 4,322
Acquisition costs deferred 16,726
Amortized to expense during the year (16,297)
========
Balance, end of year $ 4,751
========
(E) GOODWILL
Goodwill represents the excess of cost of acquisition over the fair value of the
net assets acquired and is being amortized using the straight-line method over
15 years. Accumulated amortization is $889 at December 31, 1997.
(F) LOSSES AND LOSS EXPENSES PAYABLE
Losses and loss expenses payable are based on formula and case-basis estimates
for reported claims, and on estimates, based on experience, for unreported
claims and loss expenses. The liability for unpaid losses and loss expenses, net
of estimated salvage and subrogation recoverable of $2,382 at December 31, 1997,
has been established to cover the estimated ultimate cost of insured losses. The
amounts are necessarily based on estimates of future rates of inflation and
other factors, and accordingly there can be no assurance that the ultimate
liability will not vary from such estimates. The estimates are continually
reviewed and adjusted as necessary; such adjustments are included in current
operations. Salvage and subrogation recoverables are estimated using historical
experience.
8
<PAGE> 14
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) INVESTMENTS
Investments in fixed maturities and equity securities held as available-for-sale
are carried at fair value. Net unrealized gains or losses, net of applicable
deferred taxes, are shown as a separate component of stockholder's equity, and
are not included in the determination of net income. Gains and losses on the
sale of equity securities are computed using the first-in, first-out method.
(H) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its parent,
Mutual. Pursuant to a written agreement, each entity within the consolidated
group pays its share of federal income taxes based on separate return
calculations.
Income taxes are accounted for using the liability method. Using this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
(I) CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
(J) NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
Company has not yet determined the reporting changes required by SFAS 130 to
comprehensive income.
9
<PAGE> 15
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(2) INVESTMENTS
Realized and unrealized gains and losses are summarized as follows:
YEAR ENDED
DECEMBER 31,
1997
------------
Realized gains:
Fixed maturity securities $ 227
Equity securities 2,392
-------
Total realized gains 2,619
-------
Realized losses:
Fixed maturity securities (49)
Equity securities (70)
-------
Total realized losses (119)
-------
Net realized gains on investments $ 2,500
=======
Increase in unrealized gains:
Equity securities $ 3,133
Fixed maturity securities 2,376
Deferred federal income taxes thereon (1,928)
-------
Increase in net unrealized holding gains $ 3,581
=======
10
<PAGE> 16
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(2) INVESTMENTS (CONTINUED)
The Company's investments in available-for-sale securities at December 31, 1997
are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
--------- ------------- -------------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 28,104 $ 180 $173 $ 28,111
Obligations of states and political
subdivisions 57,600 2,239 -- 59,839
Corporate securities 2,031 140 39 2,132
Mortgage-backed securities 10,491 161 39 10,613
-------- ------ ---- --------
Total fixed maturities 98,226 2,720 251 100,695
Equity securities 14,833 6,784 128 21,489
-------- ------ ---- --------
Total $113,059 $9,504 $379 $122,184
======== ====== ==== ========
</TABLE>
Deferred federal income taxes on the net unrealized gains was $3,508 at December
31, 1997.
The amortized cost and fair value of fixed maturities at December 31, 1997, by
contractual maturity, are summarized as follows:
AVAILABLE-FOR-SALE
AMORTIZED COST FAIR VALUE
-------------- ----------
Due after 1 year or less $ 2,333 $ 2,324
Due after 1 year through 5 years 15,791 15,744
Due after 5 years through 10 years 23,492 24,369
Due after 10 years 46,119 47,645
------- --------
87,735 90,082
Mortgage-backed securities 10,491 10,613
------- --------
$98,226 $100,695
======= ========
11
<PAGE> 17
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(2) INVESTMENTS (CONTINUED)
Expected maturities may differ from contractual maturities because the issuers
may have the right to call or prepay the obligations with or without call or
prepayment penalties.
Fixed maturities with carrying values of approximately $12,424 were on deposit
as required by law or specific escrow agreement at December 31, 1997.
Components of net investment income are summarized as follows:
YEAR ENDED
DECEMBER 31,
1997
------------
Fixed maturity securities $5,908
Equity securities 346
Cash and cash equivalents 216
------
Investment income 6,470
Investment expenses (922)
------
Net investment income $5,548
======
(3) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for these instruments approximate their fair value.
Investment securities: Fair values for investments in fixed maturities are
based on quoted market prices, where available. For fixed maturities not
actively traded, fair values are estimated using values obtained from
independent pricing services. The fair values for equity securities are
based on quoted market prices.
See Note 2 for additional fair value disclosures.
12
<PAGE> 18
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(4) LOSSES AND LOSS EXPENSES PAYABLE
Activity in the liability for losses and loss expenses is summarized as follows:
YEAR ENDED
DECEMBER 31,
1997
------------
Losses and loss expenses payable, net of reinsurance
receivables, at beginning of year $43,297
Incurred related to:
Current year 47,597
Prior years (5,153)
-------
Total incurred 42,444
-------
Paid related to:
Current year 27,355
Prior years 16,807
-------
Total paid 44,162
-------
Losses and loss expenses payable, net of reinsurance
recoverables, at end of year $41,579
=======
The liability for losses and loss expenses decreased by $5,153 in 1997 for
claims that had occurred in prior years. These decreases have resulted primarily
from moderating trends in the frequency and severity of losses and loss expenses
due to lower inflation. This along with fundamental improvements primarily in
the auto liability and workers' compensation lines of business resulted in
incurred losses and loss expenses developing favorably. Because of the nature of
the business written over the years, the Company's management believes that the
Company has limited exposure to environmental claim liabilities.
(5) REINSURANCE
In the ordinary course of business, the Company assumes and cedes reinsurance
with other insurers and reinsurers and is a member in various pools and
associations. The voluntary arrangements provide greater diversification of
business and limit the maximum net loss
13
<PAGE> 19
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(5) REINSURANCE (CONTINUED)
potential arising from large risks and catastrophes. Most of the ceded
reinsurance is effected under reinsurance contracts known as treaties; some is
by negotiation on individual risks. Although the ceding of reinsurance does not
discharge the original insurer from its primary liability to its policyholder,
the insurance company that assumes the coverage assumes the related liability.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured business. The recoverability
of these assets depends on the reinsurers' ability to perform under the
reinsurance agreements. The Company evaluates and monitors the financial
condition and concentrations of credit risk associated with its reinsurers under
voluntary reinsurance arrangements to minimize its exposure to significant
losses from reinsurer insolvencies.
The Company, along with State Auto Property and Casualty Insurance Company
(State Auto P&C) participates in a reinsurance pooling arrangement with Mutual.
The arrangement provides that all premiums, losses, loss expenses, underwriting
expenses, premiums in course of collection and reinsurance recoverable on loss
payments (all transactions and balances in the underwriting accounts) of the
companies be pooled and then allocated to each company based on percentages
outlined in the agreement. The pooling participation percentages allocate 35% to
State Auto P&C, 55% to Mutual and 10% to the Company.
The pooling arrangement was amended pursuant to an Amended and Restated
Reinsurance Pooling Agreement, effective as of January 1, 1998, to include all
of the property and casualty business of Midwest Security Insurance Company
(Midwest Security), a wholly-owned subsidiary of Mutual. Concurrently, with the
inclusion of Midwest Security, the pooling participation percentages were
amended to allocate 37% to State Auto P&C, 52% to Mutual, 10% to the Company and
1% to Midwest Security. In connection with the January 1, 1998 change in pooling
percentages, Milbank received approximately $1.7 million to cover its increased
share of pool liabilities.
Pursuant to the pooling arrangement, Mutual is responsible for the collection of
premiums and payment of losses, loss expenses and underwriting expenses of the
pooled companies. Unpaid balances are reflected in due to or due from affiliate
in the accompanying balance sheet. Settlements of the intercompany account are
made quarterly. No interest is paid on this
14
<PAGE> 20
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(5) REINSURANCE (CONTINUED)
account. All premium balances receivable and reinsurance recoverable on paid
losses from unaffiliated reinsurers are carried by Mutual.
The State Auto Insurance Companies (State Auto P&C, Mutual, the Company and
State Auto National Insurance Company (National)) participate in a catastrophe
reinsurance program whereby State Auto P&C assumes catastrophe reinsurance from
Mutual, Milbank and National pursuant to a catastrophe reinsurance agreement in
the amount of $100 million excess of $120 million. This layer of $100 million in
excess of $120 million has been excluded from the pooling arrangement pursuant
to the terms of the Amended and Restated Reinsurance Pooling Agreement effective
January 1, 1998.
The Company has reported ceded losses and loss expenses payable and prepaid
reinsurance premiums as assets. The amounts reported represent the Company's
pooling percentage of the total amounts ceded to unaffiliated reinsurers. All
contracts providing indemnification against loss or liability relating to
insurance risk have been accounted for as reinsurance.
The following table summarizes the Company's direct business, amounts
contributed to the pool and the Company's participation in the pool:
YEAR ENDED
DECEMBER 31,
1997
------------
Losses and loss expenses payable:
Direct and assumed (excluding intercompany pooling) $36,732
Ceded (excluding intercompany pooling) (2,348)
-------
Net amount contributed to the pool $34,384
=======
Direct and assumed (intercompany pooling) $43,918
Ceded (intercompany pooling) (2,224)
-------
Net participation in the pool $41,694
=======
15
<PAGE> 21
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(5) REINSURANCE (CONTINUED)
YEAR ENDED
DECEMBER 31,
1997
------------
Unearned premiums:
Direct and assumed (excluding intercompany pooling) $20,971
Ceded (excluding intercompany pooling) (162)
-------
Net amount contributed to the pool $20,809
=======
Direct and assumed (intercompany pooling) $25,588
Ceded (intercompany pooling) (572)
-------
Net participation in the pool $25,016
=======
Earned premiums:
Direct and assumed (excluding intercompany pooling) $58,598
Ceded (excluding intercompany pooling) (688)
-------
Net amount contributed to the pool $57,910
=======
Direct and assumed (intercompany pooling) $67,992
Ceded (intercompany pooling) (2,204)
-------
Net participation in the pool 65,788
Assumed from affiliates (excluding intercompany pooling) 836
-------
Total $66,624
=======
Losses and loss expenses incurred:
Direct and assumed (intercompany pooling) $52,226
Ceded (excluding intercompany pooling) (397)
-------
Net amount contributed to the pool $51,829
=======
Direct and assumed (intercompany pooling) $43,489
Ceded (intercompany pooling) (980)
-------
Net participation in the pool $42,509
=======
16
<PAGE> 22
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(6) TRANSACTIONS WITH AFFILIATES
State Auto P&C provides executive management services to oversee the insurance
operations of the Company. Fees relating to these services amounted to $830 in
1997. Stateco Financial Services, Inc. provides investment management services
to the Company. Fees relating to these services amounted to $508 in 1997.
(7) FEDERAL INCOME TAXES
A reconciliation between actual federal income taxes and the amount computed at
the indicated statutory rate is as follows:
YEAR ENDED DECEMBER 31, 1997
AMOUNT %
------ ---
Amount at statutory rate $3,344 35%
Tax-free interest and dividends
received deduction (916) (9.5%)
Other, net 87 .5%
------ ----
Federal income tax expense $2,515 26%
====== ====
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, 1997
-----------------
Deferred tax assets:
Unearned premiums not currently deductible $1,751
Losses and loss expenses payable discounting 1,938
Other 139
------
Total deferred tax assets 3,828
17
<PAGE> 23
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(7) FEDERAL INCOME TAXES (CONTINUED)
Deferred tax liabilities:
Deferral of policy acquisition costs (1,663)
Net pension expense (866)
Unrealized holding gain on investments (3,508)
Other (29)
-------
Total deferred tax liabilities (6,066)
-------
Net deferred tax liability $(2,238)
=======
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets and, therefore, no such valuation
allowance has been established. Federal income taxes paid during 1997 were $819.
(8) BENEFIT PLANS
The Company, pursuant to an intercompany agreement, participates, together with
Mutual and its affiliates, in a defined benefit pension plan that covers
substantially all employees of Mutual, the Company and State Auto Financial
Corporation (STFC). The assets of the plan are represented primarily by U.S.
government and agency obligations, bonds, and common stocks. Mutual, the Company
and STFC's policy is to fund pension costs in accordance with the requirements
of the Employee Retirement Income Security Act of 1974. Benefits are determined
by applying factors specified in the plan to a participant's defined average
annual compensation.
18
<PAGE> 24
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(8) BENEFIT PLANS (CONTINUED)
Information regarding the funded status and net periodic pension cost for the
Company's participation in the plan is as follows:
YEAR ENDED
DECEMBER 31,
1997
------------
Accumulated benefit obligation:
Vested $ 7,415
Nonvested 50
-------
$ 7,465
=======
Projected benefit obligation (PBO) for services
rendered to date
$(7,895)
Plan assets at fair value 12,830
-------
Plan assets in excess of PBO 4,935
Unrecognized net gain (2,460)
-------
Net prepaid pension expense $ 2,475
=======
19
<PAGE> 25
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(8) BENEFIT PLANS (CONTINUED)
YEAR ENDED
DECEMBER 31,
1997
------------
Net periodic pension cost consists of the following:
Service cost (benefits earned during the period) $ 302
Interest cost on PBO 549
Actual return on plan assets (943)
-----
Net periodic pension benefit $ (92)
=====
The actuarial assumptions used in these calculations are as follows:
1997
----
Weighted average discount rate 7.25%
Rates of increase in compensation levels 4.50%
Expected long-term rate of return on assets 9.00%
The Company is also a participant, along with Mutual and its affiliates, in a
defined contribution plan that covers substantially all employees of Mutual, the
Company and STFC. Contributions to the plan are based on employee contributions
and the level of Company match. The Company's share of the expense under the
plan totaled $151 for 1997.
(9) STOCKHOLDER'S EQUITY
The Company is subject to regulations and restrictions under which payment of
dividends from statutory surplus can be made without prior approval of
regulatory authorities. Pursuant to these rules, approximately $7 million is
available for payment to Mutual in 1998 without prior approval.
20
<PAGE> 26
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(9) STOCKHOLDER'S EQUITY (CONTINUED)
Reconciliations of statutory capital and surplus and net income or loss, as
determined using statutory accounting practices, to the amounts included in the
accompanying financial statements are as follows:
YEAR ENDED
DECEMBER 31,
1997
------------
Statutory capital and surplus $56,288
Add (subtract) cumulative effect of adjustments:
Deferred policy acquisition costs 4,751
Losses and loss expenses payable 2,382
Net prepaid pension expense 2,475
Deferred federal income taxes (2,238)
Excess of statutory loss liabilities over case basis amounts 2,192
Goodwill 2,078
Fixed maturities at fair value 3,340
Other, net 511
-------
Stockholder's equity per accompanying financial statements $71,779
=======
Statutory net income $ 6,964
Increases (decreases):
Deferred policy acquisition costs 429
Losses and loss expenses payable 36
Net prepaid pension expense 380
Deferred federal income taxes (273)
Net investment income (287)
Goodwill (198)
Other, net (12)
-------
Net earnings per accompanying financial statements $ 7,039
=======
21
<PAGE> 27
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
1997
----
<S> <C> <C> <C> <C>
Total revenues $17,998 $18,019 $18,536 $18,863
Earnings before federal income
taxes 1,737 2,067 2,346 3,404
Net earnings 1,340 1,562 1,737 2,400
</TABLE>
(11) CONTINGENCIES
The Company is involved in litigation and may become involved in potential
litigation arising in the ordinary course of business. In the opinion of
management, the effects, if any, of such litigation are not expected to be
material to the financial statements.
(12) SUBSEQUENT EVENTS
On March 6, 1998, the Board of Directors of STFC voted to authorize the officers
of STFC to undertake such actions as are necessary to effect the exercise of
STFC's option to acquire the Company from Mutual. The effective date of this
transaction was July 7, 1998.
(13) YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define the applicable year. Any of the computer
programs used by the Company that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of uncertain duration in
the Company's operations, including, among other things, an inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on an analysis of its systems software, management determined that it is
required to modify or replace significant portions of the Company's software so
that its computer systems will function properly with respect to dates in the
Year 2000 and thereafter.
22
<PAGE> 28
Milbank Insurance Company
Notes to Financial Statements (continued)
(Dollars in thousands)
(13) YEAR 2000 (UNAUDITED) (CONTINUED)
Management presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for the Company. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 Issue could
adversely affect the operations of the Company.
To address the Year 2000 Issue in a timely and effective manner, management
purchased software from a third party vendor to assist in diagnosing and
correcting certain of the Company's major policy processing software systems. In
addition, management is utilizing the Company's internal resources to reprogram,
or replace, and test the balance of its software for necessary Year 2000
modifications. Management presently anticipates completing the Year 2000
modifications on the Company's critical business applications software by
October 1998 and its remaining non-critical business applications software
during 1999. Management expects to have these changes completed prior to the
Year 2000 Issue having an adverse impact on the Company's operations and
operating systems.
Also, management has initiated communications with all of the Company's
significant suppliers and business partners to determine the extent to which the
Company's interface systems are vulnerable to such third parties' failure to
remediate their own Year 2000 Issues. The Company's estimate of its dates of
completion include time associated with the impact of third party Year 2000
Issues, based on presently available information. However, there can be no
guarantee that the software systems of other companies on which the Company's
computer systems rely will be timely converted and would not have an adverse
effect on the Company.
The date by which the Company believes it will complete the Year 2000
modifications are based on management's judgment, and information available to
it as well as its assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant software code, and the affect of the
Year 2000 Issue on regulators and other government agencies, among others.
23
<PAGE> 29
<TABLE>
MILBANK INSURANCE COMPANY
BALANCE SHEET
June 30, 1998
<CAPTION>
(dollars in thousands)
(unaudited)
<S> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost $99,278) $101,536
Equity securities, available for sale, at fair value (cost $15,937) 26,310
--------
Total investments 127,846
Cash and cash equivalents 8,682
Deferred policy acquisition costs 4,913
Accrued investment income and other assets 1,655
Net prepaid pension expense 2,047
Reinsurance recoverable on losses and loss expenses payable 2,573
Prepaid reinsurance premiums 569
Property and equipment, net 2,496
Goodwill 1,979
--------
Total assets $152,760
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Losses and loss expenses payable $ 46,165
Unearned premiums 26,512
Federal income taxes:
Current 719
Deferred 3,302
Due to affiliates 558
--------
Total liabilities 77,256
--------
STOCKHOLDER'S EQUITY
Common stock ($100 par value; authorized, issued and
outstanding 25,000 shares) 2,500
Additional paid-in capital 47,588
Accumulated other comprehensive earnings 8,210
Retained earnings 17,206
--------
Stockholder's equity 75,504
--------
Total liabilities and stockholder's equity $152,760
========
</TABLE>
See accompanying notes to the financial statements.
<PAGE> 30
MILBANK INSURANCE COMPANY
STATEMENTS OF INCOME
For the six months ended June 30, 1998 and 1997
(dollars in thousands)
(unaudited)
1998 1997
---- ----
Earned premiums $34,486 $32,474
Net investment income 2,752 2,675
Net realized gains on investments 507 868
------- -------
Total revenues 37,745 36,017
------- -------
Losses and loss expenses 24,457 21,568
Acquisition and operating expenses 11,201 10,498
Other expense, net 149 147
------- -------
Total expenses 35,807 32,213
------- -------
Income before federal income taxes 1,938 3,804
Federal income tax expense 492 902
------- -------
Net income $ 1,446 $ 2,902
======= =======
See accompanying notes to the financial statements.
<PAGE> 31
MILBANK INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
For the six months ended June 30, 1998
(dollars in thousands)
(unaudited)
1998
----
Common stock:
Beginning of year $ 2,500
Issuance of common stock --
-------
End of period 2,500
-------
Additional paid in capital:
Beginning of year 47,588
Issuance of common stock --
-------
End of period 47,588
-------
Accumulated other comprehensive earnings:
Beginning of year 5,931
Unrealized gains (net of
reclassificiation adjustment) 2,279 2,279
-------
End of period 8,210
-------
Retained earnings:
Beginning of year 15,760
Net income 1,446 1,446
-------
End of period 17,206
-------
------
Comprehensive earnings $3,725
======
Total stockholder's equity $75,504
=======
See accompanying notes to the financial statements.
<PAGE> 32
<TABLE>
MILBANK INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(dollars in thousands)
(unaudited)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,446 $ 2,902
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization, net 475 481
Net realized gains on investments (507) (868)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (62) (228)
Accrued investment income and other assets 1 (91)
Net prepaid pension expense (20) (189)
Other liabilities and due to/from affiliate, net 1,189 (1,750)
Reinsurance recoverable on losses and loss expenses
payable and prepaid reinsurance premiums 71 44
Losses and loss expenses payable 878 (329)
Unearned premiums 242 451
Federal income taxes (1,708) 902
-------- --------
2,005 1,325
Cash provided from the change in the reinsurance pool
participation percentage 1,649 --
-------- --------
Net cash provided by operating activities 3,654 1,325
-------- --------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (24,408) (21,007)
Purchase of equity securities (2,963) (3,768)
Maturities, calls and principal reductions of
fixed maturities - available for sale 2,289 1,968
Sale of fixed maturities - available for sale 20,975 18,696
Sale of equity securities 2,123 3,692
Net additions of property and equipment -- (74)
-------- --------
Net cash used in investing activities (1,984) (493)
-------- --------
Net increase in cash and cash equivalents 1,670 832
Cash and cash equivalents at beginning of period 7,012 2,977
-------- --------
Cash and cash equivalents at end of period $ 8,682 $ 3,809
======== ========
Supplemental disclosures:
Federal income taxes paid $ 2,200 --
======== ========
</TABLE>
See accompanying notes to the financial statements.
<PAGE> 33
MILBANK INSURANCE COMPANY
Notes to Financial Statements
June 30, 1998
(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,
1997 included in this filing.
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, 1998.
2. Comprehensive Earnings
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive earnings and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net earnings or shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive earnings.
The components of comprehensive earnings, net of related tax, for the six-month
period ended June 30, 1998 is as follows (in thousands):
Net earnings $1,446
Unrealized gains, net of tax 2,279
------
Comprehensive earnings $3,725
======
The components of accumulated other comprehensive earnings, net of related tax,
included in stockholders' equity at June 30, 1998, include only unrealized
gains, net of tax.
3. New Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997, but is not required to be applied to interim
financial statements in the initial year of adoption. SFAS No. 131 changes the
way public companies report segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial reports to shareholders. The Company has not yet determined
the reporting changes required by SFAS No. 131 to segment information.
<PAGE> 34
MILBANK INSURANCE COMPANY
Notes to Financial Statements
June 30, 1998
(unaudited)
4. Subsequent Event
On July 7, 1998, State Auto Financial Corporation acquired 100% of the
outstanding shares of the Company from State Automobile Mutual Insurance Company
(State Auto Mutual). State Auto Mutual is the majority owner of State Auto
Financial. The transaction was effected through a merger in which 5,137,000
common shares, without par value, of State Auto Financial were exchanged with
State Auto Mutual for all of the issued and outstanding shares of capital stock
of the Company. The Company is now a wholly owned subsidiary of State Auto
Financial. The transaction will be accounted for under the pooling-of-interests
method of accounting.
<PAGE> 35
Exhibit B
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
acquisition of Milbank Insurance Company (Milbank) by State Auto Financial
Corporation (State Auto Financial) which is being accounted for under the
pooling-of-interests method of accounting. The unaudited pro forma financial
statements are based on the historical financial statements and notes thereto
(as applicable) of Milbank and the historical consolidated financial statements
and notes thereto (as applicable) of State Auto Financial after giving effect to
certain adjustments described in the accompanying notes to the unaudited pro
forma financial statements.
The unaudited pro forma balance sheet assumes the transaction took place on June
30, 1998, and combines Milbank's balance sheet with State Auto Financial's
balance sheet as of that date. The unaudited pro forma statements of earnings
assumes that the transaction took place on January 1, 1995, and combines
Milbank's statements of earnings with State Auto Financial's statements of
earnings for the fiscal years ended December 31, 1997, 1996 and 1995 and the six
months ended June 30, 1998.
The unaudited pro forma financial statements does not purport to represent what
State Auto Financial's financial position or results of operations would
actually have been had the transaction in fact occurred on the dates indicated
above, nor to project State Auto Financial's financial position or results of
operations for any future date or period. The pro forma financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in State Auto Financial's 1997 Annual Report on Form 10-K
and Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
<PAGE> 36
<TABLE>
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA BALANCE SHEET AS OF JUNE 30, 1998
(UNAUDITED)
(in thousands)
<CAPTION>
Historical
State Auto Historical Pro Forma
Financial Milbank Adjustments State Auto Financial
--------- ------- ----------- --------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Hold to maturity $ 69,889 -- $ 69,889
Available for sale 362,695 101,536 464,231
Equity securities 8,162 26,310 34,472
-------- -------- --------
Total investments 440,746 127,846 568,592
Cash and cash equivalents 23,039 8,682 31,721
Deferred policy acquisition costs 19,369 4,913 24,282
Accrued investment income and other assets 17,972 1,655 19,627
Net prepaid pension expense 13,239 2,047 15,286
Reinsurance recoverable on losses and loss expenses payable 12,809 2,573 15,382
Prepaid reinsurance premiums 3,956 569 4,525
Current federal income taxes 663 -- (663) 0
Property and equipment, net 3,725 2,496 6,221
Goodwill -- 1,979 1,979
-------- -------- --------
Total assets $535,518 $152,760 $687,615
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable $182,947 $ 46,165 $229,112
Unearned premiums 109,160 26,512 135,672
Federal income taxes:
Current -- 719 (663) 56
Deferred 2,310 3,302 5,612
Due to affiliates 411 558 969
Other liabilities 2,691 -- 2,691
-------- -------- --------
Total liabilities 297,519 77,256 374,112
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock 91,899 2,500 10,342 (1) 104,741
Additional paid-in capital 3,447 47,588 (10,342) (1) 40,693
Accumulated comprehensive income 8,317 8,210 16,527
Retained earnings 134,336 17,206 151,542
-------- -------- --------
Stockholders' equity 237,999 75,504 313,503
-------- -------- --------
Total liabilties and stockholders' equity $535,518 $152,760 $687,615
======== ======== ========
</TABLE>
See accompanying notes to the pro forma financial statements.
<PAGE> 37
<TABLE>
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(in thousands, except per share data)
<CAPTION>
Historical
State Auto Historical Pro Forma
Financial Milbank Adjustments State Auto Financial
--------- ------- ----------- --------------------
<S> <C> <C> <C> <C>
Earned premiums $142,540 $34,486 $177,026
Net investment income 13,108 2,752 278 (2) 16,138
Management services income 4,682 -- (722)(2) 3,960
Net realized gains on investments 542 507 1,049
-------- ------- --------
Total revenues 160,872 37,745 198,173
-------- ------- --------
Losses and loss expenses 100,816 24,457 125,273
Acquisition and operating expenses 41,396 11,201 (562)(2) 52,035
Other expense, net 1,429 149 118 (2) 1,696
-------- ------- --------
Total expenses 143,641 35,807 179,004
-------- ------- --------
Income before federal income taxes 17,231 1,938 19,169
Federal income tax expense 4,366 492 4,858
-------- ------- --------
Net income $ 12,865 $ 1,446 $ 14,311
======== ======= ========
Net income per common share:
Basic $ 0.35 $ 0.34
Diluted 0.34 0.33
Weighted average common shares outstanding:
Basic 36,706 5,137 (3) 41,843
Diluted 37,778 5,137 (3) 42,915
</TABLE>
See accompanying notes to the pro forma financial statements.
<PAGE> 38
<TABLE>
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(in thousands, except per share data)
<CAPTION>
Historical
State Auto Historical Pro Forma
Financial Milbank Adjustments State Auto Financial
--------- ------- ----------- --------------------
<S> <C> <C> <C> <C>
Earned premiums $254,682 $65,368 $320,050
Net investment income 25,078 5,548 508 (2) 31,134
Management services income 8,705 -- (1,338)(2) 7,367
Net realized gains on investments 543 2,500 3,043
-------- ------- --------
Total revenues 289,008 73,416 361,594
-------- ------- --------
Losses and loss expenses 165,790 42,444 208,234
Acquisition and operating expenses 74,213 21,130 (992)(2) 94,351
Other expense, net 1,921 288 162 (2) 2,371
-------- ------- --------
Total expenses 241,924 63,862 304,956
-------- ------- --------
Income before federal income taxes 47,084 9,554 56,638
Federal income tax expense 13,125 2,515 15,640
-------- ------- --------
Net income $ 33,959 $ 7,039 $ 40,998
======== ======= ========
Net income per common share:
Basic $ 0.93 $ 0.99
Diluted 0.90 0.97
Weighted average common shares outstanding:
Basic 36,407 5,137 (3) 41,544
Diluted 37,313 5,137 (3) 42,450
</TABLE>
See accompanying notes to the pro forma financial statements.
<PAGE> 39
<TABLE>
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(in thousands, except per share data)
<CAPTION>
Historical
State Auto Historical Pro Forma
Financial Milbank Adjustments State Auto Financial
--------- ------- ----------- --------------------
<S> <C> <C> <C> <C>
Earned premiums $240,345 $64,127 $304,472
Net investment income 23,879 5,523 475 (2) 29,877
Management services income 8,020 -- (1,246)(2) 6,774
Net realized gains on investments 1,401 1,387 2,788
-------- ------- --------
Total revenues 273,645 71,037 343,911
-------- ------- --------
Losses and loss expenses 173,540 46,540 (46)(2) 220,034
Acquisition and operating expenses 67,447 19,437 (881)(2) 86,003
Other expense, net 2,510 416 156 (2) 3,082
-------- ------- --------
Total expenses 243,497 66,393 309,119
-------- ------- --------
Income before federal income taxes 30,148 4,644 34,792
Federal income tax expense 7,546 839 8,385
-------- ------- --------
Net income $ 22,602 $ 3,805 $ 26,407
======== ======= ========
Net income per common share:
Basic $ 0.62 $ 0.64
Diluted 0.61 0.63
Weighted average common shares outstanding:
Basic 36,140 5,137 (3) 41,277
Diluted 36,808 5,137 (3) 41,945
</TABLE>
See accompanying notes to the pro forma financial information.
<PAGE> 40
<TABLE>
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(in thousands, except per share data)
<CAPTION>
Historical
State Auto Historical Pro Forma
Financial Milbank Adjustments State Auto Financial
--------- ------- ----------- --------------------
<S> <C> <C> <C> <C>
Earned premiums $232,524 $63,840 $296,364
Net investment income 22,617 5,401 443 (2) 28,461
Management services income 7,574 -- (1,197)(2) 6,377
Net realized gains on investments 1,201 557 1,758
-------- ------- --------
Total revenues 263,916 69,798 332,960
-------- ------- --------
Losses and loss expenses 158,913 43,498 (45)(2) 202,366
Acquisition and operating expenses 67,348 20,263 (774)(2) 86,837
Other expense, net 2,316 423 65 (2) 2,804
-------- ------- --------
Total expenses 228,577 64,184 292,007
-------- ------- --------
Income before federal income taxes 35,339 5,614 40,953
Federal income tax expense 9,797 1,262 11,059
-------- ------- --------
Net income $ 25,542 $ 4,352 $ 29,894
======== ======= ========
Net income per common share:
Basic $ 0.71 $ 0.73
Diluted 0.70 0.72
Weighted average common shares outstanding:
Basic 35,913 5,137 (3) 41,050
Diluted 36,371 5,137 (3) 41,508
</TABLE>
See accompanying notes to the pro forma financial statements.
<PAGE> 41
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
NOTE 1. PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been reflected in the pro forma
financial information:
(1) Common stock and additional paid in capital were adjusted by a net
$10,342,000 to reflect the merger accounted for as a
pooling-of-interests through the exchange of 5,137,000 shares of State
Auto Financial common stock for 25,000 shares of Milbank capital stock.
(2) To eliminate impact of intercompany transactions.
(3) To reflect the exchange of common shares, without par value, of State
Auto Financial for all of the issued and outstanding shares of capital
stock of Milbank.
NOTE 2. RECLASSIFICATIONS
Certain reclassifications have been included in the unaudited pro forma balance
sheet to conform to statement presentations.
<PAGE> 42
EXHIBIT 10(JJ)
Agreement and Plan of Reorganization
Formerly identified as Exhibit 10(II) on the Form 8-K filed on July 8, 1998.
Please refer to that Form 8-K for the copy of the exhibit.
