<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, 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 Identification No.)
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 38,472,377
-------------------------------- --------------------------
(CLASS) (OUTSTANDING ON 08/09/00)
<PAGE> 2
INDEX
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 2000 and
December 31, 1999
Condensed consolidated statements of income - Three months
ended June 30, 2000 and 1999
Condensed consolidated statements of income - Six months ended
June 30, 2000 and 1999
Condensed consolidated statements of cash flows - Six months
ended June 30, 2000 and 1999
Notes to condensed consolidated financial statements -
June 30, 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)
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 2000 1999
---- ----
(unaudited) (see note 1)
<S> <C> <C>
Fixed maturities:
Held for investment, at amortized cost
(fair value $41,201 and $44,051 respectively) $ 41,056 $ 43,981
Available for sale, at fair value
(amortized cost $613,327 and $544,051, respectively) 605,995 527,806
Equity securities, at fair value (cost $42,144 and $39,303, respectively) 55,135 55,518
---------------- ---------------
Total investments 702,186 627,305
Cash and cash equivalents 10,751 24,560
Deferred policy acquisition costs 31,367 28,936
Accrued investment income and other assets 18,368 17,977
Due from affiliate 5,176 -
Net prepaid pension expense 35,765 18,931
Reinsurance receivable 9,061 10,807
Prepaid reinsurance premiums 9,261 15,784
Property and equipment, net 11,120 11,288
Deferred federal income taxes 6,624 1,828
Goodwill 2,400 2,529
---------------- ---------------
Total assets $842,079 $759,945
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable $237,448 $232,489
Unearned premiums 153,091 153,570
Note payable to affiliate 45,500 45,500
Current federal income taxes 3,052 1,322
Due to affiliates - 5,336
Postretirement health care benefits 53,659 2,498
Other liabilities 1,502 1,543
---------------- ---------------
Total liabilities 494,252 442,258
---------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, without par value. Authorized 100,000,000 shares;
42,511,194 and 42,355,438 shares issued, respectively, at stated
value of $2.50 per share 106,278 105,888
Less treasury shares 4,039,649 at cost (46,651) (46,588)
Additional paid-in capital 43,185 42,562
Accumulated comprehensive income 3,812 156
Retained earnings 241,203 215,669
---------------- ---------------
Stockholders' equity 347,827 317,687
---------------- ---------------
Total liabilities and stockholders' equity $842,079 $759,945
================ ===============
</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, 2000 and 1999
(dollars in thousands, except per share amounts)
(unaudited)
2000 1999
---- ----
Earned premiums $ 99,477 $ 98,853
Net investment income 9,624 8,357
Management services income 4,394 2,192
Net realized (losses) gains on investments (340) 872
Other income (includes $372 and $374,
respectively, from affiliates) 798 912
--------- ---------
Total revenues 113,953 111,186
--------- ---------
Losses and loss expenses 66,195 67,972
Acquisition and operating expenses 28,812 27,824
Interest expense 690 67
Other expense 1,744 1,556
--------- ---------
Total expenses 97,441 97,419
--------- ---------
Income before federal income taxes 16,512 13,767
Federal income tax expense 4,018 3,398
--------- ---------
Net income $ 12,494 $ 10,369
========= =========
Earnings per share:
- basic $ 0.33 $ 0.25
========= =========
- diluted $ 0.32 $ 0.25
========= =========
Dividends paid per common share $ 0.028 $ 0.025
========= =========
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, 2000 and 1999
(dollars in thousands, except per share amounts)
(unaudited)
2000 1999
---- ----
Earned premiums $198,288 $197,329
Net investment income 18,998 16,808
Management services income 8,798 4,376
Net realized gains on investments 2,799 1,926
Other income (includes $771 and $715,
respectively, from affiliates) 1,531 1,678
-------- --------
Total revenues 230,414 222,117
-------- --------
Losses and loss expenses 130,404 134,464
Acquisition and operating expenses 59,707 56,034
Interest expense 1,365 67
Other expense, net 3,842 3,124
-------- --------
Total expenses 195,318 193,689
-------- --------
Income before federal income taxes 35,096 28,428
Federal income tax expense 8,919 7,179
-------- --------
Net income $ 26,177 $ 21,249
======== ========
Net earnings per share:
- basic $ 0.68 $ 0.50
======== ========
- diluted $ 0.67 $ 0.50
======== ========
Dividends paid per common share $ 0.055 $ 0.050
======== ========
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, 2000 and 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,177 $ 21,249
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization, net 1,707 1,413
Net realized gains on investments (2,799) (1,926)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (665) (1,522)
Accrued investment income and other assets (702) 931
Net prepaid pension expense (16,834) (961)
Postretirement health care benefits 51,161 517
Other liabilities and due to/from affiliate, net (10,718) (7,751)
Reinsurance receivable and prepaid reinsurance premiums 418 (5,309)
Losses and loss expenses payable (7,575) 3,729
Unearned premiums (479) 4,549
Federal income taxes (5,035) (2,255)
--------- ---------
34,656 12,664
Cash provided from the change in the reinsurance pool
participation percentage 18,617 11,419
--------- ---------
Net cash provided by operating activities 53,273 24,083
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (119,994) (119,866)
Purchase of equity securities (8,224) (12,269)
Maturities, calls and principal reductions of fixed maturities -
held to maturity 2,887 8,900
Maturities, calls and principal reductions of fixed maturities -
available for sale 12,133 15,913
Sale of fixed maturities - available for sale 37,200 71,701
Sale of equity securities 8,705 8,394
Net cash acquired on acquisiton of Farmers Casualty
Insurance Company and subsidiary - 11,568
Net additions of property and equipment (83) (2,839)
--------- ---------
Net cash used in investing activities (67,376) (18,498)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt - 16,000
Payments to acquire treasury stock - (16,401)
Net proceeds from sale of common stock 959 1,172
Payment of dividends (665) (645)
--------- ---------
Net cash used in financing activities 294 126
--------- ---------
Net (decrease) increase in cash and cash equivalents (13,809) 5,711
Cash and cash equivalents at beginning of period 24,560 32,605
--------- ---------
Cash and cash equivalents at end of period $ 10,751 $ 38,316
========= =========
Supplemental disclosures:
Federal income taxes paid $ 7,000 $ 9,500
========= =========
</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, 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 and six month periods ending June 30, 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 (as defined below) aggregate participation to 53% (State
Auto Property and Casualty Insurance Company ("State Auto P&C") - 39%, Milbank
Insurance Company ("Milbank") - 10%, Farmers Casualty Insurance Company
("Farmers Casualty") - 3% and SAIC - 1%) (collectively the "Pooled
Subsidiaries"). 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 received cash of approximately
$28.1 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, State Automobile Mutual
Insurance Company ("Mutual"), Midwest Security Insurance Company ("Midwest
Security"), State Auto National Insurance Company ("National") and Mid-Plains
Insurance Company ("Mid-Plains"). As a 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 Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 12,494 $ 10,369 $ 26,177 $ 21,249
Unrealized holding gains (losses), net of tax 258 (7,758) 3,656 (10,165)
-------- -------- -------- --------
Comprehensive income $ 12,752 $ 2,611 $ 29,833 $ 11,084
======== ======== ======== ========
</TABLE>
<PAGE> 8
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
June 30, 2000
(in thousands, except per share amounts)
(unaudited)
The components of accumulated other comprehensive income, net of related tax,
included in stockholders' equity at June 30, 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 Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income for basic and diluted
Earnings per share $ 12,494 $ 10,369 $ 26,177 $ 21,249
------------- -------------- ------------ -------------
Denominator:
Weighted average shares for
Basic earnings per share 38,405 41,642 38,378 41,847
Effect of dilutive stock options 639 768 570 781
Adjusted weighted average shares
For diluted earnings per share 39,044 42,410 38,948 42,628
------------- -------------- ------------ -------------
Basic earnings per share $ 0.33 $ 0.25 $ 0.68 $ 0.50
------------- -------------- ------------ -------------
Diluted earnings per share $ 0.32 $ 0.25 $ 0.67 $ 0.50
------------- -------------- ------------ -------------
</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 Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums earned:
Other insurers and reinsurers $ 2,617 $ 3,312 $ 5,623 $ 7,436
Ceded under Pooling Arrangement 99,879 97,461 197,447 193,714
Losses and loss expenses incurred:
Other insurers and reinsurers $ 735 $ 2,718 $ 469 $ 5,968
Ceded under Pooling Arrangement 69,789 70,900 132,409 132,298
</TABLE>
<PAGE> 9
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
June 30, 2000
(in thousands, except per share amounts)
(unaudited)
5. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from external customers:
Standard insurance $101,641 $99,904 $202,200 $199,605
Nonstandard insurance 7,306 8,554 14,786 16,946
Investment management services 835 829 1,674 1,694
Management and operations services 3,667 - 7,326 -
All other 841 958 1,616 1,832
------------- -------------- ------------ -------------
Total revenues from external customers 114,290 110,245 227,602 220,077
============= ============== ============ =============
Intersegment revenues:
Standard insurance $ 40 $ 30 $ 81 $ 60
Investment management services 1,076 644 2,152 1,290
Management and operations services 713 - 1,399 -
All other 456 375 855 715
------------- -------------- ------------ -------------
Total intersegment revenues 2,285 1,049 4,487 2,065
============= ============== ============ =============
Segment profit (loss):
Standard insurance $11,612 $11,398 $21,872 $23,661
Nonstandard insurance 245 30 378 (188)
Investment management services 1,312 1,325 2,639 2,635
Management and operations services 4,578 - 9,149 -
All other 176 412 415 959
------------- -------------- ------------ -------------
Total segment profit 17,923 13,165 34,453 27,067
Reconciling items:
Corporate expenses (1,071) (261) (2,156) (515)
Net realized gains (losses) (340) 872 2,799 1,926
Miscellaneous adjustments - (9) - (50)
------------- -------------- ------------ -------------
Total consolidated income before
federal income taxes $16,512 $13,767 $35,096 $28,428
============= ============== ============ =============
Segment assets:
Standard insurance $741,057 $672,592
Nonstandard insurance 44,691 47,137
Investment management services 7,547 5,864
Management and operations services 43,981 -
All other 14,325 15,387
------------ -------------
Total segment assets $851,601 $740,980
============ =============
</TABLE>
<PAGE> 10
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued
June 30, 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 operations 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> 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 $2.7 million to $16.5 million and
$6.7 million to $35.1 million for the three months and six months ended June 30,
2000, respectively, from the same 1999 period. Contributing to these increases
was an amendment to the Company's Pooling Arrangement, a change in the
management services provided by State Auto P&C and for the six month period a
decrease in the level of catastrophe losses compared to the same period in 1999.
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 operations services under new management
agreements for insurance and non-insurance affiliates. Pursuant to the
management and operation services agreements, State Auto P&C received cash of
approximately $28.1 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 Company ("National"), a wholly owned
subsidiary of State Auto Financial and Mid-Plains Insurance Company
("Mid-Plains"), a wholly owned subsidiary of Farmers Casualty. As a 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 June 30, 2000, increased
$624,000 (0.6%) to $99.5 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 5.5%. 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
3.6%. The Company's nonstandard insurance segment's internal growth also
decreased consolidated earned premiums by approximately 1.3%.
Consolidated earned premiums for the six months ended June 30, 2000, increased
$959,000 (0.5%) to $198.3 million from the same 1999 period. Increasing
consolidated earned premiums by 5.5% was the change in the Pooled
Subsidiaries' aggregate pooled participation percentage (discussed above).
Offsetting this increase, was a decrease in the internal growth of the standard
insurance segment of 3.4% and of the nonstandard insurance segment of 1.1%. Also
negatively impacting the Company's consolidated earned premiums by approximately
0.5%, 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
<PAGE> 12
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.
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 had a negative impact on earned
premiums over the last several quarters. The completion of this re-underwriting
effort, coupled with a perceived "hardening" of the commercial market, is
resulting in a return to written premium growth in this book of business.
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 can continue its strategy
of taking modest price increases on a regularly scheduled basis. 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 $1.3 million (15.2%) to $9.6 million and $2.2
million (13.0%) to $19.0 million for the three month and six month periods
ending June 30, 2000, respectively, from the same 1999 periods. 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, increased to 5.5% for both the three month and six month periods ending
June 30, 2000, from 5.4% and 5.3% for the same 1999 comparable periods,
respectively.
Management services income increased $2.2 million to $4.4 million and $4.4
million to $8.8 million for the three month and six month periods ending June
30, 2000, respectively, from the same 1999 period. These increases are 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 (the "loss ratio"),
decreased to 66.5% for the three months ended June 30, 2000 from 68.8% for the
same 1999 period and for the six months ended June 30, 2000, decreased to 65.8%
from 68.1% for the same 1999 period. The decrease in the three month loss ratio
was largely the result of the Company experiencing an unusually high number of
large commercial claims that impacted the 1999 second quarter operations. See
discussion above regarding management's response to the Company's commercial
book of business. The six month loss ratio improvement is primarily due to an
improvement in the level of catastrophe claims in 2000 compared to 1999. This
improvement for the six months was reduced slightly by 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 29.0% for the quarter ended June 30, 2000 from
28.1% for the same 1999 period and for the six months ended June 30, 2000,
increased to 30.1% from 28.4% for the same 1999 period. The increase in the
expense ratio for both the three month and six month periods can be attributed
to an increase in the amount of Quality Performance Bonus earned by employees
compared to that earned during the same respective time periods 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 less than anticipated 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 $0.2 million to $1.7 million and $0.7 million to $3.8
million for the three month and six month periods ending June 30, 2000,
respectively, from the same 1999 periods. Increasing the
<PAGE> 13
six month results was the estimated amount of interest the Company must pay on
the North Carolina premium rate refunds as discussed above.
The effective Federal tax rate was 24.3% and 25.4% for the three month and six
month periods ending June 30, 2000, respectively, compared to 24.7% and 25.3%
for the same 1999 periods, respectively.
Liquidity and Capital Resources
-------------------------------
Through the six months ended June 30, 2000, net cash provided by operating
activities increased to $53.3 million from $24.1 million during the same time
period in 1999. This increase is due to the cash transfers in conjunction with
the 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.
Overall, net cash used in investing activities was $67.4 million up from $18.5
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 and transfer of employees to State Auto
P&C.
Net cash used in financing activities for the six months ended June 30, 2000
remained comparable to the same period in 1999.
As of June 30, 2000, funds consisting of cash and cash equivalents were $10.8
million versus $38.3 million at June 30, 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, the Company's agent appointment
efforts, rate reviews, sales forecasts, loss forecasts, and other Company
actions in response to their adverse underwriting results. 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> 14
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 26, 2000. The total shares represented at the meeting
were 35,674,062. This constituted 92.68% of the Company's 38,368,918 shares
outstanding. At the meeting, the shareholders voted on three resolutions; the
first being the election of Urlin G. Harris, Jr., George R. Manser and Richard
K. Smith as Class III Directors, each to hold office until the 2003 annual
meeting of shareholders and until a successor is elected and qualified, with
each director nominee receiving the votes indicated:
NUMBER OF VOTES
---------------
FOR WITHHELD
--- --------
Urlin G. Harris, Jr. 34,430,959 1,243,103
George R. Manser 34,431,894 1,242,168
Richard K. Smith 34,436,874 1,237,188
On the basis of this vote, Urlin G. Harris, Jr., George R. Manser and
Richard K. Smith were elected as Class III Directors to serve until the 2003
annual meeting and until a successor is elected and qualified.
The second resolution pertained to the approval of the Company's 2000
Stock Option Plan. The Common Shares were voted as follows with respect to such
resolution:
For the Approval Opposed to the Approval Abstain
---------------- ----------------------- -------
30,320,383 2,471,448 60,467
On the basis of this vote, the resolution approving the Company's 2000
Stock Option Plan was adopted by the shareholders.
<PAGE> 15
The third resolution pertained to the approval of the Company's 2000
Directors' Stock Option Plan. The Common Shares were voted as follows with
respect to such resolution:
For the Approval Opposed to the Approval Abstain
---------------- ----------------------- -------
32,179,406 594,106 78,786
On the basis of this vote, the resolution approving the Company's 2000
Directors' Stock Option Plan was adopted by the shareholders.
Item 5. Other Information - None
INDEX TO EXHIBITS
Item 6. a. Exhibits
Exhibit No. Description of Exhibits
----------- -----------------------
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: AUGUST 11, 2000 /s/ Steven J. Johnston
-------------------- ---------------------------------------
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
