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.
( ) Transition report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Ohio 31-1324304
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(State or other (I.R.S. Employer Identification No.)
jurisdiction of incorporation)
518 East Broad Street, Columbus, Ohio 43215-3976
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(Address of principal executive offices) (zip code)
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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 38,698,965
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(CLASS) (OUTSTANDING ON 05/04/01)
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INDEX
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - March 31, 2001 and December 31, 2000
Condensed consolidated statements of income - Three months ended March 31, 2001 and 2000
Condensed consolidated statements of cash flows - Three months ended March 31, 2001 and 2000
Notes to condensed consolidated financial statements - March 31, 2001
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
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)
March 31 December 31
ASSETS 2001 2000
(unaudited) (see note 1)
----------- ------------
Fixed maturities:
Held for investment, at amortized cost
(fair value $35,166 and $40,255 respectively) $33,972 $39,307
Available for sale, at fair value
(amortized cost $657,964 and $636,302, respectively) 680,684 653,251
Equity securities, at fair value (cost $46,954 and $44,220, respectively) 55,728 58,312
-------- --------
Total investments 770,384 750,870
Cash and cash equivalents 14,862 21,305
Deferred policy acquisition costs 33,225 32,458
Accrued investment income and other assets 22,249 19,795
Due from affiliate 1,716 1,405
Net prepaid pension expense 38,988 37,738
Reinsurance recoverable on losses and loss expenses payable 8,102 7,930
Prepaid reinsurance premiums 11,666 11,575
Property and equipment, net 12,685 12,760
Goodwill 2,206 2,270
-------- --------
Total assets $916,083 $898,106
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss expenses payable $239,193 $244,583
Unearned premiums 164,283 160,387
Note payable to affiliate 45,500 45,500
Postretirement benefit liabilities 55,507 55,841
Current federal income taxes 3,999 2,903
Deferred federal income taxes 2,196 1,490
Other liabilities 3,703 1,343
-------- --------
Total liabilities 514,381 512,047
-------- --------
STOCKHOLDERS' EQUITY
Common stock, without par value. Authorized 100,000,000 shares;
42,768,861 and 42,625,723 shares issued, respectively, at stated
value of $2.50 per share 106,922 106,564
Less treasury shares (4,072,900 and 4,071,012, respectively) at cost (47,068) (47,038)
Additional paid-in capital 45,069 44,208
Accumulated other comprehensive income 20,602 20,317
Retained earnings 276,177 262,008
-------- --------
Stockholders' equity 401,702 386,059
-------- --------
Total liabilities and stockholders' equity $916,083 $898,106
======== ========
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See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2001 and 2000
(dollars in thousands, except per share amounts)
(unaudited)
2001 2000
---- ----
Earned premiums $101,561 $ 98,811
Net investment income 10,304 9,374
Management services income from affiliates 4,920 4,404
Net realized gains on investments 401 3,139
Other income (includes $413 and $399,
respectively, from affiliates) 815 733
------- -------
Total revenues 118,001 116,461
------- -------
Losses and loss expenses 65,783 64,209
Acquisition and operating expenses 30,599 30,895
Interest expense 569 675
Other expense 1,851 2,098
------- -------
Total expenses 98,802 97,877
------- -------
Income before federal income taxes 19,199 18,584
Federal income tax expense 4,659 4,901
------- -------
Net income $ 14,540 $ 13,683
======= =======
Earnings per share:
- basic $ 0.37 $ 0.35
======= =======
- diluted $ 0.36 $ 0.35
======= =======
Dividends paid per common share $ 0.030 $ 0.028
======= =======
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See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2001 and 2000
(in thousands)
(unaudited)
2001 2000
------- -------
Cash flows from operating activities:
Net income $ 14,540 $ 13,683
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 687 840
Net realized gains on investments (401) (3,139)
Changes in operating assets and liabilities:
Deferred policy acquisition costs (767) 355
Accrued investment income and other assets (2,609) (256)
Net prepaid pension expense (1,250) (1,098)
Postretirement health care benefits (334) 779
Other liabilities and due to/from affiliate, net 2,049 (11,724)
Reinsurance receivable and prepaid reinsurance premiums (263) 65
Losses and loss expenses payable (5,390) (5,562)
Unearned premiums 3,896 (3,958)
Federal income taxes 2,158 10,927
-------- --------
12,316 912
Cash provided from the change in the reinsurance pool
participation percentage -- 18,617
Cash provided from transfer of employees -- 28,098
-------- --------
Net cash provided by operating activities 12,316 47,627
-------- --------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale (74,206) (56,400)
Purchase of equity securities (5,034) (3,199)
Maturities, calls and principal reductions of fixed maturities -
held to maturity 5,317 989
Maturities, calls and principal reductions of fixed maturities -
available for sale 10,939 6,735
Sale of fixed maturities - available for sale 42,007 28,926
Sale of equity securities 2,029 7,955
Net additions of property and equipment (61) --
-------- --------
Net cash used in investing activities (19,009) (14,994)
-------- --------
Cash flows from financing activities:
Net proceeds from sale of common stock 622 177
Payment of dividends (372) (331)
-------- --------
Net cash (used in) provided by financing activities 250 (154)
-------- --------
Net decrease in cash and cash equivalents (6,443) 32,479
Cash and cash equivalents at beginning of period 21,305 24,560
-------- --------
Cash and cash equivalents at end of period $ 14,862 $ 57,039
======== ========
Supplemental disclosures:
Federal income taxes paid $ 2,500 $ 834
======== ========
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See accompanying notes to condensed consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements March 31, 2001
(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, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 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, 2000.
2. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, are as follows:
Three months ended
March 31
2001 2000
---- ----
Net income $14,540 $13,683
Unrealized holding gains, net of tax 285 3,398
------- -------
Comprehensive income $14,825 $17,081
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The components of accumulated other comprehensive income, net of related tax, included in stockholders' equity at March 31, 2001 and December 31, 2000 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:
Three months ended
March 31
2001 2000
---- ----
Numerator:
Net income for basic and diluted
Earnings per share $14,540 $13,683
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Denominator:
Weighted average shares for
Basic earnings per share 38,619 38,352
Effect of dilutive stock options 989 485
Adjusted weighted average shares
For diluted earnings per share 39,608 38,837
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Basic earnings per share $ 0.37 $ 0.35
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Diluted earnings per share $ 0.36 $ 0.35
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued March 31, 2001
(in thousands, except per share amounts)
(unaudited)
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:
Three months ended
March 31
2001 2000
---- ----
Premiums earned:
Other insurers and reinsurers $ 2,935 $ 3,006
Ceded under Pooling Arrangement 102,151 97,568
Losses and loss expenses incurred:
Other insurers and reinsurers $ 912 $ (266)
Ceded under Pooling Arrangement 60,621 62,620
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5. SEGMENT INFORMATION
Three months ended
March 31
2001 2000
---- ----
Revenues from external customers:
Standard insurance $ 103,851 $ 100,559
Nonstandard insurance 7,866 7,480
Investment management services 825 839
Management and operations services 4,188 3,659
All other 858 775
--------- ---------
Total revenues from external customers $ 117,588 $ 113,312
========= =========
Intersegment revenues:
Standard insurance $ 41 $ 41
Investment management services 784 686
Management and operations services 1,215 1,076
All other 399 399
--------- ---------
Total intersegment revenues $ 2,439 $ 2,202
========= =========
Segment profit (loss):
Standard insurance $ 12,121 $ 10,096
Nonstandard insurance 590 133
Investment management services 1,360 1,327
Management and operations services 5,171 4,446
All other 183 239
--------- ---------
Total segment profit 19,425 16,241
Reconciling items:
Corporate expenses (627) (796)
Net realized gains 401 3,139
--------- ---------
Total consolidated income before
federal income taxes $ 19,199 $ 18,584
========= =========
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STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - continued March 31, 2001
(in thousands, except per share amounts)
(unaudited)
5. SEGMENT INFORMATION - CONTINUED:
Segment assets:
Standard insurance $866,746 $785,207
Nonstandard insurance 53,638 44,560
Investment management services 6,006 6,861
All other 15,626 14,420
-------- --------
Total segment assets $942,016 $851,048
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6. SERVICE FEE REVENUE
The Ohio Department of Insurance (the "Department") has requested that Mutual,
starting with the quarter beginning January 1, 2001, file an analysis on a
quarterly basis with the Department that justifies the apportionment of all
costs, including the service fee paid by Mutual to State Auto P&C under the
accounting guidance outlined in Statement of Statutory Accounting Principles No.
70 - Allocation of Expenses. The Company believes that its accounting for such
costs, including the service fee is consistent with all statutory accounting
principles. However, there can be no assurance that all or any part of the
service fee paid by Mutual will be justified to the Department's satisfaction,
which may affect the amount of such fee recognized as revenue by the Company.
During the quarter ended March 31, 2001, service fee revenue, included in management services income from affiliates in the accompanying financial statements, paid by Mutual, accounted for $4.2 million or 3.5 percent of total revenues and $0.07 on a basic and diluted earnings per share, after tax, basis.
7. RECLASSIFICATIONS
Certain items in the 2000 condensed consolidated financial statements have been reclassified to conform to the 2001 presentation.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
March 31, 2001
(unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
This discussion pertains to the following companies: State Auto Financial Corporation (the "Company") and its wholly-owned insurance subsidiaries State Auto Property & Casualty Insurance Company ("State Auto P&C"), Milbank Insurance Company ("Milbank"), Farmers Casualty Insurance Company ("Farmers Casualty") and State Auto Insurance Company ("SAIC"), all of the foregoing of which engage in the standard insurance segment of the Company's operations. The Company's nonstandard segment of operations is conducted through State Auto National Insurance Company ("State Auto National"), a wholly-owned subsidiary of the Company and Mid-Plains Insurance Company ("Mid-Plains") a wholly-owned subsidiary of Farmers Casualty. State Auto P&C, Milbank, Farmers Casualty and SAIC are collectively referred to below as the "Pooled Subsidiaries", while the Pooled Subsidiaries, State Automobile Mutual Insurance Company ("Mutual") and its wholly-owned subsidiary, Midwest Security Insurance Company ("Midwest"), are collectively referred to below as the "Pooled Companies."
Income before federal income taxes increased $0.6 million to $19.2 million for the quarter ended March 31, 2001. An increase in premium growth and positive results in the Company's insurance operations contributed mainly to this increase. See the discussion included within the Liquidity and Capital Resources section regarding the service fee paid by Mutual to the Company.
Consolidated earned premiums during the quarter ended March 31, 2001 increased $2.8 million (2.8%) to $101.6 million from the same 2000 period. First quarter 2000 was negatively impacted by approximately $1.0 million due to 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 was mandated by the Insurance Department of this state. Absent the impact of this 2000 return of premiums, premiums earned increased $1.8 million (1.8%). The standard insurance segment's earned premiums increased consolidated earned premiums 2.4%. This segment's net premiums written for the first quarter 2001 increased approximately 8.8% driven largely by growth in its commercial lines of business. The recent growth in the Pooled Companies commercial lines of business has been the main factor in providing this increase in premium, though the decline in personal lines business has been lessening. The nonstandard insurance segment's earned premiums increased consolidated earned premiums 0.4%. Production levels in this segment continued to improve during the first quarter as result of the easing of the competitive pricing pressures it had felt by certain market leaders in the first half of 2000. Net premiums written for the first quarter 2001 increased 39.3% from the same 2000 period.
Net investment income during the quarter ended March 31, 2001 increased $1.0 million (9.9%) to $10.3 million from the same 2000 period. An increase in invested assets over the same time period contributed to this increase. Invested assets at March 31, 2001 were $738.8 million versus $645.0 million at March 31, 2000. The investment yield, based on fixed and equity securities at cost, increased to 5.5% for the three month period from 5.4% for the same 2000 comparable period.
Management services income increased $0.5 million to $4.9 million for the three-month period ending March 31, 2001 from the same 2000 period. This increase is largely due to the increase in service fee revenue paid by Mutual in 2001. The Ohio Department of Insurance (the "Department") has requested that, beginning in 2001, Mutual file an analysis on a quarterly basis with the Department that justifies under statutory accounting guidance outlined in Statement of Statutory Accounting Principle No. 70 - Allocation of Expenses ("SSAP No. 70") the apportionment of all costs, including the service fee paid by Mutual to State Auto P&C under the 2000 Management Agreement (as defined below). See related discussion in the Liquidity and Capital Resources section.
Net realized gains on investments decreased $2.9 million to $0.4 million for the three-month period ending March 31, 2001 from the same 2000 period, as the Company took advantage of selling several high tech stocks during the first quarter of 2000 to realize gains prior to the downturn in the equity market.
Losses and loss expenses, as a percentage of earned premiums (the "loss ratio"), decreased to 64.8% for the three months ended March 31, 2001 from 65.0% for the same 2000 period. Contributing to this improvement in the quarterly loss ratio was an improvement in the level of catastrophe claims in 2001 compared to 2000; however, the Company's commercial lines of business experienced an increase in its losses versus the same 2000 time period. With the increased top line growth that the Company has been experiencing in commercial lines over the last several quarters, management continues to monitor its underwriters' adherence to the Company's underwriting guidelines as well as the adequacy of prices relative to risks written.
Acquisition and operating expenses, as a percentage of earned premiums (the "expense ratio"), decreased to 30.1% for the quarter ended March 31, 2001 from 31.3% for the same 2000 period. Contributing to the decline in the three-month ratio was a decrease in the amount of Quality Performance Bonus earned by employees compared to that earned during the same respective time period in 2000, as well as the fact that fixed costs, such as salaries, depreciation and utilities, comprise a lesser portion of premiums in 2001 than they did in 2000 when the Companies' premiums were less than anticipated.
Interest expense relates to the line of credit agreement the Company entered into with Mutual during 1999 to assist in the funding of its stock repurchase program. Based on terms of the agreement, the interest rate adjusts annually. In 2001, the interest rate is 5.0% compared to 6.0% in 2000.
The effective Federal tax rate was 24.3% and 26.4% for the three months ending March 31, 2001 and 2000, respectively. Contributing to this decline in the effective rate were net realized gains in the current quarter comprising a lesser proportion of taxable income versus the same period in 2000.
Liquidity and Capital Resources
As of the end of the first quarter 2001, net cash provided by operating activities decreased to $12.3 million from $47.6 million in 2000. This decrease is due to cash transfers from affiliate companies in 2000 in conjunction with the change in the Company's Pooling Arrangement and transfer of employees to State Auto P&C, both of which were effective January 1, 2000. Overall, net cash used in investing activities increased to $19.0 million from $15.0 million in 2000. This increase was due to the Company investing unallocated cash in 2001 to long-term investments.
As of March 31, 2001, funds consisting of cash and cash equivalents were $14.9 million versus $57.0 million at March 31, 2000.
As described in the Company's Form 10-K for the year ended December 31, 2000, which is incorporated herein by reference, the Department has requested that Mutual file an analysis on a quarterly basis with the Department, starting with the quarter beginning January 1, 2001, that justifies under statutory accounting guidance outlined in SSAP No. 70, the apportionment of all costs, including the service fee paid by Mutual to State Auto P&C under the 2000 Management Agreement. The Company believes its accounting for such service fee is consistent with all statutory accounting principles. However, there can be no assurance that all or any part of the service fee paid by Mutual will be justified to the Department's satisfaction, which may affect the amount of such fee recognized as revenue by the Company. During the quarter ended March 31, 2001, service fee revenue, included in management services income from affiliates, paid by Mutual, accounted for $4.2 million or 3.5 percent of total revenues and $0.07 on a basic and diluted earnings per share, after tax, basis.
While there can be no assurance that all or any part of the service fee revenue recognized by the Company will be justified to the Department's satisfaction, management continues to focus on its insurance operations which is the primary source of earnings and cash flow for the Company. The Company believes its underwriting and pricing discipline, as well as its commitment to delivering its products as effectively and efficiently as possible, has been a key factor in the Company's underwriting results over the last several years. The Company remains active in the personal and commercial markets, developing new products to enhance its product portfolio; appointing new agents in its operating
territories; and refining its pricing levels for the markets and lines of business it believes offer the most profit potential.
Market Risk
With respect to Market Risk, see the discussion regarding this subject in the Company's December 31, 2000 Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the December 31, 2000 Form 10-K. There have been no material changes from the information reported regarding Market Risk in the 2000 Form 10-K.
FORWARD-LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
Statements contained in this Form 10-Q or any other reports or documents prepared by the Company or made by management may be "forward-looking" 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. Forward-looking statements may be identified, preceded by, followed by, or otherwise include, without limitation, words such as "plans," "believes," "expects," "anticipates," "intends," "estimates," or similar expressions. The following factors, among others, in some cases have affected and in the future could affect the Company's actual financial performance.
o As discussed in Item 1 of the Company's December 31, 2000 Form
10-K, which is incorporated herein by reference, Mutual has
entered into agreements with Meridian Mutual and MIGI pursuant
to which Meridian Mutual will be merged with and into Mutual,
with Mutual continuing as the surviving corporation of the
merger, and MIGI will be acquired by Mutual. In addition,
during the past several years, Mutual and the Company have
acquired other insurance companies, such as Milbank, Farmers
Casualty, and Midwest Security, and it is anticipated that
Mutual and the Company will continue to pursue acquisitions of
other insurance companies in the future. Acquisitions involve
numerous risks and uncertainties, including the following:
obtaining necessary regulatory approvals of the acquisition
may prove to be more difficult than anticipated; integrating
the acquired business may prove to be more costly or difficult
than anticipated; integrating the acquired business without
material disruption to existing operations may prove to be
more difficult than anticipated; anticipated cost savings may
not be fully realized (or not realized within the anticipated
time frame) or additional or unexpected costs may be incurred;
and retaining key employees of the acquired business may prove
to be more difficult than anticipated. In addition, other
companies in the insurance industry have similar acquisition
strategies. There can be no assurance that any future
acquisitions will be successfully integrated into the
Company's operations, that competition for acquisitions will
not intensify or that the Company will be able to complete
such acquisitions on acceptable terms and conditions. In
addition, the costs of unsuccessful acquisition efforts may
adversely affect the Company's financial performance.
o The Company's financial results are subject to the occurrence of weather-related and other types of catastrophic events, none of which are within the Company's control.
o The Company's operations are subject to changes occurring in the legislative, regulatory and judicial environment, including but not limited to changes related to the implementation of the Gramm Leach Bliley Act of 1999. Risks and uncertainties related to the legislative, regulatory, and judicial environment include, but are not limited to, legislative changes at both the state and federal level, state and federal regulatory rulemaking promulgations and adjudications that may affect the Company specifically, its affiliates or the industry generally, class action and other litigation involving the insurance industry and judicial decisions affecting claims, policy coverages and the general costs of doing business. Many of these changes are beyond the Company's control.
o The laws of the various states establish insurance departments with broad regulatory powers relative to approving intercompany arrangements, such as management, pooling, and investment management agreements, granting and revoking licenses to transact business,
regulating trade practices, licensing agents, approving policy forms, setting reserve requirements, determining the form and content of required statutory financial statements, prescribing the types and amount of investments permitted and requiring minimum levels of statutory capital and surplus. The Ohio Department of Insurance (the "Department") has requested that, beginning in 2001, Mutual file an analysis on a quarterly basis with the Department, starting with the quarter beginning January 1, 2001, that justifies under statutory accounting guidance outlined in SSAP No. 70, the apportionment of all costs, including the service fee paid by Mutual to State Auto P&C under the 2000 Management Agreement. The Company believes its accounting for such service fee is consistent with all statutory accounting principles. However, there can be no assurance that all or any part of the service fee paid by Mutual will be justified to the Department's satisfaction, which may affect the amount of such fee recognized as revenue by the Company. In addition, although premium rate regulation varies among states and lines of insurance, such regulations generally require approval of the regulatory authority prior to any changes in rates. Furthermore, all of the states in which the State Auto Group transacts business have enacted laws, which restrict these companies' underwriting discretion. Examples of these laws include restrictions on agency terminations and laws requiring companies to accept any applicant for automobile insurance. These laws may adversely affect the ability of the insurers in the State Auto Group to earn a profit on their underwriting operations.
o The property and casualty insurance industry is highly competitive. Price competition has been very intense during recent years. This continued to be true in regards to both commercial lines and personal lines, particularly auto insurance in 2000. Several "national" carriers' active marketing efforts with respect to personal lines auto insurance have had an impact on the market for this coverage. The Company competes with numerous insurance companies, many of which are substantially larger and have considerably greater financial resources. In addition, because the Company's products are marketed exclusively through independent insurance agencies, most of which represent more than one company, the Company faces competition within each agency. The Company competes through underwriting criteria, appropriate pricing, and quality service to the policyholder and the agent and through a fully developed agency relations program. See "Marketing" in the "Narrative Description of Business" in Item 1.
o The Company is subject to numerous other factors which effects its operations, including, without limitation, the development of new insurance products, geographic spread of risk, 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, and shortages of technical and professional employees.
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.
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
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Exhibit 10(HH) First Amendment to State Auto Financial
Corporation 2000 Directors Stock Option Plan
b. Reports on Form 8-K: None
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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 15, 2001 /s/ Steven J. Johnston
------------ -------------------------------------
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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EXHIBIT 10(HH)
First Amendment to
State Auto Financial Corporation
2000 Directors Stock Option Plan
FIRST AMENDMENT
TO
STATE AUTO FINANCIAL CORPORATION
2000 DIRECTORS STOCK OPTION PLAN
The State Auto Financial Corporation 2000 Directors Stock Option Plan (the "Plan") is hereby amended in the following particulars:
1. Section 3. STOCK OPTIONS. Subsection (a) Grant and Eligibility is hereby deleted in its entirety and replaced by the following:
(a) GRANT AND ELIGIBILITY. All directors of the Company or its Parent who are not full-time employees of the Company or its Parent or Subsidiary corporations and who are in compliance with the Company's stock ownership guidelines as applicable to such directors are eligible to be granted Awards under the Plan. Promptly following each annual meeting of the shareholders of the Company on or after the effective date of the Plan, each person who is then a director of the Company or its Parent and not a full-time employee of the Company or its Parent or Subsidiary corporations shall be granted an Option to purchase 1,500 shares of Stock.
2. The effective date of this First Amendment is March 2, 2001 and this First Amendment shall be deemed to be a part of the Plan as of such date. In the event of any inconsistencies between the provisions of the Plan and this First Amendment, the provisions of this First Amendment shall control. Except as modified by this First Amendment the Plan shall continue in full force and effect without change.
The First Amendment was approved and adopted by the Board of Directors of State Auto Financial Corporation on March 2, 2001.