<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 2000
------------------------------------------------
( ) 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 jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
518 East Broad Street, Columbus, Ohio 43215-3976
- -------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(614) 464-5000
- -------------------------------------------------------------------------------
Registrant's telephone number, including area code
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 38,378,504
- -------------------------------- -----------------------
(CLASS) (OUTSTANDING ON 5/10/00)
<PAGE> 2
INDEX
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - March 31, 2000 and
December 31, 1999
Condensed consolidated statements of income -
Three months ended March 31, 2000 and 1999
Condensed consolidated statements of cash flows
- Three months ended March 31, 2000 and 1999
Notes to condensed consolidated financial statements -
March 31, 2000
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
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)
<CAPTION>
March 31 December 31
ASSETS 2000 1999
-------- -----------
<S> <C> <C>
Fixed maturities:
Held for investment, at amortized cost
(fair value $43,086 and $44,051 respectively) $ 42,975 $ 43,981
Available for sale, at fair value
(amortized cost $564,244 and $544,051, respectively) 555,947 527,806
Equity securities, at fair value (cost $37,829 and $39,303, respectively) 51,337 55,518
-------- --------
Total investments 650,259 627,305
Cash and cash equivalents 57,039 24,560
Deferred policy acquisition costs 30,346 28,936
Accrued investment income and other assets 18,078 17,977
Due from affiliate 6,147 --
Net prepaid pension expense 34,667 18,931
Reinsurance receivable 9,965 10,807
Prepaid reinsurance premiums 8,712 15,784
Property and equipment, net 11,151 11,288
Deferred federal income taxes 6,892 1,828
Goodwill 2,464 2,529
-------- --------
Total assets $835,720 $759,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable $239,461 $232,489
Unearned premiums 149,612 153,570
Note payable to affiliate 45,500 45,500
Current federal income taxes 12,282 1,322
Due to affiliates -- 5,336
Postretirement health care benefits 52,874 2,498
Other liabilities 1,467 1,543
-------- --------
Total liabilities 501,196 442,258
-------- --------
STOCKHOLDERS' EQUITY
Common stock, without par value. Authorized 100,000,000 shares;
42,403,260 and 42,355,438 shares issued, respectively, at stated
value of $2.50 per share 106,008 105,888
Less 4,034,342, at cost (46,588) (46,588)
Additional paid-in capital 42,507 42,562
Accumulated comprehensive income 3,554 156
Retained earnings 229,043 215,669
-------- --------
Stockholders' equity 334,524 317,687
-------- --------
Total liabilities and stockholders' equity $835,720 $759,945
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
<TABLE>
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2000 and 1999
(dollars in thousands, except per share amounts)
(unaudited)
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Earned premiums $ 98,811 $ 98,477
Net investment income 9,374 8,451
Management services income 4,404 2,184
Net realized gains on investments 3,139 1,054
Other income (includes $399 and $341,
respectively, from affiliates) 733 765
-------- --------
Total revenues 116,461 110,931
-------- --------
Losses and loss expenses 64,209 66,492
Acquisition and operating expenses 30,895 28,210
Interest expense 675 --
Other expense 2,098 1,568
-------- --------
Total expenses 97,877 96,270
-------- --------
Income before federal income taxes 18,584 14,661
Federal income tax expense 4,901 3,781
-------- --------
Net income $ 13,683 $ 10,880
======== ========
Earnings per share:
- basic $ 0.35 $ 0.25
======== ========
- diluted $ 0.35 $ 0.25
======== ========
Dividends paid per common share $ 0.028 $ 0.025
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
<TABLE>
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(in thousands)
(unaudited)
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,683 $ 10,880
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization, net 840 704
Net realized gains on investments (3,139) (1,054)
Changes in operating assets and liabilities:
Deferred policy acquisition costs 355 (642)
Accrued investment income and other assets (256) 1,084
Net prepaid pension expense (15,737) (481)
Postretirement health care benefits 50,376 492
Other liabilities and due to/from affiliate, net (11,724) 2,674
Reinsurance receivable and prepaid reinsurance premiums 65 (2,880)
Losses and loss expenses payable (5,562) (768)
Unearned premiums (3,958) 221
Federal income taxes 4,067 1,561
-------- --------
29,010 11,791
Cash provided from the change in the reinsurance pool
participation percentage 18,617 11,419
-------- --------
Net cash provided by operating activities 47,627 23,210
-------- --------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (56,400) (73,990)
Purchase of equity securities (3,199) (7,495)
Maturities, calls and principal reductions of fixed maturities -
held to maturity 989 5,283
Maturities, calls and principal reductions of fixed maturities -
available for sale 6,735 8,771
Sale of fixed maturities - available for sale 28,926 48,943
Sale of equity securities 7,955 3,973
Net cash acquired on acquisiton of Farmers Casualty
Insurance Company and subsidiary -- 11,568
Net additions of property and equipment -- (1,780)
-------- --------
Net cash used in investing activities (14,994) (4,727)
-------- --------
Cash flows from financing activities:
Net proceeds from sale of common stock 177 60
Payment of dividends (331) (324)
-------- --------
Net cash used in financing activities (154) (264)
-------- --------
Net increase in cash and cash equivalents 32,479 18,219
Cash and cash equivalents at beginning of period 24,560 32,605
-------- --------
Cash and cash equivalents at end of period $ 57,039 $ 50,824
======== ========
Supplemental disclosures:
Federal income taxes paid $ 834 $ 2,200
======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE> 6
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(in thousands, except per share amounts)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ending March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. The balance sheet at December 31, 1999 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries' annual
report on Form 10-K for the year ended December 31, 1999.
Effective January 1, 2000, the Pooling Arrangement was amended to make State
Auto Insurance Company ("SAIC"), a wholly owned standard insurance subsidiary of
State Auto Financial, a participant in the Pooling Arrangement and increase the
Pooled Subsidiaries aggregate participation to 53% (State Auto P&C - 39%,
Milbank - 10 %, Farmers Casualty - 3% and SAIC - 1%). In conjunction with the
change in pool participation, the Pooled Subsidiaries received cash from Mutual
of $18.6 million, which related to the additional net insurance liabilities
assumed by the Pooled Subsidiaries on January 1, 2000. All parties that
participate in the Pooling Arrangement have an A.M. Best rating of A+
(Superior).
State Auto P&C, in addition to its insurance operations, effective January 1,
2000, provides management and operation services under new management agreements
for all insurance and non-insurance affiliates. Pursuant to the management and
operation services agreements, State Auto P&C will receive cash of approximately
$31.8 million equal to the net plan benefit liabilities assumed relating to the
transfer to State Auto P&C of all employees from Mutual, Stateco Financial
Services, Inc. ("Stateco"), and Strategic Insurance Software, Inc.("S.I.S."),
effective January 1, 2000. Stateco and S.I.S. are wholly owned subsidiaries of
the Company. Prior to January 1, 2000, State Auto P&C provided executive
management services to the Pooled Subsidiaries, Mutual, Midwest Security,
National and Mid-Plains. As result of the change in the nature of services
provided by State Auto P&C, the management fee charged to insurer affiliates was
amended and is based on a percentage of the three year adjusted average surplus
of each managed insurer, except for Midwest Security, Farmers Casualty and
Mid-Plains whose management fee continues to be based on a percentage of
quarterly direct premiums written.
2. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31
--------
2000 1999
---- ----
<S> <C> <C>
Net income $13,683 $10,880
Unrealized holding gains (losses), net of tax 3,398 (2,407)
------- -------
Comprehensive income $17,081 $ 8,473
======= =======
</TABLE>
<PAGE> 7
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
March 31, 2000
(in thousands, except per share amounts)
(unaudited)
The components of accumulated other comprehensive income, net of related tax,
included in stockholders' equity at March 31, 2000 and December 31, 1999 include
only unrealized holding gains (losses), 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
March 31
--------
2000 1999
---- ----
<S> <C> <C>
Numerator:
Net income for basic and diluted
Earnings per share $13,683 $10,880
------- -------
Denominator:
Weighted average shares for
Basic earnings per share 38,352 42,054
Effect of dilutive stock options 485 796
Adjusted weighted average shares
For diluted earnings per share 38,837 42,850
------- -------
Basic earnings per share $ 0.35 $ 0.25
------- -------
Diluted earnings per share $ 0.35 $ 0.25
------- -------
</TABLE>
4. REINSURANCE
The following provides the income statement transactions for ceded
reinsurance information for transactions with other insurers and reinsurers
as well as the ceded reinsurance transaction for the Pooling Arrangement
between the Company's Pooled Subsidiaries and Mutual:
<TABLE>
<CAPTION>
Three months ended
March 31
--------
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Premiums earned:
Other insurers and reinsurers $ 3,006 $ 4,124
Ceded under Pooling Arrangement 97,568 96,253
Losses and loss expenses incurred:
Other insurers and reinsurers $ (266) $ 3,250
Ceded under Pooling Arrangement 62,620 61,398
</TABLE>
<PAGE> 8
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
March 31, 2000
(in thousands, except per share amounts)
(unaudited)
5. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended
March 31
--------
2000 1999
---- ----
<S> <C> <C>
Revenues from external customers:
Standard insurance $100,559 $ 99,701
Nonstandard insurance 7,480 8,392
Investment management services 839 865
Management and operations services 3,659 --
All other 775 874
-------- --------
Total revenues from external customers $113,312 $109,832
======== ========
Intersegment revenues:
Standard insurance $ 41 $ 30
Investment management services 1,076 646
Management and operations services 686 --
All other 399 340
-------- --------
Total intersegment revenues $ 2,202 $ 1,016
======== ========
Segment profit (loss):
Standard insurance $ 10,260 $ 12,263
Nonstandard insurance 133 (218)
Investment management services 1,327 1,310
Management and operations services 4,571 --
All other 239 547
-------- --------
Total segment profit 16,530 13,902
Reconciling items:
Corporate expenses (1,085) (254)
Net realized gains 3,139 1,054
Miscellaneous adjustments -- (41)
-------- --------
Total consolidated income before federal
income taxes $ 18,584 $ 14,661
======== ========
Segment assets:
Standard insurance $ 745,804 $677,531
Nonstandard insurance 44,560 47,350
Investment management services 6,861 7,277
Management and operations services 39,403 --
All other 14,420 16,217
--------- --------
Total segment assets $ 851,048 $748,375
========= ========
</TABLE>
<PAGE> 9
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
March 31, 2000
(in thousands, except per share amounts)
(unaudited)
The Company has four reportable segments: standard insurance, nonstandard
insurance, investment management services and effective January 1, 2000,
management and operations services. As noted in footnote 1 - Basis of
Presentation, the Company began providing management and operation services
through its wholly-owned subsidiary State Auto P&C.
6. RECLASSIFICATIONS
Certain items in the 1999 condensed consolidated financial statements have been
reclassified to conform to the 2000 presentation.
<PAGE> 10
STATE AUTO FINANCIAL CORPORATION AND SUBISIDIAIRES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Income before federal income taxes increased $3.9 million to $18.6 million for
the quarter ended March 31, 2000 from the same 1999 period. Contributing to this
increase in income was a decrease in the level of catastrophe losses compared to
the same time period in 1999, an amendment to the Company's Pooling Arrangement
and a change in the management services provided by State Auto P&C.
Effective January 1, 2000 the Company amended its quota share reinsurance
pooling arrangement (the "Pooling Arrangement") with State Automobile Mutual
Insurance Company ("Mutual"), a majority shareholder of the Company. During
1999, the Company's standard insurance subsidiaries, State Auto Property &
Casualty Insurance Company ("State Auto P&C"), Milbank Insurance Company
("Milbank") and Farmers Casualty Insurance Company ("Farmers Casualty") (the
"Pooled Subsidiaries") participated in the Pooling Arrangement with Mutual and
Midwest Security Insurance Company ("Midwest Security"), a wholly owned
subsidiary of Mutual, whereby the aggregate pooling participation percentage of
the Pooled Subsidiaries was 50% (State Auto P&C - 37%, Milbank - 10% and Farmers
Casualty - 3%). Effective January 1, 2000, the Pooling Arrangement was amended
to make State Auto Insurance Company ("SAIC"), a wholly owned standard insurance
subsidiary of State Auto Financial, a participant in the Pooling Arrangement and
increase the Pooled Subsidiaries aggregate participation to 53% (State Auto P&C
- - 39%, Milbank - 10 %, Farmers Casualty - 3% and SAIC - 1%). In conjunction with
the change in pool participation, the Pooled Subsidiaries received cash from
Mutual of $18.6 million, which related to the additional net insurance
liabilities assumed by the Pooled Subsidiaries on January 1, 2000. All parties
that participate in the Pooling Arrangement have an A.M. Best rating of A+
(Superior).
State Auto P&C, in addition to its insurance operations, effective January 1,
2000, provides management and operation services under new management agreements
for all insurance and non-insurance affiliates. Pursuant to the management and
operation services agreements, State Auto P&C will receive cash of approximately
$31.8 million equal to the net plan benefit liabilities assumed relating to the
transfer to State Auto P&C of all employees from Mutual, Stateco Financial
Services, Inc. ("Stateco"), and Strategic Insurance Software, Inc.("S.I.S."),
effective January 1, 2000. Stateco and S.I.S. are wholly owned subsidiaries of
the Company. Prior to January 1, 2000, State Auto P&C provided executive
management services to the Pooled Subsidiaries, Mutual, Midwest Security, State
Auto National Insurance, a wholly owned subsidiary of State Auto Financial and
Mid-Plains Insurance Company ("Mid-Plains"), a wholly owned subsidiary of
Farmers Casualty. As result of the change in the nature of services provided by
State Auto P&C, the management fee charged to insurer affiliates was amended and
is based on a percentage of the three year adjusted average surplus of each
managed insurer, except for Midwest Security, Farmers Casualty and Mid-Plains
whose management fee continues to be based on a percentage of quarterly direct
premiums written.
Consolidated earned premiums during the quarter ended March 31, 2000, increased
$334,000 (0.3%) to $98.8 million from the same 1999 period. This increase was
principally the result of the change in the Pooled Subsidiaries aggregate pooled
participation percentage from 50% to 53% (discussed above). This action
increased consolidated earned premiums 5.4%. The standard insurance segment's
internal growth, as written by the Pooled Companies, excluding the impact of the
change in the Pooling Arrangement, decreased consolidated earned premiums by
3.1%. The Company's nonstandard insurance segment's internal growth also
decreased consolidated earned premiums by approximately 1.0%. Also negatively
impacting the Company's consolidated earned premiums by approximately 1.0%, is a
return of premiums to the policyholders in the state of North Carolina as a
result of a rate reduction dating back to 1994 that has been mandated by the
Insurance Department of this state. In 1994 and 1996 the North Carolina Rate
Bureau ("NCRB") filed for an auto rate increase, which was challenged by the
North Carolina Insurance Department. The parties agreed to a settlement of the
dispute in late March 2000, which resulted in a rate reduction for the 1994 rate
filing and the 1996 rate filing being approved as originally filed by the NCRB.
Consequently, the Company is required to return approximately $1.1 million in
disputed premiums, plus $530,000 in interest. The interest portion of the
returned premium has been reflected in the miscellaneous expense line item.
<PAGE> 11
As previously reported, over the course of 1999 the Company's commercial lines
book of business began to manifest some deterioration, which prompted management
to commence a careful review of its underwriters' adherence to its underwriting
guidelines for commercial lines. This action has had a negative impact on earned
premiums over the last several quarters. Additionally, the personal lines
business continues to be very price competitive though recently there is some
evidence an increasing number of companies are reacting to unrelenting
underwriting losses by increasing rates. If this persists, it should help with
the Company's persistency and sales. The Company's refusal to abandon sound
underwriting principles and cost based pricing in the face of irresponsible
price competition in the marketplace is reflected in its improved loss ratios.
That also means that the Company will most likely not be required to take large
rate increases or remove large numbers of "bad" risks from its book of business
to achieve an acceptable level of operating returns. The Company continues to
develop new products to enhance its product portfolio, it continues to appoint
new agents in its operating territories, and it continues to regularly review
rates in each line and each state to refine its pricing levels for the markets
it believes offer the most profit potential.
Net investment income increased $0.9 million (10.9%) to $9.4 million for the
three months ended March 31, 2000 from the same 1999 period. Contributing to
these increases was the cash transfers to the Company in conjunction with the
change in the Pooling Arrangement and transfer of employees to State Auto P&C as
discussed above. The investment yield, based on fixed and equity securities at
cost, remained comparable to the same 1999 period at 5.4%.
Management services income increased $2.2 million to $4.4 million for the three
months ended March 31, 2000 from the same 1999 period. This increase is largely
attributable to the change in the nature of the management services provided by
State Auto P&C as discussed above.
Losses and loss expenses, as a percentage of earned premiums, decreased to 65.0%
for the three months ended March 31, 2000 from 67.5% for the same 1999 period.
The improvement in the GAAP loss ratio is primarily due to an improvement in the
level of catastrophe claims in 2000 compared to 1999. Slightly offsetting this
improvement was the impact of the North Carolina rate refund, as discussed
above.
Acquisition and operating expenses, as a percentage of earned premiums (the
"expense ratio"), increased to 31.3% for the quarter ended March 31, 2000 from
28.6% for the same 1999 period. The increase in the expense ratio can be
attributed to an increase in the amount of Quality Performance Bonus earned by
employees in the current quarter compared to that earned during the same time
period in 1999. Also impacting the expense ratio are fixed costs such as
salaries, depreciation and utilities which comprise a larger portion of earned
premiums in 2000 than they did in 1999 as a result of the Company's decrease in
premium writings.
Interest expense relates to the line of credit agreement State Auto Financial
entered into with Mutual during the second quarter of 1999 to assist in the
funding of its stock repurchase program.
Other expense increased $0.5 million (33.8%) to $2.1 million from the same 1999
period. This increase is due to the interest the Company must pay on the North
Carolina premium rate refunds as discussed above.
The effective Federal tax rate was 26.4% and 25.8% for the three months ending
March 31, 2000 and 1999, respectively. Contributing to this increase in the
effective rate was an improvement in the underwriting insurance operations over
the same 1999 period.
Liquidity and Capital Resources
- -------------------------------
As of the end of the first quarter 2000, net cash provided by operating
activities increased to $47.6 million from $23.2 million in 1999. This increase
is due to the cash transfers in conjunction with change in the Pooling
Arrangement and transfer of employees to State Auto P&C as discussed above.
Additionally, there was a general increase in cash flows that resulted from the
change in pool percentages from previous periods.
<PAGE> 12
Overall, net cash used in investing activities was $14.9 million up from $4.7
million in 1999. This increase in cash used in investing activities was the
result of the investment of the cash transferred to the Company from the January
1, 2000 Pooling Arrangement amendment.
Net cash provided by financing activities for the three months ended March 31,
2000 remained comparable to the same period in 1999.
As of March 31, 2000, funds consisting of cash and cash equivalents were $57.0
million versus $50.8 million at March 31, 1999.
Market Risk
- -----------
With respect to Market Risk, see the discussion regarding this subject in the
Company's December 31, 1999 Management's Discussion and Analysis of Financial
Condition and Results of Operations, included in the December 31, 1999 Form
10-K. There have been no material changes from the information reported
regarding Market Risk in the 1999 Form 10-K.
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 within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to certain risks
and uncertainties that could cause the Company's actual results to differ
materially from those projected. Such statements include, without limitation,
those pertaining to the weather related catastrophes impacting the Company's
losses, product offerings, statements relating to the new insurer, State Auto
Insurance Company, the state of competition, other company's actions in response
to their adverse underwriting results, agent appointment efforts, rate reviews,
and sales forecasts. These risks and uncertainties include, but are not limited
to, legislative changes at both the state and federal level, state and federal
regulatory rule making promulgation's, class action litigation involving the
insurance industry and judicial decisions affecting claims, policy coverages and
the general costs of doing business, 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, other types of technical and
professional employees, and regulatory or governmental systems breakdowns, and
other risks indicated in the Company's filing with the Securities and Exchange
Commission, including the Company's Form 10-K for its year ended December 31,
1999.
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
<PAGE> 13
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 - None
Item 5. Other Information - None
INDEX TO EXHIBITS
Item 6. a. Exhibits
Exhibit No. Description of Exhibits
----------- -----------------------
Exhibit 10(BB) Second Amendment to the June 1, 1999 Credit
Agreement dated December 1, 1999 between
State Auto Financial Corporation and State
Automobile Mutual Insurance Company
27 Financial data schedules
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: May 12, 2000 /s/ Steven J. Johnston
-------------------------------------
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE> 1
Exhibit 10(BB)
Second Amendment
to the
June 1, 1999
Credit Agreement
dated
December 1, 1999
between
State Auto Financial Corporation
and
State Automobile Mutual Insurance Company
<PAGE> 2
SECOND AMENDMENT
TO THE
CREDIT AGREEMENT
This Second Amendment to the Credit Agreement dated effective as of
December 1, 1999 (the "Second Amendment") is attached to and hereby expressly
made a part of the Credit Agreement dated as of June 1, 1999 (the "Credit
Agreement") by and between State Auto Financial Corporation (the "Company") and
State Automobile Mutual Insurance Company (the "Lender").
In consideration of the mutual covenants set forth herein and INTENDING
TO BE LEGALLY BOUND HEREBY, the Company and the Lender hereby agree to amend the
Credit Agreement in the following particulars as set forth in this Second
Amendment.
Section 1. Definitions and Accounting Matters: The definition of
Commitment is deleted and replaced by the following:
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
$45,500,000.
Section 2. Commitment, Loans, Notes and Prepayments:
Section 2.01 Loans is deleted and replaced by the following:
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 $45,500,000. Loans paid or prepaid may
not be re-borrowed.
In addition, the Company hereby restates and brings forward each
representation and warranty set forth in Section 6 of the Credit Agreement as
though each were made as of the date of this Second Amendment.
The Company also specifically agrees that the covenants set forth in
Section 7 of the Credit Agreement shall continue to be applicable to the Credit
Agreement as amended by this Second Amendment.
By their signatures hereon, the parties expressly agree to the changes
to the Credit Agreement as set forth in this Second Amendment and each does
further hereby reaffirm each and every other provision of the Credit Agreement.
For the Company
By: /s/ Steven J. Johnston
---------------------------------
Title: Senior Vice President
------------------------------
<PAGE> 3
For the Lender
Commitment
$45,500,000
State Automobile Mutual Insurance Company
By: /s/ John R. Lowther
---------------------------------
Title: Vice President
------------------------------
<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 MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 555,947,000
<DEBT-CARRYING-VALUE> 42,975,000
<DEBT-MARKET-VALUE> 0
<EQUITIES> 51,337,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 650,259,000
<CASH> 57,039,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 30,346,000
<TOTAL-ASSETS> 835,720,000
<POLICY-LOSSES> 239,461,000
<UNEARNED-PREMIUMS> 149,612,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 45,500,000
0
0
<COMMON> 106,008,000
<OTHER-SE> 228,516,000
<TOTAL-LIABILITY-AND-EQUITY> 835,720,000
98,811,000
<INVESTMENT-INCOME> 9,374,000
<INVESTMENT-GAINS> 3,139,000
<OTHER-INCOME> 5,137,000
<BENEFITS> 64,209,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 30,895,000
<INCOME-PRETAX> 18,584,000
<INCOME-TAX> 4,901,000
<INCOME-CONTINUING> 13,683,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,683,000
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.35
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
