<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 1999
-------------------------------------------------
( ) Transition report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Transition period from to
----------------------- ------------------------
State Auto Financial Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1324304
- ------------------------------- --------------------------------------
(State or other (I.R.S. Employer Identification No.)
jurisdiction of incorporation)
518 East Broad Street, Columbus, Ohio 43215-3976
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(614) 464-5000
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares, without par value 40,565,812
- -------------------------------- ------------------------
(CLASS) (OUTSTANDING ON 8/06/99)
<PAGE> 2
INDEX
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 1999 and
December 31, 1998
Condensed consolidated statements of income - Three months
ended June 30, 1999 and 1998
Condensed consolidated statements of income - Six months ended
June 30, 1999 and 1998
Condensed consolidated statements of cash flows - Six months
ended June 30, 1999 and 1998
Notes to condensed consolidated financial statements -
June 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE> 3
PART I. Financial Information
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1999 1998
--------- -----------
<S> <C> <C>
Fixed maturities:
Held for investment, at amortized cost
(fair value $47,775 and $57,826, respectively) $ 46,913 $ 55,926
Available for sale, at fair value
(amortized cost $508,088 and $464,008, respectively) 507,600 481,844
Equity securities, at fair value (cost $34,684 and $29,233, respectively) 50,427 42,196
--------- ---------
Total investments 604,940 579,966
Cash and cash equivalents 38,316 32,605
Surplus note receivable -- 9,000
Deferred policy acquisition costs 28,299 24,799
Accrued investment income and other assets 18,661 19,542
Net prepaid pension expense 17,776 16,378
Reinsurance receivable 18,012 13,667
Prepaid reinsurance premiums 3,727 4,014
Property and equipment, net 10,997 7,927
Due from affiliates 6,120 --
Current federal income taxes 997 --
Goodwill 2,658 1,880
--------- ---------
Total assets $ 750,503 $ 709,778
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable $ 247,082 $ 218,701
Unearned premiums 144,885 135,088
Note payable 16,000 --
Current federal income taxes -- 2,608
Deferred federal income taxes 2,311 8,095
Due to affiliates -- 884
Other liabilities 4,179 3,578
--------- ---------
Total liabilities 414,457 368,954
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, without par value. Authorized 100,000,000 shares;
42,210,337 and 42,039,892 shares issued, respectively, at stated value
of $2.50 per share 105,526 105,100
Less 1,330,525 and 13,212 treasury shares, respectively (16,568) (167)
Additional paid-in capital 42,285 41,539
Accumulated comprehensive income 10,111 20,276
Retained earnings 194,692 174,076
--------- ---------
Stockholders' equity 336,046 340,824
--------- ---------
Total liabilities and stockholders' equity $ 750,503 $ 709,778
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 1999 and 1998
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Restated -
See Note 1)
<S> <C> <C>
Earned premiums (net of ceded earned premiums of
$3,116 and $3,758, respectively) $ 98,853 $ 88,884
Net investment income 8,357 8,112
Management services income 2,192 1,987
Net realized gains on investments 872 324
Other income 912 516
-------- --------
Total revenues 111,186 99,823
-------- --------
Losses and loss expenses (net of ceded losses and loss
expenses of $4,616 and $2,624, respectively) 67,972 69,282
Acquisition and operating expenses 27,824 25,829
Interest expense 67 --
Other expense 1,556 1,416
-------- --------
Total expenses 97,419 96,527
-------- --------
Income before federal income taxes 13,767 3,296
Federal income tax expense (benefit):
Current 3,200 940
Deferred 198 (424)
-------- --------
Total federal income taxes 3,398 516
-------- --------
Net income $ 10,369 $ 2,780
======== ========
Earnings per share:
- basic $ 0.25 $ 0.07
======== ========
- diluted $ 0.25 $ 0.06
======== ========
Dividends paid per common share $ 0.025 $ 0.023
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1999 and 1998
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(Restated -
See Note 1)
<S> <C> <C>
Earned premiums (net of ceded earned premiums of
$6,750 and $7,253, respectively) $ 197,329 $ 177,026
Net investment income 16,808 16,123
Management services income 4,376 3,959
Net realized gains on investments 1,926 1,050
Other income 1,678 1,025
--------- ---------
Total revenues 222,117 199,183
--------- ---------
Losses and loss expenses (net of ceded losses and loss
expenses of $6,255 and $3,997, respectively) 134,464 125,273
Acquisition and operating expenses 56,034 52,036
Interest expense 67 --
Other expense, net 3,124 2,705
--------- ---------
Total expenses 193,689 180,014
--------- ---------
Income before federal income taxes 28,428 19,169
Federal income tax expense (benefit):
Current 6,589 5,485
Deferred 590 (627)
--------- ---------
Total federal income taxes 7,179 4,858
--------- ---------
Net income $ 21,249 $ 14,311
========= =========
Net earnings per share:
- basic $ 0.50 $ 0.34
========= =========
- diluted $ 0.50 $ 0.33
========= =========
Dividends paid per common share $ 0.050 $ 0.046
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 6
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(Restated -
See Note 1)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,249 $ 14,311
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization, net 1,412 1,103
Net realized gains on investments (1,926) (1,050)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (1,522) (633)
Accrued investment income and other assets 931 (1,951)
Net prepaid pension expense (961) (385)
Other liabilities and due to/from affiliate, net (7,233) 3,753
Reinsurance receivable and prepaid reinsurance premiums (1,505) (1,095)
Losses and loss expenses payable 5,606 7,011
Unearned premiums (1,131) 2,317
Federal income taxes (2,255) (2,849)
--------- ---------
12,665 20,532
Cash provided from the change in the reinsurance pool
participation percentage 11,418 19,708
--------- ---------
Net cash provided by operating activities 24,083 40,240
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (119,866) (120,887)
Purchase of equity securities (12,269) (5,885)
Maturities, calls and principal reductions of fixed maturities -
held to maturity 8,900 9,330
Maturities, calls and principal reductions of fixed maturities -
available for sale 15,913 13,147
Sale of fixed maturities - available for sale 71,701 62,839
Sale of equity securities 8,394 2,392
Net cash acquired on acquisiton of Farmers Casualty
Insurance Company and subsidiary 11,568 --
Net additions of property and equipment (2,839) (552)
--------- ---------
Net cash used in investing activities (18,498) (39,616)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt 16,000 --
Net proceeds from sale of common stock 1,172 742
Payments to acquire treasury stock (16,401) --
Payment of dividends (645) (575)
--------- ---------
Net cash provided by financing activities 126 167
--------- ---------
Net increase in cash and cash equivalents 5,711 791
Cash and cash equivalents at beginning of period 32,605 30,931
--------- ---------
Cash and cash equivalents at end of period $ 38,316 $ 31,722
========= =========
Supplemental disclosures:
Federal income taxes paid $ 9,500 $ 7,650
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 7
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements for the interim
periods included herein have been prepared by State Auto Financial Corporation
(the "Company" or "State Auto Financial") 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.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1998 included in
the Company's 1998 Form 10-K filed with the Securities and Exchange Commission.
In July 1998 the Company acquired the outstanding shares of Milbank Insurance
Company ("Milbank") from State Automobile Mutual Insurance Company ("Mutual"),
an affiliated company. The transaction was effected through an exchange with
Mutual of approximately 5.1 million Company common shares for all of the issued
and outstanding capital stock of Milbank. Since the transaction was a
combination of entities under common control it has been accounted for similar
to a pooling-of-interest. The June 30, 1998 financial information has been
restated to include the financial position and operations of Milbank.
Effective January 1, 1999, the Company purchased Farmers Casualty Insurance
Company ("Farmers Casualty"), an Iowa domiciled standard property casualty
insurer, for approximately $9.0 million. In addition, Farmers Casualty owns 100%
of the outstanding shares of Mid-Plains Insurance Company ("Mid-Plains"), an
Iowa domiciled property casualty insurer, which principally writes nonstandard
auto insurance. This transaction has been accounted for using the purchase
method of accounting. In conjunction with the acquisition, liabilities assumed
were as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $28,040
Cash paid for the common stock (9,000)
-------
Liabilities assumed $19,040
=======
</TABLE>
Also on January 1, 1999, the pooling arrangement was amended to include all of
the property and casualty business of Farmers Casualty. With the inclusion of
Farmers Casualty in the pool, the pooling participation percentages were amended
to allocate 37% to State Auto Property & Casualty ("State Auto P&C"), a wholly
owned subsidiary of the Company, 49% to Mutual, 10% to Milbank, 1% to Midwest
Security Insurance Company, a wholly owned subsidiary of Mutual, and 3% to
Farmers Casualty. State Auto P&C, Milbank and Farmers Casualty received
approximately $11.4 million to cover their increased share of pool liabilities.
<PAGE> 8
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
June 30, 1999
(in thousands, except per share data)
(unaudited)
2. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
(Restated - (Restated -
See Note 1) See Note 1)
<S> <C> <C> <C> <C>
Net income $ 10,369 $ 2,780 $ 21,249 $ 14,311
Unrealized holding gains
(losses), net of tax (7,758) 781 (10,165) 1,766
-------------------------- --------------------------
Comprehensive income $ 62,611 $ 3,561 $ 11,084 $ 16,077
========================== ==========================
</TABLE>
The components of accumulated other comprehensive income, net of related tax,
included in stockholders' equity at June 30, 1999 and December 31, 1998 include
only unrealized holding gains, net of tax.
3. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
(Restated - (Restated -
See Note 1) See Note 1)
<S> <C> <C> <C> <C>
Numerator:
Net income for basic and diluted
Earnings per share $ 10,369 $ 2,780 $ 21,249 $ 14,311
------------------------- -------------------------
Denominator
Weighted average shares for
Basic earnings per share 41,642 41,859 41,847 41,843
Effect of dilutive stock options 768 1,089 781 1,072
------------------------- -------------------------
Adjusted weighted average shares
For diluted earnings per share 42,410 42,948 42,628 42,915
------------------------- -------------------------
Basic earnings per share $ 0.25 $ 0.07 $ 0.50 $ 0.34
------------------------- -------------------------
Diluted earnings per share $ 0.25 $ 0.06 $ 0.50 $ 0.33
------------------------- -------------------------
</TABLE>
<PAGE> 9
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
June 30, 1999
(In thousands, except per share data)
(unaudited)
4. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
(Restated - (Restated -
See Note 1) See Note 1)
<S> <C> <C> <C> <C>
Revenues from external customers:
Standard insurance $ 99,904 $ 91,087 $ 199,605 $ 181,767
Nonstandard insurance 8,554 6,936 16,946 13,441
Investment management services 829 825 1,694 1,637
All other 958 676 1,832 1,294
------------------------- -------------------------
Total revenues from external customers $ 110,245 $ 99,524 $ 220,077 $ 198,139
========================= =========================
Intersegment revenues:
Standard insurance $ 93 $ 66 $ 186 $ 131
Nonstandard insurance (30) (23) (60) (45)
Investment management services 644 591 1,290 1,159
All other 375 283 715 525
------------------------- -------------------------
Total intersegment revenues $ 1,082 $ 917 $ 2,131 $ 1,770
========================= =========================
Segment profit (loss):
Standard insurance $ 11,398 $ 1,919 $ 23,661 $ 15,884
Nonstandard insurance 30 19 (188) 60
Investment management services 1,325 1,198 2,635 2,408
All other 412 329 959 560
------------------------- -------------------------
Total segment profit 13,165 3,465 27,067 18,912
Reconciling items:
Corporate expenses (261) (480) (515) (777)
Net realized gains 872 324 1,926 1,050
Miscellaneous adjustments (9) (13) (50) (16)
------------------------- -------------------------
Total consolidated income before taxes $ 13,767 $ 3,296 $ 28,428 $ 19,169
========================= =========================
Segment assets:
Standard insurance $ 672,592 $ 630,003
Nonstandard insurance 47,137 38,638
Investment management services 5,864 6,057
All other 15,386 14,044
--------------------------
Total segment assets $ 740,979 $ 688,742
==========================
</TABLE>
The standard insurance segment's assets increased about $31.0 million at June
30, 1999 from the amount reported at December 31, 1998 because of the
acquisition of Farmers Casualty and the concurrent change in the pooling
arrangement, as discussed above in Note 1. The nonstandard insurance segment's
assets increased about $9.0 million from the amount reported at December 31,
1998, because Mid-Plains, which is a wholly owned subsidiary of Farmers
Casualty, is a part of the nonstandard insurance segment.
<PAGE> 10
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
June 30, 1999
(in thousands, except per share data)
(unaudited)
5. DEBT
During the second quarter of 1999, State Auto Financial's Board of Directors
approved a plan to repurchase up to 4.0 million shares of its common stock until
December 31, 2000. Since the repurchase began in the second quarter of 1999,
State Auto Financial has repurchased 1,312,000 shares, 915,500 from Mutual and
396,500 from the public. Repurchases are transacted to maintain the same
ownership ratios, with 70% of the repurchased stock from Mutual and 30% from the
public.
In conjunction with the stock repurchase plan State Auto Financial entered into
a line of credit agreement with Mutual whereby State Auto Financial may draw up
to $30.0 million, at an interest rate of 6.0%, to be used specifically to
repurchase shares of the Company's stock. To date, State Auto Financial has
drawn on $16.0 million of the $30.0 million line of credit. Repayment of
principal shall begin no later than 2001.
6. RECLASSIFICATIONS
Certain items in the 1998 condensed consolidated financial statements have been
reclassified to conform with the 1999 presentation.
<PAGE> 11
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Income before federal income taxes increased $10.5 million to $13.8 million and
$9.3 million to $28.4 million for the three months and six months ended June 30,
1999, respectively, from the same 1998 periods. A decrease in the level of
catastrophes of approximately $13.3 million and $9.8 million for the three
months and six months ended June 30, 1999, respectively, from the same 1998
periods contributed significantly to the improvement in income.
1999 was also impacted by the acquisition of Farmers Casualty Insurance Company
("Farmers Casualty") and an amendment to the Company's pooling arrangement. On
January 1, 1999, the Company acquired Farmers Casualty and its subsidiary
Mid-Plains Insurance Company ("Mid-Plains"), both Iowa domiciled insurers.
Farmers Casualty is a standard property and casualty insurer while Mid-Plains
writes principally nonstandard auto insurance. This transaction was accounted
for under the purchase method of accounting. During 1998, the Company's standard
insurance subsidiaries, State Auto Property & Casualty Insurance Company ("State
Auto P&C") and Milbank Insurance Company ("Milbank") participated in a pooling
arrangement with State Automobile Mutual Insurance Company ("Mutual"), a
majority shareholder of the Company and Midwest Security Insurance Company
("Midwest Security"), a wholly owned subsidiary of Mutual. State Auto P&C
assumed 37% of the pooled business, Milbank 10%, Mutual 52% and Midwest Security
1%. Effective January 1, 1999, the Company amended its pooling arrangement to
include all of the property and casualty insurance business of Farmers Casualty.
With the inclusion of Farmers Casualty in the pool, the pooling participation
percentages were amended to allocate 37% to State Auto P&C, 49% to Mutual, 10%
to Milbank, 1% to Midwest Security and 3% to Farmers Casualty (collectively,
these companies are referred to as the "Pooled Companies"). In connection with
the January 1, 1999 pooling changes, the Company received approximately $11.4
million to cover its increased share of the pooled liabilities.
Consolidated earned premiums during the quarter ended June 30, 1999, increased
$9.9 million (11.2%) to $98.9 million from the same 1998 period. The 11.2%
increase was derived from four sources. The impact of the change in allocation
percentages of the Company's pooling arrangement, as well as the addition of
Farmers Casualty to the pool increased consolidated earned premiums 8.6%. The
growth in the standard insurance segment (State Auto P&C, Milbank and Farmers
Casualty), excluding the impact of the changes in the pooling arrangement,
increased consolidated earned premiums about 1.0%, while the impact of the
addition of Mid-Plains to the nonstandard insurance segment increased
consolidated earned premiums 2.0%. The nonstandard insurance segment continued
to experience a slight decrease in its earned premiums during the three months
ended June 30, 1999.
Consolidated earned premiums for the six months ended June 30, 1999, increased
$20.3 million (11.5%) to $197.3 million from the same 1998 period. The impact of
the change in allocation percentages of the Company's pooling arrangement, as
well as the addition of Farmers Casualty to the pool increased consolidated
earned premiums 6.6%. The growth in the standard insurance segment (State Auto
P&C, Milbank and Farmers Casualty), excluding the impact of the changes in the
pooling arrangement, increased consolidated earned premiums 1.0%. The impact of
the addition of Mid-Plains to the nonstandard insurance segment increased
consolidated earned premiums 4.0%. Nevertheless, the nonstandard insurance
segment experienced a decrease in its earned premiums for the six months ended
June 30, 1999.
During 1999 the Company has continued to experience minimal internal growth in
its standard insurance segment. While commercial lines pricing remained soft,
the Company did experience an increase in new business during the second
quarter. Competition for private passenger auto continues to be very intense,
particularly from the direct response companies. This adversely affected the
Pooled Companies ability to generate new private passenger business because
management continued to stress responsible pricing and diligent underwriting.
<PAGE> 12
The nonstandard insurance segment experienced a decrease in its earned premiums.
This was the continuing result of significant auto physical damage rate
increases and a more restrictive underwriting posture the Company implemented in
this segment throughout most of its operating states during 1998 as well as
increased competition in this market segment during 1999. While these management
actions have resulted in a decrease in the volume of business over the last
several reporting periods, this segment's statutory loss experience continues to
improve over comparative prior periods.
Net investment income increased $0.2 million (3.0%) to $8.4 million and $0.7
million (4.2%) to $16.8 million for the three months and six months ended June
30, 1999, respectively, from the same 1998 periods. Contributing to these
increases was the transfer to the Company of approximately $11.4 million in
conjunction with the change in the pooling arrangement, the addition of Farmers
Casualty and Mid-Plains to the Company's operations and a general increase in
investable assets over the previous 1998 period. Total cost of investable assets
at June 30, 1999 was $628.0 million compared to $575.4 million at June 30, 1998.
The investment yield, based on fixed and equity securities at cost, decreased to
5.3% and 5.4% for the three months and six months ended June 30, 1999,
respectively, from 5.7% for the same 1998 comparable periods.
Losses and loss expenses, as a percentage of earned premiums, decreased to 68.8%
for the three months ended June 30, 1999 from 77.9% for the same 1998 period and
for the six months ended June 30, 1999, decreased to 68.1% from 70.8% for the
same 1998 period. The decrease in losses and loss expense percentages were
largely due to a decrease in the level of catastrophe losses experienced by the
Company compared to the same 1998 period. During the second quarter of 1998 the
Company experienced storm-related catastrophe claims in nearly all operating
states. The improvement in the level of catastrophe claims in 1999 compared to
1998 contributed to a 15 percentage point decrease in the GAAP loss ratio in the
current quarter and approximately 6 percentage points for the six months ended
June 30, 1999. Offsetting the improvement in the 1999 catastrophe levels (as
well as the GAAP loss ratio) was an unusually high number of large commercial
claims impacting the current quarterly operations. Despite these unusually large
losses management believes the Company's core business remains stable.
Acquisition and operating expenses, as a percentage of earned premiums (the
"expense ratio"), decreased to 28.1% for the quarter ended June 30, 1999 from
29.1% for the same 1998 period and for the six months ended June 30, 1999,
decreased to 28.4% from 29.4% for the 1998 period. These decreases are
attributable to an improvement in a number of expense items of the Company and
not any one specific item.
Interest expense relates to the line of credit agreement State Auto Financial
commenced with Mutual during the second quarter of 1999 to assist in the funding
of its repurchase program as discussed in the Liquidity and Capital Resources
section below.
The effective Federal tax rate was 24.7% and 25.3% for the three months and six
months ended June 30, 1999, respectively, compared to 15.7% and 25.3% for the
same 1998 periods, respectively. The fluctuation in the effective rates for the
quarterly periods is largely the result of the differences in the level of
catastrophe losses experienced by the Company in 1998 compared to the current
1999 quarter.
Liquidity and Capital Resources
- -------------------------------
In 1999, net cash provided by operating activities decreased to $24.1 million
($40.2 million in 1998). On January 1, 1998 the Company amended its pooling
arrangement to include the insurance operations of Midwest Security as well as
change its allocation percentages. In connection with the January 1, 1998
pooling change, the Company received approximately $19.7 million to cover its
increased share of the pooled liabilities whereas for the January 1, 1999
pooling change the Company received $11.4 million. Absent these cash transfers,
net cash provided by operating activities decreased to $12.7 million at June 30,
1999 ($20.5 million in 1998). Pursuant to the pooling arrangement, Mutual is
responsible for the payment of losses and loss expenses and receipt of premiums
for the pooled companies. Quarterly unpaid incurred pooled balances are
reflected in "due to or due from affiliates" in the accompanying condensed
consolidated balance sheets. Settlements of the intercompany accounts are made
in the month following the end of the quarter.
<PAGE> 13
Overall, net cash used in investing activities decreased to $18.5 million ($39.6
million in 1998). Contributing to this decrease was an increase of $11.6 million
in net cash acquired by the Company on the acquisition of Farmers Casualty and
its subsidiary Mid-Plains. The balance is due to $8.3 million less in cash
provided from the change in the reinsurance pool participation percentages
between 1999 and 1998.
Net cash provided by financing activities for the six months ended June 30, 1999
remained comparable to the same period in 1998. During the second quarter of
1999, State Auto Financial's Board of Directors approved a plan to repurchase up
to 4.0 million shares of its common stock over a period ending December 31,
2000. Since the repurchase began in the second quarter of 1999, State Auto
Financial has repurchased 1,312,000 shares, 915,500 from Mutual and 396,500 from
the public. Repurchases are transacted to maintain the same ownership ratios,
with 70% of the repurchased stock from Mutual and 30% from the public.
In conjunction with the stock repurchase plan State Auto Financial entered into
a line of credit agreement with Mutual whereby State Auto Financial may draw up
to $30.0 million, at an interest rate of 6.0%, to be used specifically to
repurchase shares of the Company's stock. To date, State Auto Financial has
drawn on $16.0 million of the $30.0 million line of credit. Repayment of
principal shall begin no later than 2001.
As of June 30, 1999, funds consisting of cash and cash equivalents were $38.3
million versus $31.7 million at June 30, 1998. At June 30, 1999 approximately
$5.8 million had been allocated to an escrow account for the additional
capitalization of State Auto Insurance Company, with the balance allocated to
fund general operations.
Market Risk
- -----------
With respect to Market Risk, see the discussion regarding this subject in the
Company's December 31, 1998 Management's Discussion and Analysis of Financial
Condition and Results of Operations, included in the December 31, 1998 Form
10-K. There have been no material changes from the information reported
regarding Market Risk in the 1998 Form 10-K.
Year 2000
- ---------
Description of the Year 2000 Issues Affecting the Company
- ---------------------------------------------------------
The Company and its affiliates (all of which are sometimes collectively referred
to hereafter as "State Auto") commenced work on its Year 2000 ("Y2K") issues in
the fall of 1996. At that time, one of its first tasks was to perform an
inventory of all software systems. As a result of this inventory, it identified
approximately 5 million lines of in house maintained program code in its various
software systems. Following this inventory the Company set priorities as to
system remediation based on the role each system played in the Company being
able to carry on its insurance operations or meet its general business needs.
The Company's applications software must support certain essential functions:
issuing insurance policies, collecting policy premiums and paying claims and
premium refunds. In addition, there is other applications software used by the
Company in the general operation and management of its business.
Following months of intensive remediation effort, in April 1998, the Company
conducted its first major test of one of its major insurance policy processing
systems. The results of that test were positive. The Company conducted a second
comprehensive Millennium test at an off-site computer facility in August 1998.
All major insurance policy processing systems were tested as if it were the Year
2000. Testing also included Leap Day, February 29, 2000. This test was also
successful. In March 1999, the company conducted another successful Y2K test at
an off-site computer facility, which was geared specifically to Leap Day,
February 29, 2000 and March 1, 2000. An additional test is planned for
September. Additionally, all internal test systems run with advanced dates
giving the Company the opportunity to identify Y2K issues early enough to react
to them. Testing has already begun with policies that renew with effective dates
beyond January 1, 2000.
At this time, one hundred percent (100%) of the Company's in-force insurance
policies are being processed on a Y2K compliant system, based on the test
results mentioned above. However, in an effort
<PAGE> 14
to ensure that no material problems arise from the policy processing systems
used by the Company the Company plans to continue simulated Year 2000 testing
throughout 1999.
State Auto's Y2K project team has, through June 1999, completed its efforts on
approximately 99% of State Auto's applications software. That means that
approximately 99% of the software systems State Auto uses in its insurance
operations or in meeting its general business needs has been through Y2K
remediation, testing, and has been introduced back into the Company's production
environment. Included within this 99% are the systems that address policy
issuance, premium billing and collection and claims processing at State Auto.
The remaining 1% of applications software code that is not presently Y2K
compliant involves applications that are not "mission critical", such as certain
management reports and other similar tools. Some of this remaining code may well
be determined to be obsolete. State Auto plans to have 100% of its non-obsolete
applications software Y2K compliant during the third quarter 1999.
In addition to addressing its own applications software Y2K problems, State Auto
may be affected by the Y2K issues of third parties with which it has a material
relationship. This includes the independent insurance agents who sell the
Company's products, many of whom have automated agency management systems in
place.
In addition, a number of State Auto Agencies and the Company are able to
communicate policy data electronically. There are several agency management
systems that permit this so-called upload and download of information but not
all are Y2K compliant. If upload and download are disrupted by Y2K issues, it
will likely affect the efficiency with which the Company operates its business.
The Company has surveyed all State Auto Agencies that currently upload data
electronically to State Auto and verified that every one of these agencies has a
Y2K compliant agency vendor system. For those agencies that only receive a
download of policy information from State Auto, current information on the Y2K
compliance status of their systems available to State Auto indicates that the
majority of them are Y2K compliant. In the event that any of these agencies
encounters any difficulty with download, State Auto is prepared to suspend the
electronic transfer and turn back on the generation of policy documents of which
an agency would need to maintain records manually.
The consequences of the disruption would depend on the extent to which State
Auto's various lines of business may be uploaded and downloaded at the time the
disruption would occur and the duration of the disruption. Thus, it is not
possible to reasonably estimate the financial impact of such reduced efficiency.
There are certain other vendors which have a material relationship with the
Company by virtue of the fact that they provide a product or service that State
Auto uses in the ordinary course of its business, such as underwriting
information providers, task specific software or hardware product vendors, and
financial institutions. Y2K compliance by third party vendors will continue to
be one of State Auto's focal points throughout the remainder of 1999. State Auto
expects to have third party vendor products then in use Y2K compliant by the end
of the 3rd quarter of 1999.
Stateco Financial Services, Inc. ("Stateco"), a wholly owned subsidiary of State
Auto Financial which provides investment management services to each of the
State Auto insurers, has had in place a third party vendor investment management
system which is represented by the vendor to be Y2K compliant. Based on its
present use of this system, Stateco does not expect its services to be disrupted
by Y2K issues affecting it, although Stateco will be included in the contingency
planning discussed below should some unanticipated system failure arise.
State Auto's Costs to Address Year 2000 Issues
- ----------------------------------------------
State Auto's Y2K compliance expense to date for resources has been $ 4.2 million
dollars of a projected $5.0 million dollars. This estimate is subject to change
depending on future, presently unforeseen developments, which could affect the
cost of Y2K compliance for State Auto. The money spent to date is virtually all
payroll costs attributable to the State Auto employees on the Y2K project team.
The foregoing expense does not include approximately $0.5 million spent by State
Auto on accelerated technology purchases for systems or equipment to ensure Y2K
compliance for such system or equipment. Also, an outsourcing agreement with
State Auto's primary third party software vendor to provide additional
<PAGE> 15
resources for other systems projects has generated an additional expense to
State Auto of approximately $2.8 million over the last two years.
State Auto's Risks Due to Year 2000 Issues
- ------------------------------------------
As a property casualty insurer, State Auto faces the additional risk of insured
or allegedly insured losses to its policyholders from the Y2K exposure. State
Auto has clarified certain commercial liability insurance policies with respect
to this exposure. It is too early to know the nature and extent of insured
losses that might arise from the Y2K problem, be they from information systems
failures or embedded chip processing failures.
State Auto does not expect a material adverse impact from Y2K issues arising
from embedded chip processing failures occurring on site. Those embedded chip
issues which the Company has some opportunity to control or address that have
been identified to date have been generally facilities related or involving
small business equipment (i.e. fax machines). Upgrades and equipment replacement
are being coordinated by a variety of business managers responsible for such
equipment.
State Auto's Year 2000 Contingency Plans
- ----------------------------------------
State Auto is making progress in the development of a formal Y2K contingency
plan. Each internal department has responded to a survey relating to its use of
external systems, which might be subject to disruption. The company is also
utilizing some previously developed Business Recovery documents as part of this
contingency plan. The Company expects to have a contingency plan in place by the
4th quarter 1999. Some of the issues that the plan would likely contemplate
would be manual processing alternatives, non-electronic forms of information
distribution, assurance of adequate supplies, and mitigation of the impact of
utilities and financial institution disruptions.
State Auto continues to work with its business recovery service provider. State
Auto is following a program developed by that provider that requires a
comprehensive Y2K preparation approach. Conforming to this allows State Auto to
take advantage of its provider's facilities for business recovery in the event
that an external Y2K issue that was addressed does happen to fail.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Statements contained herein expressing the beliefs of management and the other
statements, which are not historical facts contained in this report, are forward
looking statements that involve risks and uncertainties. Such statements
include, without limitation, those pertaining to the weather related
catastrophes impacting the Company's losses, product offerings, National's
premium receivable collections effort, the Year 2000 discussion, the statements
relating to the new insurer to be created, State Auto Insurance Company, the
legislative and regulatory environment and sales forecasts. These risks and
uncertainties include, but are not limited to, legislative changes, judicial and
regulatory decisions, the impact of competitive products and pricing, product
development, geographic spread of risk, weather and weather-related events,
other types of catastrophic events, fluctuations of securities markets, economic
conditions, technological difficulties and advancements, availability of labor
and materials in storm hit areas, late reported claims, previously undisclosed
damage, utilities and financial institution disruptions, shortages of
programmers, and regulatory or governmental systems breakdowns.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption "Market
Risk" under Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<PAGE> 16
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of State Auto Financial Corporation
was held on Thursday, May 27, 1999. The total shares represented at the meeting
were 38,737,952. This constituted 92.0% of the Company's 42,057,917 shares
outstanding. At the meeting, the shareholders voted on one resolution; the
election of Robert L. Bailey, William J. Lhota and David J. D'Antoni as Class II
Directors, each to hold office until the 2002 annual meeting of shareholders and
until a successor is elected and qualified, with each director nominee receiving
the votes indicated:
<TABLE>
<CAPTION>
NUMBER OF VOTES
---------------
FOR WITHHELD
--- --------
<S> <C> <C>
Robert L. Bailey 38,467,232 270,720
William J. Lhota 37,466,792 271,160
David J. D'Antoni 37,467,972 269,980
</TABLE>
On the basis of this vote, Robert L. Bailey, William J. Lhota and David
J. D'Antoni were elected as Class II Directors to serve until the 2002 annual
meeting and until a successor is elected and qualified.
Item 5. Other Information - None
<PAGE> 17
INDEX TO EXHIBITS
Item 6. a. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
----------- -----------------------
<S> <C>
10(LL) Credit Agreement dated as of June 1, 1999
between State Auto Financial Corporation and
State Automobile Mutual Insurance Company
27 Financial data schedules
</TABLE>
b. Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STATE AUTO FINANCIAL CORPORATION
Date: AUGUST 13, 1999 /s/ Steven J. Johnston
----------------- ----------------------------------------
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE> 1
10(LL)
Credit Agreement
dated as of June 1, 1999
between
State Auto Financial Corporation
and
State Automobile Mutual Insurance Company
<PAGE> 2
CREDIT AGREEMENT
CREDIT AGREEMENT dated as of June 1, 1999, between State Auto Financial
Corporation, a corporation duly organized and validly existing under the laws of
the State of Ohio (the "Company"); and State Automobile Mutual Insurance
Company, an Ohio corporation (the "Lender").
The Company has requested that the Lender make loans to it in an
aggregate principal amount not exceeding $30,000,000 and the Lender is prepared
to make such loans upon the terms and conditions hereof. In consideration of the
mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the
Company and Lender hereby agree as follows:
Section 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following
terms shall have the following meanings (all terms defined in this Section 1.01
or in other provisions of this Agreement in the singular to have the same
meanings when used in the plural and vice versa):
"Borrowing Notice" shall mean a Borrowing Notice substantially
in the form of Exhibit B hereto as executed by an authorized officer of the
Company, whose names and signatures are included on Exhibit C, attached hereto
and incorporated herein.
"Business Day" shall mean any day (a) on which commercial
banks are not authorized or required to close in Columbus, OH.
"Commitment" shall mean, as to the Lender, the obligation of
the Lender to make Loans in an aggregate principal amount up to, but not
exceeding $30,000,000.
"Commitment Termination Date" shall mean December 31, 2000,
subject to extension as provided in Section 2.07 hereof.
"Credit Documents" shall mean, collectively, this Agreement
and the Notes.
"Default" shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.
"Event of Default" shall have the meaning assigned to such
term in Section 8 hereof.
"Existing Commitment Termination Date" shall have the meaning
assigned to such term in Section 2.07 hereof.
"GAAP" shall mean generally accepted accounting principles in
the United States of America as in effect from time to time.
<PAGE> 3
Page 2
"Lien" shall mean, with respect to any Property, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such Property. For purposes of this Agreement and the other Credit Documents, a
Person shall be deemed to own subject to a Lien any Property that it has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
(other than an operating lease) relating to such Property.
"Loans" shall mean the loans provided for in Section 2.01
hereof.
"Notes" shall mean the promissory notes provided for by
Section 2.05 hereof each in substantially the form as attached as Exhibit A.
"Person" shall mean any individual, corporation, company,
voluntary association partnership, limited liability company, joint venture,
trust, unincorporated organization or government (or any agency, instrumentality
or political subdivision thereof).
"Property" shall mean any right or interest in or to property
of any kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
1.02 Accounting Terms and Determinations. Except as otherwise
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lenders hereunder shall be
prepared, in accordance with GAAP. All calculations made for the purposes of
determining compliance with this Agreement shall (except as otherwise expressly
provided herein) be made by application of GAAP.
Section 2. Commitment, Loans, Notes and Prepayments.
2.01 Loans. The Lender agrees, on the terms and conditions of
this Agreement, to make one or more term loans to the Company in Dollars on or
before the Commitment Termination Date in an aggregate principal amount up to
but not exceeding $30,000,000. Loans paid or prepaid may not be re-borrowed.
2.02 Borrowings. The Company shall give the Lender notice of
each borrowing desired hereunder by delivering to the Lender a Borrowing Notice
in substantially the form attached as Exhibit B. Not later than 1:00 p.m.
Columbus, OH time on the date specified for each borrowing hereunder, the Lender
shall make available to the Company the amount of the Loan to be made by it on
such date at any account designated by the Company, in immediately available
funds.
2.03 Changes of Commitments. The Company shall have the right
at any time or from time to time to terminate or reduce the aggregate unused
amount of the Commitment; provided that (i) the Company shall give notice of
each such termination or reduction as provided in Section 4.03 hereof and (ii)
each partial reduction shall be in an aggregate amount at least equal to
$1,000,000 (or a larger integral multiple of $500,000).
2.04 Commitment Fee. The Company shall pay to the Lender a
commitment fee on the daily average unused amount of the Lender's Commitment,
for the period from and including the date hereof to but not including the
earlier of the date such Commitment is terminated and the Commitment Termination
Date, at a rate per annum equal to 1/4 of 1%.
<PAGE> 4
Page 3
Accrued Commitment fee shall be payable on the first business day of each
calendar quarter (for the quarter then ended) and on the earlier of the date the
Commitment is terminated and the Commitment Termination Date.
2.05 Notes.
(a) Each Loan made by the Lender shall be evidenced by a
single promissory note of the Company substantially in the form of Exhibit A
hereto, dated the date such Loan is made, payable to such Lender in a principal
amount equal to the amount of such Loan and otherwise duly completed.
(b) The date, amount and interest rate of each Loan made by
the Lender to the Company, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books.
(c) The Lender shall not be entitled to have its Notes
substituted or exchanged for any reason, or subdivided for promissory notes of
lesser denominations, except in connection with a permitted assignment of all or
any portion of such Lender's Commitment, Loans and Notes pursuant to Section
9.05 hereof (and, if requested by the Lender, the Company agrees to so exchange
any Notes).
2.06 Optional Prepayments of Loans. Subject to Section 4.02
hereof, the Company shall have the right to prepay Loans at any time or from
time to time, provided that: (a) the Company shall give the Lender notice of
each such prepayment as provided in Section 4.03 hereof (and, upon the date
specified in any such notice of prepayment, the amount to be prepaid shall
become due and payable hereunder); (b) prepayments of the Loans shall be applied
to the installments of the Loans pro rata in accordance with the respective
principal amounts thereof outstanding on the date of such prepayment.
2.07 Extension of Commitment Termination Date.
(a) The Company may, by notice to the Lender given not less
than 120 days and not more than 180 days prior to the Commitment Termination
Date then in effect (the "Existing Commitment Termination Date"), request that
the Lenders extend the Commitment Termination Date for an additional 365 days
from the Existing Commitment Termination Date; provided that in no event may the
Company request more than three such extensions. The Lender, acting in its sole
discretion, shall, by notice (which shall be irrevocable) to the Company given
no earlier than the date that is 90 days prior to the Existing Commitment
Termination Date (herein, the "Consent Date") and no later than the date that is
three Business Days after the Consent Date, advise the Company whether or not
such Lender agrees to such extension. In the event the Lender does not agree to
the Extension, the Commitment terminates on the then current Commitment
Termination Date and no additional Loans shall be made under this Agreement.
(b) Notwithstanding the foregoing clause (a), the extension of
the Existing Commitment Termination Date shall not be effective with respect to
the Lender unless:
(i) no Default shall have occurred and be continuing
on each of the date of the notice requesting such extension
(the "Request Date"), the Consent Date and the Existing
Commitment Termination Date;
<PAGE> 5
Page 4
(ii) each of the representations and warranties made
by the Company in Section 7 hereof shall be true and complete
on and as of each of the Request Date, the Consent Date and
the Existing Commitment Termination Date with the same force
and effect as if made on and as of such date (or, if any such
representation or warranty is expressly stated to have been
made as of a specific date, as of such specific date);
Section 3. Payments of Principal and Interest.
3.01 Repayment of Loans. The Company hereby promises to pay to
the Lender on demand, the principal of each Loan made and in any event, not
later than five years following the Commitment Termination Date as extended by
agreement of the parties.
3.02 Interest. The Company hereby promises to pay to the
Lender interest on the unpaid principal amount of each Loan made by such Lender
for the period from and including the date of such Loan to but excluding the
date such Loan shall be paid in full, at the following rates per annum:
(a) during the period from the date hereof to the original
Commitment Termination Date an interest rate equal to six percent (6%); and
(b) thereafter the interest rate applicable to any Loans shall
adjust at January 1 of each calendar year after December 31, 2000 to reflect a
substantially equivalent relationship of the current interest rate to the
current prime lending rate, subject to the material adverse changes as reflects
the Company's financial position.
(c) said interest payments shall be due no later than the
first Business Day of each calendar quarter during the term hereof, for the
quarter then ended.
Notwithstanding the foregoing, the Company hereby promises to
pay to the Lender for account of the Lender interest at the rate of the then
current interest rate times 1.5 on any principal of any Loan made by such Lender
and on any other amount payable by the Company hereunder or under the Notes held
by such Lender to or for account of such Lender that shall not be paid in full
when due (whether at stated maturity, by acceleration, or otherwise), for the
period from and including the due date thereof to but excluding the date the
same is paid in full.
Section 4. Payments; Pro Rata Treatment; Computations; Etc.
4.01 Payments.
(a) Except to the extent otherwise provided herein, all
payments of principal, interest and other amounts to be made by the Company
under this Agreement and the Notes, shall be made in U.S. Dollars, in
immediately available funds, without deduction, set-off or counterclaim, to the
Lender at an account designated by the Lender in writing to the Company, not
later than 1:00 p.m. Columbus, OH time on the date on which such payment shall
become due (each such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day).
<PAGE> 6
Page 5
(b) The Company shall, at the time of making each payment
under this Agreement or any Note for account of the Lender, specify to the
Lender the Loans or other amounts payable by the Company hereunder to which such
payment is to be applied.
(c) If the due date of any payment under this Agreement or any
Note would otherwise fall on a day that is not a Business Day, such date shall
be extended to the next succeeding Business Day, and interest shall be payable
for any principal so extended for the period of such extension.
4.02 Minimum Amounts. Each borrowing and partial prepayment of
principal of Loans shall be in an aggregate amount at least equal to $500,000 or
a larger integral multiple of $500,000.
4.03 Certain Notices. Notices by the Company to the Lender of
terminations or reductions of the Commitment and of borrowings and optional
prepayments of Loans shall be irrevocable and shall be effective only if
received by the Lender not later than 10:00 a.m. Columbus, OH time on the third
Business Day prior to the date of the relevant termination, reduction, borrowing
or prepayment. Each such notice of termination or reduction shall specify the
amount of the Commitment to be terminated or reduced. Each such notice of
borrowing or optional prepayment shall specify the Loans to be borrowed or
prepaid and the amount (subject to Section 4.02 hereof) of each Loan to be
borrowed or prepaid and the date of borrowing or optional prepayment (which
shall be a Business Day). Only those individuals identified on Exhibit C
attached hereto and incorporated herein shall be authorized to execute such
Borrowing Notice and this list may be amended from time to time only by action
of the Board of Directors of the Company, and a copy thereof certified to by the
Secretary of the Company shall be provided to the Lender.
Section 5. Conditions Precedent.
5.01 Effectiveness. The effectiveness of this Agreement is
subject to the condition precedent that the Lender shall have received this
Agreement in a form satisfactory to the Lender, which shall have been duly
executed by the Company and delivered to the Lender.
5.02 Initial and Subsequent Loans. The obligation of the
Lender to make any Loan to the Company upon the occasion of each borrowing
hereunder (including the initial borrowing) is subject to the further conditions
precedent that:
(a) the Lender shall have received a Borrowing Notice, duly
completed and executed;
(b) the Lender shall have received a Note, duly completed and
executed;
(c) both immediately prior to the making of such Loan and also
after giving effect thereto and to the intended use thereof:
(i) no Default shall have occurred and be continuing;
and
(ii) the representations and warranties made by the
Company in Section 6 hereof shall be true and complete on and
as of the date of the making of such Loan with the same force
and effect as if made on and as of such date
<PAGE> 7
Page 6
(or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such
specific date).
Section 6. Representations and Warranties. The Company represents and warrants
to the Lender and the Lender that:
6.01 Corporate Existence. The Company: (a) is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization; (b) has all
requisite corporate or other power, and has all material governmental licenses,
authorizations, consents and approvals necessary to own its assets and carry on
its business as now being or as proposed to be conducted; (c) is qualified to do
business and is in good standing in all jurisdictions in which the nature of the
business conducted by it makes such qualification necessary.
6.02 Financial Condition. The Company has heretofore furnished
to the Lender the balance sheet of the Company as of December 31, 1998 and as of
March 31, 1999. Such balance sheets present fairly in all material respects the
financial condition of the Company as at said date in accordance with GAAP. The
Company does not have on the date hereof and will not have on the Closing Date
any material contingent liabilities, liabilities for taxes, unusual forward or
long-term commitments or unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in said balance
sheets as at said dates. Since the dates of said balance sheets, there has been
no material adverse change in the condition (financial or otherwise),
operations, business or prospects of the Company from that set forth in said pro
forma balance sheets as at said dates.
6.03 Litigation. There are no legal or arbitration
proceedings, or any proceedings by or before any governmental or regulatory
authority or agency, now pending or (to the knowledge of the Company) threatened
against the Company or any of its Property.
6.04 No Breach. None of the execution and delivery of this
Agreement and the Notes to which the Company is a party, the consummation of the
transactions herein and therein contemplated or compliance with the terms and
provisions hereof and thereof will conflict with or result in a breach of, or
require any consent under, the charter or by-laws of the Company, or any
applicable law or regulation, or any order, writ, injunction or decree of any
court or governmental authority or agency, or any agreement or instrument to
which the Company is a party or by which it or any of its Property is bound or
to which it is subject, or constitute a default under any such agreement or
instrument, or result in the creation or imposition of any Lien upon any
Property of the Company pursuant to the terms of any such agreement or
instrument.
6.05 Action. The Company has all necessary corporate power,
authority and legal right to execute, deliver and perform its obligations under
each of the Credit Documents to which it is a party; the execution, delivery and
performance by the Company of each of the Credit Documents to which it is a
party have been duly authorized by all necessary corporate action on its part
(including, without limitation, any required shareholder approvals); and this
Agreement has been duly and validly executed and delivered by the Company and
constitutes, and each of the Notes to which it is a party when executed and
delivered (in the case of the Notes, for value) will constitute, its legal,
valid and binding obligation, enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or similar laws of general applicability
<PAGE> 8
Page 7
affecting the enforcement of creditors' rights and (b) the application of
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
6.06 Approvals. No authorizations, approvals or consents of,
and no filings or registrations with, any governmental or regulatory authority
or agency, or any securities exchange, are necessary for the execution, delivery
or performance by the Company of this Agreement or any of the other Credit
Documents to which it is a party or for the legality, validity or enforceability
hereof or thereof, except for such insurance holding company filings as may be
required under Ohio law.
6.07 Taxes. As of the date hereof, the Company has filed all
required Federal or other tax returns or obtained extensions for such filings.
As of the date of each borrowing, the Company will have filed all Federal income
tax returns and all other material tax returns (if any) that are required to be
filed by it and will have paid all taxes due pursuant to such returns or
pursuant to any assessment received by the Company. The charges, accruals and
reserves on the books of the Company in respect of taxes and other governmental
charges are, in the opinion of the Company, adequate.
Section 7. Covenants of the Company. The Company covenants and agrees with the
Lender that, so long as any Commitment or Loan is outstanding and until payment
in full of all amounts payable by the Company hereunder:
7.01 Financial Statements, Etc. The Company shall deliver to
the Lender:
(a) as soon as available and in any event within 45 days after
the end of each quarterly fiscal period of each fiscal year of the
Company, statements of income, retained earnings and cash flows of the
Company for such period and for the period from the beginning of the
respective fiscal year to the end of such period, and the related
balance sheet of the Company as at the end of such period, setting
forth in each case in comparative form the corresponding figures for
the corresponding periods in the preceding fiscal year (except that,
(i) in the case of balance sheets, such comparison shall be to the last
day of the prior fiscal year and (ii) comparative information shall not
be required in the absence of a preceding fiscal year or a
corresponding period in a preceding fiscal year), accompanied by a
certificate of a senior officer of the Company, which certificate shall
state that said financial statements present fairly in all material
respects the financial condition and results of operations of the
Company in accordance with GAAP, as at the end of, and for, such period
(subject to normal year-end audit adjustments);
(b) promptly after the Company knows or has reason to believe
that any Default has occurred, a notice of such Default stating that
such notice is a "Notice of Default" and describing the same in
reasonable detail and, together with such notice or as soon thereafter
as possible, a description of the action that the Company has taken or
proposes to take with respect thereto;
(c) from time to time such other information regarding the
financial condition, operations, business or prospects of the Company
as the Lender may reasonably request.
<PAGE> 9
Page 8
The Company will furnish to the Lender, at the time it
furnishes each set of financial statements pursuant to paragraph (a) above, a
certificate of a senior officer of the Company to the effect that no Default has
occurred and is continuing (or, if any Default has occurred and is continuing,
describing the same in reasonable detail and describing the action that the
Company has taken or proposes to take with respect thereto).
7.02 Litigation. The Company will promptly give to the Lender
notice of all material legal or arbitration proceedings, and of all material
proceedings by or before any governmental or regulatory authority or agency, and
any material development in respect of such legal or other proceedings,
affecting the Company.
7.03 Existence, Etc. The Company will:
(a) preserve and maintain its legal existence and all of its
material rights, privileges, licenses and franchises;
(b) comply in all material respects with the requirements of
all applicable laws, rules, regulations and orders of governmental or
regulatory authorities;
(c) pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any
of its Property prior to the date on which penalties attach thereto,
except for any such tax, assessment, charge or levy the payment of
which is being contested in good faith and by proper proceedings and
against which adequate reserves are being maintained;
(d) maintain all of its Properties used or useful in its
business in good working order and condition, ordinary wear and tear
excepted;
(e) keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP; and
(f) permit representatives of the Lender during normal
business hours, to examine, copy and make extracts from its books and
records, to inspect any of its Properties, and to discuss its business
and affairs with its officers, all to the extent reasonably requested
by such Lender.
7.04 Use of Proceeds. The Company will use the proceeds of the
Loans hereunder solely to finance the purchase from State Automobile Mutual
Insurance Company and public shareholders the Company's common shares, without
par value, pursuant to the Stock Repurchase Program approved by the Board of
Directors of the Company on May 7, 1999.
7.05 Modifications of Certain Documents. The Company will not
consent to any modification, supplement or waiver of any of the provisions of,
or assignment of any rights or obligations of any other Person under, any Credit
Documents without the prior consent of the Lender.
Section 8. Events of Default. If one or more of the following events (herein
called "Events of Default") shall occur and be continuing:
<PAGE> 10
Page 9
(a) The Company shall default in the payment when due (whether
at stated maturity or upon optional prepayment) of any principal of or interest
on any Loan, any fee or any other amount payable by it hereunder or under any
other Credit Document to which it is a party; or
(b) Any representation, warranty or certification made or
deemed made herein or in any other Credit Document to which the Company is a
party (or in any modification or supplement hereto or thereto) by the Company,
or any certificate furnished to any Lender or the Lender pursuant to the
provisions hereof or thereof, shall prove to have been false or misleading as of
the time made or furnished in any material respect; or
(c) The Company shall default in the performance of any of its
obligations under any of Sections 7.04, or 7.05 hereof; the Company shall
default in the performance of any of its other obligations in this Agreement or
any other Credit Document to which it is a party and such default shall continue
unremedied for a period of thirty or more days after the occurrence of such
default; or
(d) The Company shall admit in writing its inability to, or be
generally unable to, pay its debts as such debts become due; or
(e) The Company shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
examiner or liquidator of itself or of all or a substantial part of its
Property, (ii) make a general assignment for the benefit of its creditors, (iii)
commence a voluntary case under the Bankruptcy Code, (iv) file a petition
seeking to take advantage of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement or winding-up, or
composition or readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it in
an involuntary case under the Bankruptcy Code or (vi) take any corporate action
for the purpose of effecting any of the foregoing; or
(f) A proceeding or case shall be commenced, without the
application or consent of the Company, in any court of competent jurisdiction,
seeking (i) its reorganization, liquidation, dissolution, arrangement or
winding-up, or the composition or readjustment of its debts, (ii) the
appointment of a receiver, custodian, trustee, examiner, liquidator or the like
of the Company or of all or any substantial part of its respective Property or
(iii) similar relief in respect of the Company under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment
of debts, and such proceeding or case shall continue undismissed, or an order,
judgment or decree approving or ordering any of the foregoing shall be entered
and continue unstayed and in effect, for a period of 60 or more days; or an
order for relief against the Company shall be entered in an involuntary case
under the Bankruptcy Code.
THEREUPON: (1) in the case of an Event of Default other than one
referred to in clause (e) or (f) of this Section 8 with respect to the Company,
the Lender will, by notice to the Company, terminate the Commitment and/or
declare the principal amount then outstanding of, and the accrued interest on,
the Loans and all other amounts payable by the Company hereunder and under the
Notes to be forthwith due and payable, whereupon such amounts shall be
immediately due and payable without presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the
Company; and (2) in the case of the occurrence of an Event of Default referred
to in clause (e) or (f) of this Section 8 with respect to the Company, the
Commitment shall automatically be terminated and the principal
<PAGE> 11
Page 10
amount then outstanding of, and the accrued interest on, the Loans and all other
amounts payable by the Company hereunder and under the Notes shall automatically
become immediately due and payable without presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the
Company.
Section 9. Miscellaneous.
9.01 Waiver. No failure on the part of the Lender to exercise
and no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under this Agreement or any Note shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under this Agreement or any Note preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
9.02 Notices. All notices, requests and other communications
provided for herein (including, without limitation, any modifications of, or
waivers, requests or consents under, this Agreement) shall be given or made in
writing (including, without limitation, by telecopy) delivered to the intended
recipient at the "Address for Notices" specified below its name on the signature
page hereof); or, as to any party, at such other address as shall be designated
by such party in a notice to each other party. Except as otherwise provided in
this Agreement, all such communications shall be deemed to have been duly given
when transmitted by telecopier or personally delivered or, in the case of a
mailed notice, upon receipt, in each case given or addressed as aforesaid.
9.03 Amendments, Etc. Except as otherwise expressly provided
in this Agreement, any provision of this Agreement may be modified or
supplemented only by an instrument in writing signed by the Company and the
Lender. Any provision of this Agreement may be waived by the Lender, provided
that: no modification, supplement or waiver shall, unless by an instrument
signed by the Lender: (i) (except as provided in Section 2.07 hereof) increase,
or extend the term of, the Commitment, or extend the time or waive any
requirement for the reduction or termination of the Commitment, (ii) extend the
date fixed for the payment of principal of or interest on any Loan or any fee
hereunder, (iii) reduce the amount of any such payment of principal, (iv) reduce
the rate at which interest is payable thereon or any fee is payable hereunder,
(v) alter the rights or obligations of the Company to prepay Loans, (vi) alter
the manner in which payments or prepayments of principal, interest or other
amounts hereunder shall be applied as between the Lenders or Types of Loans,
(vii) alter the terms of this Section 9.03, (viii) waive any of the conditions
precedent set forth in Section 6.01 hereof.
9.04 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
9.05 Assignments and Participations.
(a) The Company may not assign any of its rights or
obligations hereunder or under the Notes without the prior consent of the
Lender.
(b) The Lender may not assign any of its Loans, its Notes, and
its Commitment.
<PAGE> 12
Page 11
9.06 Captions. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
9.07 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
9.08 Governing Law; Submission to Jurisdiction. This Agreement
and the Notes shall be governed by, and construed in accordance with, the law of
the State of Ohio. The Company hereby submits to the nonexclusive jurisdiction
of the United States District Court for the Southern District of Ohio and of the
Court of Common Pleas sitting in Franklin County, including its Appellate
Division, in the State of Ohio, for the purposes of all legal proceedings
arising out of or relating to this Agreement or the transactions contemplated
hereby. The Company hereby irrevocably waives, to the fullest extent permitted
by applicable law, any objection that it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
forum.
9.09 Waiver of Jury Trial. THE COMPANY AND THE LENDER HEREBY
IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY.
9.10 Treatment of Certain Information; Confidentiality.
(a) The Lender agrees (on behalf of itself and each of its
affiliates, directors, officers, employees and representatives) to use
reasonable precautions to keep confidential, in accordance with its customary
procedures for handling confidential information of the same nature and in
accordance with safe and sound business practices, any non-public information
supplied to it by the Company pursuant to this Agreement that is identified by
the Company as being confidential at the time the same is delivered to the
Lender, provided that nothing herein shall limit the disclosure of any such
information (i) after such information shall have become public (other than
through a violation of this Section 9.10), (ii) to the extent required by
statute, rule, regulation or judicial process, (iii) to counsel for the Lender,
(iv) to any regulatory authority having jurisdiction over the Lender, or to
auditors or accountants, (v) in connection with any litigation to which the
Lender is a party, or in connection with the enforcement of rights or remedies
hereunder or under any other Credit Document.
9.11 No Recourse. No recourse shall be had for any obligation
owing to the Lender under any Credit Document or for the payment of any fee due
to any Lender under any Credit Document or any other obligation or claim arising
out of or based upon any Credit Document against any stockholder, employee,
officer, director, affiliate or incorporator of the Company, based on their
status as such or their actions in connection therewith, except to the extent
resulting from the fraud or willful misconduct of such stockholder, employee,
officer, director, affiliate or incorporator of the Company based on their
status as such or their actions in connection therewith, except to the extent
resulting from the fraud or willful misconduct of such stockholder, employee,
officer, director, affiliate, or incorporator, as the case may be. The
provisions of this section shall survive the termination of any or all Credit
Documents.
<PAGE> 13
Page 12
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the day and year first above
written.
STATE AUTO FINANCIAL CORPORATION
By /s/ Steven J. Johnston
------------------------
Title: Vice President
Address for Notices:
STATE AUTO FINANCIAL CORPORATION
518 East Broad Street
Columbus, OH 43215
Attention: Steven J. Johnston
Telecopier No.: (614) 464-4911
Telephone No.: (614) 464-5029
<PAGE> 14
Page 13
LENDER
- ------
Commitment
- ----------
$30,000,000
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By: /s/ Robert L. Bailey
----------------------
Title:
Address for Notices:
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
518 East Broad Street
Columbus, OH 43215
Attention: Robert H. Moone
Telecopier No.: (614) 464-4911
Telephone No.: (614) 464-5131
<PAGE> 15
Page 14
EXHIBIT A to the Credit Agreement
[Form of Note]
PROMISSORY NOTE
$_______________ __________ __, 199_
Columbus, OH
FOR VALUE RECEIVED, STATE AUTO FINANCIAL CORPORATION, an Ohio
corporation (the "Company"), hereby promises to pay to STATE AUTOMOBILE MUTUAL
INSURANCE COMPANY (the "Lender") for its account as provided by the Credit
Agreement referred to below, at the principal office of the Lender in Columbus,
OH, the principal sum of _______________ Dollars (or such lesser amount as shall
equal the aggregate unpaid principal amount of the Loans made by the Lender to
the Company under the Credit Agreement), in lawful money of the United States of
America and in immediately available funds, on the dates and in the principal
amounts provided in the Credit Agreement, and to pay interest on the unpaid
principal amount of each such Loan, at such office, in like money and funds, for
the period commencing on the date of such Loan until such Loan shall be paid in
full, at the rates per annum and on the dates provided in the Credit Agreement.
The date, amount, and interest rate of each Loan made by the Lender to
the Company, and each payment made on account of the principal thereof, shall be
recorded by the Lender on its books, provided that the failure of the Lender to
make any such recordation (or any error by such Lender in making any such
recordation) or endorsement shall not affect the obligations of the Company to
make a payment when due of any amount owing under the Credit Agreement or
hereunder in respect of the Loans made by the Lender.
This Note is one of the Notes referred to in the Credit Agreement dated
as of June 1, 1999 (as modified and supplemented and in effect from time to
time, the "Credit Agreement") between the Company and the Lender, and evidences
Loans made by the Lender thereunder. Capitalized terms used, but not defined in
this Note, have the respective meanings assigned to them in the Credit
Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for optional prepayments of
Loans upon the terms and conditions specified therein.
This Note may not be assigned by the Lender.
This Note shall be governed by, and construed in accordance with, the
law of the State of Ohio.
STATE AUTO FINANCIAL CORPORATION
By
-----------------------------------------------
Title:
<PAGE> 16
Page 15
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Credit
Agreement to the Company, on the dates, in the principal amounts, bearing
interest at the rates set forth below, subject to the payments, and prepayments
of principal set forth below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Date Made Principal Amount of Loan Interest Rate Amt. Paid, Unpaid or Prepaid
Principal
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 17
Page 16
EXHIBIT B to the Credit Agreement
State Automobile Mutual Insurance Company
Chief Financial Officer
518 East Broad Street
Columbus, OH 43215
Re: Credit Agreement dated as of June 1, 1999, between State Auto Financial
Corporation and State Automobile Mutual Insurance Company.
Ladies and Gentlemen:
Reference is made to the Credit Agreement dated as of June 1, 1999 (as modified
and supplemented and in effect from time to time, the "Credit Agreement"),
between STATE AUTO FINANCIAL CORPORATION (the "Company"), and STATE AUTOMOBILE
MUTUAL INSURANCE COMPANY, as Lender. Capitalized terms used but not defined
herein shall have the respective meanings assigned to such terms in the Credit
Agreement.
Pursuant to Section 2.02 of the Credit Agreement, the Company hereby notifies
you that it will make a borrowing of a Loan on ______________, 199___ in the
principal amount of $_____________.
STATE AUTO FINANCIAL CORPORATION
By
------------------------------
Title:
1 Insert a date falling on or after the third Business Day following the
date of this Notice
2 Insert an amount at least equal to $500,000 or a larger integral
multiple of $500,000.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATE AUTO
FINANCIAL CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE INTERIM PERIOD
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 507,600,000
<DEBT-CARRYING-VALUE> 46,913,000
<DEBT-MARKET-VALUE> 0
<EQUITIES> 50,427,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 604,940,000
<CASH> 38,316,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 28,299,000
<TOTAL-ASSETS> 750,503,000
<POLICY-LOSSES> 247,082,000
<UNEARNED-PREMIUMS> 144,885,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,000,000
0
0
<COMMON> 105,526,000
<OTHER-SE> 230,520,000
<TOTAL-LIABILITY-AND-EQUITY> 336,046,000
197,329,000
<INVESTMENT-INCOME> 16,808,000
<INVESTMENT-GAINS> 1,926,000
<OTHER-INCOME> 1,678,000
<BENEFITS> 134,464,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 56,034,000
<INCOME-PRETAX> 28,428,000
<INCOME-TAX> 7,179,000
<INCOME-CONTINUING> 7,179,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,249,000
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.50
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 464,232,000
<DEBT-CARRYING-VALUE> 69,889,000
<DEBT-MARKET-VALUE> 0
<EQUITIES> 34,472,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 568,592,000
<CASH> 31,721,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 24,282,000
<TOTAL-ASSETS> 687,616,000
<POLICY-LOSSES> 229,112,000
<UNEARNED-PREMIUMS> 135,672,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 104,764,000
<OTHER-SE> 208,739,000
<TOTAL-LIABILITY-AND-EQUITY> 313,503,000
177,026,000
<INVESTMENT-INCOME> 16,123,000
<INVESTMENT-GAINS> 1,050,000
<OTHER-INCOME> 1,025,000
<BENEFITS> 125,273,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 52,036,000
<INCOME-PRETAX> 19,169,000
<INCOME-TAX> 4,858,000
<INCOME-CONTINUING> 4,858,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,311,000
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.33
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
