SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2001
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
For the transition period from ___________ to _____________
Commission File Number 0-19289
Ohio 31-1324304
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
518 East Broad Street, Columbus, Ohio 43215-3976
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(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code: (614) 464-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
On March 22, 2002, the aggregate market value (based on the closing sales price on that date) of the voting stock held by non-affiliates of the Registrant was $190,168,643.
On March 22, 2002, the Registrant had 38,980,255 Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Proxy Statement relating to the annual meeting of shareholders to be held May 23, 2002, which Proxy Statement will be filed within 120 days of December 31, 2001, are incorporated by reference in Part III, Items 10, 11, 12 and 13 of this report.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
State Auto Financial Corporation, an Ohio corporation formed April 18, 1990 ("State Auto Financial" or "STFC"), is an insurance holding company headquartered in Columbus, Ohio, which engages, through its subsidiaries, primarily in the property and casualty insurance business. State Auto Financial is approximately 68% owned by State Automobile Mutual Insurance Company, an Ohio property and casualty insurance company formed in 1921 ("Mutual").
State Auto Financial owns 100% of the outstanding shares of State Auto Property and Casualty Insurance Company, a South Carolina corporation ("State Auto P&C"), Milbank Insurance Company, a South Dakota corporation ("Milbank"), Farmers Casualty Insurance Company, an Iowa corporation ("Farmers Casualty"), State Auto Insurance Company, an Ohio corporation ("SAIC"), and State Auto National Insurance Company, an Ohio corporation ("National"). State Auto P&C, Milbank and Farmers Casualty are regional standard insurers engaged primarily in writing personal and commercial automobile, homeowners, commercial multi-peril, workers' compensation and fire insurance. SAIC provides standard personal insurance to its policyholders through the use of leading edge technology within the independent agency system. National writes nonstandard personal automobile insurance.
While Mutual originally acquired Milbank, Mutual sold Milbank to STFC in July 1998. State Auto Financial issued approximately 5.1 million common shares of STFC to Mutual in exchange for 100% of the outstanding shares of Milbank and as a result, Milbank became a wholly-owned subsidiary of State Auto Financial. Since the transaction was a combination of entities under common control, it has been accounted for similar to a pooling of interest.
On January 1, 1999, Farmers Casualty, an Iowa domiciled standard property casualty insurer writing in Iowa and Kansas, became a wholly owned subsidiary of STFC following completion of its plan of conversion from a mutual insurer. In August 1998, STFC contributed $9.0 million in capital to Farmers Casualty in the form of a surplus note. On completion of Farmers Casualty's conversion, STFC exchanged the surplus note for all the issued and outstanding shares of Farmers Casualty. Farmers Casualty owns 100% of the outstanding shares of Mid-Plains Insurance Company ("Mid-Plains"), an Iowa based insurer which principally writes nonstandard auto insurance in Iowa and Kansas.
In May 1999, SAIC was formed by STFC. It began operations in Ohio upon receiving its Ohio certificate of authority in January 2000. SAIC currently writes standard personal lines in Ohio utilizing leading edge technology to the maximum extent feasible.
In addition to the above-described insurers, effective as of January 1, 1997, Mutual acquired 100% of the outstanding shares of Midwest Security Insurance Company ("Midwest Security"), a Wisconsin domiciled standard personal lines property and casualty insurer. Midwest Security participates in the Pooling Arrangement (defined below). See "Pooling Arrangement" in the "Narrative Description of Business."
In 2000, Mutual entered into agreements with Meridian Mutual Insurance Company ("Meridian Mutual"), an Indiana domiciled property and casualty insurance company, and Meridian Insurance Group, Inc. ("MIGI"), an Indiana domiciled publicly traded insurance holding company. In one transaction, Meridian Mutual was merged with and into Mutual, with Mutual continuing as the surviving corporation. In a substantially concurrent transaction, the outstanding shares of MIGI were acquired by Mutual. The effective date of both transactions was June 1, 2001. MIGI's wholly-owned insurance subsidiaries are Meridian Security Insurance Company, an Indiana domiciled standard property casualty insurer ("Meridian Security"), Meridian Citizens Security Insurance Company, an Indiana domiciled standard property
casualty insurer ("Meridian Citizens"), and Insurance Company of Ohio, an Ohio domiciled standard property casualty insurer ("ICO"). MIGI is also party to an affiliation agreement with Meridian Citizens Mutual Insurance Company, an Indiana domiciled standard property casualty insurer ("Meridian Citizens Mutual"). Meridian Security, Meridian Citizens, ICO and Meridian Citizens Mutual are hereafter referred to collectively as the "Meridian Insurers", and together with MIGI they are hereafter referred to collectively as the "Meridian Companies."
State Auto P&C, Mutual, Milbank, Midwest Security, Farmers Casualty and SAIC, all of which participate in a pooling arrangement, are collectively referred to hereafter as the "Pooled Companies." State Auto P&C, Milbank, Farmers Casualty and SAIC are collectively referred to hereafter as the "Pooled Subsidiaries". See "Pooling Arrangement" in the "Narrative Description of Business." The Pooled Companies, National, Mid-Plains and the Meridian Insurers are collectively referred to as the "State Auto Group."
At this time, the insurers in the State Auto Group market their insurance products through approximately 22,800 independent insurance agents associated with approximately 3,800 agencies in 26 states. The State Auto Group's insurance products are marketed primarily in the central and eastern part of the United States, excluding New York, New Jersey and the New England States.
Another wholly-owned subsidiary of State Auto Financial, Stateco Financial Services, Inc., an Ohio corporation ("Stateco"), provides investment management services to affiliated insurance companies and insurance premium finance services to commercial insurance customers of the State Auto Group. See "Investment Management Services" and "Insurance Premium Finance Services" in the "Narrative Description of Business."
Strategic Insurance Software, Inc. ("S.I.S."), an Ohio corporation wholly-owned by STFC, develops and sells software for the processing of insurance transactions, management of insurance policy data and electronic interfacing of insurance policy information between insurance companies and agencies. See "Insurance Software Business" in the "Narrative Description of Business."
518 Property Management and Leasing, LLC ("518 PML"), an Ohio limited liability company, engages in the business of owning and leasing real and personal property to affiliated companies. The members of 518 PML are State Auto P&C and Stateco. See "Property Leasing Business" in the "Narrative Description of Business."
State Auto Financial and its subsidiaries, State Auto P&C, Milbank, Farmers Casualty, SAIC, National, Mid-Plains, Stateco, S.I.S., and 518 PML, are collectively referred to as the "Company." ANY REFERENCE TO FINANCIAL INFORMATION FOR 1999 EXCLUDES SAIC.
Since January 1, 1987, State Auto P&C has participated in a quota share reinsurance pooling arrangement with Mutual (the "Pooling Arrangement"). While it has been modified several times since 1987, as of January 1, 2000, it was further amended adding SAIC as a participant and modifying the pooling percentages as follows: Mutual (46%), State Auto P&C (39%), Milbank (10%), Midwest Security (1%), Farmers Casualty (3%), and SAIC (1%), and those percentages remained in effect through September 30, 2001. Effective October 1, 2001, the pooling percentages were modified as follows: Mutual (19%), State Auto P&C (59%), Milbank (17%), Midwest Security (1%), Farmers Casualty (3%) and SAIC (1%). See "Pooling Arrangement" in the "Narrative Description of Business."
Prior to January 1, 2000, State Auto P&C provided executive management services for all insurance affiliates within the State Auto Group pursuant to an Amended and Restated Management Agreement dated April 1, 1994 (the "Amended and Restated Management Agreement"), the Midwest Management Agreement (defined below), and the Farmers Casualty Management Agreement (defined below). Mutual provided non-executive employees and facilities for such entities through December 31, 1999. See "Management Agreement" in the "Narrative Description of Business."
Effective January 1, 2000, any individuals providing services to any of the companies in the State Auto Group who were not already employees of State Auto P&C became employees of State Auto P&C. In conjunction with this change, the foregoing management agreements were replaced with a Management and Operations Agreement dated January 1, 2000 (the "2000 Management Agreement"), a 2000 Midwest Management Agreement (as defined below) and a 2000 Farmers Casualty Management Agreement (defined below). Mutual continues to provide facilities for such entities under these new management agreements. Effective October 1, 2001, the 2000 Management Agreement was amended as discussed below. See "Management Agreement" in the "Narrative Description of Business."
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
See Note 14 to the Company's Consolidated Financial Statements, included in Item 8, "Financial Statements and Supplementary Data" regarding the Company's reportable segments. Prior to 2001, the Company operated in two insurance segments, the standard insurance segment, consisting of the business operations of the Pooled Subsidiaries and the nonstandard insurance segment, consisting of the business operations of National and Mid-Plains. With the merger of Meridian Mutual into Mutual and effective July 1, 2001, with the addition of the former Meridian Mutual business to the Pooling Arrangement (see "Pooling Arrangement" in "Narrative Description of Business"), the Company renamed the two insurance segments that existed prior to 2001 to be the State Auto standard segment and the State Auto nonstandard segment, and added two additional insurance segments; the standard insurance business of the former Meridian Mutual ("Meridian Standard Segment") and the nonstandard insurance business of the former Meridian Mutual ("Meridian Nonstandard Segment"). Additional information regarding the Company's insurance as well as its non-insurance segments, is provided in the "Narrative Description of Business."
(c) SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Statements contained in this Form 10-K which are not historical in nature 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. For a discussion of certain risks and uncertainties that could cause the Company's actual results to differ materially from those projected, see Item 7 - Forward-Looking Statements; Certain Factors Affecting Future Results.
(d) NARRATIVE DESCRIPTION OF BUSINESS.
PROPERTY AND CASUALTY INSURANCE
POOLING ARRANGEMENT
Since January 1987, State Auto P&C and Mutual have participated in the Pooling Arrangement. Under the terms of the Pooling Arrangement, State Auto P&C cedes all of its insurance business to Mutual. All of Mutual's property and casualty insurance business is also included in the pooled business. Mutual then cedes a percentage of the pooled business to State Auto P&C and retains the balance. From January 1987 through December 31, 1991, State Auto P&C assumed 20% of the pooled business. Effective January 1, 1992, State Auto P&C increased its percentage of the pool to 30%. Effective January 1, 1995, the Pooling Arrangement was amended to include all of the property and casualty business of Milbank. Concurrently with the inclusion of Milbank, the participation percentages were amended as follows: Mutual 55%, State Auto P&C 35% and Milbank 10%. Effective January 1, 1998, Midwest Security was added to the Pooling Arrangement and concurrently the participation percentages were amended as follows: Mutual 52%, State Auto P&C 37%, Milbank 10%, and Midwest Security 1%. With the addition of Farmers Casualty to the State Auto Group, effective January 1, 1999, it was added to the
Pooling Arrangement and concurrently the pooling percentages were also amended as follows: Mutual 49%, State Auto P&C 37%, Milbank 10%, Midwest Security 1% and Farmers Casualty 3%.
Effective January 1, 2000, the Pooling Arrangement was amended through
the Reinsurance Pooling Agreement Amended and Restated as of January 1, 2000 as
subsequently amended (the "2000 Pooling Agreement"). The 2000 Pooling Agreement:
1) added SAIC as a party; 2) modified the pooling percentages to: Mutual 46%,
State Auto P&C 39%, Milbank 10%, Midwest Security 1%, Farmers Casualty 3% and
SAIC 1%; 3) increased the exclusion for the Catastrophe Assumption Agreement
written by State Auto P&C from $100.0 million excess of $120.0 million to $135.0
million excess of $120.0 million (see "Reinsurance" in the "Narrative
Description of Business"); and 4) excluded voluntary assumed reinsurance from
third parties underwritten by Mutual from and after January 1, 2000. Effective
June 1, 2001, with the merger of Meridian Mutual into Mutual, all insurance
business that had been written by Meridian Mutual became, legally, Mutual
business. For the period June 1, 2001 through June 30, 2001, the insurance
business formerly known as the Meridian Mutual business prior to the June 1
merger was excluded from the Pooling Arrangement. Effective July 1, 2001, the
insurance business of the former Meridian Mutual became part of the Pooling
Arrangement. The business written by the former Meridian Mutual includes both
standard and nonstandard personal lines and standard commercial lines. The
principal lines of business are standard personal and commercial automobile,
nonstandard personal automobile, homeowners, commercial multi-peril, workers'
compensation, general liability and fire insurance. The former Meridian Mutual
business represents approximately 20% of the Pooled Companies' business.
The former Meridian Mutual business continues to be processed primarily through the former Meridian Mutual underwriting and claims system for both its standard and nonstandard business. Management will monitor this former Meridian Mutual business as a separate segment from the State Auto standard/nonstandard business processed through State Auto's underwriting and claims systems. Monitoring of these business segments separately is necessary in order to facilitate the integration of the former Meridian Mutual business as it migrates over time to the State Auto systems platform which fully implements State Auto policies, pricing, underwriting and claims philosophies. Over time, it is anticipated that the Meridian segments will decrease and eventually disappear as those segments are fully integrated on the State Auto systems platform. See "Standard Insurance Segment" and "Nonstandard Insurance Segment" in "Narrative Description of Business". Effective October 1, 2001, the Pooling Arrangement was amended again to change the pooling percentages of the participants to: Mutual 19%, Midwest Security 1%, State Auto P&C 59%, Milbank 17%, Farmers Casualty 3% and SAIC 1%. This change in the Pooling Arrangement was part of a resolution reached by the Company and the Ohio Department of Insurance ("ODI") as to the disagreement between the Company and ODI relating to the service fee paid by Mutual to State Auto P&C under the 2000 Management Agreement (See "Management Agreement " in "Narrative Description of Business").
The pooling percentages are reviewed by management at least annually, and more often if deemed appropriate by management or the Board of Directors of each company, to determine whether any adjustments should be made. As a result of the October 1, 2001 changes, it is not management's current intention to recommend the Company adjust its aggregate pooling percentage in the foreseeable future. Pooling changes generally can be expected to be based on the performance of the insurance operations of the current pool participants, the growth in direct premiums written of each company as it relates to the pooling percentages, the combined ratio of the pooled business and the net premiums written of the pooled business in relation to the statutory capital and surplus of each participant, among other factors. Under revised procedures, management of each of the Pooled Companies would make recommendations to an independent committee of the Board of each of Mutual and STFC. These independent committees would review and evaluate such factors as they deem relevant and recommend any appropriate pooling change to the Boards of both Mutual and State Auto Financial. See "Management Agreement" in the "Narrative Description of Business." The Pooling Arrangement is terminable by any party on 90 days notice or by mutual agreement of the parties. None of the Pooled Companies currently intends to terminate the Pooling Arrangement.
The Pooling Arrangement is designed to produce more uniform and stable underwriting results for each of the Pooled Companies than any one company would experience individually by spreading the underwriting risk among each of the participants. Under the terms of the Pooling Arrangement, all premiums, incurred losses, loss expenses and other underwriting expenses are prorated among the companies on the basis of their participation in the pool. One effect of the Pooling Arrangement is to provide each participant with an identical mix of property and casualty insurance business on a net basis.
The 2000 Pooling Agreement contains a provision which excludes from the scope of the Pooling Arrangement catastrophic loss claims and loss adjustment expenses incurred by State Auto P&C, Mutual, Milbank, National, Midwest Security, Farmers Casualty, SAIC, and Mid-Plains in the amount of $115.0 million in excess of $120.0 million as well as the premium for such exposures. State Auto P&C is the reinsurer for each insurer in the State Auto Group for this layer of reinsurance under a Catastrophe Assumption Agreement. Effective November 2001, these limits in the Catastrophe Assumption Agreement were amended to $100.0 million excess of $120.0 million, which layer of reinsurance continues to be excluded from the 2000 Pooling Agreement. See "Reinsurance" in the "Narrative Description of Business."
The business of the Meridian Insurers is not included in the Pooling Arrangement and therefore does not affect the Company's insurance operations.
MANAGEMENT AGREEMENT
Prior to January 1, 2000, State Auto P&C provided executive management services for all insurance affiliates within the State Auto Group pursuant to the Amended and Restated Management Agreement, the Midwest Management Agreement, and the Farmers Casualty Management Agreement. Mutual provided non-executive employees and facilities for such entities through December 31, 1999. For its performance of these services, State Auto P&C was paid a quarterly management fee based on formulas outlined in the management agreements, provided certain performance standards were achieved by the companies to which executive management services were provided, as described in the agreements.
Effective January 1, 2000, any individuals providing services to any of the companies in the State Auto Group who were not already employees of State Auto P&C became employees of State Auto P&C. In conjunction with this change, the foregoing management agreements were replaced with the 2000 Management Agreement, the 2000 Midwest Management Agreement and the 2000 Farmers Casualty Management Agreement. Mutual continues to provide facilities for such entities under these new management agreements. Effective January 1, 2002, State Auto P&C became the employer of record for those persons who had been employees of MIGI.
Under these management agreements put in place in January of 2000, State Auto P&C, through its employees, is responsible for performing all organizational, operational and management functions for each of the managed companies. For its performance of these services, State Auto P&C was paid a quarterly management and operations services fee based on formulas outlined in the agreements, to the extent certain performance standards were achieved, as described in these agreements. The quarterly management and operations services fee under the 2000 Management Agreement among State Auto P&C and Mutual, inter alia, was based on a percentage of the three year average of each managed company's adjusted surplus or equity. Under the 2000 Midwest Management Agreement, among State Auto P&C, Mutual and Midwest Security, Midwest Security pays 0.75% of direct written premium for management and operation services performed by employees of State Auto P&C. The 2000 Farmers Casualty Management Agreement is a management agreement among Farmers Casualty, Mid-Plains, State Auto P&C and Mutual. Farmers Casualty and Mid-Plains pay 0.75% of direct written premium for management and operations services performed by employees of State Auto P&C.
As periodically disclosed during early 2001, the ODI requested that Mutual file an analysis with the ODI on a quarterly basis, starting with the quarter beginning January 1, 2001, that justified the
apportionment of the service fee paid by Mutual to State Auto P&C under the 2000 Management Agreement, under the accounting guidelines outlined in Statement of Statutory Accounting Principle No. 70 - Allocation of Expenses. The Company believed its accounting for such service fee was consistent with all statutory accounting principles. After months of discussions, on October 24, 2001, the Board of Directors of the Company and Mutual and Special Independent Committees thereof approved a resolution of the disagreement between the Company and the ODI regarding the service fee paid by Mutual to State Auto P&C. The disagreement with ODI was resolved and ODI expressly did not take issue with Mutual's payment of the service fee for the first three quarters of 2001, which amounted to $12.5 million pre-tax, nor with Mutual's accounting for the service fee in each of those quarters. The ODI also approved regulatory filings, effective October 1, 2001, implementing a revised 2000 Management Agreement, changing the Pooling Arrangement's participation percentages and implementing a Stop Loss Reinsurance Arrangement between Mutual and certain of the Pooled Companies. See "Pooling Arrangement" and "Reinsurance" in the "Narrative Description of Business".
As noted above, effective October 1, 2001, the 2000 Management Agreement was amended to eliminate the service fee charged by State Auto P&C to affiliates, including Mutual, that were party to the 2000 Management Agreement. The 2000 Management Agreement continues to allocate costs and apportion those costs among the parties to the 2000 Management Agreement in accordance with terms outlined in the 2000 Management Agreement. Neither the 2000 Midwest Management Agreement or the 2000 Farmers Casualty Management Agreement was affected by the disagreement or its resolution with the ODI relative to the 2000 Management Agreement. As a result of the loss of the service fee under the 2000 Management Agreement, substantially all of State Auto P&C's insurance operations management fee has been eliminated, effective October 1, 2001. Consequently, beginning with the first quarter 2002, the management and operations services segment will be included in the other category for segment reporting as the results of this segment will no longer meet the quantitative thresholds for separate presentation as a reportable segment.
The parties intend to also modify the conflict procedures addressed by the 2000 Management Agreement. The Coordinating Committee has been replaced by the Independent Committee of the Board of Directors of each of Mutual and State Auto Financial. An amendment to the 2000 Management Agreement effecting this change has been approved by the boards of directors and is subject to regulatory approval. These committees review and evaluate business opportunities meeting described criteria using such factors as they consider relevant. Based upon such review and evaluation, these committees then make recommendations to their respective boards of directors as to whether or not such business opportunity should be pursued and if so, by which company. The Boards of Directors of Mutual, State Auto Financial and, when appropriate, a subsidiary, must then act on the recommendation of the committee after considering all other factors they deem relevant.
Each of the 2000 Management Agreement, the 2000 Midwest Management Agreement and the 2000 Farmers Casualty Management Agreement has a ten-year term ending December 31, 2009, and automatically renews for an additional ten-year term unless sooner terminated in accordance with its terms. The 2000 Management Agreement may also be terminated by any of the managed companies upon events constituting a change of control or potential change of control (as defined in the 2000 Management Agreement) of the Company, upon agreement between a managed company and State Auto P&C and, the agreement is terminated automatically with respect to a party if it is subject to insolvency proceedings. If the 2000 Management Agreement is terminated for any reason, the Company would have to locate facilities to continue its operations, although the Company does not anticipate such termination.
Investment management services are provided by Stateco. See "Investment Management Services" in the "Narrative Description of Business."
STANDARD INSURANCE SEGMENT
The Company's share of the business written by the Pooled Companies constitutes the Company's State Auto and Meridian standard insurance segments as well as the Meridian nonstandard segment. See "Nonstandard Insurance Segment" in the "Narrative Description of Business". The standard segments include personal and commercial property and casualty insurance lines, including automobile, homeowners, commercial multi-peril, workers' compensation, liability, fire and other lines of business. Independent insurance agencies constitute the Company's sales force for both the standard segments and the nonstandard segments. Footnote 14 in the Company's Consolidated Financial Statements included herewith sets forth the amount of the Company's net earned premiums by line of insurance for both the State Auto and Meridian standard segments and nonstandard segments.
As mentioned above, the insurance business of Mutual, (including after July 1, 2001, the business formerly known as the Meridian Mutual business), State Auto P&C, Milbank, Midwest Security, Farmers Casualty, and SAIC, is combined through the Pooling Arrangement. This Pooling Arrangement effectively gives each of the Pooled Companies an identical mix of personal and commercial business as written by all six insurers. More than half of the Pooled Companies State Auto standard segment products' sales are personal lines. The Meridian standard segment is weighted toward commercial lines, though in recent years Meridian's standard segment growth had been primarily in personal lines due to Group Advantage(R) policies. The Group Advantage(R) program has been terminated. A substantial proportion of that business has already been non-renewed in a manner consistent with local law. The Company intends to non-renew all Group Advantage(R) business.
The insurance businesses of National and Mid-Plains are not included in the Pooling Arrangement; however, the Meridian nonstandard segment is included in the Pooling Arrangement because the former Meridian Mutual's nonstandard business was not written in a separate company. Except for reinsurance arrangements between each of these companies and Mutual, 100% of each of these companies' business remains in the Company. National's, Mid-Plains' and the former Meridian Mutual's nonstandard segment are personal lines auto insurance products written for nonstandard risks, with less restrictive underwriting criteria and higher rates than those applicable to standard risks.
The Company uses computer-based underwriting procedures for its State Auto standard personal lines business. Under such procedures, applications for such business may be accepted or rejected based upon established underwriting guidelines. Applications that do not meet guidelines for automated acceptance are referred to personal lines specialists who review the applications and assess exposure. During the underwriting process, risks are also reviewed to determine whether or not they are acceptable as submitted by the independent agents as preferred, standard or nonstandard risks. The Company has just begun a project to update and enhance its computer assisted underwriting system. This will extend over many months, but it is expected to enhance efficiency and productivity, without impairing the quality of the Company's underwriting. While personal lines specialists have had underwriting and sales responsibilities, the Company has been expanding new sales efforts in personal lines. It has created the Personal Lines Sales Specialist position, whose primary responsibilities are to have regular personal contact with a group of agencies for the purpose of making those agencies more aware of the Company's personal lines product portfolio.
The following tables set forth the statutory loss ratios by line of insurance and the combined ratio for the standard insurance segments of the Company's business, prepared in accordance with accounting practices prescribed or permitted by state insurance authorities, for the periods indicated. The loss ratio is the ratio of incurred losses and associated expenses to net earned premiums ("loss ratio"). The combined ratio is a traditional measure of underwriting profitability. The combined ratio is the sum of (a) the loss ratio; and (b) the ratio of expenses incurred for commissions, premium taxes, administrative and other underwriting expenses, to net written premium ("expense ratio"). When the combined ratio is under 100%, underwriting results are generally considered profitable. Conversely, when the combined ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio does not reflect investment income or federal income taxes. The Company's operating income depends on income
from underwriting operations, investments and management fees, although management fee income is substantially reduced after October 1, 2001. See "Management Agreement" in the "Narrative Description of Business".
The following table provides the aggregate statutory loss ratios by line of insurance and the combined ratio for the Company's two standard insurance segments, the State Auto standard insurance segment and beginning July 1, 2001, the Meridian standard insurance segment:
Standard Insurance Segments
Year Ended December 31(1)
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2001 2000 1999
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Loss ratios:
Automobile 73.9% 66.7% 65.2%
Homeowners and Farmowners 85.8% 78.8% 75.3%
Commercial multi-peril 100.4% 63.0% 69.9%
Workers' compensation 105.2% 65.2% 41.1%
Fire and allied lines 62.9% 58.8% 89.2%
Other commercial liability 58.2% 80.7% 61.4%
Other personal lines 42.5% 34.6% 36.3%
Other commercial lines 27.1% 9.7% 28.4%
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Total loss ratio 76.2% 67.6% 67.0%
Expense ratio 28.3% 27.1% 29.5%
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Combined ratio 104.5% 94.7% 96.5%
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(1) This reflects a combination of the loss experience of the Pooled Subsidiaries after giving effect to reinsurance and the 2000 Pooling Agreement and the Reinsurance Pooling Agreement, amended and restated as of January 1, 1999, (the "99 Pooling Agreement"), respectively.
The following tables provide the statutory loss ratios by line of insurance and the combined ratio for the State Auto and Meridian standard insurance segments, respectively.
State Auto Standard Segment
Year Ended December 31(1)
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2001 2000 1999
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Loss ratios:
Automobile 65.1% 66.7% 65.2%
Homeowners and Farmowners 79.5% 78.8% 75.3%
Commercial multi-peril 74.4% 63.0% 69.9%
Workers' compensation 69.9% 65.2% 41.1%
Fire and allied lines 62.8% 58.8% 89.2%
Other commercial liability 54.5% 80.7% 61.4%
Other personal lines 44.1% 34.6% 36.3%
Other commercial lines 27.8% 9.7% 28.4%
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Total loss ratio 66.3% 67.6% 67.0%
Expense ratio 28.4% 27.1% 29.5%
---- ---- ----
Combined ratio 94.7% 94.7% 96.5%
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(1) This reflects a combination of the loss experience of the Pooled Subsidiaries after giving effect to reinsurance and the 2000 Pooling Agreement and the 99 Pooling Agreement, respectively.
Meridian Standard Segment
Year Ended December 31, 2001(1)
Loss ratios:
Automobile 131.30%
Homeowners and Farmowners 136.30%
Commercial multi-peril 171.60%
Workers' compensation 165.40%
Fire and allied lines 66.9%
Other commercial liability 214.5%
Other personal lines 27.1%
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Total loss ratio 139.6%
Expense ratio 27.8%
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Combined ratio 167.4%
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(1) This reflects the loss experience of the Meridian standard segment assumed by the Pooled Subsidiaries through the 2000 Pooling Agreement.
NONSTANDARD INSURANCE SEGMENT
In October 1991, State Auto Financial formed National to write personal automobile insurance for nonstandard risks. National began writing insurance in Ohio in 1992. It is now licensed in 22 states and active in 19, having begun operations in Florida during 2001. In addition to National, as of January 1, 1999, the Company writes nonstandard auto insurance through Mid-Plains. Mid-Plains operates in Kansas and Iowa. During 2001, the Company began moving the processing of Mid-Plains business to the National processing platform to enhance operational efficiencies. Existing nonstandard auto risks that are in the Meridian nonstandard segment will continue to be written by Mutual until such policies terminate. During the fourth quarter of 2001, National's product and system platform began to be introduced on a state by state basis to former Meridian agents so that National will be used for all new nonstandard auto business these agents place. It is envisioned that National will eventually be the principal writer for all nonstandard auto risks within the State Auto Group. Nonstandard automobile products provide insurance for private passenger automobile risks that are typically not acceptable to standard market companies because insureds have poor loss experience or driving record, a history of late payments of premium, or relatively unfavorable insurance credit scores, or a combination of these factors. Nonstandard products are priced to account for the additional risk and expenses normally associated with this market.
The following table provides the statutory loss ratios by line of insurance for the Company's nonstandard insurance segments, which includes National and Mid-Plains, and beginning July 1, 2001, the Meridian nonstandard insurance segment:
Nonstandard Insurance Segments
Year Ended December 31
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2001(1) 2000 1999
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Loss Ratio:
Automobile 92.0% 81.4% 71.7%
Expense Ratio 21.7% 25.2% 29.9%
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Combined Ratio 113.7% 106.6% 101.6%
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(1) Reflects the combination of the loss experience of National and Mid-Plains as well as the Meridian nonstandard segment assumed by the Pooled Subsidiaries through the 2000 Pooling Agreement, beginning July 1, 2001.
The following tables set forth the statutory loss ratios and combined ratios of National and Mid-Plains, which are engaged in the State Auto nonstandard segment of the business, and the Meridian nonstandard segment, respectively:
State Auto Nonstandard Segment
Year Ended December 31(1)
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2001 2000 1999
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Loss Ratio:
Automobile 77.9% 81.4% 71.7%
Expense Ratio 21.9% 25.2% 29.9%
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Combined Ratio 99.8% 106.6% 101.6%
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(1) Reflects the combination of the loss experience of National and Mid-Plains.
Meridian Nonstandard Segment
Year Ended December 31, 2001(1)
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Loss Ratio:
Automobile 168.2%
Expense Ratio 20.8%
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Combined Ratio 189.0%
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(1) Reflects the loss experience of the Meridian nonstandard segment assumed by the Pooled Subsidiaries through the 2000 Pooling Agreement, beginning July 1, 2001.
MARKETING
In its 26 states of operation, the State Auto Group markets its
products through approximately 22,800 insurance agents associated with
approximately 3,800 independent insurance agencies. While the merger of Meridian
Mutual with and into State Auto Mutual did not add new, continuing states of
operation to the operating territory of the State Auto Group, it did increase
the number of agencies in its existing states of operation by approximately
1,600. In addition to agencies added as a result of the merger with Meridian
Mutual, 156 new agencies were appointed in 2001, exceeding the Company's goal of
108. Meridian Mutual was writing business in the State of Washington through its
internet Direct Response Program prior to its merger with Mutual. This business
is currently in run off. Mutual is not licensed to write business in the State
of Washington. The State Auto Group has offered all its agents a revised State
Auto Group agency agreement, which once fully implemented, will place all its
agencies, including those it refers to as former Meridian agencies, under the
same agreement.
Additionally, through the Group Advantage(R) programs, the former Meridian Mutual made its personal lines products available to Sam's Club Members. This program, while generating premium growth, consistently failed to meet Meridian's management's profitability objectives. As a result, the former Meridian Mutual had ceased writing new business in this program during 2000 and commenced non-renewing all existing business written in the program. The losses this business incurred are reflected in the Meridian standard segment, which adversely affected the Company's 2001 results.
None of the companies in the State Auto Group has any contracts with managing general agencies.
State Auto National markets nonstandard products exclusively through the Company's network of independent agents. As noted above, State Auto National is licensed in 22 states and operated in 19 states in 2001. Mid-Plains writes nonstandard auto insurance in Iowa and Kansas through the agency network of Farmers Casualty in those states, but in 2001, the Mid-Plains business began to be processed on State Auto National's system. The former Meridian Mutual nonstandard products were also marketed through the Meridian independent agency force, as well as agents specializing in nonstandard coverage only. As noted, National's product is being introduced to these "former Meridian agents" on a state by state basis. See "Nonstandard Automobile Insurance" in the "Narrative Description of Business."
Because independent insurance agents significantly influence which insurance company their customers select, management views the Company's independent insurance agents as its primary customers. Management strongly supports the independent agency system and believes that maintenance of a strong agency system is essential for the Company's present and future success. As such, the Company continually develops programs and procedures to enhance agency relationships, including the following: regular travel by senior management and branch office staff to meet with agents, in person, in their home states; training opportunities; an agent stock purchase plan; and an agent stock option plan.
The Company actively helps its agencies develop professional sales skills within their staff. The training programs include both products and sales training in concentrated programs in the Company's home office. Further, the training programs include disciplined follow-up and coaching for an extended time.
The Company takes a leadership role in the insurance industry with respect to agency automation, promoting single entry multi-company interface using industry standards, especially through software developed and marketed by S.I.S. (SEMCI Partner(R)). The Company believes that, since agents and their customers realize better service and efficiencies through automation, they value their relationship with the Company. Automation can make it easier for the agent to do business with the Company which helps to make the Company attractive to prospective agents. This also enhances the existing agencies' relationship with the Company.
The Company shares the cost of approved advertising with selected agencies. The Company provides agents with certain travel and cash incentives if they achieve certain sales and underwriting profit levels. Further, the Company recognizes its very top agencies as Inner Circle Agents. Inner Circle Agents are rewarded with additional trip and financial incentives, including additional profit sharing bonus and additional contributions to their Inner Circle Agent Stock Purchase Plan, which is part of the Agent Stock Purchase Plan described below.
To strengthen agency commitment to producing profitable business and further develop its agency relationships, the Company's Agent Stock Purchase Plan offers its agents the opportunity to use commission income to purchase the Company's stock. The Company's transfer agent administers the plan using commission dollars assigned by the agents to purchase shares on the open market through a broker. As of year-end 2001, 257 agencies participated in this agent stock purchase plan.
In addition to the Agent Stock Purchase Plan, the Company has created an Agent Stock Option Plan incentive for a select group of agencies which represent the Company. If an agent/agency meets specific annual production and profitability requirements during a five-year period the agent participates in the plan, that agent/agency vests State Auto Financial stock options granted annually at the market price on the day of the grant. On vesting, options are exercisable and have a 10-year term from date of grant.
Under the Company's agency agreements with its independent insurance agencies, each agent the Company licenses is authorized to sell and bind coverage in accordance with established procedures.
They are also authorized to collect and remit premiums. The authority of agents to bind an insurance company is common practice in the property and casualty insurance industry. The Company controls risk by its right to terminate coverage on a policy bound by the agent. In addition, the Company does not grant binding authority for risks it considers to present a greater than normal exposure to loss. Each agency receives a percentage of direct premiums written as a commission. As bonus compensation, the agency receives a share of the underwriting profits generated by their policies. This is subject to certain qualifying conditions as set forth in the agency agreement.
The Company receives premiums on products marketed in Arkansas, District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Virginia, Washington, West Virginia and Wisconsin. During 2001, the seven states that contributed the greatest percentage of direct premiums written to the State Auto Group were North Carolina (3.5%), Pennsylvania (5.7%), Minnesota (5.8%), Tennessee (6.8%), Indiana (9.6%), Kentucky (11.5%) and Ohio (17.9%).
CLAIMS
Insurance claims on policies written by the Company are usually investigated and settled by staff claims adjusters. The Company's claims division emphasizes timely investigation of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate reserves for claims, and control of external claims adjustment expenses. Achievement of these goals supports the Company's marketing efforts by providing agents and policyholders with prompt and effective service.
Claim settlement authority levels are established for each adjuster, supervisor and manager based on his or her level of expertise and experience. Upon receipt, each claim is reviewed and assigned to an adjuster based upon its type, severity and class of insurance. The claims division is responsible for reviewing the claim, obtaining necessary documentation and establishing loss and expense reserves of certain claims. Property or casualty claims estimated to reach $100,000 or above are sent to the home office to be supervised by claims division specialists. In territories in which there is not sufficient volume to justify having full-time adjusters, the Company uses independent appraisers and adjusters to evaluate and settle claims under the supervision of claims division personnel.
The Company attempts to minimize claims costs by settling as many claims as possible through its internal claims staff and, if possible, by settling disputes regarding automobile physical damage and property insurance claims (first party claims) through arbitration. In addition, selected agents have authority to settle small first party claims which improves claims service. The Company's in-house trial counsel operations in Cleveland, Ohio and Baltimore, Maryland, which represent insureds in third party litigation, continue their operations. It has no immediate plans to add in-house trial counsel in any other territories where it operates.
The third party, proprietary bodily injury evaluation software which claims representatives use to help them value bodily injury claims, except for the most severe injury cases, continues to be a valuable tool for the Company. The Central Claims Department ("CCD") created in the Company's home office in 1998 has expanded in size since its inception, both in terms of the volume of claims handled and the number of individuals working in the unit, without a net increase in the number of employees in the claims division. The claims division also provides 24 hour, 7 days a week claim service through associates in its Contact Center. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" at "Item 7" for discussion regarding the Company's response to the Meridian claims and reserving practices.
RESERVES
Loss reserves are management's best estimates at a given point in time of what the Company expects to pay to claimants, based on facts, circumstances and historical trends then known. It can be
expected that the ultimate liability will exceed or be less than such estimates. During the loss settlement period, additional facts regarding individual claims may become known, and consequently it often becomes necessary to refine and adjust the estimates of liability.
The Company maintains reserves for the eventual payment of losses and loss expenses for both reported claims and incurred claims that have not yet been reported. Loss expense reserves are intended to cover the ultimate costs of settling all losses, including investigation and litigation costs from such losses.
Reserves for reported losses are established on either a case-by-case or formula basis depending on the type and circumstances of the loss. The case-by-case reserve amounts are determined based on the Company's reserving practices, which take into account the type of risk, the circumstances surrounding each claim and policy provisions relating to types of loss. The formula reserves are based on historical paid loss data for similar claims with provisions for trend changes caused by inflation. Loss and loss expense reserves for incurred claims that have not yet been reported are estimated based on many variables including historical and statistical information, inflation, legal developments, storm loss estimates, and economic conditions. Case and formula basis loss reserves are reviewed on a regular basis and as new data becomes available, estimates are updated resulting in adjustments to loss reserves. Although management uses many resources to calculate reserves, there is no precise method for determining the ultimate liability. The Company does not discount loss reserves for financial statement purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" at "Item 7" for discussion regarding the Company's response to the Meridian claims and reserving practices.
Mutual has guaranteed the adequacy of State Auto P&C's loss and loss expense reserves as of December 31, 1990. Pursuant to the guarantee, Mutual has agreed to reimburse State Auto P&C for any losses and loss expenses in excess of State Auto P&C's December 31, 1990 reserves ($65.5 million) that may develop from claims that have occurred on or prior to that date. This guarantee ensures that any deficiency in the reserves of State Auto P&C as of December 31, 1990, under the Pooling Arrangement percentages effective on December 31, 1990 will be reimbursed by Mutual. As of December 31, 2001, there has been no adverse development of these reserves. In the event Mutual becomes financially impaired, and subject to regulatory restrictions, it may be unable to make any such reimbursement.
The following table presents one-year development information on changes in the reserve for loss and loss expenses of the Company for the three years ended December 31, 2001.
Year Ended December 31
--------------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Reserve for losses and loss expenses
at beginning of year (1) $ 236,653 $ 221,682 $ 205,034
--------- --------- ---------
Provision for losses and loss expenses occurring:
Current year 366,348 277,805 271,507
Prior years(2) 60,726 (5,638) (6,878)
--------- --------- ---------
Total 427,074 272,167 264,629
--------- --------- ---------
Loss and loss expense payments for claims occurring during:
Current year 240,508 164,620 168,512
Prior years 144,862 104,871 100,349
--------- --------- ---------
Total 385,370 269,491 268,861
--------- --------- ---------
Impact of acquisition of Farmers Casualty
and Mid-Plains, 1/1/99 -- -- 13,247
Impact of the addition of the former Meridian Mutual
business to the Pooling Arrangement, effective
7/1/01 75,575 -- --
Impact of pooling change 10/1/01, 1/1/00, and 1/1/99(3) 156,009 12,295 7,633
1/1/99/1/98 (3)
--------- --------- ---------
Reserve for losses and loss expenses at end of year (1) $ 509,941 $ 236,653 $ 221,682
========= ========= =========
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(1) This line item is net of reinsurance recoverable on losses and loss expenses payable of approximately, $13,919,000, $7,930,000, and $10,807,000 for the years 2001, 2000, and 1999, respectively.
(2) This line item shows increases (decreases) in the current calendar year in the provision for losses and loss expenses attributable to claims occurring in prior years. The increase of $60,726,000 in 2001 for claims occurring in prior years, is generally the result of reserve strengthening that occurred on the former Meridian Mutual business in order to bring these claim reserves in line with historic State Auto adequacy levels as well as ongoing analysis of recent loss development trends. The change in the decrease in the calendar year losses and loss expenses over the two year period ending December 31, 2000 has resulted primarily from developments in the long-tail lines such as general liability, commercial auto liability, workers' compensation and no-fault insurance.
(3) This line item represents the increase in loss and loss expense reserves due to the Company's change in pooling participation percentages effective October 1, 2001, January 1, 2000, and January 1, 1999, respectively. See "Pooling Arrangement" in "Narrative Description of Business".
The following table sets forth the development of reserves for losses and loss expenses from 1991 through 2001 for the Company. "Net liability for losses and loss expenses payable" sets forth the estimated liability for unpaid losses and loss expenses recorded at the balance sheet date, net of reinsurance recoverables, for each of the indicated years. This liability represents the estimated amount of losses and loss expenses for claims arising in the current and all prior years that are unpaid at the balance sheet date, including losses incurred but not reported to the Company.
The lower portion of the table shows the re-estimated amounts of the previously reported reserve based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the claims incurred.
The upper section of the table shows the cumulative amounts paid with respect to the previously reported reserve as of the end of each succeeding year. For example, through December 31, 2001, the Company had paid 66.1% of the currently estimated losses and loss expenses that had been incurred, but not paid, as of December 31, 1991.
The amounts on the "cumulative redundancy (deficiency)" line represent the aggregate change in the estimates over all prior years. For example, the 1991 reserve has developed a $13.0 million redundancy through December 31, 2001. That amount has been included in operations over the ten years and did not have a significant effect on income of any one year. The effects on income caused by changes in estimates of the reserves for losses and loss expenses for the most recent three years are shown in the foregoing three-year loss development table.
In evaluating the information in the table, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy related to losses settled in 1996, but incurred in 1993, will be included in the cumulative redundancy amount for years 1993, 1994 and 1995. The table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected the development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
Effective January 1, 1992, the pooling percentage was changed whereby State Auto P&C increased its share in the pooled losses and loss expenses from 20% to 30%. This increase is reflected in the 1992 column. Effective January 1, 1995, the pooling percentage was again changed adding Milbank to the pool and increasing State Auto P&C's share in the pooled losses and loss expenses from 30% to 35%. This increase is reflected in the 1995 column. In addition, in 1998, 1999, 2000 and 2001, the Pooling Arrangement was amended to increase the Company's share of premiums, losses and expenses. An amount of assets equal to the increase in net liabilities was transferred to the Company from Mutual in 1992, 1995, 1998, 1999, 2000 and 2001 in conjunction with each year's respective pooling change. The amount of the assets transferred from Mutual in 1992, 1995, 1998, 1999, 2000 and 2001 has been netted against and has reduced the cumulative amounts paid for years prior to 1992, 1995, 1998, 1999, 2000 and 2001, respectively.
[See table on following page.]
State Auto Financial Corp.
Years Ended December 31
1991 1992 1993 1994 1995
(Dollars in Thousands)
Net liability for losses
and loss expenses payable $ 71,139 $ 119,044 $ 123,337 $ 126,743 $ 206,327
Paid (cumulative)
as of:
One year later 12.2% 41.3% 42.2% 1.5% 38.2%
Two years later 43.0% 60.9% 41.3% 29.1% 55.4%
Three years later 58.7% 60.6% 55.6% 44.5% 63.3%
Four years later 58.4% 68.0% 64.5% 51.0% 67.7%
Five years later 63.9% 71.9% 67.2% 54.6% 71.9%
Six years later 67.5% 72.5% 69.0% 58.8% 67.1%
Seven years later 67.7% 73.7% 72.1% 52.3%
Eight years later 69.0% 75.2% 67.0%
Nine years later 70.2% 71.5%
Ten years later 66.1%
Net liability re-estimate
as of:
One year later 91.2% 92.7% 93.7% 87.4% 87.0%
Two years later 87.2% 90.5% 90.0% 77.1% 86.4%
Three years later 85.4% 87.6% 85.0% 77.0% 83.2%
Four years later 84.5% 85.6% 86.3% 72.9% 81.6%
Five years later 82.3% 87.3% 82.8% 70.9% 81.3%
Six years later 86.7% 84.5% 81.6% 70.0% 83.6%
Seven years later 83.1% 83.0% 80.8% 72.6%
Eight years later 81.0% 82.0% 83.6%
Nine years later 79.4% 84.7%
Ten years later 81.7%
Cumulative redundancy (deficiency) $ 13,038 $ 18,201 $ 20,269 $ 34,787 $ 33,848
Cumulative redundancy (deficiency) 18.3% 15.3% 16.4% 27.4% 16.4%
Gross* liability - end of year $ 224,771 $ 245,929 $ 277,783 $ 412,553
Reinsurance receivable $ 105,727 $ 122,591 $ 151,040 $ 206,226
Net liability - end of year $ 119,044 $ 123,337 $ 126,743 $ 206,327
Gross liability re-estimated - latest 96.4% 100.6% 93.0% 84.8%
Reinsurance receivable re-estimated -
latest 109.6% 117.8% 110.2% 86.1%
Net liability re-estimated - latest 84.7% 83.6% 72.6% 83.6%
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State Auto Financial Corp.
Years Ended December 31
1996 1997 1998 1999 2000 2001
(Dollars in Thousands)
Net liability for losses
and loss expenses payable $ 199,480 $ 194,155 $ 205,034 $ 221,682 $ 236,657 $509,941
Paid (cumulative)
as of:
One year later 39.4% 32.7% 35.4% 41.8% 5.9% --
Two years later 54.1% 54.6% 61.6% 43.0%
Three years later 65.0% 70.1% 62.1%
Four years later 73.2% 69.2%
Five years later 69.8%
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net liability re-estimate
as of:
One year later 91.3% 93.0% 96.6% 97.5% 125.7% --
Two years later 87.3% 92.0% 96.7% 119.1%
Three years later 86.7% 91.9% 111.9%
Four years later 87.0% 102.0%
Five years later 92.6%
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative redundancy (deficiency) $ 14,755 ($3,924) $(24,335) $(42,279) $(60,726) --
Cumulative redundancy (deficiency) 7.4% -2.0% -11.9% -19.1% -25.7% --
Gross* liability - end of year $ 410,658 $ 402,718 $ 414,268 $ 438,748 $ 457,202
Reinsurance receivable $ 211,178 $ 208,563 $ 209,234 $ 217,065 $ 220,544
Net liability - end of year $ 199,480 $ 194,155 $ 205,034 $ 221,682 $ 236,657
Gross liability re-estimated - latest 92.9% 98.3% 107.2% 108.1% 112.5%
Reinsurance receivable re-estimated -
latest 93.1% 94.9% 102.6% 96.9% 98.3%
Net liability re-estimated - latest 92.6% 102.0% 111.9% 119.1% 125.7%
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* Gross liability includes: Direct & assumed losses & loss expenses payable.
The following table is a reconciliation as of each December 31 of losses and loss expenses payable, computed under generally accepted accounting principles ("GAAP"), to losses and loss expenses payable, computed under statutory accounting principles used by insurance companies for reporting to state insurance regulators ("STAT"):
2001 2000 1999
---- ---- ----
(in thousands)
GAAP losses and loss
expenses payable $523,960 $244,583 $232,489
Less: ceded reinsurance recoverable
on losses and loss expenses payable 13,919 7,930 10,807
Add: salvage and subrogation
recoverable 26,216 13,402 13,505
-------- -------- --------
STAT losses and loss
expenses payable $536,157 $250,055 $235,187
======== ======== ========
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REINSURANCE
Members of the State Auto Group follow the customary industry practice of reinsuring a portion of their exposures and paying to the reinsurers a portion of the premiums received on all policies. Insurance is ceded principally to reduce net liability on individual risks or for individual loss occurrences, including catastrophic losses. The Meridian Insurers do not participate in the Pooling Arrangement. Although reinsurance does not legally discharge the individual members of the State Auto Group from primary liability for the full amount of limits applicable under their policies, it does make the assuming reinsurer liable to the extent of the reinsurance ceded.
Each member of the State Auto Group is party to working reinsurance treaties for property and casualty lines with several reinsurers arranged through a reinsurance broker. Under the property excess of loss treaty, each member is responsible for the first $2.0 million of each defined loss and the reinsurers are responsible for 100% of the excess over $2.0 million up to $10 million of defined loss, depending upon the nature of the injury or damage. The rates for this reinsurance are negotiated annually.
The terms of the casualty excess of loss program provide that each company in the State Auto Group is responsible for the first $2.0 million of a covered loss. The reinsurers are responsible for 100% of the loss excess of $2.0 million and up to $5.0 million. Also, certain unusual claim situations involving bodily injury liability, property damage, uninsured motorists, and personal injury protection are covered by an arrangement that provides for $10.0 million of coverage above a $5.0 million retention for each loss occurrence. This layer of reinsurance sits above the $3.0 million excess of $2.0 million arrangement. The rates for this reinsurance are negotiated annually.
Effective July 1, 2001, the State Auto Group entered into a new reinsurance treaty for the workers compensation exposure, where each member is responsible for the first $2.0 million of covered loss. The reinsurers are responsible for 100% of the loss excess of $2.0 million and up to $10 million. Net retentions under this contract may be submitted to the casualty excess of loss program, subject to a limit of $2 million per person. This exposure was previously covered in the casualty excess of loss treaty. .
In addition, the State Auto Group has secured other reinsurance to limit the net cost of large loss events for certain types of coverage. Included are umbrella liability losses which are reinsured up to a limit of $15.0 million above a maximum $600,000 retention. The State Auto Group also makes use of the facultative market for unique risk situations and participates in involuntary pools and associations in certain states.
The members of the State Auto Group combined retain the first $40 million of each property catastrophe occurrence that affects more than those two individual risks. Eighty ($80) million dollars of
traditional reinsurance is available above the $40 million retention with a co-participation of the above named companies of 5%.
In the event the State Auto Group incur catastrophe losses in excess of $120.0 million, State Auto Financial has implemented a structured contingent financing transaction with Bank One ("Bank One") to provide up to $100.0 million to be used to cover such catastrophe losses. This arrangement, effective November 16, 2001, replaced the prior structured contingent financing transaction State Auto Financial had with Bank One effective November 17, 2000. Under this arrangement, in the event of such a loss, State Auto Financial would issue and sell redeemable preferred shares to SAF Funding Corporation, a special purpose company ("SPC"), which will borrow the money necessary for such purchase from Bank One and a syndicate of other lenders (the "Lenders"). State Auto Financial will contribute to State Auto P&C the proceeds from the sale of its preferred shares. State Auto P&C has assumed catastrophe reinsurance from Mutual, Milbank, Midwest Security, National, Farmers Casualty, Mid-Plains, SAIC, Meridian Citizens Mutual, and Meridian Security pursuant to a Catastrophe Assumption Agreement in the amount of $100.0 million excess $120.0 million. State Auto P&C will use the contributed capital to pay its direct catastrophe losses and losses assumed under the Catastrophe Assumption Agreement. State Auto Financial is obligated to redeem the preferred shares by making periodic payments to the SPC. The SPC would use these payments to repay the Lenders, over a five year period. This layer of $100.0 million excess of $120.0 million has been excluded from the Pooling Arrangement as well by virtue of the 2000 Pooling Agreement. See "Pooling Arrangement" in the "Narrative Description of Business." In addition, State Auto Financial's obligation to repay SPC has been secured by a Put Agreement among State Auto Financial, Mutual, and the Lenders, under which, in the event of a default by State Auto Financial as described in the Credit Agreement or in the Put Agreement, Mutual would be obligated to either purchase the preferred shares from the SPC or repay the SPC for the loan(s) outstanding. In February of 2002, the FASB initiated a project to consider guidance related to the issue of special purpose entity consolidation. Specifically, the FASB discussed issues related to identifying and accounting for special purpose entities as part of the FASB's Consolidation Project. The results of these deliberations could negatively impact the Company's accounting approach for the structured contingent financing transaction, if an event triggering this cover were to occur. Management will continue to monitor this guidance and its potential impact on the Company.
National has a reinsurance agreement with Mutual pursuant to which Mutual assumes all liability losses in excess of National's first $50,000 of retention. Mutual further provides National with an 8.5% quota share within the $50,000 retention on liability coverages and a 20% quota share on physical damage coverages. Mid-Plains also has a reinsurance agreement with Mutual pursuant to which Mutual reinsures Mid-Plains for $450,000 in excess of Mid-Plains' first $50,000 of retention on liability coverages.
For the period October 1, 2001 through December 31, 2003, Mutual entered into a Stop Loss Reinsurance Arrangement (the "Stop Loss") with certain of the Pooled Companies. Under the Stop Loss, Mutual has agreed to participate in the Pooling Arrangement's quarterly underwriting losses and gains, in the manner described. If the Pooling Arrangement statutory loss and loss adjustment expense ratio (the "Loss Ratio") is between 70.75% and 80.00%, Mutual will reinsure certain of the Pooled Companies 27% of the Pooling Arrangements' losses in excess of a Loss Ratio of 70.75% up to 80.00%. Certain of the Pooled Companies would be responsible for its share of the Pooling Arrangements' losses over the 80.00% threshold. Also, Mutual will have the right to participate in the profits of the Pooling Arrangement. Mutual will assume 27% of the Pooling Arrangement's underwriting profits attributable to loss ratios less than 69.25%, but more than 59.99%.
REGULATION
Most states have enacted legislation that regulates insurance holding company systems. Ohio, the domiciliary state of Mutual, National, SAIC and ICO, has adopted legislation regulating the activities of those companies. South Carolina has adopted legislation regulating the activities of State Auto P&C as the South Carolina domiciled member of the holding company system, as have South Dakota and Wisconsin, which are the domiciliary regulators of Milbank and Midwest Security, respectively, and Iowa
which regulates Farmers Casualty and Mid-Plains. The same is true in Indiana which is the domiciliary regulator for Meridian Security, Meridian Citizens, and Meridian Citizens Mutual. Each insurance company in the holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Pursuant to these laws, the respective insurance departments may examine Mutual, State Auto P&C, Milbank, Midwest Security, Farmers Casualty, SAIC, National, Mid-Plains and the Meridian Insurers, at any time, require disclosure of material transactions involving insurer members of the holding company system and require prior notice and an opportunity to disapprove of certain "extraordinary" transactions, including, but not limited to, extraordinary dividends from State Auto P&C, Milbank, Farmers Casualty, SAIC and National to State Auto Financial. Pursuant to these laws, all transactions within the holding company system affecting Mutual, State Auto P&C, Milbank, Midwest Security, Farmers Casualty, SAIC, National, Mid-Plains or any of the Meridian Insurers, must be fair and equitable. In addition, approval of the applicable Insurance Commissioner is required prior to the consummation of transactions affecting the control of an insurer.
South Carolina insurance law provides that no person may acquire direct or indirect control of State Auto P&C unless that person has obtained the prior written approval of the Chief Insurance Commissioner of South Carolina for such acquisition. Ohio has similar statutory provisions in place which would be applicable to National, SAIC and ICO, as does South Dakota for Milbank, Wisconsin for Midwest Security, Iowa for Farmers Casualty and Mid-Plains, and Indiana as respects Meridian Insurers other than ICO.
In addition to being regulated by the insurance department of its state of domicile, each insurance company is subject to supervision and regulation in the states in which it transacts business, and such supervision and regulation relate to numerous aspects of an insurance company's business operations and financial condition. The primary purpose of such supervision and regulation is to ensure financial stability of insurance companies for the protection of policyholders. The laws of the various states establish insurance departments with broad regulatory powers relative to 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. 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. In addition, 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 policy terminations, 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.
Insurance companies are required to file detailed annual reports with the supervisory agencies in each of the states in which they do business and their business and accounts are subject to examination by such agencies at any time.
There can be no assurance that such regulatory requirements will not become more stringent in the future and have an adverse effect on the operations of the State Auto Group.
DIVIDENDS. State Auto P&C, Milbank, Farmers Casualty, SAIC and National are subject to regulations and restrictions under which payment of non-extraordinary dividends from statutory surplus can be made to State Auto Financial during the year without prior approval of regulatory authorities.
State Auto Financial's insurer subsidiaries are permitted to pay dividends without prior approval from their respective domiciliary insurance departments unless the dividend is an "extraordinary dividend." While the statutes affecting each insurer subsidiary of State Auto Financial have different words, there is a common thread that runs through each state's statute regulating extraordinary dividends. That thread is
the basic definition of an extraordinary dividend which is the greater of 10% of the insurer's surplus or net income. In three states, Ohio, South Carolina and South Dakota, there is excluded from the net income of the insurer a distribution of the insurers own securities. In South Carolina, net realized capital gains and losses are excluded from the calculation of annual net income. In South Dakota, annual net income excludes net realized capital gains that exceed 20% of net unrealized capital gains.
The laws of South Carolina, Iowa and Ohio also require advance notice of payment of an ordinary dividend. In addition, by acting within a statutory time frame, the insurance commissioner in each state has the authority to limit ordinary dividends if an insurer's surplus as regards policyholders is not reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs.
Pursuant to these rules, a total of $25.1 million is available for payment to State Auto Financial as a dividend from State Auto P&C, Milbank, Farmers Casualty, SAIC and National during 2002 without prior approval from the South Carolina, South Dakota, Iowa and Ohio Insurance Departments, respectively, under current law.
RATE AND RELATED REGULATION. The Company is not aware of any adverse legislation or regulation that was adopted by any state where the Company did business during 2001 which would present material obstacles to the Company's overall business. Several states where the Company does business have passed or are considering more strict regulation of the use of credit scoring in rating and/or risk selection in personal lines of business. This could have an adverse impact on the Company as it has adopted credit scoring as an underwriting tool. Such regulation would limit the Company's ability to take advantage of this tool.
In an attempt to make capital and surplus requirements more accurately reflect the underwriting risk of different lines of insurance as well as investment risks that attend insurers' operations, the NAIC has tested insurer's risk-based capital requirements since 1994. As of December 31, 2001, each insurer affiliated with the Company exceeded all standards tested by the formula applying risk-based capital requirements.
While the insurance business has for years been subject to state regulation, the regulatory landscape has been affected by the federal financial services reform legislation, the Gramm Leach Bliley Act ("GLB"), signed into law in 1999. It is still difficult to specifically identify the impact of this new law on the Company, except in the area of privacy protection. New internal procedures have been created to comply with the new requirements imposed by GLB. Otherwise, at least as respects the Company, the strategic impact of GLB has not yet manifested itself.
The property and casualty insurance industry is also affected by court decisions. Premium rates are actuarially determined to enable an insurance company to generate an underwriting profit. These rates contemplate a certain level of risk. The courts may modify, in a number of ways, the level of risk which insurers had expected to assume including eliminating exclusions, multiplying limits of coverage, creating rights for policyholders not intended to be included in the contract and interpreting applicable statutes expansively to create obligations on insurers not originally considered when the statute was passed. Courts have also undone legal reforms passed by legislatures, which reforms were intended to reduce a litigant's rights of action or amounts recoverable and so reduce the costs borne by the insurance mechanism. These court decisions can adversely affect an insurer's profitability. They also create pressure on rates charged for coverages adversely affected and this can cause a legislative response resulting in rate suppression that can adversely affect an insurer.
THE OHIO DEPARTMENT OF INSURANCE DISPUTE
See "Management Agreement" in the "Narrative Description of Business."
INVESTMENTS
The Company's investment portfolio is managed to provide growth of statutory surplus in order to facilitate increased premium writings over the long term while maintaining the ability to service current insurance operations. The primary objectives are to generate income, preserve capital and maintain liquidity. The Company's investment portfolio is managed separately from that of Mutual and its affiliates and investment results are not shared by each of the Pooled Companies through the Pooling Arrangement. Stateco performs investment management services for the Company and Mutual and its subsidiaries, although investment policies implemented by Stateco continue to be set for each company through the Investment Committee of its Board of Directors. See "Investment Management Services" in the "Narrative Description of Business."
The Company's decision to make a specific investment is influenced
primarily by the following factors: (a) investment risks; (b) general market
conditions; (c) relative valuations of investment vehicles; (d) general market
interest rates; (e) the Company's liquidity requirements at any given time; and
(f) the Company's current federal income tax position and relative spread
between after tax yields on tax-exempt and taxable fixed income investments. The
Company has investment policy guidelines with respect to purchasing fixed income
investments which preclude investments in bonds that are rated below investment
grade by a recognized rating service. The maximum investment in any single note
or bond is limited to 5.0% of assets, other than obligations of the U.S.
government or government agencies, for which there is no limit. Investments in
equity securities are selected based on their potential for appreciation as well
as ability to continue paying dividends. (See discussion regarding Market Risk
included in Part II - Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
Strategies as to specific investments can change depending on the Company's current federal tax position, market interest rates and general market conditions. Consequently, pursuant to the Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company segregates a portion of its fixed maturity investments as available for sale for the purpose of providing greater flexibility in the investment portfolio and these are carried at fair value. Fixed maturities available-for-sale totaled $1,051.4 million and $653.3 million at December 31, 2001, and December 31, 2000, respectively. Fixed maturities that are purchased with the intention and ability of holding them until maturity are categorized as held-to-maturity and carried at amortized cost. Fixed maturities categorized as hold-to-maturity totaled $27.4 million and $39.3 million at December 31, 2001, and December 31, 2000, respectively.
At December 31, 2001 and 2000, respectively, the Company's equity portfolio totaled $59.8 million and $58.3 million.
The table below provides information about the quality of the Company's fixed maturity portfolio:
Bond Portfolio Quality
Investment Grade Corporates
and Municipals 89.1%
(Rated AA or better)
U.S. Governments 7.0%
U.S. Government Agencies 3.9%
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The following table sets forth the Company's investment results for the periods indicated:
Year Ended December 31
--------------------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Average invested assets (1) $870,864 $712,627 $633,989
Net investment income (2) $ 47,375 $ 38,915 $ 34,262
Average yield 5.4% 5.5% 5.4%
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(1) Average of the aggregate invested assets at the beginning and end of each period. Invested assets include fixed maturities at amortized cost, equity securities at cost and cash equivalents.
(2) Net investment income is net of investment expenses and does not include realized or unrealized investment gains or losses or provision for income taxes.
INVESTMENT MANAGEMENT SERVICES
Stateco has been providing investment management services since 1993. These services are provided to all insurance companies affiliated with the Company or Mutual, including Mutual, Midwest Security, State Auto P&C, Milbank, Farmers Casualty, SAIC, National, Mid-Plains and the Meridian Insurers. Stateco has entered into an Investment Management Agreement with each of these entities, (except ICO) pursuant to which Stateco manages the investment portfolios of these companies and receives an investment management fee based on performance and the size of the portfolio managed for each affiliate. The Investment Committee of each insurer's Board of Directors sets investment policies to be followed by Stateco.
INSURANCE PREMIUM FINANCE SERVICES
Through Stateco, the Company provides insurance premium finance services to certain policyholders of Mutual, State Auto P&C and Milbank. Premiums for property and casualty insurance are typically payable at the time a policy is placed in force or renewed. On certain large commercial policies, the premium cost may be difficult for a policyholder to pay in one sum. Stateco makes loans to commercial insurance policyholders for the term of an insurance policy to enable them to pay the insurance premium in installments over the term of the policy, and retains a contractual right to cancel the insurance policy if the loan installment is not paid on a timely basis. Stateco's revenue from its insurance premium finance services is not material to the Company at this time.
INSURANCE SOFTWARE BUSINESS
S.I.S., a wholly owned subsidiary of STFC, develops and sells software used by insurance companies and agencies to allow more efficient and effective electronic management and communication of policyholder data from insurers to agents (download) and from agents to insurers (upload). S.I.S.' principal product, SEMCI Partner(R), is an alternative to significantly more costly agency management systems. While S.I.S.' principal customer from a revenue standpoint is Mutual, it has sold and continues to sell SEMCI Partner(R) directly to agents, including agents who do not represent the State Auto Group. It has approximately 800 Semci Partner(R) systems in place, and of these, 75% are with agents who represent State Auto, while the remainder are in agencies that have no other business relationship with State Auto. S.I.S.' revenue from SEMCI Partner(R) and other S.I.S. software sales is not material to the Company at this time.
PROPERTY LEASING BUSINESS
518 PML is an Ohio limited liability company. The members of 518 PML are Stateco and State Auto P&C. Its business is owning office buildings and certain personal property which it leases to Mutual at what it believes are market rates. Revenue from 518 PML is not material to the Company at this time.
COMPETITION
The property and casualty insurance industry is highly competitive. While it appears that in certain lines of business prices are firming for the first time in years, which has had a positive impact on sales revenue, the fact remains that as a whole, the industry is over-capitalized based on historical norms. While competition is not currently as price driven as it had been for years, it is impossible to predict how long this harder market will last. There has been added uncertainty in the marketplace since the events of September 11th. The issue of terrorism coverage has been more highly publicized, particularly as respects the coverage reinsurers will make available to primary insurers. Some in the industry have lobbied for the federal government to address the issue to avoid severe market dislocation. As respects the Company, since its CAT reinsurance program with traditional cover renews on July 1, 2002, it has not had to face yet the loss of terrorism cover in its reinsurance, nor is it certain what the market for reinsurance will be at the time the cover renews. There is significant uncertainty in the marketplace about terrorism cover although it appears to be available albeit at a higher price. The Company intends to exclude terrorism in commercial policies. It will file exclusions with state insurance departments as soon as practicable, although not all states are approving such filings.
Another underwriting and claims issue the Company is confronting is "toxic mold". This source of loss has received significant publicity in recent months and indications exist that mold claims will become an ever increasing problem The Company believes the contract was not written or priced to address this kind of commonly occurring condition, particularly when remediation costs are extreme. Hence, to protect its current rate structure, the Company is also moving to file mold exclusions on homeowner policies in all states that will accept such filings.
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. See "Marketing" in the "Narrative Description of Business." 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.
EMPLOYEES
As of March 8, 2002, the Company had 2,042 employees. This includes 565 employees who had been employees of MIGI until January 1, 2002. Employees of the Company are not covered by any collective bargaining agreement. Management of the Company considers its relationship with its employees to be excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name of Executive Officer and Principal Occupation(s) An Executive Officer
Position(s) with Company Age During the Past Five Years of the Company Since (1)
------------------------- --- -------------------------- ------------------------
Robert H. Moone, 58 Chairman of the Board of STFC and 1991
Chairman, President and Mutual, 1/1/01 to present; Chief
Chief Executive Officer Executive Officer of STFC and Mutual,
5/99 to present; President of STFC and
Mutual, 5/96 to present; Executive Vice
President, 11/93 to 5/96 and prior
thereto Vice President of STFC and
Mutual
Mark A. Blackburn, 50 Senior Vice President of STFC and 1999
Senior Vice President Mutual, 3/01 to present; Vice President
of STFC and Mutual, 8/99 to 3/01;
Executive Vice President of Grange
Mutual Casualty Insurance Company
4/96 to 4/99; and for more than
five years prior thereto, Vice
President of General Reinsurance
Corporation
Steven J. Johnston, 42 Senior Vice President of STFC and 1994
Senior Vice President, Mutual, 8/99 to present; Treasurer and
Treasurer and Chief Chief Financial Officer of STFC and
Financial Officer Mutual, 4/97 to present; Vice President
of STFC and Mutual, 5/95 to 8/99
John R. Lowther, 51 Senior Vice President of STFC and 1991
Senior Vice President, Mutual, 3/01 to present; Secretary and
Secretary and General Counsel of STFC, 5/91 to
General Counsel present and of Mutual 8/89 to present;
Vice President of STFC, 5/91 to 3/01
and of Mutual 8/89 to 3/01
James E. Duemey, 55 Vice President and Investment Officer 1991
Vice President of STFC and Mutual, 5/91 to present
and Investment Officer
William D. Hansen, 36 Vice President of Mutual, 3/00 to 2000
Vice President present; Vice President of STFC, 5/00
to present; Assistant Vice President of
Mutual 5/95 to 3/00
Steven R. Hazelbaker 46 Vice President of Mutual 6/01 to 2001
Vice President present; Vice President of STFC 6/01 to
present; CFO and Treasurer of Meridian
Insurance Group, Inc. (MIGI) and
Meridian Mutual Insurance Company
("Meridian Mutual") 1994 to 6/01; Vice
President of MIGI and Meridian Mutual
1995 to 6/01
Noreen W. Johnson, 53 Vice President of STFC and Mutual, 3/98 1998
Vice President to present; Assistant Vice President of
Mutual, 3/97 to 3/98; employee of
Mutual since 9/92
Robert A. Lett, 62 Vice President of STFC, 3/98 to 1994
Vice President present; Vice President of Mutual, 2/88
to present
John B. Melvin, 52 Vice President of STFC, 3/98 to 1994
Vice President present; Vice President of Mutual,
11/93 to present; and prior thereto an
officer of Mutual
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Name of Executive Officer and Age Principal Occupation(s) An Executive Officer
Position(s) with Company --- During the Past Five Years of the Company Since (1)
------------------------- -------------------------- ------------------------
Cathy B. Miley, (2) 52 Vice President of STFC, 3/98 to 1995
Vice President present; Vice President of Mutual, 3/95
to present; Assistant Vice President of
Mutual, 8/92 to 3/95
Richard L. Miley, (2) 48 Vice President of STFC, 3/98 to 1995
Vice President present; Vice President of Mutual, 5/95
to present; Assistant Vice President of
Mutual, 8/87 to 5/95
John M. Petrucci, 43 Vice President of Mutual, 3/00 to 2000
Vice President present; Vice President of STFC, 5/00
to present; employee of Mutual since
9/96
Cynthia A. Powell, 41 Vice President of Mutual, 3/00 to 2000
Vice President present; Assistant Vice President, 8/96
to 3/00; Vice President of STFC 5/00 to
present; Assistant Vice President of
STFC, 4/97 to 5/00; employee of Mutual
since 6/90
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(1) Each of the foregoing executive officers has been designated by the
Company's Board of Directors as an executive officer for purposes of
Section 16 of the Securities Exchange Act of 1934.
(2) Richard L. Miley and Cathy B. Miley are husband and wife.
ITEM 2. PROPERTIES
Because the operations of the Company and Mutual are integrated with one another pursuant to the terms of the 2000 Management Agreement, the Company and Mutual share their operating facilities. See Item 1, "Management Agreement" in the "Narrative Description of Business." The Company's and Mutual's corporate headquarters are located in Columbus, Ohio in buildings owned by Mutual that contain approximately 270,000 square feet of office space. The Company and Mutual also have regional underwriting and claims office facilities, including a 6,600 square foot branch office in Cleveland, Ohio, owned by Mutual, and a 29,000 square foot branch office in Cincinnati, Ohio, owned by Mutual. In May 1999, an office building constructed by 518 PML containing 38,000 square feet was completed and leased to Mutual as its Nashville Regional Office. Mutual also leases the regional office facility in Greer, South Carolina, from 518 PML. Milbank owns an office facility in Milbank, South Dakota, where Company employees provide services to Milbank agents and policyholders. Midwest Security leases an office facility in Onalaska, Wisconsin, where Company employees service Midwest Security's agents and policyholders. In December 2000, 518 PML acquired a 21,600 square foot office building in West Des Moines, Iowa, that is now leased to Mutual as its Des Moines Regional Office. Mutual also leases a number of small offices throughout its operating area for the claims operations of Mutual and the Company. Mutual also now owns an office building in Indianapolis, Indiana which was the corporate headquarters of the former Meridian Mutual and its affiliates. This now serves as the location of the State Auto Indianapolis Regional Office.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of lawsuits arising in the ordinary course of its insurance business. Management of the Company believes that the ultimate resolution of these lawsuits will not, individually or in the aggregate, have a material, adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
STOCK TRADING
Common shares are traded in the Nasdaq National Market System under the symbol STFC. As of March 8, 2002, there were 948 shareholders of record of the Company's common shares.
MARKET PRICE RANGE, COMMON STOCK(1)
Initial Public Offering -- June 28, 1991, $2.25(1). The high and low sale prices for each quarterly period for the past two years as reported by Nasdaq are:
2000 HIGH LOW DIVIDEND
---- ---- --- --------
First Quarter $ 9.750 $ 7.125 $0.0275
Second Quarter 12.125 7.938 0.0275
Third Quarter 13.625 10.438 0.0300
Fourth Quarter $18.000 $11.250 $0.0300
2001
----
First Quarter $17.688 $13.313 $ 0.300
Second Quarter 17.340 12.833 0.300
Third Quarter 17.800 12.300 0.0325
Fourth Quarter $17.500 $13.100 $0.0325
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(1)Adjusted for a March 1993 two-for-one, a July 1996 three-for-two common stock split effected in the form of a stock dividend and a July 1998 two-for-one common stock split, respectively.
Additionally, see Liquidity and Capital Resources section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K Annual Report for a discussion of regulatory restrictions of applicable dividends payable by the Company's insurance subsidiaries.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Consolidated Financial Data" is as follows:
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31
2001* 2000* 1999* 1998* 1997 1996 1995* 1994
------------------------------------------------------------------------------------
STATEMENTS OF INCOME DATA: (Dollars in thousands, except per share data)
Earned premiums $ 555,207 397,967 392,058 356,210 320,050 304,472 296,364 225,297
Net investment income $ 47,375 38,915 34,262 32,506 31,107 29,863 28,461 22,189
Management services income $ 15,586 17,594 8,727 7,945 7,367 6,774 6,377 5,170
Net realized gains on investments $ 1,962 5,255 2,555 2,925 3,043 2,788 1,758 1,595
Other income $ 3,142 3,043 3,269 2,473 1,409 1,200 525 147
------------------------------------------------------------------------------------
Total revenues $ 623,272 462,774 440,871 402,059 362,976 345,097 333,485 254,398
====================================================================================
Income before federal income taxes $ 17,976 61,444 56,985 49,605 56,638 34,792 40,953 20,294
====================================================================================
Net income $ 20,615 47,714 42,816 37,497 40,998 26,407 29,894 15,835
====================================================================================
Earnings per common share(1)(2):
Basic $ 0.53 1.24 1.05 0.89 0.99 0.64 0.73 0.39
====================================================================================
Diluted $ 0.52 1.21 1.03 0.87 0.97 0.63 0.72 0.39
====================================================================================
Cash dividends per common share(1) $ 0.13 0.12 0.11 0.10 0.09 0.08 0.07 0.06
====================================================================================
BALANCE SHEET DATA AT YEAR END:
Total investments $ 1,138,656 750,870 627,305 579,966 526,363 499,277 479,908 350,639
Total assets $ 1,367,496 898,106 759,945 717,520 664,384 605,385 579,194 487,282
Note payable to affiliate $ 45,500 45,500 45,500 -- -- -- -- --
Total stockholders' equity $ 400,193 386,059 317,687 340,824 297,258 247,619 225,763 175,852
Book value per common share(1) $ 10.28 10.01 8.29 8.11 7.11 5.98 5.48 4.29
STATUTORY RATIOS:
Loss ratio 77.4 68.5 67.4 68.4 65.2 72.7 68.6 75.4
Expense ratio 27.8 27.0 29.5 29.4 28.9 27.3 31.0 28.2
Combined ratio 105.2 95.5 96.9 97.8 94.1 100.0 99.6 103.6
Industry combined ratio(3) 118.0 110.5 107.7 105.6 101.6 105.8 106.5 108.5
Ratio of net premiums written to
statutory capital and surplus 1.81 1.32 1.47 1.63 1.71 1.91 2.12 1.77
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(1) Adjusted for a July 1998 2-for-1 common stock split as well as a July 1996 3-for-2 common stock split effected in the form of a stock dividend.
(2) The earnings per share amounts prior to 1997 have been restated as required
to comply with SFAS no. 128.
(3) Preliminary industry information for 2001 from A.M. Best.
* Reflects change in Pooling Arrangement, effective October 1, 2001, January 1, 2000, 1999, 1998 and 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of Operations" is as follows:
OVERVIEW
State Auto Financial Corporation ("State Auto Financial"), through its principal insurance subsidiaries, State Auto Property and Casualty Insurance Company ("State Auto P&C"), Milbank Insurance Company ("Milbank"), Farmers Casualty Insurance Company ("Farmers Casualty") and State Auto Insurance Company ("SAIC"), provides personal and commercial insurance for the standard insurance market primarily in the central and eastern United States, excluding New York, New Jersey, and the New England states. Their principal lines of business include personal and commercial auto, homeowners, commercial multi-peril, workers' compensation, general liability and fire insurance. State Auto National Insurance Company ("National") and Mid-Plains Insurance Company ("Mid-Plains") write personal automobile insurance for risks in the nonstandard insurance market. State Auto P&C, Milbank, Farmers Casualty, SAIC, National and Mid-Plains products are marketed through independent agents. State Auto Financial is a majority-owned subsidiary of State Automobile Mutual Insurance Company ("Mutual"), an Ohio domiciled property and casualty insurer. State Auto Financial and its subsidiaries are referred to collectively herein as the "Company."
Through State Auto P&C, the Company provides management and operations
services under the Midwest Management Agreement (as defined below), the Farmers
Casualty Management Agreement (as defined below) and the Mutual Management
Agreement (as defined below) each effective as of January 1, 2000 (collectively
the "2000 Management Agreement"), for insurance and noninsurance affiliates. As
of January 1, 2000, all individuals providing services to any of the State Auto
Companies who were not already employees of State Auto P&C became employees of
State Auto P&C. Under the 2000 Management Agreement, State Auto P&C through its
employees, is responsible for performing all organizational, operational, and
management functions for each of the managed companies. For its performance of
these services, State Auto P&C was paid quarterly a management and operations
services fee based on formulas outlined in the 2000 Management Agreement. This
fee from a managed company would be withheld if a managed company's performance
did not meet performance criteria set forth in the 2000 Management Agreement. In
early 2001, the Ohio Department of Insurance (the "ODI") requested that Mutual
file an analysis with the ODI on a quarterly basis, starting with the quarter
beginning January 1, 2001, that justified the apportionment of the service fee
paid by Mutual to State Auto P&C under the Mutual Management Agreement under
accounting guidance outlined in Statement of Statutory Accounting Principles No.
70 - Allocation of Expenses ("SSAP No. 70"). The Company believed its accounting
for such service fee was consistent with all statutory accounting principals. On
October 24, 2001, the board of directors of the Company and Mutual and special
independent committees thereof approved a resolution of the disagreement between
the Company and the ODI regarding the service fee paid by Mutual to State Auto
P&C. The disagreement with ODI was resolved and ODI expressly did not take issue
with Mutual's payment of the service fee for the first three quarters of 2001,
which amounted to $12.5 million, pre-tax, nor with Mutual's accounting for the
service fee in each of those quarters. The ODI also approved regulatory filings,
effective October 1, 2001, implementing a revised Mutual Management Agreement,
changing the Pooled Subsidiaries (defined below) pooling participation
percentages and implementing a stop loss reinsurance arrangement.
Effective October 1, 2001, the Mutual Management Agreement was amended to eliminate the management and operations service fee charged by State Auto P&C to participants to the agreement, including Mutual. The Mutual Management Agreement continues to allocate costs and apportion those costs among the parties to the agreement in accordance with terms outlined therein. As a result of the loss of the management and operations services income under the Mutual Management Agreement, substantially all of State Auto P&C's services income has been eliminated effective October 1, 2001. Consequently, beginning with the first quarter 2002, the management and operations services segment
will be included in the other category for segment reporting as the results of this segment will no longer meet the quantitative thresholds for separate presentation as a reportable segment. See "Reportable Segments" included herein and footnote 14 regarding the Company's operating segments included in the consolidated financial statements of the Company.
As noted above, as part of the resolution of the service fee disagreement with ODI, ODI approved an amendment to the Pooling Arrangement (defined below) in which the Pooled Subsidiaries aggregate participation was increased from 53% to 80% effective October 1, 2001. In conjunction with this change in pool participation, the Pooled Subsidiaries received cash of $2.2 million and fixed maturities totaling $236.3 million from Mutual, which related to the additional net insurance liabilities assumed by the Pooled Subsidiaries on October 1, 2001. Additionally, for the period October 1, 2001 through December 31, 2003, Mutual entered into a stop loss reinsurance arrangement (the "Stop Loss") with the Pooled Subsidiaries. Under the Stop Loss, Mutual has agreed to participate in the Pooling Arrangement's quarterly underwriting losses and gains in the manner described. If the Pooling Arrangement's statutory loss and loss adjustment expense ratio (the "loss ratio") is between 70.75% and 80.00% (after the application of all available reinsurance), Mutual will reinsure the Pooled Subsidiaries 27% of the Pooling Arrangement's losses in excess of a loss ratio of 70.75% up to 80.00%. The Pooled Subsidiaries would be responsible for their share of the Pooling Arrangement's losses over the 80.00% threshold. Also, Mutual will have the right to participate in the profits of the Pooling Arrangement. Mutual will assume 27% of the Pooling Arrangement's underwriting profits attributable to loss ratios less than 69.25%, but more than 59.99%.
The Midwest Management Agreement and the Farmers Casualty Management agreement were not affected by the disagreement with the ODI or its resolution.
Pursuant to the 2000 Management Agreement, in 2000, the Company received cash of $28.1 million equal to the net pension and post-retirement plan benefit liabilities assumed relating to the above described transfer of those individuals who were employees of Mutual as of December 31, 1999. Prior to January 1, 2000, State Auto P&C provided only executive management services to all insurance affiliates.
The Midwest Management Agreement is a management agreement under which State Auto P&C provides management and operations services to Midwest Security Insurance Company, a Wisconsin domiciled, wholly-owned subsidiary of Mutual ("Midwest Security"). The Farmers Casualty Management Agreement is a management agreement under which State Auto P&C provides management and operations services to Farmers Casualty and Mid-Plains. The Mutual Management Agreement is a management agreement under which State Auto P&C provides management and operations services to Mutual, Milbank, National and SAIC, and other non-insurance affiliates.
In 1998, State Auto Financial acquired all of the outstanding shares of Milbank from Mutual pursuant to the Option Agreement dated August 1993. The purchase price of Milbank was approximately $81.9 million. The transaction was effected through an exchange with Mutual of approximately 5.1 million State Auto Financial common shares for all the issued and outstanding capital stock of Milbank. This exchange of Milbank shares for State Auto Financial common shares increased Mutual's ownership of State Auto Financial to approximately 70% of its issued and outstanding shares. Since the transaction was a combination of entities under common control, it has been accounted for similar to a pooling of interests.
In August 1998, State Auto Financial purchased $9.0 million of surplus notes from Farmers Casualty Company Mutual ("FCCM"), an Iowa domiciled property casualty insurer for the standard insurance market. In 1998, a plan to convert FCCM into a stock insurance company was approved by the board of FCCM, its policyholders and the Iowa Division of Insurance. The plan of conversion provided that State Auto Financial, in exchange for the redemption of the surplus notes, would acquire the newly issued shares of Farmers Casualty. Effective January 1, 1999, FCCM, renamed Farmers Casualty Insurance Company, became a wholly-owned subsidiary of State Auto Financial. In addition, Farmers Casualty owns 100% of the outstanding shares of Mid-Plains, an Iowa domiciled property casualty insurer, which principally writes nonstandard auto insurance.
SAIC was formed in 1999 to engage in the business of providing standard personal insurance to its policyholders through the use of leading edge technology within the independent agency system. Effective January 1, 2000, SAIC became licensed as a property and casualty insurer and began operating in the state of Ohio.
Through Stateco Financial Services, Inc. ("Stateco"), a wholly-owned subsidiary, the Company provides investment management services to affiliated companies and also provides insurance premium finance services to commercial policyholders of State Auto P&C, Milbank and Mutual.
Through Strategic Insurance Software, Inc. (S.I.S.), a wholly-owned subsidiary, the Company develops and sells software for the processing of insurance transactions, database management systems for insurance agents and electronic interfacing of information between insurance companies and agents. S.I.S. sells its services and products to affiliated companies and their agents and markets similar services and products to nonaffiliated insurers and their agencies.
518 Property Management and Leasing, LLC (518 PML), an Ohio limited liability company, is engaged in the business of owning and leasing real and personal property to affiliated companies. The members of 518 PML are State Auto P&C and Stateco.
State Auto P&C, Milbank, Farmers Casualty and SAIC (the "Pooled Subsidiaries"), State Auto Financial's companies comprising the standard insurance segment, participate in a quota share reinsurance pooling arrangement (the "Pooling Arrangement") with Mutual. The Pooling Arrangement provides that the Pooled Subsidiaries cede to Mutual all of their insurance business and assume from Mutual an amount equal to their respective participation percentages as outlined in the Pooling Arrangement. Effective January 1, 1998, the Pooled Subsidiaries aggregate participation in the Pooling Arrangement increased from 45% to 47% (State Auto P&C - 37% and Milbank - 10%) and Midwest Security became a participant in the Pooling Arrangement. On January 1, 1999, Farmers Casualty was acquired by State Auto Financial and became a participant in the Pooling Arrangement on that same date, at which time the Pooled Subsidiaries' aggregate participation increased to 50% (State Auto P&C - 37%, Milbank - 10% and Farmers Casualty - 3%). In conjunction with these changes in pool participation, the Pooled Subsidiaries received cash from Mutual of $11.4 million and $19.7 million, which related to the additional net insurance liabilities assumed by the Pooled Subsidiaries on January 1, 1999 and 1998, respectively. Effective January 1, 2000, the Pooling Arrangement was amended to make SAIC a participant in the Pooling Arrangement and the Pooled Subsidiaries aggregate participation increased to 53% (State Auto P&C - 39%, Milbank - 10%, Farmers Casualty - 3% and SAIC - 1%). In conjunction with this 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. As noted above, the Pooling Arrangement changed again effective October 1, 2001 with the Pooled Subsidiaries aggregate participation increasing to 80% ( State Auto P&C - 59%, Milbank - 17%, Farmers Casualty - 3% and SAIC - 1%). All parties that participate in the Pooling Arrangement have an A. M. Best rating of A+ (Superior).
In October of 2000, Mutual entered into an agreement with Meridian Mutual Insurance Company ("Meridian Mutual"), an Indiana domiciled property and casualty insurance company, pursuant to which Meridian Mutual would be merged with and into Mutual, with Mutual continuing as the surviving corporation. The effective date of the merger transaction was June 1, 2001. With the merging of Meridian Mutual into Mutual, all insurance business that had been written by Meridian Mutual became, legally, Mutual business. For the period June 1, 2001 through June 30, 2001, the insurance business formerly known as the Meridian Mutual business prior to the June 1 merger transaction was excluded from the Pooling Arrangement. Effective July 1, 2001, the insurance business of the former Meridian Mutual became part of the Pooling Arrangement and the Pooled Subsidiaries assumed 53% of the Meridian Mutual business on this same date. Concurrent with this transaction, the Pooled Subsidiaries received cash of $6.4 million and fixed maturities totaling $109.7 million from Mutual, which related to the additional net insurance liabilities assumed by the Pooled Subsidiaries on July 1, 2001.
The business written by the former Meridian Mutual provides both standard and nonstandard personal lines and standard commercial lines to its policyholders. The principal lines of business include standard personal and commercial automobile, nonstandard personal automobile, homeowners, commercial multi-peril, workers' compensation, general liability and fire insurance. The former Meridian Mutual business represents approximately 20% of the Pooled Companies business.
As the former Meridian Mutual business continues to be written and processed through the underwriting and claims system for both the standard and nonstandard business on the Meridian systems platform, management will monitor this business as a separate segment from the State Auto standard and nonstandard processed business. Monitoring of these segments separately is necessary in order to facilitate the integration of the business as it migrates through new policies and renewals to the State Auto systems platform where State Auto policies, pricing, underwriting , and claims philosophies will be fully integrated. Over time, it is anticipated that the Meridian operating segments will decrease and eventually disappear as they become fully integrated on to the State Auto systems platform. Consequently, with the addition of the former Meridian Mutual business to the Pooling Arrangement, the Company renamed the two insurance segments that existed prior to 2001 to be the "State Auto standard segment" and the "State Auto nonstandard segment" and that business consisting of the business known formerly as the Meridian Mutual business to be the "Meridian standard segment" and "Meridian nonstandard segment."
In discussing Results of Operations for 2001 and 2000, State Auto P&C, Milbank, Farmers Casualty, SAIC, National, Mid-Plains, Mutual and Midwest Security are referred to collectively as the "State Auto Insurance Companies", while for 1999, the State Auto Insurance Companies and Pooled Subsidiaries exclude SAIC. The Pooled Subsidiaries, Mutual and Midwest are collectively referred to below as the "Pooled Companies."
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in note 1 to the Company's consolidated financial statements. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, revenues and expenses for the period then ended and the financial entries in the accompanying notes to the financial statements. Such estimates and assumptions could change in the future, as more information becomes known which could impact the amounts reported and disclosed therein.
Losses and loss expenses payable are management's best estimates at a given point in time of what the Company expects to pay to claimants, based on facts, circumstances and historical trends then known. It can be expected that the ultimate liability will exceed or be less than such estimates. During the loss settlement period, additional facts regarding individual claims may become known, and consequently it often becomes necessary to refine and adjust the estimate of liability. Reserves for reported losses are established on either a case-by-case or formula basis depending on the type and circumstances of the loss. The case-by-case reserve amounts are determined based on the Company's reserving practices, which take into account the type of risk, the circumstances surrounding each claim and policy provisions relating to types of loss. The formula reserves are based on historical paid loss data for similar claims with provision for trend changes caused by inflation. Loss and loss expense reserves for incurred claims that have not yet been reported are estimated based on many variables including historical and statistical information, inflation, legal developments, storm loss estimates, and economic conditions. Case and formula basis loss reserves are reviewed on a regular basis and as new data becomes available, estimates are updated resulting in adjustments to loss reserves. Although management uses many resources to calculate reserves, there is no precise method for determining the ultimate liability.
Acquisition costs, consisting of commissions, premium taxes, and certain underwriting expenses relating to the production of property and casualty business, are deferred and amortized ratably over the contract period. The method followed computing the acquisition costs limits the amount of such deferred
costs to their estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, losses and loss expenses to be incurred, and certain other costs expected to be incurred as premium is earned. These amounts are based on estimates and accordingly, the actual realizable value may vary from the estimated realizable value.
Investments are either classified as held to maturity, and carried at amortized cost, or available for sale, and carried at fair value. For investments classified as available for sale, the net unrealized holding gains or losses, net of applicable deferred taxes, are shown as a separate component of stockholders' equity as accumulated other comprehensive income and as such are not included in the determination of net income. Investment income is recognized when earned, and capital gains and losses are recognized when investments are sold. The Company regularly reviews its investments based on current economic conditions, credit loss experience and other factors. If there is a decline in an investment's fair value that is determined to be other than temporary, this decline is treated as a realized loss and the cost basis of the investment is reduced to its estimated fair value at the date of determination. Review for impairment of investments requires significant management judgment.
See a discussion of other factors that may have an impact on management's best estimates at "Impact of Significant External Factors" included herein.
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
Net income for the Company decreased 56.8% in 2001. Contributing to this decease was an increase in the Company's statutory combined ratio to 105.2% from 95.5% in 2000. Negatively impacting the Company's insurance operations in 2001 were the loss results of the former Meridian Mutual business, assumed by the Pooled Subsidiaries beginning in July 2001, and a decrease in the Company's management and operations service fee income. See discussion below.
Consolidated earned premiums increased 39.5%. This increase was principally the result of the addition of the former Meridian Mutual business to the Pooling Arrangement, effective July 1, 2001, and a change in the Pooled Subsidiaries' aggregate pooling participation percentage from 53% to 80%, effective October 1, 2001 (see discussion above regarding these two transactions). These actions increased consolidated earned premiums 30.9%. The internal growth of the State Auto standard segment's earned premiums increased consolidated earned premiums 6.8%. This increase has been largely driven by growth in commercial lines of business over the last twelve months; however, during the last half of the calendar year, personal lines of business began to experience sales increases. Management believes the personal lines sales increases are due to changes in the market place and to its establishing the position of Personal Lines Sales Specialist. The internal growth of the State Auto nonstandard segment earned premiums increased consolidated earned premiums 2.0%. Production levels in this segment continued to improve during 2001 as a result of improved processing routines for agents and the easing of competitive pricing pressures it had felt from certain market leaders in the first half of 2000. The internal growth of both the Meridian standard and nonstandard segment on consolidated earned premium was flat. See discussion below regarding management's action during 2001 on the Group Advantage(R) Program as well as management's response to adequacy of premium rate levels within the standard segment and the Company's plan on integration with regard to the Meridian nonstandard segment.
Net investment income increased $8.5 million (21.7%) in 2001. Contributing to the increase over the previous year was an increase in investable assets due to the transfer of cash and fixed maturity securities from Mutual totaling $354.6 million to the Pooled Subsidiaries in conjunction with the Pooled Subsidiaries assuming 53% of the former Meridian Mutual business on July 1, 2001 and the change in the Pooled Subsidiaries pooling participation percentages, effective October 1, 2001, from 53% to 80%. Total cost of investable assets at December 31, 2001 and 2000, was $1,150.3 million and $741.1 million, respectively.
The investment yields, based on fixed and equity securities at cost, were 5.4% and 5.5% for the annual periods ending 2001 and 2000, respectively. During 2001, the Company experienced an increase in the number of calls over prior years on higher yielding fixed maturities. Monies from these calls were reinvested at lower rates. See further discussion regarding investments at the "Liquidity and Capital Resources", "Investments" and "Market Risk" sections, included herein.
Management services income, including investment management fees, decreased $2.0 million to $15.6 million for the year ended December 31, 2001. This decrease is attributable to the resolution of the disagreement between the Company and ODI regarding the recognition of the service fee paid by Mutual to State Auto P&C. The service fee under the 2000 Mutual Management Agreement paid by Mutual in 2001 was $12.5 million down from $14.5 million in 2000. See "Overview" included herein, for discussion of the resolution regarding the management and operations service fee. See "Liquidity and Capital Resources" included herein, for discussion of the overall impact of the loss of the management and operations service fee on the Company's cash flow and operations.
Losses and loss expenses, as a percentage of earned premiums (the "loss ratio"), were 76.9% and 68.4% for the years 2001 and 2000, respectively. During the fourth quarter of 2001, the Pooled Subsidiaries produced a loss ratio under the Stop Loss (described above) that exceeded the 80% threshold, thereby recovering the full layer of $6.2 million from Mutual. Adversely impacting the current year results were the loss results of the former Meridian Mutual business assumed by the Pooled Subsidiaries. For discussion purposes, the following table provides comparative statutory loss and loss adjustment expense ratios ("Statutory Loss Ratio"), net of the Stop Loss recovery, for the Company's insurance operating segments:
2001 2000
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State Auto standard segment 66.3 67.6
State Auto nonstandard segment 77.9 81.4
Meridian standard segment 139.6 -
Meridian nonstandard segment 168.2 -
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Total Statutory Loss Ratio 77.4 68.5
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The Company's State Auto standard segment reflected an improvement in its loss ratio in 2001 to 66.3 from 67.6 in 2000. This segment's largest line of business, automobile, reflected a 1.6 point improvement in its loss ratio in 2001 from 2000. This segment's next largest line of business, homeowners, has experienced some deterioration in its loss ratio over the last several years. Management has been monitoring this line of business and has taken some corrective action through rate increases and improved underwriting techniques such as credit scoring. The Company's State Auto nonstandard segment experienced an improvement in its loss ratio in 2001 to 77.9 from 81.4 in 2000. In 2000, this segment began experiencing some volatility in loss activity in those states where National began operations in 1999. Consequently, management began monitoring the premium rate adequacy in these new states and reacted accordingly throughout 2000 and 2001 by increasing rates in these new states. Additionally, this segment has implemented a number of underwriting tools, including "point-of-sale" underwriting as well as the use of credit scoring. Management believes these two tools have contributed to this segment's profit improvement.
The former Meridian Mutual business has historically produced poorer loss results than the State Auto book. Through the integration process, several areas within the Meridian Mutual book are being strengthened that should produce improved long term results. The most notable improvement was management's focus on reviewing the Meridian segments' case reserves during the second half of 2001 to ensure that the claims were reserved in a manner consistent with State Auto practices. During the review, it became apparent that case reserves on the Meridian segments for claims occurring in prior accident periods were not reserved consistently with historic State Auto adequacy levels. Nearly 14,000 open claims were reviewed, adding approximately $36 million to known case reserves on claims occurring in prior periods. Irrespective of this reserve strengthening, the Meridian segments' business continues to produce results that are not acceptable to management.
Corrective action is taking place in both the standard and nonstandard segments. Group Advantage(R) was a program within Meridian's standard segment where Meridian made its personal lines products available to Sam's Club members through insurance kiosks located in Sam's Club retail outlets. While this program generated significant premium growth, it consistently failed to meet profitability objectives. As a result, in late 2000, the former Meridian Mutual stopped writing new Group Advantage(R) business and began to terminate existing business as permitted by law. At the end of 2000, there were approximately 15,000 Group Advantage(R) policies in force. At year end 2001, there are approximately 800 of such policies in force. These remaining policies are expected to non-renew over the course of 2002.
During 2001, management also focused on strengthening the Meridian standard segment's adherence to underwriting guidelines in a manner consistent with State Auto practices, as well as analyzing the adequacy of prices relative to risks written. Consequently, management is in the process of re-underwriting 100% of the commercial renewals to be certain they fall within the State Auto guidelines. State Auto also has a practice of reviewing the rate level for each line of business in each operating state each year. Concurrent with these reviews, the Meridian standard segment's rate levels on its commercial book of business are being adjusted to the State Auto rate level. Implementing the Company's underwriting and pricing discipline within the Meridian standard segment is anticipated to have an adverse effect on top line growth of the Meridian standard segment. This may be partially offset by new business being written within the State Auto standard segment by those agencies previously representing the former Meridian Mutual but not State Auto.
The Meridian nonstandard segment produced significant underwriting losses generating a loss ratio for the six months ended December 31, 2001 of 168.2%. An integration plan is currently in place to write all new nonstandard auto business produced by former Meridian agents through National on the National system platform. The National system provides several enhancements that management anticipates will improve the nonstandard loss ratio for new risks written. Most notably, the National system uses credit scoring and "point-of-sale" underwriting tools. The order of integration has been prioritized such that the states with the most need for profit improvement are migrating to National first. New business for six of the 12 states that the Meridian nonstandard segment operates in is currently being written through National, with the remaining six states to follow throughout 2002.
Acquisition and operating expenses, as a percentage of earned premiums (the "expense ratio"), were 30.1% and 30.0% for the years 2001 and 2000, respectively. Impacting the current year expenses was approximately $1.3 million (0.2%) related to the Company's estimate of its future guaranty fund assessments related to the Reliance Insurance Company insolvency that was announced during the fourth quarter of 2001.
Interest expense relates to the line of credit agreement the Company entered into with Mutual during the second quarter of 1999 to assist in the funding of its stock repurchase program. See additional discussion in the "Liquidity and Capital Resources" section included herein.
Other expense, as a percentage of earned premiums, were 1.6% and 1.7% for the year 2001 and 2000, respectively. Other expense for 2000 included $530,000 in interest relating to the return of premiums to the policyholders in the state of North Carolina as discussed under "2000 Compared to 1999" in "Results of Operations" included herein. Absent this interest charge in 2000, other expense, as a percentage of earned premiums, was comparable between the two time periods.
During 2001, the Company experienced an underwriting loss on its insurance operations, largely due to the loss results of the former Meridian Mutual business assumed by the Pooled Subsidiaries. This underwriting loss, coupled with net investment income being largely comprised of tax-exempt income, produced an effective tax rate in 2001 of (15%) versus 22% in 2000. For additional clarification, see the reconciliation between actual federal income taxes and the amount computed at the statutory rate as detailed in footnote 7 in the notes to the Company's consolidated financial statements.
2000 COMPARED TO 1999
Net income for the Company increased 11.4% in 2000. Contributing to this increase was an improvement in the Company's statutory combined ratio to 95.5% in 2000 from 96.9% in 1999. Positively impacting the Company's operations in 2000 was a change in the services provided by State Auto P&C that generated an increase in management services income. See discussion below.
Consolidated earned premiums increased 1.5% in 2000. This increase was principally the result of the change in the Pooled Subsidiaries' aggregate pooled participation percentage from 50% to 53% (referred to 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 2.8%. The Company's nonstandard insurance segment's internal growth also decreased consolidated earned premiums by approximately 0.9%. Also negatively impacting the Company's consolidated earned premiums by approximately 0.3% was 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 North Carolina Insurance Department. In 1994 and 1996, the North Carolina Rate Bureau ("NCRB") filed 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 was 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 noted in prior reports, during 1999, the underwriting performance of the Companies' commercial lines book of business written by its standard segment began to evidence deterioration from previous performance levels. This prompted management to commence a careful review of its underwriters' adherence to the Company's underwriting guidelines for commercial lines. This action had a negative impact on direct written premiums in 1999 that continued into the first half of 2000.
During the latter half of 2000, the Company saw commercial lines sales activity increase over 1999 levels. The Pooled Companies experienced 6.0% growth in its commercial lines direct written premiums over 1999. The Company's personal lines of business within its standard segment continued to feel the effects of extreme price competition even though, during the first half of 2000, there was some evidence that an increasing number of companies were reacting to continuing underwriting losses by increasing rates. The Company's rate of decline in internal growth in these lines has diminished in the last half of 2000, but internal growth remained negative. The Company believes that its underwriting and pricing discipline was a key factor in the Company's underwriting results for the year, particularly as compared to other property casualty insurers. The Company believes that its strategy of taking modest price increases on a regularly scheduled basis and continuing its diligence in risk selection has positioned it to take advantage of this change in the market that the Company perceives is occurring. The Company is active in the personal and commercial lines 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 it believes offer the most profit potential.
The Company's nonstandard insurance segment (National and Mid-Plains) earned premium was $27.4 million in 2000 and $30.9 million in 1999, an 11.3% decrease. Intense price competition by certain market leaders is generally believed to be responsible for the internal growth performance for the year 2000. Production levels in this segment did begin to improve over the last half of 2000 but that improvement was not sufficient to make internal growth positive for the year.
Net investment income increased $4.7 million (13.6%) in 2000. Contributing to the increase over the previous year 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 referred to above. Total cost of investable assets at December 31, 2000 and 1999, respectively was $741.1 million and $651.9 million.
The investment yield based on fixed and equity securities at cost, were 5.5% and 5.4% for the annual periods ending 2000 and 1999, respectively. The Company continued to shift the composition of its fixed maturity portfolio from taxables to tax-exempt fixed maturities. At December 31, 2000 and 1999, respectively, tax-exempt securities comprised approximately 82% and 76% of the fixed maturity portfolio. Additionally, during 2000 the Company continued to experience a number of calls on its higher yielding fixed maturities. Monies from these calls were reinvested at the then lower yielding rates. See further discussion regarding investments at the "Liquidity and Capital Resources", "Investments" and "Market Risk" sections included herein.
Management services income increased $8.9 million to $17.6 million for the year ended December 31, 2000. This increase is largely attributable to the change in the nature of the management services provided by State Auto P&C as discussed above. The Department has requested that, beginning in 2001, Mutual file an analysis on a quarterly basis with the Department that justifies the apportionment of the service fee paid by Mutual to State Auto P&C under statutory accounting guidance outlined in SSAP No. 70. See "Overview".
Losses and loss expenses, as a percentage of earned premiums (the "loss ratio"), were 68.4% and 67.5% for the years 2000 and 1999, respectively. The increase in the current year loss ratio was largely the result of the Company experiencing a relatively small number of large unusual commercial claims in its standard insurance segment. Management noted that these large commercial losses did not impact any one line of business or geographic region and does not believe the nature of these claims indicates deterioration in core underwriting operations. See discussion above regarding management's response to its perception of the current underwriting environment. Additionally, the Company's nonstandard segment experienced an increase in its losses over 1999 levels particularly in those states where National began operations in 1999. The nonstandard segment is particularly volatile for new states due to the relatively small level of premium earned in the initial years of operation. Management has been monitoring the premium rate adequacy in these new states and has reacted throughout 2000 accordingly by increasing rates in these new states.
Acquisition and operating expenses, as a percentage of earned premiums (the "expense ratio"), were 30.0% and 28.5% for the years 2000 and 1999, respectively. The increase in the expense ratio is impacted by the fixed costs such as salaries, depreciation and utilities which comprised 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 in 2000.
Interest expense relates to the line of credit agreement the Company entered into with Mutual during the second quarter of 1999 to assist in the funding of its stock repurchase program. See additional discussion in the "Liquidity and Capital Resources" section included herein.
Other expense increased $0.3 million to $6.9 million for the year ending December 31, 2000. Other expense for 2000 included the interest the Company paid on the North Carolina premium rate refunds, discussed above.
The effective federal tax rate was 22% and 25% for the years ended 2000 and 1999, respectively. During 2000, the Company continued to shift its fixed maturity portfolio from taxable to tax-exempt securities. As a result of this continued shift, tax-exempt income comprised a larger proportion of income before federal income taxes in 2000 than in 1999. For additional clarification, see the reconciliation between actual federal income taxes and the amount computed at the statutory rate as detailed in footnote 7 in the notes to the Company's consolidated financial statements.
REPORTABLE SEGMENTS
The Company's segment profits (losses) of the State Auto standard insurance segment, the State Auto nonstandard insurance segment, the Meridian standard insurance segment, the Meridian nonstandard insurance segment and the investment management services segment, are monitored by
management on an unconsolidated basis, as reflected in footnote 14, Reportable Segments, in the Company's consolidated financial statements and therefore do not reflect adjustments for transactions with other segments. The following table reflects segment profit or loss for these segments for the years ended 2001, 2000, and 1999:
2001 2000 1999
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(In thousands)
State Auto standard insurance $ 45,664 $ 35,579 $ 41,146
State Auto nonstandard insurance 1,378 (116) 1,647
Meridian standard insurance (44,397) -- --
Meridian nonstandard insurance (5,933) -- --
Investment management services 5,965 5,354 5,191
Management and operations services $ 15,322 $ 17,552 $ 6,330
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Improvement in the Company's current year segment profit within the State Auto standard and nonstandard insurance segments is primarily due to an improvement in these segments' current year loss experience and management's response to premium rate inadequacy as discussed at "2001 Compared to 2000" in "Results of Operations." The fluctuation in segment profit for the State Auto standard insurance segment in 2000 compared to 1999 is due to a decline in its underwriting income resulting from an increase in the level of commercial losses, as discussed above. Prior to 1997, the State Auto nonstandard segment focused on improving its loss experience through implementation of a more restrictive underwriting posture and rate increases in several operating states. While this segment showed improvement as a result of these actions, 2000 experienced significant losses in several of its new states of operation. As discussed above, management continually monitors this segment's premium rate adequacy given the nature of the risks that are written through the nonstandard market. Meridian standard and nonstandard insurance segments' operational loss reflects the impact of State Auto management's integration plan, which included the Company's review of Meridian's case reserves during the second half of 2001 as described more fully above at "2001 Compared to 2000" in "Results of Operations". The increase in segment profit of the investment management segment in 2001 is the result of this segment providing its services to the MIGI Insurers beginning June 1, 2001. This segment's profits increased slightly in 2000 due to increasing market rates within the fixed maturity market. This segment's revenue is based on the average market value of the portfolio of the companies managed, which is largely comprised of fixed maturities. With the change in the interest rate environment throughout 2000, the average market value of the portfolio of the companies managed increased throughout 2000. Segment profits related to management and operations services decreased in 2001 as a result of the resolution of the disagreement between the Company and ODI regarding the service fee paid by Mutual to the Company in 2001. See discussion at "Overview" as well as "2001 Compared to 2000" in "Results of Operations". Segment profits related to management and operations services increased in 2000 from 1999 due to the change in the Management and Operations Agreement as discussed in Note 1(j) in the consolidated financial statements. For additional information on the Company's reportable segments, see footnote 14 on "Reportable Segments" in the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of a company to generate adequate amounts of cash to meet its needs for both long and short-term cash obligations as they come due. The Company's significant sources of cash are premiums, investment income and investments as they mature. The Company continually monitors its investment and reinsurance programs to ensure they are appropriately structured to enable the insurance subsidiaries to meet anticipated and unanticipated short and long-term cash requirements without the need to sell investments to meet fluctuations in claim payments.
In 2001, net cash provided by operating activities decreased to $63.5 million from $87.7 million in 2000. This decrease was due to a cash transfer in 2000 of $18.6 million to the Pooled Subsidiaries in connection with the 2000 amended Pooling Arrangement, as well as a cash transfer of $28.1 million to State Auto P&C relating to the net plan benefit liabilities assumed in connection with the Mutual
Management Agreement, whereas in 2001, the settlement of approximately $355.0 million between the Company and Mutual due to the impact on the Pooled Subsidiaries from adding the Meridian Mutual business to the Pooling Arrangement and changing the pooling participation percentages was $8.6 million in cash and the balance in fixed maturity securities. Absent the impact of these transactions, net cash provided by operating activities was $54.9 million in 2001 versus $40.9 million in 2000. The increase in cash flow from operations in 2001 is largely attributable to the increase in premium writings and net investment income over the same time period in 2000. In 2000, net cash provided by operating activities increased to $87.7 million from $48.9 million in 1999. Absent the cash provided from the January 1, 2000 and January 1, 1999 Pooled Subsidiaries pooling participation percentage changes, cash provided from operating activities was $40.9 million in 2000 and $37.5 million in 1999, respectively. This 2000 increase in cash flow from operations was largely attributable to an increase in the management and operation services fee and net investment income over 1999 levels. Over the last three years, operating cash flows have been sufficient to meet the operating needs of the Company while providing opportunities for increased investment and financing needs. The combination of the elimination of the relatively consistent cash flow from the management and operations services fee from Mutual in 2001 along with a significantly larger insurance segment, is expected to result in more volatility going forward but will also provide opportunity for increased earnings and cash flows from operations.
Net cash used in investing activities reflects cash flows used in purchases of fixed maturity and equity securities, respectively, of $246.3 million and $16.4 million in 2001, $187.7 million and $15.8 million in 2000, and $207.8 million and $25.6 million in 1999. The fluctuation in the purchase of fixed maturity securities between years has been largely driven by the call activity in response to the changes in the interest rate environment over the last three years. During 1999, market interest rates on fixed maturities declined from previous years' levels and the Company experienced a significantly higher number of calls on fixed maturities than in previous years. During 2000, this call activity slowed somewhat from previous year's levels. The activity in the call level increased again during 2001 with another decline in market interest rates in response to the Federal Reserve Board's monetary policy and easing inflationary pressure. Cash flows provided by maturities, calls and principal reductions of fixed maturities were $50.2 million in 2001, $27.0 million in 2000 and $37.3 million in 1999. Overall, net cash used in investing activities was $55.3 million in 2001, $90.9 million in 2000 and $56.9 million in 1999. The increase in the 2000 investing activities was the result of the Company investing the proceeds received on the cash transfers discussed under cash flows from operating activities.
Net cash provided by financing activities consists of proceeds from issuance of common stock and payment of dividends to shareholders. Mutual, whose ownership in State Auto Financial is approximately 68%, has waived its right to receipt of the dividends declared by State Auto Financial in an effort to enhance the statutory surplus of the insurance subsidiaries of State Auto Financial for use in support of underwriting operations. Prior to the declaration of each dividend by State Auto Financial, Mutual's directors review the facts and circumstances then present in deciding whether to waive such dividend. Beginning in 2002, dividend waiver decisions will be made by the Independent Committee of the Mutual board of directors. The Independent Committee has met and determined that it would review dividend waiver decisions on an annual basis from this point forward. It decided to waive Mutual's dividends that might be declared by the board of directors of the Company for the year 2002 in order to take better advantage of the investment opportunity STFC represents for Mutual.
Impacting cash used in financing activities during 2001 and 2000 was State Auto Financial's Board of Directors approving a plan to repurchase up to 1.0 million shares of its common stock from the public over a period ending December 31, 2001. Through December 31, 2001, State Auto Financial repurchased 50,522 shares. Impacting 1999 was a previous repurchase program of State Auto Financial's common stock. During the second quarter of 1999, State Auto Financial's Board of Directors approved a plan to repurchase up to 4.0 million shares of its outstanding common stock over a period ending December 31, 2000. Repurchases were transacted to maintain the same ownership ratios between Mutual and the public as it existed in May 1999, with 69% repurchased from Mutual and 31% from the public. Through December 31, 1999, all 4.0 million shares were repurchased, with approximately 2.7 million shares repurchased from Mutual and 1.3 million shares from the public. In conjunction with the
stock repurchase plan, State Auto Financial entered into a line of credit agreement with Mutual for $45.5 million at an interest rate of 6.0%. The interest rate adjusts each January 1 based on a formula set forth in the note. The interest rate was 5.0% during 2001 and will be 4.75% for 2002. Commencing in 2001, principal is due upon demand, with final payment to be received on or prior to December 31, 2005. On March 1, 2002, the Board of Directors of State Auto Financial again approved a plan to repurchase up to 1.0 million shares of its common stock over a period extending to and through December 31, 2003 from the public.
Effective with the June 1, 2001 merger transaction between Meridian Mutual and Mutual, Mutual acquired all of the outstanding shares of Meridian Insurance Group, Inc. ("MIGI"), an Indiana domiciled insurance holding company. MIGI's wholly owned insurance subsidiaries are Meridian Security Insurance Company ("Meridian Security"), an Indiana domiciled property and casualty insurer, Meridian Citizens Security Insurance Company ("Meridian Citizens Security"), an Indiana domiciled property and casualty insurer, and Insurance Company of Ohio ("ICO), an Ohio domiciled property and casualty insurer. MIGI is also party to an affiliation agreement with Meridian Citizens Mutual Insurance Company ("Meridian Citizens Mutual"), an Indiana domiciled property and casualty insurer. Meridian Security, Meridian Citizens Security, ICO and Meridian Citizens Mutual are collectively referred to hereafter as the "Meridian Insurers."
Mutual, State Auto P&C, Milbank, Midwest Security, Farmers Casualty, SAIC, National, Mid-Plains, and effective June 1, 2001, the Meridian Insurers, are participants in a catastrophe reinsurance program. Collectively, these participants in the catastrophe reinsurance program are referred to as the "State Auto Insurance Companies." The amount retained by the State Auto Insurance Companies is $40.0 million for each occurrence. For up to $80.0 million in losses, excess of $40.0 million, traditional reinsurance coverage is provided. At the beginning of 2001, State Auto P&C was assuming catastrophe reinsurance from Mutual, Milbank, Midwest Security, Farmers Casualty, SAIC, National, Mid-Plains and the Meridian Insurers, beginning June 1, 2001, in the amount of $115 million excess of $120 million. Effective November 2001, the catastrophe reinsurance program was renegotiated whereby State Auto P&C now assumes $100 million excess of $120 million. This layer of $100 million in excess of $120 million has been excluded from the Pooling Arrangement. There have been no losses assumed under this agreement.
To provide funding if the State Auto Insurance Companies were to incur catastrophe losses in excess of $120.0 million, State Auto Financial entered into a structured contingent financing transaction with a financial institution and a syndicate of other lenders (the "Lenders") to provide up to $100.0 million for reinsurance purposes. In the event of such a loss, this arrangement provides that State Auto Financial would sell redeemable preferred shares to SAF Funding Corporation, a special purpose company ("SPC"), which would borrow the money necessary for such purchase from the Lenders. State Auto Financial would then contribute to State Auto P&C the funds received from the sale of its preferred shares. State Auto P&C would use the contributed capital to pay its direct catastrophe losses and losses assumed under the catastrophe reinsurance agreement. State Auto Financial is obligated to repay SPC (which would repay the Lenders) by redeeming the preferred shares over a five-year period. In the event of a default by State Auto Financial, the obligation to repay SPC has been secured by a Put Agreement among State Auto Financial, Mutual and the Lenders, under which Mutual would be obligated to either purchase the preferred shares from the SPC or repay the SPC for the loan(s) outstanding. In February of 2002, the FASB initiated a project to consider guidance related to the issue of special purpose entity consolidation. Specifically, the FASB discussed issues related to identifying and accounting for special purpose entities as part of the FASB's Consolidation Project. The results of these deliberations could negatively impact the Company's accounting approach for the structured contingent financing transaction, if an event triggering this cover were to occur. Management will continue to monitor this guidance and its potential impact on the Company.
On March 11, 1997, Mutual acquired 100% of the outstanding shares of Midwest Security, effective as of January 1, 1997. In connection with this purchase, Mutual and State Auto Financial entered into an Option Agreement granting State Auto Financial the right to purchase Midwest Security from Mutual within five years at a price determined by a formula set out in the Option Agreement. State Auto Financial did not exercise this right to acquire Midwest Security.
State Auto P&C's December 31, 1990 liability for losses and loss expenses of $65.5 million has been guaranteed by Mutual. Pursuant to the guaranty agreement, all ultimate adverse development of the December 31, 1990 liability, if any, is to be reimbursed by Mutual to State Auto P&C in conformance with pooling percentages in place at that time. As of December 31, 2001, there has been no adverse development of the liability.
On March 1, 2002, the Board of Directors of State Auto Financial declared a quarterly cash dividend of $0.0325 per common share, payable on March 29, 2002, to shareholders of record on March 14, 2002. This is the 43rd consecutive cash dividend declared by State Auto Financial's Board since State Auto Financial had its initial public offering of common stock on June 28, 1991. State Auto Financial has increased cash dividends to shareholders for eight consecutive years.
The maximum amount of dividends that may be paid to State Auto Financial during 2002 by its insurance subsidiaries without prior approval under current law is limited to $25.1 million. The Company is required to notify the insurance subsidiaries' respective State Insurance Commissioner within five business days after declaration of all dividends and at least ten days prior to payment. Additionally, the domiciliary Commissioner of each insurer subsidiary has the authority to limit a dividend when the Commissioner determines, based on factors set forth in the law, that an insurer's surplus is not reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs. Such restrictions are not expected to limit the capacity of State Auto Financial to meet its cash obligations.
The National Association of Insurance Commissioners ("NAIC") maintains risk-based capital requirements for property and casualty insurers. Risk-based capital is a formula that attempts to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, loss reserve adequacy and other business factors. Applying the risk-based capital requirements as of December 31, 2001, each of the State Auto Insurance Companies exceeded all standards established by the formula.
As discussed above, there was particular emphasis throughout 2001 on improving the former Meridian Mutual book of business. That is expected to continue in 2002. The Company believes its underwriting and pricing discipline, as well as its commitment to delivering its products as effectively and efficiently as possible, have been key factors 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.
OTHER DISCLOSURES
INVESTMENTS
Stateco performs investment management services (the investment management services segment) on behalf of the Company and Mutual and its subsidiary. The Investment Committee of each insurer's Board of Directors sets investment policies to be followed by Stateco.
The primary investment objectives of the Company are to generate income, preserve capital and maintain adequate liquidity for the payment of claims. Fixed maturities that are purchased with the intention and ability of holding them until maturity are categorized as held to maturity and carried at amortized cost. Fixed maturities that may be sold due to changing investment strategies are categorized as available for sale and are carried at fair value. At December 31, 2001, the Company had no fixed maturity investments rated below investment grade, nor any mortgage loans.
As of December 31, 2001, the Company had fixed maturities with a fair value of $1,051.4 million designated as available for sale compared to $653.3 million at December 31, 2000. During 2001, the Company continued its program to increase its equity portfolio to enhance growth of statutory surplus over
the long term. At December 31, 2001 and 2000, respectively, the equity portfolio totaled $59.8 and $58.3 million, respectively.
The Company's current investment strategy does not rely on the use of derivative financial instruments.
MARKET RISK
Investable assets comprise approximately 85% of the Company's total assets. Of the total investable assets, 92.3% are invested in fixed maturities, 5.1% in equity securities and the remaining in cash and cash equivalents.
The Company's decision to make a specific investment is influenced
primarily by the following factors: (a) investment risks; (b) general market
conditions; (c) relative valuations of investment vehicles; (d) general market
interest rates; (e) the Company's liquidity requirements at any given time; and
(f) the Company's current federal income tax position and relative spread
between after tax yields on tax-exempt and taxable fixed income investments.
The fixed maturity portfolio is managed in a laddered-maturity style and considers business mix and liability payout patterns to ensure adequate cash flow to meet claims as they are presented. At December 31, 2001, the Company's fixed maturity portfolio had an average maturity of 12.9 years. For the insurance subsidiaries, the maximum investment in any single note or bond is limited to 5.0% of statutory assets, other than obligations of the U.S. government or government agencies, for which there is no limit. The fixed maturity portfolio is very high in quality with all holdings either in Government obligations, municipal, or corporate obligations. The average rating of the fixed maturity portfolio is AA. The Company does not intend to change its investment policy on the quality of its fixed maturity investments. Investments in equity securities are selected based on their potential for appreciation as well as ability to continue paying dividends. Additional information regarding the composition of investments, along with maturity schedules regarding investments in fixed maturities, is included in footnote 2 of the consolidated financial statements.
The Company's primary market risk exposures are to changes in market prices for equity securities and changes in interest rates and credit ratings for fixed maturity securities. The Company has no exposure to foreign currency exchange rate risk nor does it rely on the use of derivative financial instruments. To provide the Company greater flexibility in order to manage its market risk exposures, the Company has segregated a portion of its fixed maturities as available for sale. Also, the Company does not maintain a trading portfolio.
2001 was characterized by significant changes in the Company's investment portfolio. These changes were the result of the financial market environment as well as the Pooled Subsidiaries assumption through the Pooling Arrangement of the former Meridian Mutual business on July 1, 2001 and the October 1, 2001 change in the Pooled Subsidiaries pooling participation percentages. The impact to the Company from the assumption of the Meridian Mutual business as well as the October 1, 2001 pooling participation percentage change, resulted in additional assets of $354 million, comprised primarily of fixed maturity investments, being transferred to the Pooled Subsidiaries. These transfers of assets are primarily responsible for the 51.1% increase in the Company's investable assets at December 31, 2001 ($1,168.7 million in 2001 versus $772.2 million in 2000).
The equity markets declined in 2001, the first time since the 1973/1974 bear market in which the market declined two years in a row. For the year, the Company's equity portfolio holds unrealized gains of $9.5 million at December 31, 2001, down $4.6 million from December 31, 2000.
The fixed maturity portfolio was impacted by the asset transfers discussed above. While the interest rate environment did not change significantly from 2000, the market did weaken a bit near the end
of the year resulting in the Company experiencing a decline of $8.1 million in its unrealized gains on its available for sale fixed maturity portfolio at December 31, 2001.
The following table provides information about the Company's fixed maturity investments used for purposes other than trading that are sensitive to changes in interest rates. The table presents principal cash flows from maturities, anticipated calls and estimated prepayments, or pay downs from holdings in asset backed securities. The table also presents the average interest rate for each period presented.
PRINCIPAL AMOUNT MATURING IN:
(Dollars in thousands)
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed interest
rate securities $ 55,498 17,428 24,334 31,913 46,135 866,916 1,042,224 $1,080,077
Average
Interest rate 5.2% 6.5% 5.5% 5.3% 5.8% 5.8% 5.8%
|
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules beginning in the first quarter of 2002. The Company has determined that the adoption of the statements will not have a material impact on the Company's financial position and results of operations.
IMPACT OF SIGNIFICANT EXTERNAL FACTORS
Inflation can have a significant impact on property and casualty insurers because premium rates are established before the amount of losses and loss expenses are known. When establishing rates, the Company attempts to anticipate increases from inflation subject to limitations imposed for competitive pricing. Inflation has been relatively modest over the last several years thereby allowing a better opportunity for premiums to keep pace with inflation on certain lines of business.
The Company considers inflation when estimating liabilities for losses and loss expenses, particularly for claims having a long period between occurrence and settlement. The liabilities for losses and loss expenses are management's estimates of the ultimate net cost of underlying claims and expenses and are not discounted for the time value of money. In times of high inflation, the normally higher yields on investment income may partially offset potentially higher claims and expenses.
The Company is also affected by court decisions. Premiums rates are actuarially determined to enable an insurance company to generate an underwriting profit. These rates contemplate a certain level of risk. The courts may modify, in a number of ways, the level of risk which insurers had expected to assume including eliminating exclusions, multiplying limits of coverage, creating rights for policyholders not intended to be included in the contract and interpreting applicable statutes expansively to create obligations on insurers not originally considered when the statute was passed. Courts have also undone legal reforms passed by legislatures, which reforms were intended to reduce a litigant's rights of action or amounts recoverable and so reduce the costs borne by the insurance mechanism. These court decisions can adversely affect an insurer's profitability. They also create pressure on rates charged for coverages adversely affected and this can cause a legislative response resulting in rate suppression that can adversely affect an insurer. The Company may also be adversely affected by regulatory actions on matters within the jurisdiction of the various insurance departments where the Company does business or has entities domiciled.
The Company is not aware of any adverse legislation or regulation that was adopted by any state where the Company did business during 2001 which would present material obstacles to the Company's overall business. Several states where the Company does business have passed or are considering more strict regulation of the use credit scoring in rating and/or risk selection in personal lines of business. This could have an adverse impact on the Company as it has adopted credit scoring as an underwriting tool. Such regulation would limit the Company's ability to take advantage of this tool.
FORWARD-LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
Statements contained in this Form 10-K 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.
- In addition to the acquisition of the Meridian Insurers and
Mutual's merger with Meridian Mutual as discussed above,
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;
loss results of the Company acquired may be worse than
expected; 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.
- 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.
- The Company's operations are subject to changes occurring in the legislative, regulatory and judicial environment. 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 Company, its affiliates, or the insurance industry generally and judicial decisions affecting claims, policy coverages and the general costs of doing business. Many of these changes are beyond the Company's control.
- 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. 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 and laws regulating underwriting "tools". These laws may adversely affect the ability of the insurers in the State Auto Group to earn a profit on their underwriting operations.
- The property and casualty insurance industry is highly competitive. While prices have generally increased in some lines, price competition continues to be intense. 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.
- 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 7(a). QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
"Qualitative and Quantitative Disclosures About Market Risk" is included in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Market Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, including the Notes to Consolidated Financial Statements and the Report of Independent Auditors are as follows:
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
State Auto Financial Corporation
We have audited the accompanying consolidated balance sheets of State Auto Financial Corporation and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conduct our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of State Auto Financial Corporation and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
Columbus, Ohio /s/ Ernst & Young, LLP February 26, 2002 |
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
2001 2000
---- ----
(dollars in thousands,
Assets except share data)
Fixed maturities:
Held to maturity, at amortized cost (fair value $28,672 and $40,225,
respectively)............................................................... $ 27,406 39,307
Available for sale, at fair value (amortized cost $1,042,539 and $636,302,
respectively)............................................................... 1,051,405 653,251
Equity securities, available for sale, at fair value (cost $50,361 and $44,220,
respectively)............................................................... 59,845 58,312
----------- -----------
Total investments................................................................ 1,138,656 750,870
Cash and cash equivalents........................................................ 30,016 21,305
Deferred policy acquisition costs................................................ 67,087 32,458
Accrued investment income and other assets....................................... 38,908 19,795
Due from affiliate............................................................... -- 1,405
Net prepaid pension expense...................................................... 43,344 37,738
Reinsurance recoverable on losses and loss expenses payable...................... 13,919 7,930
Prepaid reinsurance premiums..................................................... 4,955 11,575
Federal income taxes:
Current....................................................................... 1,549 --
Deferred...................................................................... 13,800 --
Property and equipment, at cost, net of accumulated depreciation of $3,351
and $2,785, respectively...................................................... 13,250 12,760
Goodwill......................................................................... 2,012 2,270
----------- -----------
Total assets..................................................................... $ 1,367,496 898,106
=========== ===========
Liabilities and Stockholders' Equity
Losses and loss expenses payable................................................. $ 523,860 244,583
Unearned premiums................................................................ 329,495 160,387
Note payable to affiliate........................................................ 45,500 45,500
Postretirement benefit liabilities............................................... 57,237 55,841
Federal income taxes:
Current....................................................................... -- 2,903
Deferred...................................................................... -- 1,490
Other liabilities................................................................ 5,059 1,343
Due to affiliates................................................................ 6,152 --
----------- -----------
Total liabilities................................................................ 967,303 512,047
----------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Class A Preferred stock (nonvoting), without par value. Authorized 2,500,000
shares; none issued......................................................... -- --
Class B Preferred stock, without par value. Authorized 2,500,000 shares;
none issued................................................................. -- --
Common stock, without par value. Authorized 100,000,000 shares; 43,045,320
and 42,625,723 shares issued, respectively, at stated value of $2.50
per share................................................................... 107,613 106,564
Less 4,108,230 and 4,071,012 treasury shares, respectively, at cost........... (47,613) (47,038)
Additional paid-in capital.................................................... 47,106 44,208
Accumulated other comprehensive income........................................ 12,030 20,317
Retained earnings............................................................. 281,057 262,008
----------- -----------
Total stockholders' equity....................................................... 400,193 386,059
----------- -----------
Total liabilities and stockholders' equity....................................... $ 1,367,496 898,106
=========== ===========
|
See accompanying notes to consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------
2001 2000 1999
---- ---- ----
(dollars in thousands,
except per share amount)
Earned premiums................................................. $ 555,207 397,967 392,058
Net investment income........................................... 47,375 38,915 34,262
Management services income from affiliates...................... 15,586 17,594 8,727
Net realized gains on investments............................... 1,962 5,255 2,555
Other income (includes $1,450, $1,546 and $1,676, respectively,
from affiliates)............................................. 3,142 3,043 3,269
--------- ------- -------
Total revenues.................................................. 623,272 462,774 440,871
--------- ------- -------
Losses and loss expenses........................................ 427,074 272,167 264,628
Acquisition and operating expenses.............................. 167,207 119,569 111,772
Interest expense to affiliate................................... 2,275 2,730 955
Other expenses.................................................. 8,740 6,864 6,531
--------- ------- -------
Total expenses.................................................. 605,296 401,330 383,886
--------- ------- -------
Income before federal income taxes.............................. 17,976 61,444 56,985
--------- ------- -------
Federal income tax expense (benefit):
Current...................................................... 7,699 14,408 12,136
Deferred..................................................... (10,338) (678) 2,033
--------- ------- -------
Total federal income taxes...................................... (2,639) 13,730 14,169
--------- ------- -------
Net income...................................................... $ 20,615 47,714 42,816
========= ======= =======
Earnings per common share:
Basic........................................................ $ 0.53 1.24 1.05
========= ======= =======
Diluted...................................................... $ 0.52 1.21 1.03
========= ======= =======
Dividends paid per common share................................. $ 0.13 0.12 0.11
========= ======= =======
|
See accompanying notes to consolidated financial statements
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
-----------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Common Treasury Treasury Paid-in Comprehensive Retained
Shares Stock Shares Stock Capital Income Earnings Total
------ -------- -------- -------- ------- ------- -------- --------
BALANCE-DECEMBER 31, 1998 42,040 $105,100 13 $(167) $41,539 $20,276 $174,076 $340,824
====== ======== ======== ======== ======= ======= ======== ========
Net income 42,816 42,816
Unrealized losses, net of
tax and reclassification
adjustment (20,120) (20,120)
--------
Comprehensive income 22,696
--------
Issuance of common stock 315 788 1,139 1,927
Tax benefit from stock
options exercised 258 258
Treasury shares acquired
on stock option exercises 21 (222) (222)
Treasury shares acquired
under repurchase program 4,000 (46,199) (46,199)
Stock options granted 242 242
Change in minority interest
of subsidiary (616) 92 (524)
Cash dividends paid (1,315) (1,315)
------ -------- -------- -------- ------- ------- -------- --------
BALANCE-DECEMBER 31, 1999 42,355 105,888 4,034 (46,588) 42,562 156 215,669 317,687
====== ======== ======== ======== ======= ======= ======== ========
Net income 47,714 47,714
Unrealized gains, net of
tax and reclassification
adjustment 20,161 20,161
--------
Comprehensive income 67,875
--------
Issuance of common stock 271 676 1,120 1,796
Tax benefit from stock
options exercised 189 189
Treasury shares acquired
on stock option exercises 12 (149) (149)
Treasury shares acquired
under repurchase program 25 (301) (301)
Stock options granted 524 524
Change in minority interest
of subsidiary (187) 22 (165)
Cash dividends paid (1,397) (1,397)
------ -------- -------- -------- ------- ------- -------- --------
BALANCE-DECEMBER 31, 2000 42,626 106,564 4,071 (47,038) 44,208 20,317 262,008 386,059
====== ======== ======== ======== ======= ======= ======== ========
Net income 20,615 20,615
Unrealized losses, net of tax
and reclassification
adjustment (8,287) (8,287)
--------
Comprehensive income 12,328
--------
Issuance of common stock 419 1,049 1,604 2,653
Tax benefit from stock
options exercised 1,140 1,140
Treasury shares acquired on
stock option exercises 12 (187) (187)
Treasury shares acquired
under repurchase program 25 (388) (388)
Stock options granted 154 154
Cash dividends paid (1,566) (1,566)
------ -------- -------- -------- ------- ------- -------- --------
BALANCE-DECEMBER 31, 2001 43,045 $107,613 4,108 $(47,613) $47,106 $12,030 $281,057 $400,193
====== ======== ======== ======== ======= ======= ======== ========
|
See accompanying notes to consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------------
Year ended December 31
-----------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income.................................................................... $ 20,615 47,714 42,816
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, net.......................................... 3,036 3,548 3,257
Net realized gains on investments........................................... (1,962) (5,255) (2,555)
Changes in operating assets and liabilities:
Deferred policy acquisition costs......................................... (4,735) (1,756) (2,159)
Accrued investment income and other assets................................ (16,671) (2,480) 1,218
Net prepaid pension expense............................................... (5,606) (4,168) (2,116)
Postretirement benefit liabilities........................................ 1,396 3,746 654
Reinsurance recoverable on losses and loss
expenses payable and prepaid reinsurance premiums....................... (7,943) (763) (4,721)
Other liabilities and due to/from affiliates, net......................... 11,273 (7,106) 2,900
Losses and loss expenses payable.......................................... 47,693 (440) (7,099)
Unearned premiums......................................................... 21,919 6,817 4,031
Federal income taxes...................................................... (14,139) 1,093 1,290
Cash provided from adding the former Meridian Mutual Insurance
Company business to the reinsurance pool, effective 7/1/01................. 6,380 -- --
Cash provided from the change in the reinsurance pool
participation percentage 10/1/01, 1/1/00 and 1/1/99, respectively......... 2,197 18,617 11,419
Cash provided from transfer of employees, effective 1/1/00.................... -- 28,098 --
--------- ------ ------
Net cash provided by operating activities........................................ 63,453 87,665 48,935
--------- ------ ------
Cash flows from investing activities:
Purchase of fixed maturities - available for sale............................. (246,269) (187,724) (207,768)
Purchase of equity securities................................................. (16,437) (15,783) (25,567)
Maturities, calls and principal reductions of fixed maturities - held
to maturity................................................................. 11,612 4,600 11,776
Maturities, calls and principal reductions of fixed maturities - available
for sale.................................................................... 38,552 22,355 25,516
Sale of fixed maturities - available for sale................................. 149,043 71,530 113,671
Sale of equity securities..................................................... 9,301 16,158 17,369
Net cash acquired on acquisition of Farmers Casualty Insurance Company........ -- -- 11,568
Net additions of property and equipment....................................... (1,056) (2,066) (3,459)
--------- ------ ------
Net cash used in investing activities............................................ (55,254) (90,930) (56,894)
--------- ------ ------
Cash flows from financing activities:
Net proceeds from issuance of debt to affiliate............................... -- -- 45,500
Net proceeds from issuance of common stock.................................... 2,466 1,708 1,928
Payments to acquire treasury shares........................................... (388) (301) (46,199)
Payment of dividends.......................................................... (1,566) (1,397) (1,315)
--------- ------ ------
Net cash provided by (used in) financing activities.............................. 512 10 (86)
--------- ------ ------
Net increase (decrease) in cash and cash equivalents............................. 8,711 (3,255) (8,045)
--------- ------ ------
Cash and cash equivalents at beginning of year................................... 21,305 24,560 32,605
--------- ------ ------
Cash and cash equivalents at end of year......................................... $ 30,016 21,305 24,560
========= ====== ======
|
See accompanying notes to consolidated financial statements.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements of State Auto Financial Corporation include State Auto Financial Corporation (State Auto Financial) and its wholly-owned subsidiaries that consist of:
- State Auto Property and Casualty Insurance Company (State Auto P&C), a South Carolina corporation
- Milbank Insurance Company (Milbank), a South Dakota corporation
- Farmers Casualty Insurance Company (Farmers Casualty), an Iowa corporation
- State Auto Insurance Company (SAIC), an Ohio corporation
- State Auto National Insurance Company (National), an Ohio corporation
- Stateco Financial Services, Inc. (Stateco), an Ohio corporation
- Strategic Insurance Software, Inc. (S.I.S.), an Ohio corporation.
Mid-Plains Insurance Company (Mid-Plains), an Iowa corporation, is a
wholly-owned subsidiary of Farmers Casualty. The financial statements also
include the operations and financial position of 518 Property Management and
Leasing, LLC (518 PML), whose members are State Auto P&C and Stateco.
In August 1998, State Auto Financial purchased $9.0 million of surplus
notes from Farmers Casualty Company Mutual (FCCM), an Iowa domiciled standard
property casualty insurer. In 1998, a plan to convert FCCM into a stock
insurance company was approved by the board of FCCM, its policyholders and the
Iowa Division of Insurance. The plan of conversion contemplated that State Auto
Financial, in exchange for the redemption of the surplus notes, would acquire
the newly issued shares of Farmers Casualty. Effective January 1, 1999, FCCM,
renamed Farmers Casualty Insurance Company, became a wholly-owned subsidiary of
State Auto Financial.
State Auto Financial, an Ohio corporation, is a majority-owned subsidiary
of State Automobile Mutual Insurance Company (Mutual), an Ohio corporation.
State Auto Financial and subsidiaries are referred to herein as "the Companies"
or "the Company." All significant intercompany balances and transactions have
been eliminated in consolidation.
(b) DESCRIPTION OF BUSINESS The Company, through State Auto P&C, Milbank, Farmers Casualty and SAIC, provides standard personal and commercial insurance to its policyholders. Their principal lines of business include personal and commercial automobile, homeowners, commercial multi-peril, workers' compensation, general liability and fire insurance. National and Mid-Plains provide nonstandard automobile insurance. State Auto P&C, Milbank, Farmers Casualty, SAIC, National, and Mid-Plains operate primarily in the central and eastern United States, excluding New York, New Jersey, and the New England states, through the independent insurance agency system. State Auto P&C, Milbank, Farmers Casualty, SAIC, National and Mid-Plains are chartered and licensed as property and casualty insurers in the states of South Carolina, South Dakota, Iowa, Ohio (SAICand National) and Iowa, respectively, and are licensed in various other states. As such, they are subject to the regulations of the applicable Departments of Insurance of their respective states of domicile (the Departments) and the regulations of each state in which they operate. These property and casualty insurance companies undergo periodic financial examination by the Departments and insurance regulatory agencies of the states that choose to participate. Through State Auto P&C, effectiveJanuary 1, 2000, the Company provides management and operation services under new management agreements for all insurance and non-insurance affiliates. Pursuant to these agreements, the Company received approximately $28.1 million equal to the net pension and postretirement plan benefit liabilities assumed relating to the transfer to the Company of all employees from Mutual and other affiliated companies. Prior to January 1, 2000, the Company, through State Auto P&C, provided executive insurance management services to all insurance affiliates. SAIC was formed in 1999 to engage in the business of providing standard personal insurance to its policyholders through the use of leading edge technology within the independent agency system. Effective January 1, 2000, SAIC was chartered and licensed as a property and casualty insurer in the state of Ohio and began operations at that time. Through Stateco, the Company provides investment management services to affiliated companies and also provides insurance premium finance services to customers of State Auto P&C, Mutual and Milbank. The Company, through S.I.S., develops and sells software for the processing of insurance transactions,
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
database management for insurance agents and electronic interfacing of
information between insurance companies and agencies. S.I.S.sells services and
products to affiliated companies and their agents and markets similar services
and products to nonaffiliated insurers and their agencies.
518 PML, an Ohio limited liability company, was formed to engage in the
business of owning and leasing real and personal property to affiliated
companies.
(c) BASIS OF PRESENTATION The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which vary in certain respects from statutory accounting practices followed by State Auto P&C, Milbank, Farmers Casualty, SAIC, National and Mid-Plains that are prescribed or permitted by the Departments. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, revenues and expenses for the period then ended and the accompanying notes to the financial statements. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of losses and loss expenses payable. In connection with the determination of this estimate, management uses historical data and current business conditions to formulate estimates including assumptions related to the ultimate cost to settle claims. These estimates by their nature are subject to uncertainties for various reasons. The Company's results of operations and financial condition could be impacted in the future should the ultimate payments required to settle claims vary from the liability currently provided.
(d) DEFERRED POLICY ACQUISITION COSTS Acquisition costs, consisting of commissions, premium taxes, and certain underwriting expenses related to the production of property and casualty business, are deferred and amortized ratably over the contract period. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, losses and loss expenses to be incurred, and certain other costs expected to be incurred as premium is earned, without credit for anticipated investment income. These amounts are based on estimates and accordingly, the actual realizable value may vary from the estimated realizable value. Net deferred policy acquisition costs were:
2001 2000 1999
---- ---- ----
(dollars in thousands)
Balance, beginning of
year.................. $ 32,458 28,936 24,799
Acquisition costs
deferred.............. 143,651 101,305 96,578
Amortized to expense
during the year....... 109,022 97,783 92,441
--------- ------ ------
Balance, end
of year............... $ 67,087 32,458 28,936
========= ====== ======
|
(e) INVESTMENTS Investments in fixed maturities, where the Companies have the ability and intent to hold to maturity, are carried at amortized cost. Mortgage-backed securities are carried at amortized cost using the scientific method of amortization including anticipated prepayments. Prepayment assumptions are obtained from a pricing service and are based on the current interest rate and economic environment. The retrospective adjustment method is used to value all such securities. For fixed maturities classified as held to maturity, unrealized holding gains or losses are not reflected in the accompanying consolidated financial statements. Investments in fixed maturity and equity securities held as available for sale are carried at fair value. The unrealized holding gains or losses, net of applicable deferred taxes, are shown as a separate component of stockholders' equity as accumulated other comprehensive income and as such are not included in the determination of net income. Gains and losses on the sale of equity securities are computed using the first-in, first-out method. The Company regularly reviews its investments based on current economic conditions, credit loss experience and other factors. If there is a decline in an investment's fair value that is determined to be other than temporary, it is treated as a realized loss and the cost basis of the investment is reduced to its estimated fair value.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(f) GOODWILL Goodwill represents the excess of cost of acquisition over the fair value of the net assets acquired and is being amortized using the straight-line method over 15 years. Accumulated amortization is $1,863,657 and $1,605,000 at December 31, 2001 and 2000, respectively. See related goodwill discussion at note 1(n).
(g) LOSSES AND LOSS EXPENSES PAYABLE Losses and loss expenses payable are based on formula and case-basis estimates for reported claims, and on estimates, based on experience and perceived trends, for unreported claims and loss expenses. The liability for unpaid losses and loss expenses, net of estimated salvage and subrogation recoverable of $26,216,000 and $13,403,000 at December 31, 2001 and 2000, respectively, has been established to cover the estimated ultimate cost of insured losses. The amounts are necessarily based on estimates of future rates of inflation and other factors, and accordingly there can be no assurance that the ultimate liability will not vary from such estimates. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations (see note 4). Salvage and subrogation recoverables are estimated using historical experience. As such, losses and loss expenses payable represent management's best estimate of the ultimate liability related to reported and unreported claims.
(h) PREMIUM REVENUES Premiums are recognized as earned using the monthly pro rata method over the contract period.
(i) MANAGEMENT SERVICES INCOME Management services income includes income for management and operations services provided by State Auto P&C in 2001 and 2000 and executive insurance management services provided in 1999 and income for investment management services provided by Stateco. See note 6(d) regarding the Company's resolution of its disagreement with the Ohio Department of Insurance (ODI) regarding its recognition of management and operations service fee revenue paid by Mutual in 2001. Management and operations services income in 2001 and 2000, to the extent certain operational ratios are achieved, is recognized quarterly based on a percentage of the three year average of each managed company's adjusted surplus or equity, whereas in 1999 executive management income was based on a five year average of each managed insurer's adjusted statutory surplus. Midwest Security Insurance Company (Midwest Security), a wholly-owned subsidiary of Mutual, is an exception to this, calculating its fee based on a percentage of quarterly direct premiums written. Investment management income is recognized quarterly based on a percentage of the average fair value of investable assets and the performance of the equity portfolio of each company managed.
(j) SOFTWARE REVENUE RECOGNITION S.I.S. recognizes revenue from license fees when the product is delivered and service revenue when services are performed. Costs of developing and testing new or enhanced software products are capitalized and are amortized on a product-by-product basis utilizing the straight-line method over a period not to exceed three years. Unamortized software development costs of $186,000 and $626,000 are included in accrued investment income and other assets at December 31, 2001 and 2000, respectively. Software amortization, included in other expenses, was $440,000, $622,000 and $614,000 in 2001, 2000 and 1999, respectively.
(k) FEDERAL INCOME TAXES The Company files a consolidated federal income tax return and pursuant to an agreement, each entity within the consolidated group pays its share of federal income taxes based on separate return calculations.
Income taxes are accounted for using the liability method. Using this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
(l) CASH EQUIVALENTS TheCompany considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents.
(m) OTHER COMPREHENSIVE INCOME Comprehensive income is defined as all changes in an enterprise's equity during a period other than those
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
resulting from investments by owners and distributions to owners. Comprehensive income includes net income and other comprehensive income. Other comprehensive income includes all other non-owner related changes to equity and represents net unrealized gains and losses on available-for-sale fixed maturities and equity securities.
Separate presentation of the accumulated balance of other comprehensive income within the equity section of the statement of financial position is also required. The Company has presented the required displays of total comprehensive income and its components, within the "Consolidated Statements of Stockholders' Equity." See additional disclosures at note 13.
(n) NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwilll and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules beginning in the first quarter of 2002. The Company has determined that the adoption of the statements will not have a material impact on the Company's financial position and results of operations.
(2) INVESTMENTS
Realized and unrealized gains and losses are summarized as follows:
YEAR ENDED DECEMBER 31
---------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Realized gains:
Fixed maturities available for sale................................... $ 3,072 791 1,336
Equity securities..................................................... 2,258 5,959 3,642
------- ------- -------
Total realized gains..................................................... 5,330 6,750 4,978
------- ------- -------
Realized losses:
Fixed maturities available for sale................................... 114 827 488
Equity securities..................................................... 3,254 668 1,896
Other................................................................. -- -- 39
------- ------- -------
Total realized losses.................................................... 3,368 1,495 2,423
------- ------- -------
Net realized gains on investments........................................ $ 1,962 5,255 2,555
======== ======= =======
Increase (decrease) in unrealized holding gains-- Equity securities...... $(4,608) (2,123) 3,252
Increase (decrease) in unrealized holding gains-- Fixed
maturities available for sale at fair value........................... (8,134) 33,195 (34,081)
Change in deferred unrealized gain....................................... (7) (55) (125)
Deferred federal income taxes thereon.................................... 4,462 (10,856) 10,834
------- ------- -------
Increase (decrease) in net unrealized holding gains or losses............ $(8,287) 20,161 (20,120)
======== ======= =======
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company's investments in held to maturity and available for sale securities are summarized as follows:
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY AT DECEMBER 31, 2001: COST HOLDING GAINS HOLDING LOSSES VALUE
---- ------------- -------------- -----
(in thousands)
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................... $ 2,015 73 -- 2,088
Obligations of states and political subdivisions........... 7,011 403 -- 7,414
Mortgage-backed securities: U.S. government agencies....... 18,380 790 -- 19,170
---------- -------- -------- ---------
Total...................................................... $ 27,406 1,266 -- 28,672
========== ======== ======== =========
AVAILABLE FOR SALE AT DECEMBER 31, 2001:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................... $ 60,623 2,051 286 62,388
Obligations of states and political subdivisions........... 831,865 12,799 9,014 835,650
Corporate securities....................................... 110,549 3,050 789 112,810
Mortgage-backed securities: U.S. government agencies....... 30,777 938 20 31,695
Mortgage-backed securities: Corporate...................... 8,725 139 2 8,862
---------- -------- -------- ---------
Total fixed maturities.................................. 1,042,539 18,977 10,111 1,051,405
Equity securities.......................................... 50,361 13,794 4,310 59,845
---------- -------- -------- ---------
Total...................................................... $1,092,900 32,771 14,421 1,111,250
========== ======== ======== =========
|
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY AT DECEMBER 31, 2000: COST HOLDING GAINS HOLDING LOSSES VALUE
---- ------------- -------------- -----
(in thousands)
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................... $ 2,276 38 -- 2,314
Obligations of states and political subdivisions........... 7,026 354 -- 7,380
Mortgage-backed securities................................. 30,005 555 29 30,531
---------- -------- -------- ---------
Total...................................................... $ 39,307 947 29 40,225
========== ======== ======== =========
AVAILABLE FOR SALE AT DECEMBER 31, 2000:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................... $ 66,434 1,250 648 67,036
Obligations of states and political subdivisions........... 513,311 15,634 874 528,071
Corporate securities....................................... 33,259 897 266 33,890
Mortgage-backed securities: U.S. government agencies....... 23,298 978 22 24,254
Total fixed maturities.................................. 636,302 18,759 1,810 653,251
Equity securities.......................................... 44,220 17,768 3,676 58,312
---------- -------- -------- ---------
Total...................................................... $ 680,522 36,527 5,486 711,563
========== ======== ======== =========
|
Deferred federal income taxes on the net unrealized holding gain for available for sale investments was $6,478,000 and $10,940,000 at December 31, 2001 and 2000, respectively.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The amortized cost and fair value of fixed maturities segregated by held to maturity and available for sale, at December 31, 2001, by contractual maturity, are summarized as follows:
HELD TO MATURITY AVAILABLE FOR SALE
---------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(in thousands)
Due after 1 year or less.......................... $ 1,503 1,542 4,730 4,774
Due after 1 year through 5 years.................. 512 546 59,972 62,180
Due after 5 years through 10 years................ 7,011 7,414 187,667 191,815
Due after 10 years................................ -- -- 750,668 752,079
------- ------ --------- ---------
9,026 9,502 1,003,037 1,010,848
Mortgage-backed securities........................ 18,380 19,170 39,502 40,557
------- ------ --------- ---------
$27,406 28,672 1,042,539 1,051,405
======= ====== ========= =========
|
Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay the obligations with or without call or prepayment penalties.
Fixed maturities with carrying values of approximately $27,666,000 and $21,633,000 were on deposit with regulators as required by law or specific escrow agreement at December 31, 2001 and 2000, respectively.
Components of net investment income are summarized as follows:
2001 2000 1999
---- ---- ----
(in thousands)
Fixed maturities..................... $41,262 36,568 32,096
Equity securities...................... 996 848 678
Cash and cash equivalents.............. 5,756 1,926 1,707
----- ----- -----
Investment income.................... 48,014 39,342 34,481
------ ------ ------
Investment expenses.................. 639 427 219
----- ----- -----
Net investment income................ $47,375 38,915 34,262
======= ====== ======
|
The Company's current investment strategy does not rely on the use of derivative financial instruments.
See note 3 for additional fair value disclosures.
(3) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
INVESTMENT SECURITIES: Fair values for investments in fixed maturities are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheets for these instruments approximate their fair value.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) LOSSES AND LOSS EXPENSES PAYABLE
Activity in the liability for losses and loss expenses is summarized as follows:
YEAR ENDED DECEMBER 31
----------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Losses and loss expenses payable, net of reinsurance recoverables,
at beginning of year......................................................... $ 236,653 221,682 205,034
Incurred related to:
Current year................................................................. 366,348 277,805 271,507
Prior years.................................................................. 60,726 (5,638) (6,878)
--------- ------- -------
Total incurred.................................................................. 427,074 272,167 264,629
--------- ------- -------
Paid related to:
Current year................................................................. 240,508 164,620 168,512
Prior years.................................................................. 144,862 104,871 100,349
--------- ------- -------
Total paid...................................................................... 385,370 269,491 268,861
--------- ------- -------
Impact of adding the former Meridian Mutual Insurance Company to the
Pooling Arrangement, effective July 1, 2001 (note 6)......................... 75,575 -- --
--------- ------- -------
Impact of pooling change, October 1, 2001, January 1, 2000 and 1999,
respectively (note 6)....................................................... 156,009 12,295 7,633
--------- ------- -------
Impact of acquisition of Farmers Casualty and Mid-Plains,
January 1, 1999 (note 1(a)).................................................. -- -- 13,247
--------- ------- -------
Losses and loss expenses payable, net of reinsurance recoverables,
at end of year............................................................... $ 509,941 236,653 221,682
========= ======= =======
|
Losses and loss expenses incurred increased by $60,726,000 in 2001, and decreased by $5,638,000 in 2000 and $6,878,000 in 1999, respectively, for claims that had occurred in prior years. The increase of $60,726,000 in 2001, for claims occurring in prior years, is the result of reserve strengthening that occurred on the former Meridian Mutual Insurance Company (Meridian Mututal) business in order to bring these claim reserves in line with historic State Auto adequacy levels as well as the result of ongoing analysis of recent loss development trends. See note 6(a) regarding discussion of the Meridian Mutual business assumed by the Pooled Subsidiaries. The change in the incurred losses related to prior years over the two year period ending December 31, 2000 has resulted primarily from development in the long-tail lines such as general liability, commercial auto liability, workers' compensation and no-fault insurance. Because of the nature of the business written over the years, the Company's management believes that the Company has limited exposure to environmental claim liabilities.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) REINSURANCE In the ordinary course of business, the Company assumes and cedes reinsurance with other insurers and reinsurers and are members in various pools and associations. See Note 6(a) for discussion of reinsurance with affiliates. The voluntary arrangements provide greater diversification of business and limit the maximum net loss potential arising from large risks and catastrophes. Most of the ceded reinsurance is effected under reinsurance contracts known as treaties; some is by negotiation on individual risks. Although the ceding of reinsurance does not discharge the original insurer from its primary liability to its policyholder, the insurance company that assumes the coverage assumes the related liability. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. The recoverability of these assets depends on the reinsurers' ability to perform under the reinsurance agreements. The Company evaluates and monitors the financial condition and concentrations of credit risk associated with its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. The Company has reported ceded losses and loss expenses payable and prepaid reinsurance premiums with other insurers and reinsurers as assets. All reinsurance contracts provide indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance. Prior to the reinsurance transaction with Mutual under the Pooling Arrangement, as discussed in note 6(a), the effect of the Company's reinsurance on its balance sheets and income statements, is as follows:
DECEMBER 31
-----------
2001 2000
---- ----
(in thousands)
Losses and loss expenses payable:
Direct.......................................................... $ 240,012 229,422
Assumed......................................................... 3,837 5,035
Ceded........................................................... (7,742) (7,930)
-------- -------
Net losses and loss expenses payable......................... $236,107 226,527
======== =======
Unearned premiums:
Direct.......................................................... $ 189,800 159,173
Assumed......................................................... 1,107 1,214
Ceded .......................................................... (4,955) (3,131)
-------- -------
Net unearned premiums........................................ $ 185,952 157,256
======== =======
|
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
(in thousands)
Written premiums:
Direct............................................ $ 501,250 439,623 436,150
Assumed........................................... 4,196 4,678 8,281
Ceded............................................. (15,447) (10,905) (11,216)
--------- ------- -------
Net written premiums........................... $ 489,999 433,396 433,215
========= ======= =======
Earned premiums:
Direct............................................ $ 472,766 432,318 429,577
Assumed........................................... 4,304 5,166 10,822
Ceded............................................. (13,623) (10,864) (13,698)
--------- ------- -------
Net earned premiums............................ $ 463,447 426,620 426,701
========= ======= =======
Losses and loss expenses incurred:
Direct............................................ $ 328,363 297,757 289,162
Assumed........................................... 3,054 3,726 10,803
Ceded............................................. (5,549) (2,165) (9,736)
--------- ------- -------
Net losses and loss expenses incurred.......... $ 325,868 299,318 290,229
========= ======= =======
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) TRANSACTIONS WITH AFFILIATES
(a) REINSURANCE State Auto P&C, Milbank, Farmers Casualty, SAIC (the Pooled Subsidiaries) and Midwest Security participate in a quota share reinsurance pooling arrangement (the Pooling Arrangement) with Mutual whereby the Pooled Subsidiaries and Midwest Security cede to Mutual all of their insurance business and assume from Mutual an amount equal to their respective participation percentages in the Pooling Arrangement. All premiums, losses and loss expenses and underwriting expenses are allocated among the participants on the basis of each company's participation percentage in the Pooling Arrangement. The Pooling Arrangement provides indemnification against loss or liability relating to insurance risk and has been accounted for as reinsurance.
Since 1998, State Auto P&C, Milbank and Midwest Security have participated
in the Pooling Arrangement with Mutual. On January 1, 1999, Farmers Casualty was
acquired by State Auto Financial and became a participant in the Pooling
Arrangement on that same date, at which time the Pooled Subsidiaries' aggregate
participation increased from 47% to 50%. In conjunction with this change in pool
participation, the Pooled Subsidiaries received cash from Mutual of $11.4
million, which related to the additional net insurance liabilities assumed by
the Pooled Subsidiaries on January 1, 1999. Effective January 1, 2000, the
Pooling Arrangement was amended to make SAIC a participant in the Pooling
Arrangement and the Pooled Subsidiaries aggregate participation increased to
53%. In conjunction with this 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. In 2000, Mutual entered into an agreement with Meridian Mutual
Insurance Company (Meridian Mutual), an Indiana domiciled property and casualty
insurance company, pursuant to which Meridian Mutual would be merged with and
into Mutual, with Mutual continuing as the surviving corporation. The effective
date of the merger transaction was June 1, 2001. With the merging of Meridian
Mutual into Mutual, all insurance business that had been written by Meridian
Mutual became, legally, Mutual business. For the period June 1, 2001 through
June 30, 2001, the insurance business formerly known as the Meridian Mutual
business prior to the June 1 merger transaction was excluded from the Pooling
Arrangement. Effective July 1, 2001, the insurance business of the former
Meridian Mutual became part of the Pooling Arrangement, and the Pooled
Subsidiaries assumed 53% of the former Meridian Mutual business on this same
date. Concurrently, with this transaction, the Pooled Subsidiaries received cash
of $6.4 million and fixed maturities totaling $109.7 million from Mutual which
related to the additional net insurance liabilities assumed by the Pooled
Subsidiaries on July 1, 2001. As part of the resolution of the disagreement with
the ODI regarding the recognition of the service fee revenue paid by Mutual to
State Auto P&C (see note 6(d)), the Pooled Subsidiaries aggregate participation
in the Pooling Arrangement was increased to 80%, effective October 1, 2001. In
conjunction with this change in pool participation, the Pooled Subsidiaries
received cash of $2.2 million and fixed maturities totaling $236.3 million from
Mutual, which related to the additional net insurance liabilities assumed on
October 1, 2001. All parties that participate in the Pooling Arrangement have an
A. M. Best rating of A+ (Superior).
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Pooling Arrangement does not relieve each individual pooled subsidiary of its primary liability as the originating insurer, consequently, there is a concentration of credit risk arising from business ceded to Mutual. As the Pooling Arrangement provides for the right of offset, the Company has reported losses and loss expenses payable and prepaid reinsurance premiums to Mutual as assets only in situations when net amounts ceded to Mutual exceed that assumed. The following provides a summary of the reinsurance transactions on the Company's balance sheets and income statements for the Pooling Arrangement between the Pooled Subsidiaries and Mutual:
DECEMBER 31
-----------------------
2001 2000
---- ----
(in thousands)
Losses and loss expenses payable:
Ceded.......................................................... $(219,851) (212,614)
Assumed........................................................ 499,862 222,740
--------- ------
Net assumed.................................................. $ 280,011 10,126
========= ======
Unearned premiums:
Ceded.......................................................... $(172,265) (149,854)
Assumed........................................................ 310,853 141,410
--------- ------
Net assumed (ceded).......................................... $ 138,588 (8,444)
========= ======
|
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
(in thousands)
Written premiums:
Ceded............................................ $(448,331) (405,397) (403,679)
Assumed.......................................... 529,253 370,576 356,609
Earned premiums:
Ceded............................................ $(426,880) (399,057) (395,698)
Assumed.......................................... 515,619 367,275 358,700
Losses and loss expenses incurred:
Ceded............................................ $ (298,755) (277,340) (268,536)
Assumed.......................................... 406,138 250,189 242,935
|
Effective with the June 1, 2001 merger transaction of Meridian Mutual into Mutual, Mutual also acquired all of the outstanding shares of Meridian Insurance Group, Inc. (MIGI), an Indiana domiciled insurance holding company. MIGI's wholly-owned insurance subsidiaries are Meridian Security Insurance Company, an Indiana domiciled property and casualty insurer, Meridian Citizens Security Insurance Company, an Indiana domiciled property and casualty insurer, and Insurance Company of Ohio, an Ohio domiciled property and casualty insurer. MIGI is also party to an affiliation agreement with Meridian Citizens Mutual Insurance Company, an Indiana domiciled property and casualty insurer. Collectively, the MIGIinsurer subsidiaries and affiliates are hereafter collectively referred to as the "Meridian Insurers".
Mutual, State Auto P&C, Milbank, Midwest Security, Farmers Casualty, SAIC, National, Mid Plains, and, effective June 1, 2001, the Meridian Insurers, are participants in a catastrophe reinsurance program. Collectively, these participants in the catastrophe reinsurance program are referred to as the "State Auto Insurance Companies." State Auto P&C assumed catastrophe reinsurance from Mutual, Milbank, Midwest Security, Farmers Casualty, SAIC, National, Mid-Plains and the Meridian Insurers in the amount of $115 million excess of $120 million. Effective November 2001, the catastrophe reinsurance program was renegotiated whereby State Auto P&C assumed $100 million excess of $120 million. Under this agreement, the Company has assumed from Mutual and its affiliate premiums written and earned of $3,021,000, $3,129,000 and $2,355,000 for
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2001, 2000 and 1999, respectively. There have been no losses assumed under this agreement. The catastrophe reinsurance program with State Auto P&C has been excluded from the Pooling Arrangement.
To protect against a catastrophe loss event, in which the State Auto Insurance Companies would incur catastrophe losses in excess of $120 million, State Auto Financial entered into a structured contingent financing transaction with a financial institution and a syndicate of other lenders (the Lender) to provide (effective November 2001) up to $100 million for reinsurance purposes. In the event of such a loss, this arrangement provides that State Auto Financial would sell redeemable preferred shares to SAF Funding Corporation, a special purpose company (SPC), which would borrow the money necessary for such purchase from the Lenders. This arrangement with the Lenders, SPC and State Auto Financial is a financing arrangement, whereby State Auto Financial would receive cash funding in the event of a catastrophe event as described above. State Auto Financial would then contribute to State Auto P&C the funds received from the sale of its preferred shares. State Auto P&C would use the contributed capital proceeds to pay its direct catastrophe losses and losses assumed under the catastrophe reinsurance agreement. State Auto Financial is obligated to repay SPC by redeeming the preferred shares over a five-year period. In the event of a default by State Auto Financial, the obligation to repay SPC has been secured by a Put Agreement among State Auto Financial, Mutual and the Lenders, under which Mutual would be obligated to either purchase the preferred shares from the SPC or repay the SPC for the loan(s) outstanding.
For the period October 1, 2001 through December 31, 2003, Mutual entered into a stop loss reinsurance arrangement (Stop Loss) with the Pooled Subsidiaries. Under the Stop Loss, Mutual has agreed to participate in the Pooling Arrangement's quarterly underwriting losses and gains in the manner described. If the Pooling Arrangement's statutory loss and loss adjustment expense ratio (loss ratio) is between 70.75% and 80% (after the application of all available reinsurance), Mutual will reinsure the Pooled Subsidiaries 27% of the Pooling Arrangement's losses in excess of a loss ratio of 70.75% up to 80.00%. The Pooled Subsidiaries would be responsible for their share of the Pooling Arrangement's losses over the 80% threshold. Also, Mutual will have the right to participate in the profits of the Pooling Arrangement. Mutual will assume 27% of the Pooling Arrangement's underwriting profits attributable to loss ratios less than 69.25%, but more than 59.99%. During 2001, the Pooled Subsidiaries ceded to Mutual, $6,177,000 under the Stop Loss, which has been reflected in reinsurance recoverable on losses and loss expenses payable at December 31, 2001, while no premium was assumed by Mutual under the Stop Loss.
(b) INTERCOMPANY BALANCES Pursuant to the Pooling Arrangement, Mutual is responsible for the collection of premiums and payment of losses, loss expenses and underwriting expenses of the Pooled Subsidiaries. Unpaid balances are reflected in due to or due from affiliates in the accompanying consolidated balance sheets. Settlements of the intercompany account are made quarterly. No interest is paid on this account. All premium balance receivables and reinsurance recoverable on paid losses from unaffiliated reinsurers are carried by Mutual. The Company had off-balance-sheet credit risk of approximately $123 million and $60 million related to premium balances due to Mutual from agents and insureds at December 31, 2001 and 2000, respectively.
(c) NOTE PAYABLE In 1999, State Auto Financial entered into a line of credit agreement with Mutual for $45.5 million in conjunction with its stock repurchase program, at an interest rate of 6.0%. See related footnote at note 9(a). Principal payment is due on demand after December 31, 2000, with final payment to be received on or prior to December 31, 2005. The interest rate is adjustable annually after the year 2000 to reflect adjustments in the then current prime lending rate as well as State Auto Financial's current financial position. Interest rate for the year 2002 is 4.75% and in 2001 was 5.0%. Interest expense on the loan from Mutual was $2,275,000, $2,730,000 and $955,000 in 2001, 2000 and 1999, respectively.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(d) MANAGEMENT SERVICES Effective January 1, 2000, State Auto P&C began providing management and operation services to Mutual and its insurance affiliate. Revenue relating to these services amount to $12,621,000 and $14,654,000 in 2001 and 2000, respectively. Prior to 2000, State Auto P&C provided Mutual and its insurance affiliate executive management services to oversee the insurance operations of these companies. Revenue relating to these services amounted to $4,908,000 in 1999. Stateco provides Mutual and its affiliate investment management services. Revenue related to these services amount to $2,965,000, $2,940,000 and $3,099,000 in 2001, 2000, and 1999, respectively.
During early 2001, the ODI requested that Mutual file an analysis with the ODI on a quarterly basis, starting with the quarter beginning January 1, 2001, that justified the apportionment of the management and operation services 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 believed its accounting for such service fee was consistent with all statutory accounting principles. On October 24, 2001, the board of directors of the Company and Mutual and special committees thereof approved a resolution of the disagreement between the Company and the ODI regarding the service fee paid by Mutual to State Auto P&C. The disagreement with ODI was resolved and ODI expressly did not take issue with Mutual's payment of the service fee to State Auto P&C for the nine-month period ending September 30, 2001 which amounted to $12.5 million, pre-tax, nor with Mutual's accounting for the service fee for this same time period. The ODI also approved regulatory filings, effective October 1, 2001, implementing a revised management agreement, changing the Pooled Subsidiaries pooling participation percentages and implementing a stop loss reinsurance arrangement. See note 6(a) regarding the change in the Pooled Subsidiaries pooling participation percentages and the implementation of a stop loss reinsurance arrangement.
Effective October 1, 2001, the management agreement between State Auto P&C and certain affiliate companies, including Mutual, was amended to eliminate the management and operations service fee charged by State Auto P&C. The management agreement continues to allocate costs and apportion those costs among the parties to the agreement in accordance with terms outlined therein. As a result of the loss of the management and operations services income under this management agreement, substantially all of State Auto P&C's services income has been eliminated, effective October 1, 2001. See note 14. The management agreement between State Auto P&C and Midwest Security was not affected by the disagreement or resolution with the ODI.
(e) OTHER TRANSACTIONS S.I.S. provides insurance software products and services to Mutual and its affiliate. Revenue relating to these services amount to $692,000, $900,000 and $1,109,000 in 2001, 2000 and 1999, respectively, and is included in other income. 518 PML leases assets to Mutual and its affiliate. Revenue relating to these services amount to $758,000, $646,000 and $567,000 in 2001, 2000 and 1999, respectively and is included in other income.
State Auto P&C's December 31, 1990 liability for losses and loss expenses of $65,464,000 has been guaranteed by Mutual. Pursuant to the guaranty agreement, all ultimate adverse development of the December 31, 1990 liability, if any, is to be reimbursed by Mutual to State Auto P&C in conformance with pooling percentages in place at that time. As of December 31, 2001, there has been no adverse development of the liability.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) FEDERAL INCOME TAXES A reconciliation between actual federal income taxes (benefit) and the amount computed at the indicated statutory rate is as follows:
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
(in thousands)
Amount at statutory rate................................ $ 6,291 35 21,505 35 19,947 35
Tax-free interest and dividends received deduction...... (8,925) (50) (7,918) (13) (6,315) (11)
Other, net.............................................. (5) -- 143 -- 537 1
--------- --- ------ -- ------ --
Effective tax rate...................................... $ (2,639) (15) 13,730 22 14,169 25
========= === ====== == ====== ==
|
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31
2001 2000
---- ----
(in thousands)
Deferred tax assets:
Unearned premiums not deductible.............................. $ 22,847 10,385
Losses and loss expenses payable discounting.................. 19,767 9,219
Postretirement benefit liabilities............................ 13,746 13,035
Other......................................................... 1,982 2,110
Alternative minimum tax credit................................ 1,410 --
-------- ------
Total deferred tax assets................................. 59,752 34,749
-------- ------
Deferred tax liabilities:
Deferral of policy acquisition costs.......................... 23,481 11,360
Net pension expense........................................... 13,993 12,628
Unrealized holding gain on investments........................ 6,478 10,940
Other......................................................... 2,000 1,311
-------- ------
Total deferred tax liabilities............................ 45,952 36,239
-------- ------
Net deferred tax assets (liabilities)..................... $ 13,800 (1,490)
======== ======
|
The Company is required to establish a valuation allowance for any portion
of the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets and, therefore, no such valuation
allowance has been established.
Federal income taxes paid during 2001, 2000 and 1999 were $11,500,000,
$12,638,000 and $12,621,000, respectively.
(8) (a) PENSION BENEFIT PLANS Prior to 2000, State Auto P&C, Stateco and S.I.S., pursuant to an intercompany agreement, were participants, together with Mutual, in a defined benefit pension plan and a defined contribution plan that covered substantially all employees of Mutual and the Company.
Effective January 1, 2000, all employees of Mutual, Stateco and S.I.S., became employees of State Auto P&C, under new management agreements effective on that same date. See related discussion at Note (1)(b). Pursuant to the new management agreements, the Company paid cash of approximately $14.6 million to Mutual, equal to the net prepaid pension asset received.
The assets of the defined benefit pension plan are represented primarily by U.S. government and
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
agency obligations, bonds, and common stocks. The Company's policy is to fund
pension costs in accordance with the requirements of the Employee Retirement
Income Security Act of 1974. Benefits are determined by applying factors
specified in the plan to a participant's defined average annual compensation.
Information regarding the funded status and net periodic pension benefit
for the Company's participation in the defined benefit pension plan is as
follows:
DECEMBER 31
-----------
2001 2000
---- ----
(in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year....................................................... $ 87,093 44,016
Transfer in benefit obligation at beginning of year due to employee transfer.................. -- 39,586
Service cost.................................................................................. 3,537 3,339
Interest cost................................................................................. 6,750 6,728
Changes in plan provisions.................................................................... -- 1,205
Actuarial (gain) loss......................................................................... 9,145 (438)
Benefits paid................................................................................. (9,048) (7,343)
-------- ------
Benefit obligation at end of year............................................................. $ 97,477 87,093
-------- ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year................................................ $162,658 84,883
Transfer in plan assets at beginning of year due to employee transfer......................... -- 76,340
Actual return on plan assets.................................................................. (17,413) 8,778
Benefits paid................................................................................. (9,048) (7,343)
-------- ------
Fair value of plan assets at end of year...................................................... $136,197 162,658
-------- ------
Funded status................................................................................. $ 38,720 75,565
Unrecognized transition asset................................................................. (725) (846)
Unrecognized prior service cost............................................................... 2,263 2,470
Unrecognized net (gain) or loss............................................................... 3,086 (39,451)
-------- ------
Net prepaid pension expense................................................................... $ 43,344 37,738
======== ======
|
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
(in thousands)
COMPONENTS OF NET PERIODIC BENEFIT
Service cost.................................................................... $ 3,537 3,339 2,047
Interest cost................................................................... 6,750 6,728 3,278
Expected return on plan assets.................................................. (14,633) (13,391) (6,125)
Amortization of prior service cost.............................................. 207 207 114
Amortization of transition asset................................................ (121) (121) (124)
Amortization of net (gain) or loss.............................................. (1,346) (930) 7
------- ------ ----
Net periodic benefit............................................................ $(5,606) (4,168) (803)
======= ====== ====
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate.................................................................... 7.50% 8.00% 8.00%
Expected long-term rate of return on assets...................................... 9.00% 9.00% 9.00%
Rates of increase in compensation levels......................................... 5.00% 5.00% 5.00%
|
Effective January 1, 2000, the net prepaid pension expense is carried on
the financial statements of the Company and the annual periodic pension benefit
or cost is allocated to affiliated companies based on allocations pursuant to
intercompany management agreements. The Company's share of the 2001 and 2000 net
periodic benefit was $4.0 million and $2.6 million, respectively.
The Company maintains a defined contribution plan that covers substantially
all employees of the Company. Contributions to the plan are based on employee
contributions and the level of Company match. The Company's share of the expense
under the plan totaled $1,120,000, $890,000 and $852,000 for the years 2001,
2000 and 1999, respectively.
(b) POSTRETIREMENT BENEFITS In addition to pension benefits, the Company provides certain health care and life insurance benefits for its eligible retired employees. Substantially all of the Company's employees may become eligible for these benefits if they retire between age 55 and 65 with 15 years or more of service or if they retire at age 65 or later with 5 years or more of service. Prior to 2000, State Auto P&C, Stateco and S.I.S., pursuant to an intercompany agreement, were participants, together with Mutual, in a postretirement medical and life insurance benefit plan. The postretirement benefit obligation was immaterial to the consolidated balance sheet prior to 2000. Effective January 1, 2000, all employees of Mutual, Stateco and S.I.S., became employees of State Auto P&C, under new management agreements effective on that same date. See related discussion at Note (1)(b). Pursuant to the new management agreements, the Company received cash of approximately $49.6 million from Mutual, equal to the funded status of the postretirement obligation assumed. Plan assets are primarily composed of mutual funds and government securities. Information regarding the funded status and net periodic benefit cost for the Company's participation in the postretirement benefit plan is as follows:
2001 2000
---- ----
(in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year........................................................... $ 42,913 1,481
Transfer in benefit obligation at beginning of year due to employee transfer...................... -- 43,632
Service cost...................................................................................... 1,423 1,242
Interest cost..................................................................................... 3,356 3,205
Actuarial gain.................................................................................... 2,946 (5,247)
Employee contributions............................................................................ (2,080) (1,400)
-------- -----
Benefit obligation at end of year................................................................. $ 48,558 42,913
-------- -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.................................................... $ 1,568 --
Transfer of plan assets at beginning of year due to employee transfer............................. -- 1,479
Expected return on assets......................................................................... 133 126
Gain (loss) on assets............................................................................. 67 (37)
-------- -----
Fair value of plan assets at end of year.......................................................... $ 1,768 1,568
-------- -----
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31
2001 2000
---- ----
(in thousands)
Funded status at end of year......................................... $(46,790) (41,345)
Unrecognized transition asset........................................ (38) (41)
Unrecognized gain.................................................... (8,700) (12,099)
-------- -------
Accrued postretirement benefit obligation at end of year............. $(55,528) (53,485)
======== =======
|
YEAR ENDED DECEMBER 31
2001 2000
---- ----
(in thousands)
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost......................................................... $ 1,423 1,242
Interest cost........................................................ 3,356 3,205
Expected return on assets............................................ (133) (126)
Amortization of unrecognized amounts................................. (523) (495)
-------- -----
Net periodic benefit cost............................................ $ 4,123 3,826
======== =====
|
An 8.0% weighted average discount rate was used for 2001 and 2000 to
determine the accumulated postretirement benefit obligation. An 8.5% weighted
average rate was used for 2001 and 2000 to determine the long-term rate of
return on plan assets.
Effective January 1, 2000, the postretirement benefit liability is carried
on the financial statements of the Company and the net periodic benefit cost is
allocated to affiliated companies based on allocations pursuant to intercompany
management agreements. The Company's share of the 2001 and 2000 net periodic
cost was $3.0 million and $2.6 million, respectively.
The assumed rate of future increases in per capita cost of health care
benefits was 10% for the first year and grading down 1% per year to an ultimate
rate of 5%. The health care cost trend rate assumption affects the amounts
reported. For example, increasing the assumed health care cost trend rate by one
percentage point would increase the accumulated postretirement benefit
obligation by approximately $7,464,000 and would increase the medical service
and interest cost by approximately $1,156,000.
The Company also has a supplemental executive retirement plan for which the
accrued obligation at December 31, 2001 and 2000 was $1,709,000 and $2,356,000,
respectively.
(9) STOCKHOLDERS' EQUITY
(a) TREASURY SHARES In May 1999, State Auto Financial's Board of Directors approved a plan to repurchase up to 4.0 million shares of its outstanding common stock over a period ending December 31, 2000. Repurchases were transacted to maintain the same ownership ratios between Mutual and the public as it existed in May 1999, with 69% repurchased from Mutual and 31% from the public. Through December 31, 1999 all 4.0 million shares were repurchased, with approximately 2.7 million shares repurchased from Mutual and 1.3 million shares from the public. In conjunction with the stock repurchase plan, State Auto Financial entered into a line of credit agreement with Mutual. See related footnote at note 6 (c). In May 2000, State Auto Financial's Board of Directors approved a plan to repurchase up to 1.0 million shares of its common stock from the public over a period ending December 31, 2001. Through December 31, 2001, State Auto Financial repurchased 50,522 shares from the public. Repurchases during 2000 and 2001 were funded through dividends from subidiaries. On March 1, 2002, the State Auto Financial's Board of Directors approved a plan to repurchase up to 1.0 million shares of common stock from the public over a period extending to and through December 31, 2003.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION State Auto P&C, Milbank, Farmers Casualty, SAIC and Nationalare subject to regulations and restrictions under which payment of dividends from statutory earned surplus can be made to State Auto Financial during the year without prior approval of regulatory authorities. Pursuant to these rules, approximately $25.1 million is available for payment to State Auto Financial in 2002 without prior approval.
Reconciliations of statutory capital and surplus and net income (loss), as determined using statutory accounting practices, to the amounts included in the accompanying consolidated financial statements are as follows:
DECEMBER 31
-----------
2001 2000
---- ----
(in thousands)
Statutory capital and surplus of insurance subsidiaries....................................... $ 317,983 325,532
Net assets of noninsurance parent and affiliates.............................................. (21,033) (25,744)
--------- -------
296,950 299,788
Increases (decreases):
Deferred policy acquisition costs.......................................................... 67,087 32,458
Losses and loss expenses payable........................................................... 26,216 13,403
Net prepaid pension expense................................................................ 43,344 37,738
Postretirement benefit liability........................................................... (19,708) (18,478)
Deferred federal income taxes.............................................................. (25,347) (1,854)
Excess of statutory loss liabilities over case basis amounts............................... -- 2,567
Fixed maturities at fair value............................................................. 8,979 17,250
Goodwill................................................................................... 2,012 2,270
Other, net................................................................................. 660 917
--------- -------
Stockholders' equity per accompanying consolidated
financial statements................................................................... $ 400,193 386,059
========= =======
|
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
(in thousands)
Statutory net income (loss) of insurance subsidiaries........................ $ (39,773) 43,991 36,601
Net income of noninsurance parent and affiliates............................. 1,826 1,125 2,944
--------- ------ ------
(37,947) 45,116 39,545
Increases (decreases):
Deferred policy acquisition costs......................................... 34,629 3,522 3,407
Losses and loss expenses payable.......................................... 12,813 (103) 15
Net prepaid pension expense............................................... 1,131 640 2,578
Postretirement benefit expense............................................ (1,230) (1,150) --
Deferred federal income taxes............................................. 10,673 401 (2,265)
Goodwill amortization..................................................... (258) (258) (258)
Other, net................................................................ 804 (454) (206)
--------- ------ ------
Net income per accompanying consolidated
financial statements................................................... $ 20,615 47,714 42,816
========= ====== ======
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In March 1998, the National Association of Insurance Commissioners revised the Accounting Practices and Procedures Manual for insurance companies in a process referred to as Codification. The revised manual became effective January 1, 2001. The revised manual changed, to some extent, prescribed statutory insurance accounting practices and resulted in changes to the accounting practices that the insurance subsidiaries of State Auto Financial use to prepare its statutory-basis financial statements. The cumulative effect of changes in accounting principles adopted to conform to the revised Accounting Practices and Procedures Manual was reported as an adjustment to statutory surplus as of January 1, 2001. The adoption of Codification, as of January 1, 2001, increased statutory surplus of the insurance subsidiaries of State Auto Financial by approximately $19.3 million.
(10) PREFERRED STOCK
State Auto Financial has authorized two classes of preferred stock. For
both classes, upon issuance, the Board of Directors has authority to fix and
determine the significant features of the shares issued, including, among other
things, the dividend rate, redemption price, redemption rights, conversion
features and liquidation price payable in the event of any liquidation,
dissolution, or winding up of the affairs of State Auto Financial. See note 6
(a) regarding State Auto Financial's obligation to issue redeemable preferred
shares to SPC in connection with its catastrophic reinsurance arrangements with
a financial institution.
The Class A preferred stock is not entitled to voting rights until, for any
period, dividends are in arrears in the amount of six or more quarterly
dividends.
(11) STOCK INCENTIVE PLANS The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock incentive plans. For stock options granted to employees of Mutual in 1999, the Company also followed APB 25 and related Interpretations, as the Company deemed such employees to be common law employees of the Company. Compensation cost charged against operations in 2001, 2000 and 1999 were $14,000, $31,000 and $137,000, respectively, for those employee stock options granted where the exercise price was less than the market price of the underlying stock on the date of grant. Had compensation cost for the Company's plans been determined based on the fair values at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123), the Company's pro forma net earnings and net earnings per share information would have been as follows:
2001 2000 1999
---- ---- ----
(in thousands, except
per share figures)
Pro forma net earnings................................................................. $ 18,865 45,784 41,414
Pro forma net earnings per common share
Basic............................................................................. $ 0.49 1.19 1.02
Diluted........................................................................... $ 0.48 1.17 1.00
|
The fair value of options granted in 2001, 2000 and 1999 were estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair values and related assumptions for options granted were as follows:
2001 2000 1999
---- ---- ----
Fair value................................................................ $ 6.79 4.66 4.49
Dividend yield............................................................ .90% .90% .90%
Risk free interest rate................................................... 4.85% 6.51% 5.77%
Expected volatility factor................................................ .36 .34 .32
Expected life (years)..................................................... 6.7 7.2 5.7
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company has stock option plans for certain directors and key employees.
In May 2000, the Company's 1991 Stock Option Plan and 1991 Directors' Stock
Option Plan were replaced with the 2000 Stock Option Plan (Key Employee Plan)
and the 2000 Directors Stock Option Plan (Nonemployee Director Plan),
respectively, upon approval of shareholders at the 2000 annual meeting of
shareholders. The Nonemployee Directors' Plan provides each nonemployee director
an option to purchase 1,500 shares of common stock following each annual meeting
of the shareholders at an option price equal to the fair market value at the
close of business on the date of the annual meeting. The Company has reserved
300,000 shares of common stock under this plan. These options are exercisable at
issuance to 10 years from date of grant. The Key Employee's Plan provides that
qualified stock options may be granted at an option price not less than fair
market value at date of grant and that nonqualified stock options may be granted
at any price determined by the options committee of the Board of Directors. The
Company has reserved 5,000,000 shares of common stock under this plan. These
options are exercisable at such time or times as may be determined by a
committee of the Company's Board of Directors. Normally, these options are
exercisable from 1 to 10 years from date of grant.
The Company has an employee stock purchase plan with a dividend
reinvestment feature, under which employees of the Company may choose at two
different specified time intervals each year to have up to 6% of their annual
base earnings withheld to purchase the Company's common stock. The purchase
price of the stock is 85% of the lower of its beginning-of-interval or
end-of-interval market price. The Company has reserved 2,400,000 shares of
common stock under this plan. At December 31, 2001, 1,803,000 shares have been
purchased under this plan.
The Company has a stock option incentive plan for certain designated
independent insurance agencies that represent the Company and its affiliates.
The Company has reserved 400,000 shares of common stock under this plan. The
plan provides that the options become exercisable on the first day of the
calendar year following the agency's achievement of specific production and
profitability requirements over a period not greater than two calendar years
from date of grant or a portion thereof in the first calendar year in which an
agency commences participation under the plan. Options granted and vested under
this plan have a 10-year term. The Company has accounted for the plan in its
accompanying financial statements at fair value.The fair value of options
granted was estimated at the reporting date or vesting date using the
Black-Scholes option-pricing model. The weighted average fair value and related
assumptions for 2001, 2000 and 1999, respectively, were as follows: fair value
of $8.04, $10.91 and $4.02; dividend yield of .90% for all years; expected
volatility factor of .34, .32 and .30; risk-free interest rate of 5.16%, 5.19%
and 6.80%; and expected life of the option of 8.7, 9.0 and 9.7 years. Expense of
$140,000, $493,000 and $105,000 associated with this plan was recognized in
2001, 2000 and 1999, respectively.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A summary of the Company's stock option activity and related information for these plans for the years ended December 31, 2001, 2000 and 1999, follows:
2001 2000 1999
---------------------------- ---------------------------- ----------------------------
WEIGHTED - AVERAGE WEIGHTED - AVERAGE WEIGHTED - AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- ------------------ ------- ------------------ ------- ------------------
(numbers in thousands, except per share figures)
Outstanding, beginning
of year 2,852 $8.28 2,546 $7.76 2,272 $ 6.76
Granted 299 16.53 492 10.29 453 11.24
Exercised 315 4.39 (129) 4.32 (165) 3.34
Canceled (39) 10.16 (57) 11.15 (14) 10.52
----- ----- -----
Outstanding, end of year 2,797 8.70 2,852 8.28 2,546 7.76
===== ===== =====
|
A summary of information pertaining to options outstanding and exercisable as of December 31, 2001 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------------
WEIGHTED - AVERAGE
REMAINING WEIGHTED - AVERAGE WEIGHTED - AVERAGE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
------------------------ ------ ------------------ ------------------ ------ ------------------
(numbers in thousands, except per share figures)
Less than $5.00 521 1.2 $ 4.31 521 $ 4.31
$5.01 - $10.00 883 4.1 6.58 872 6.56
Greater than $10.01 1,393 7.8 13.45 980 12.93
----- -----
2,797 5.4 9.58 2,373 8.70
===== =====
|
(12) NET EARNINGS PER COMMON SHARE The following table sets forth the compilation of basic and diluted net earnings per common share:
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
(in thousands, except per share data)
Numerator:
Net earnings for basic and diluted earnings per common share.............. $ 20,615 47,714 42,816
======== ====== ======
Denominator:
Weighted average shares for basic net earnings
per common share..................................................... 38,775 38,427 40,780
Effect of dilutive stock options.......................................... 906 693 746
-------- ------ ------
Adjusted weighted average shares for
diluted net earnings per common share .............................. 39,681 39,120 41,526
======== ====== ======
Basic net earnings per common share.......................................... $ 0.53 1.24 1.05
======== ====== ======
Diluted net earnings per common share........................................ $ 0.52 1.21 1.03
======== ====== ======
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) OTHER COMPREHENSIVE INCOME The related federal income tax effects of each component of other comprehensive income (loss) are as follows:
YEAR ENDED DECEMBER 31, 2001
----------------------------
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
(in thousands)
Net unrealized holding losses on securities:
Unrealized holding losses arising during 2001............................. $(10,787) 3,775 (7,012)
Reclassification adjustments for gains realized in net income............. (1,962) 687 (1,275)
Net unrealized holding losses............................................. (12,749) 4,462 (8,287)
-------- ----- ------
Other comprehensive loss..................................................... $(12,749) 4,462 (8,287)
======== ===== ======
|
YEAR ENDED DECEMBER 31, 2001
----------------------------
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
(in thousands)
Net unrealized holding gains on securities:
Unrealized holding gains arising during 2000.............................. $36,272 (12,695) 23,577
Reclassification adjustments for gains realized in net income............. (5,255) 1,839 (3,416)
-------- ------- ------
Net unrealized holding gains.............................................. 31,017 (10,856) 20,161
-------- ------- ------
Other comprehensive income................................................... $31,017 (10,856) 20,161
======== ======= ======
|
YEAR ENDED DECEMBER 31, 2001
----------------------------
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
(in thousands)
Net unrealized holding losses on securities:
Unrealized holding losses arising during 1999............................. $(28,361) 9,926 (18,435)
Reclassification adjustments for gains realized in net income............. (2,593) 908 (1,685)
-------- ------ ------
Net unrealized holding losses............................................. (30,954) 10,834 (20,120)
-------- ------ ------
Other comprehensive loss..................................................... $(30,954) 10,834 (20,120)
======== ====== ======
|
(14) REPORTABLE SEGMENTS Prior to 2001 the Company had four reportable segments: standard insurance, nonstandard insurance, investment management services and management and operations services (prior to 2000, executive insurance management services). The reportable segments are business units managed separately because of the differences in products or service they offer and type of customer they serve. The standard insurance segment provides personal and commercial insurance to its policyholders. Its principal lines of business include personal and commercial automobile, homeowners, commercial multi-peril, workers' compensation, general liability and fire insurance. The nonstandard insurance segment provides personal automobile insurance to policyholders that are typically rejected or canceled by standard insurance carriers because of poor loss experience or a history of late payment of premiums. Both the standard and nonstandard insurance segments operate primarily in the central and eastern United States, excluding New York, New Jersey, and the New England states, through the independent insurance agency system. Effective July 1, 2001, with the Pooled Subsidiaries assumption of the former Meridian Mutual business through the Pooling Arrangement, as more fully described in note 6(a), the Company's standard and nonstandard insurance segments have been segregated into four reportable segments. While these segments offer similar products and services and operate in the same geographical locations within the United States, they differ within their operating measures, more specifically within their loss and profitability results. Consequently, the Company has defined the two insurance segments that existed
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
prior to 2001 to be State Auto standard insurance and State Auto nonstandard
insurance and the former Meridian Mutual business assumed through the Pooling
Arrangement by the Pooled Subsidiaries to be Meridian standard insurance and
Meridian nonstandard insurance. Monitoring the performance of the Meridian
segments allows management to review the results of its integration efforts of
these segments while this business continues to be processed through the
Meridian systems platform. As this business begins to migrate through new and
renewal policy issuance on the State Auto systems platform where State Auto
policies, pricing and underwriting philosophies are fully integrated, it is
anticipated that the Meridian segments will decrease.
The investment management services segment manages the investment
portfolios of affiliated insurance companies. The management and operations
services segment provided employee services and managed the day-to-day
operations of all affiliated Companies. As a result of the loss of the
management and operations services income as described in note 6(d), the
management and operations service segment will be included in the all other
category for segment reporting beginning in the first quarter of 2002 as the
results for this segment will no longer meet the quantitative thresholds for
separate presentation as a reportable segment.
The Company evaluates performance of its reportable segments and allocates
resources thereon based on profit or loss from operations, excluding net
realized gains on investments on the Company's investment portfolio, before
federal income taxes. The Company monitors its assets for the insurance segments
on a legal entity basis, which for the Pooled Subsidiaries includes assets of
three of the four reportable insurance segments (State Auto standard insurance,
Meridian standard insurance and Meridian nonstandard insurance). The Company
does not allocate assets to the management and operations services segment. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
Revenue from segments in the other category is attributable to three other
operating segments of the Company; an insurance software development and resale
segment, a premium finance segment and a property management and leasing
segment. These segments have never met the quantitative thresholds for
individual presentation as reportable segments.
The following provides financial information regarding the Company's
reportable segments:
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
(in thousands)
REVENUES FROM EXTERNAL CUSTOMERS:
State Auto standard insurance............................................... $ 485,059 406,602 392,557
State Auto nonstandard insurance............................................ 37,536 29,595 32,973
Meridian standard insurance................................................. 72,825 -- --
Meridian nonstandard insurance.............................................. 6,501 -- --
Investment management services.............................................. 3,466 3,360 3,371
Management and operations services.......................................... 12,621 14,654 5,628
All other................................................................... 3,152 3,227 3,537
--------- ------- -------
Total revenues from external customers......................................... 621,160 457,438 438,066
Intersegment revenues:
State Auto standard insurance............................................... 128 162 120
Investment management services.............................................. 3,553 2,884 2,575
Management and operations services.......................................... 3,706 4,303 1,451
All other................................................................... 1,800 1,744 1,676
--------- ------- -------
Total intersegment revenues.................................................... 9,187 9,093 5,822
--------- ------- -------
Total revenue.................................................................. 630,347 466,531 441,578
--------- ------- -------
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
(in thousands)
Reconciling items:
Intersegment revenues....................................................... (9,187) (9,093) (5,822)
Corporate revenues.......................................................... 150 81 250
Net realized gains on investment............................................ 1,962 5,255 2,555
--------- ------- -------
Total consolidated revenues.................................................... $ 623,272 462,774 440,871
========= ======= =======
SEGMENT PROFIT (LOSS):
State Auto standard insurance............................................... $ 45,664 35,579 41,146
State Auto nonstandard insurance............................................ 1,378 (116) 1,647
Meridian standard insurance................................................. (44,397) -- --
Meridian nonstandard insurance.............................................. (5,933) -- --
Investment management services.............................................. 5,965 5,354 5,191
Management and operations services.......................................... 15,322 17,552 6,330
All other................................................................... 1,004 905 1,238
--------- ------- -------
Total segment profit........................................................ 19,003 59,274 55,552
Reconciling items:
Corporate expenses.......................................................... (2,989) (3,085) (1,122)
Net realized gains on investments........................................... 1,962 5,255 2,555
--------- ------- -------
Total consolidated income before federal income taxes.......................... $ 17,976 61,444 56,985
========= ======= =======
NET INVESTMENT INCOME:
State Auto standard insurance............................................. $ 37,230 33,436 29,060
State Auto nonstandard insurance.......................................... 1,997 1,899 1,839
Meridian standard insurance............................................... 3,595 -- --
Meridian nonstandard insurance............................................ 338 -- --
Investment management services............................................ 318 360 272
All other................................................................. 193 244 268
--------- ------- -------
Total net investment income.................................................. 43,671 35,939 31,439
Reconciling items:
Corporate net investment income........................................... 150 81 249
Reclassification adjustments in consolidation............................. 3,554 2,895 2,574
--------- ------- -------
Total consolidated net investment income..................................... $ 47,375 38,915 34,262
========= ======= =======
|
DECEMBER 31
-----------
2001 2000
---- ----
(in thousands)
SEGMENT ASSETS:
Pooled Subsidiaries......................................................................... $1,261,689 850,080
State Auto nonstandard insurance............................................................ 67,043 48,811
Investment management services.............................................................. 8,698 6,879
All other................................................................................... 15,685 15,543
---------- -------
Total segment assets........................................................................ 1,353,115 921,313
Reconciling items:
Corporate assets............................................................................ 3,559 1,150
Reclassification adjustments in consolidation............................................... 10,822 (24,357)
---------- -------
Total consolidated assets...................................................................... $1,367,496 898,106
========== =======
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Revenues from external customers include the following products and services:
YEAR ENDED DECEMBER 31
----------------------
2001 2000 1999
---- ---- ----
(in thousands)
Earned premiums State Auto standard insurance:
Automobile................................................................... $237,401 203,967 204,155
Homeowners and farmowners.................................................... 77,105 67,247 63,666
Commercial multi-peril....................................................... 31,215 25,349 23,902
Workers' compensation........................................................ 15,365 10,628 10,764
Fire and allied.............................................................. 36,031 27,848 25,763
Other and products liability................................................. 21,875 21,924 20,052
Other lines.................................................................. 25,304 13,603 12,873
-------- ------- -------
Total State Auto standard insurance earned premiums............................. 444,296 370,566 361,175
Total State Auto nonstandard insurance earned premiums.......................... 35,256 27,401 30,883
-------- ------- -------
Meridian standard insurance:
Automobile................................................................... 36,402 -- --
Homeowners and farmowners.................................................... 9,536 -- --
Commercial multi-peril....................................................... 11,381 -- --
Workers' compensation........................................................ 8,660 -- --
Fire and allied.............................................................. 499 -- --
Other and products liability................................................. 519 -- --
Other lines.................................................................. 2,157 -- --
-------- ------- -------
Total Meridian standard insurance earned premiums............................... 69,154 -- --
Total Meridian nonstandard insurance earned premiums............................ 6,501 -- --
-------- ------- -------
Total earned permiums........................................................... 555,207 397,967 392,058
Investment management services.................................................. 2,965 2,940 3,099
Management and operations services.............................................. 12,621 14,654 4,908
Net investment income........................................................... 47,225 38,834 34,012
Other income.................................................................... 3,142 3,043 3,989
-------- ------- -------
Total revenues from external customers.......................................... $621,160 457,438 438,066
======== ======= =======
|
The standard insurance segments and the Meridian nonstandard insurance segment participate in a reinsurance pooling agreement with other standard and nonstandard insurance affiliates. For discussion regarding this arrangement and these segments' contribution to the pool and participation in the pool, see note 6.
Revenues from external customers are derived entirely within the United States. Also, all long-lived assets are located within the United States.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
2001
----
FOR THREE MONTHS ENDED
----------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(dollars in thousands, except per share amounts)
Total revenues............................................ $ 118,001 123,032 156,671 225,568
Income (loss) before federal income taxes................. 19,199 12,028 8,029 (21,280)
Net income (loss) ........................................ 14,540 9,433 7,276 (10,634)
Net earnings (loss) per common share (note 9a):
Basic................................................ 0.37 0.24 0.19 (0.27)
Diluted.............................................. 0.36 0.24 0.18 (0.27)
========= ======= ======= =======
|
2000
----
FOR THREE MONTHS ENDED
----------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(dollars in thousands, except per share amounts)
Total revenues............................................ $ 116,461 113,953 116,328 116,032
Income before federal income taxes........................ 18,584 16,512 9,131 17,217
Net income ............................................... 13,683 12,494 8,006 13,531
Net earnings per common share (note 9a):
Basic................................................ 0.35 0.33 0.21 0.35
Diluted.............................................. 0.35 0.32 0.20 0.34
========= ======= ======= =======
|
(16) CONTINGENCIES The Company's insurance subsidiaries are involved in litigation and may become involved in potential litigation arising in the ordinary course of business. Additionally, the insurance subsidiaries may be impacted by adverse regulatory actions and adverse court decisions where insurance coverages are expanded beyond the scope originally contemplated in the policy(ies). In the opinion of management, the effects, if any, of such litigation and published court decicions are not expected to be material to the consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item with respect to directors will be contained in the Company's proxy statement to be filed within 120 days of December 31, 2001, and is hereby incorporated herein by reference.
Information required under this Item with respect to executive officers is contained under the heading "Executive Officers of the Registrant" in Item 1 of this Form 10-K report.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's proxy statement to be filed within 120 days of December 31, 2001, and is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item will be contained in the Company's proxy statement to be filed within 120 days of December 31, 2001, and is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's proxy statement to be filed within 120 days of December 31, 2001, and is hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) LISTING OF FINANCIAL STATEMENTS
The following consolidated financial statements of the Company, are filed as part of this Form 10-K Report and are included in Item 8:
Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Income for each of the three years in the period ended December 31, 2001 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2001 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001 Notes to Consolidated Financial Statements
(a)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Company for the years 2001, 2000, and 1999, are included in Item 14(d), following the signatures, and should be read in conjunction with the consolidated financial statements contained in this Form 10-K Annual Report.
Schedule Number Schedule ------ -------- |
I(a) & I(b). Summary of Investments - Other Than Investments in Related Parties
II. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
(a)(3) LISTING OF EXHIBITS
Exhibit No. Description of Exhibit If incorporated by reference document
----------- ---------------------- with which Exhibit was previously filed
3(A)(1) State Auto Financial Corporation's Amended and Restated with SEC 1933 Act Registration Statement No.
Articles of Incorporation 33-40643 on Form S-1 (see Exhibit 3(a)
therein)
3(A)(2) State Auto Financial Corporation's Amendment to the 1933 Act Registration Statement No.
Amended and Restated Articles of Incorporation 33-89400 on Form S-8 (see Exhibit 4(b)
therein)
3(A)(3) State Auto Financial Corporation Certificate of Form 10-K Annual Report for the year
Amendment to the Amended and Restated Articles of ended December 31, 1998 (see Exhibit
Incorporation as of June 2, 1998 3(A)(3) therein)
3(B) State Auto Financial Corporation's Amended and Restated 1933 Act Registration Statement No.
Code of Regulations 33-40643 on Form S-1 (see Exhibit 3(b)
therein)
4 State Auto Financial Corporation's Amended and Restated Form 10-K Annual Report for the year
Articles of Incorporation, and Articles 1, 3, 5 and 9 of ended December 31, 1992 (see Exhibit
the Company's Amended and Restated Code of Regulations 3(A) and 3(B) therein)
10(A) Guaranty Agreement between State Automobile Mutual 1933 Act Registration Statement No.
Insurance Company and State Auto Property and Casualty 33-40643 on Form S-1 (see Exhibit 10
Insurance Company dated as of May 16, 1991 (d) therein)
10(B) Form of Indemnification Agreement between State Auto 1933 Act Registration Statement No.
Financial Corporation and each of its directors 33-40643 on Form S-1 (see Exhibit 10
(e) therein)
10(C)* State Auto 1991 Quality Performance Bonus Plan 1933 Act Registration Statement No.
33-40643 on Form S-1 (see Exhibit 10
(f) therein)
10(D)* 1991 Stock Option Plan 1933 Act Registration Statement No.
33-40643 on Form S-1 (see Exhibit 10
(h) therein)
10(E)* Amendment Number 1 to the 1991 Stock Option Plan 1933 Act Registration Statement No.
33-89400 on Form S-8 (see Exhibit 4 (a)
therein)
10(F)* 1991 Directors' Stock Option Plan 1933 Act Registration Statement No.
33-40643 on Form S-1 (see Exhibit 10
(i) therein)
|
*Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit
Exhibit No. Description of Exhibit If incorporated by reference document
----------- ---------------------- with which Exhibit was previously filed
10(G) License Agreement between State Automobile Mutual with SEC 1933 Act Registration Statement No.
Insurance Company and Policy Management Systems 33-40643 on Form S-1 (see Exhibit 10 (k)
Corporation dated December 28, 1984 therein)
10(H) Investment Management Agreement between Stateco Form 10-K Annual Report for the year
Financial Services, Inc. and State Automobile Mutual ended December 31, 1992 (see Exhibit 10
Insurance Company, effective April 1, 1993 (N) therein)
10(I)* State Auto Insurance Companies Directors' Deferred Form 10-K Annual Report for year ended
Compensation Plan December 31, 1995 (see Exhibit 10(S)
therein)
10(J)* State Auto Insurance Companies Amended and Restated Registration Statement on Form S-8, File
Non-Qualified Incentive Deferred Compensation Plan No. 333-56338 (see Exhibit 4(e) therein)
10(K)* Amendment Number 2 to the 1991 Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 1996 (see Exhibit
10(DD) therein)
10(L)* Amendment Number 1 to the 1991 Directors' Stock Option Form 10-K Annual Report for the year
Plan ended December 31, 1996 (see Exhibit
10(EE) therein)
10(M) Amended and Restated SERP of State Auto Mutual Form 10-K Annual Report for the year
effective as of January 1, 1994 ended December 31, 1997 (see Exhibit
10(HH) therein)
10(N) Credit Agreement dated as of June 1, 1999 between Form 10-Q for the period ended June 30,
State Auto Financial Corporation and State Automobile 1999 (see Exhibit 10(LL) therein)
Mutual Insurance Company
10(O) Reinsurance Pooling Agreement amended and restated as Form 10-K Annual Report for the year
of January 1, 2000 by and among State Automobile ended December 31, 1999 (see Exhibit
Mutual Insurance Company, State Auto Property and 10(W) therein)
Casualty Insurance Company, Milbank Insurance Company,
Midwest Security Insurance Company, Farmers Casualty
Insurance Company and State Auto Insurance Company
10(P) Management and Operations Agreement as of January 1, Form 10-K Annual Report for the year
2000 among State Automobile Mutual Insurance Company, ended December 31, 1999 (see Exhibit
State Auto Financial Corporation, State Auto Property 10(X) therein)
and Casualty Insurance Company, State Auto National
Insurance Company, Milbank Insurance Company, State
Auto Insurance Company, Stateco Financial Services,
Inc., Strategic Insurance Software, Inc., 518 Property
Management and Leasing, LLC
|
*Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit
Exhibit No. Description of Exhibit
----------- ----------------------
If incorporated by reference document
with which Exhibit was previously filed
10(Q) Property Catastrophe Overlying Excess of Loss with SEC Form 10-K Annual Report for the year
Reinsurance contract issued to State Automobile ended December 31, 1999 (see Exhibit
Mutual Insurance Company, State Auto National 10(Y) therein)
Insurance Company, Milbank Insurance Company, Midwest
Security Insurance Company, Farmers Casualty
Insurance Company, Mid-Plains Insurance Company by
State Auto Property and Casualty Insurance Company
10(R) First Amendment to the Management and Operations Form 10-K Annual Report for the year
Agreement effective January 1, 2000 among State ended December 31, 1999 (see Exhibit
Automobile Mutual Insurance Company, State Auto 10(Z) therein)
Financial Corporation, State Auto Property and
Casualty Insurance Company, State Auto National
Insurance Company, Milbank Insurance Company, State
Auto Insurance Company, Stateco Financial Services,
Inc., Strategic Insurance Software, Inc. and 518
Property Management and Leasing, LLC
10(S) First Amendment to the June 1, 1999 Credit Agreement Form 10-K Annual Report for the year
dated November 1, 1999 between State Auto Financial ended December 31, 1999 (see Exhibit
Corporation and State Automobile Mutual Insurance 10(AA) therein)
Company
10(T) Second amendment to the June 1, 1999 Credit Agreement Form 10-Q for the period ended March 31,
dated December 1, 1999 between State Auto Financial 2000 (see Exhibit 10(BB) therein)
Corporation and State Automobile Mutual Insurance
Company
10(U)* Employment Agreement and Executive Agreement between Form 10-K Annual Report for the year
State Auto Financial Corporation and Robert H. Moone ended December 31, 2000 (see Exhibit
10(BB) therein)
10(V)* Form of Executive Agreement between State Auto Form 10-K Annual Report for the year
Financial Corporation and certain executive ended December 31, 2000 (see Exhibit
officers 10(CC) therein)
10(W) First Amendment to the Reinsurance Pooling Agreement Form 10-K Annual Report for the year
Amended and Restated as of January 1, 2000 by and ended December 31, 2000 (see Exhibit
among State Auto Property and Casualty Insurance 10(DD) therein)
Company, State Automobile Mutual Insurance Company,
Milbank Insurance Company, Midwest Security Insurance
Company, Farmers Casualty Insurance Company and State
Auto Insurance Company
10(X) Addendum No. 1 of the Property Catastrophe Overlying Form 10-K Annual Report for the year
Excess of Loss Reinsurance Contract by and among ended December 31, 2000 (see Exhibit
State Auto Property and Casualty Insurance Company, 10(EE) therein)
State Automobile Mutual Insurance Company, State Auto
National Insurance Company, Milbank Insurance
Company, Midwest Security Insurance Company, Farmers
Casualty Insurance Company, Mid-Plains Insurance
Company and State Auto Insurance Company dated
November 17, 2000
|
*Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit
10(Y)* 2000 Stock Option Plan Definitive Proxy Statement on Form DEF
14A, File No. 000-19289, for Annual
Meeting of Shareholders held on May 26,
2000 (see Appendix A therein)
10(Z)* 2000 Directors Stock Option Plan Definitive Proxy Statement on Form DEF
14A, File No. 000-19289, for Annual
Meeting of Shareholders held on May 26,
2000 (see Appendix B therein)
10(AA)* First Amendment to 2000 Directors Stock Option Plan Form 10-Q for the period ended March 31,
2001 (see Exhibit 10(HH) therein)
10(BB)* Second Amendment to the Reinsurance Pooling Agreement Form 10-Q for the period ended June 30,
Amended and Restated as of January 1, 2000, by the 2001 (see Exhibit 10(II) therein)
State Automobile Mutual Insurance Company, State Auto
Property and Casualty Insurance Company, Milbank
Insurance Company, Midwest Security Insurance
Company, Farmers Casualty Insurance Company and State
Auto Insurance Company
10(CC)* Second Amendment to 1991 Directors Stock Option Plan Form 10-Q for the period ended September
30, 2001 (see Exhibit 10(JJ) therein)
10(DD)* Second Amendment to 2000 Directors Stock Option Plan Form 10-Q for the period ended September
30, 2001 (see Exhibit 10(KK) therein)
10(EE)* Third Amendment to 2000 Directors Stock Option Plan Included herein
10(FF) Third Amendment to State Auto Reinsurance Pooling Included herein
Agreement, Amended and Restated as of January 1, 2000
10(GG) Stop Loss Reinsurance Agreement dated October 1, 2001 Included herein
among inter alia Mutual and State Auto P&C
10(HH) Amendment No. 2 to the Management and Operations Included herein
Agreement dated January 1, 2000 among, inter alia,
Mutual and State Auto P&C
10(II) $100,000,000 Credit Agreement among SAF Funding Included herein
Corporation, as Borrower, the Lenders and Bank One,
NA as Agent dated as of November 16, 2001
10(JJ) Put Agreement among State Automobile Mutual Insurance Included herein
Company, State Auto Financial Corporation and Bank
One, NA as Agent dated as of November 16, 2001
10(KK) Standby Purchase Agreement between State Auto Included herein
Financial Corporation and SAF Funding Corporation
dated as of November 16, 2001
21 List of Subsidiaries of State Auto Financial Included herein
Corporation
23 Consent of Independent Auditors Included herein
24(A) Powers of Attorney - William J. Lhota, Urlin G. Form 10-Q for the period ended June 30,
Harris, Jr., Paul W. Huesman, George R. Manser, and 1997 (see Exhibit 24(C) therein)
David J. D'Antoni
|
*Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit
24(B) Power of Attorney - John R. Lowther Form 10-Q for the period ended March 31,
1998 (see Exhibit 24(D) therein)
24(C) Power of Attorney - Robert H. Moone Form 10-K Annual Report for the year
ended December 31, 1998 (see Exhibit
24(E) therein)
24(D) Power of Attorney - Richard K. Smith Form 10-K Annual Report for the year
ended December 31, 2000 (See Exhibit
24(D) therein)
24(E) Power of Attorney - Ramon L. Humke Included herein
|
(b) REPORTS ON FORM 8-K
The Company did not file any Form 8-K current reports during
the fourth quarter of the Company's fiscal year ended December
31, 2001.
(c) EXHIBITS
The exhibits have been submitted as a separate section of this
report following the financial statement schedules.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules have been submitted as a
separate section of this report following the signatures.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STATE AUTO FINANCIAL CORPORATION
Dated: March 29, 2002 /s/Robert H. Moone
--------------------------------------
Robert H. Moone
Chairman, President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/Steven J. Johnston Chief Financial Officer, March 29, 2002
--------------------------- Senior Vice President, Treasurer
Steven J. Johnston (principal financial officer
and principal accounting
officer)
John R. Lowther* Secretary and Director March 29, 2002
---------------------------
John R. Lowther
Urlin G. Harris, Jr.* Director March 29, 2002
---------------------------
Urlin G. Harris, Jr.
David J. D'Antoni* Director March 29, 2002
---------------------------
David J. D'Antoni
Paul W. Huesman* Director March 29, 2002
---------------------------
Paul W. Huesman
William J. Lhota* Director March 29, 2002
---------------------------
William J. Lhota
George R. Manser* Director March 29, 2002
---------------------------
George R. Manser
Ramon L. Humke* Director March 29, 2002
---------------------------
Ramon L. Humke
Richard K. Smith* Director March 29, 2002
---------------------------
Richard K. Smith
|
/s/Robert H. Moone Chairman, President and March 29, 2002 --------------------------- Chief Executive Officer Robert H. Moone (principal executive officer) |
*Steven J. Johnston by signing his name hereto, does sign this document on behalf of the person indicated above pursuant to a Power of Attorney duly executed by such person.
/s/Steven J. Johnston March 29, 2002 --------------------------- Steven J. Johnston Attorney in Fact |
Item 14(c)
Exhibit Index
(a)(3) LISTING OF EXHIBITS
If incorporated by reference document
Exhibit No. Description of Exhibit with which Exhibit was previously filed with SEC
----------- ---------------------- ------------------------------------------------
3(A)(1) State Auto Financial Corporation's Amended and Restated 1933 Act Registration Statement No.
Articles of Incorporation 33-40643 on Form S-1 (see Exhibit 3(a)
therein)
3(A)(2) State Auto Financial Corporation's Amendment to the 1933 Act Registration Statement No.
Amended and Restated Articles of Incorporation 33-89400 on Form S-8 (see Exhibit 4(b)
therein)
3(A)(3) State Auto Financial Corporation Certificate of Form 10-K Annual Report for the year
Amendment to the Amended and Restated Articles of ended December 31, 1998 (see Exhibit
Incorporation as of June 2, 1998 3(A)(3) therein)
3(B) State Auto Financial Corporation's Amended and Restated 1933 Act Registration Statement No.
Code of Regulations 33-40643 on Form S-1 (see Exhibit 3(b)
therein)
4 State Auto Financial Corporation's Amended and Restated Form 10-K Annual Report for the year
Articles of Incorporation, and Articles 1, 3, 5 and 9 of ended December 31, 1992 (see Exhibit
the Company's Amended and Restated Code of Regulations 3(A) and 3(B) therein)
10(A) Guaranty Agreement between State Automobile Mutual 1933 Act Registration Statement No.
Insurance Company and State Auto Property and Casualty 33-40643 on Form S-1 (see Exhibit 10
Insurance Company dated as of May 16, 1991 (d) therein)
10(B) Form of Indemnification Agreement between State Auto 1933 Act Registration Statement No.
Financial Corporation and each of its directors 33-40643 on Form S-1 (see Exhibit 10
(e) therein)
10(C)* State Auto 1991 Quality Performance Bonus Plan 1933 Act Registration Statement No.
33-40643 on Form S-1 (see Exhibit 10
(f) therein)
10(D)* 1991 Stock Option Plan 1933 Act Registration Statement No.
33-40643 on Form S-1 (see Exhibit 10
(h) therein)
10(E)* Amendment Number 1 to the 1991 Stock Option Plan 1933 Act Registration Statement No.
33-89400 on Form S-8 (see Exhibit 4 (a)
therein)
10(F)* 1991 Directors' Stock Option Plan 1933 Act Registration Statement No.
33-40643 on Form S-1 (see Exhibit 10
(i) therein)
|
*Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit
Page 2
If incorporated by reference document
Exhibit No. Description of Exhibit with which Exhibit was previously filed with SEC
----------- ---------------------- ------------------------------------------------
10(G) License Agreement between State Automobile Mutual 1933 Act Registration Statement No.
Insurance Company and Policy Management Systems 33-40643 on Form S-1 (see Exhibit 10 (k)
Corporation dated December 28, 1984 therein)
10(H) Investment Management Agreement between Stateco Form 10-K Annual Report for the year
Financial Services, Inc. and State Automobile Mutual ended December 31, 1992 (see Exhibit 10
Insurance Company, effective April 1, 1993 (N) therein)
10(I)* State Auto Insurance Companies Directors' Deferred Form 10-K Annual Report for year ended
Compensation Plan December 31, 1995 (see Exhibit 10(S)
therein)
10(J)* State Auto Insurance Companies Amended and Restated Registration Statement on Form S-8, File
Non-Qualified Incentive Deferred Compensation Plan No. 333-56338 (see Exhibit 4(e) therein)
10(K)* Amendment Number 2 to the 1991 Stock Option Plan Form 10-K Annual Report for the year
ended December 31, 1996 (see Exhibit
10(DD) therein)
10(L)* Amendment Number 1 to the 1991 Directors' Stock Option Form 10-K Annual Report for the year
Plan ended December 31, 1996 (see Exhibit
10(EE) therein)
10(M) Amended and Restated SERP of State Auto Mutual Form 10-K Annual Report for the year
effective as of January 1, 1994 ended December 31, 1997 (see Exhibit
10(HH) therein)
10(N) Credit Agreement dated as of June 1, 1999 between Form 10-Q for the period ended June 30,
State Auto Financial Corporation and State Automobile 1999 (see Exhibit 10(LL) therein)
Mutual Insurance Company
10(O) Reinsurance Pooling Agreement amended and restated as Form 10-K Annual Report for the year
of January 1, 2000 by and among State Automobile ended December 31, 1999 (see Exhibit
Mutual Insurance Company, State Auto Property and 10(W) therein)
Casualty Insurance Company, Milbank Insurance Company,
Midwest Security Insurance Company, Farmers Casualty
Insurance Company and State Auto Insurance Company
10(P) Management and Operations Agreement as of January 1, Form 10-K Annual Report for the year
2000 among State Automobile Mutual Insurance Company, ended December 31, 1999 (see Exhibit
State Auto Financial Corporation, State Auto Property 10(X) therein)
and Casualty Insurance Company, State Auto National
Insurance Company, Milbank Insurance Company, State
Auto Insurance Company, Stateco Financial Services,
Inc., Strategic Insurance Software, Inc., 518 Property
Management and Leasing, LLC
|
*Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit
Page 3
If incorporated by reference document
Exhibit No. Description of Exhibit with which Exhibit was previously filed with SEC
----------- ---------------------- ------------------------------------------------
10(Q) Property Catastrophe Overlying Excess of Loss Form 10-K Annual Report for the year
Reinsurance contract issued to State Automobile ended December 31, 1999 (see Exhibit
Mutual Insurance Company, State Auto National 10(Y) therein)
Insurance Company, Milbank Insurance Company, Midwest
Security Insurance Company, Farmers Casualty
Insurance Company, Mid-Plains Insurance Company by
State Auto Property and Casualty Insurance Company
10(R) First Amendment to the Management and Operations Form 10-K Annual Report for the year
Agreement effective January 1, 2000 among State ended December 31, 1999 (see Exhibit
Automobile Mutual Insurance Company, State Auto 10(Z) therein)
Financial Corporation, State Auto Property and
Casualty Insurance Company, State Auto National
Insurance Company, Milbank Insurance Company, State
Auto Insurance Company, Stateco Financial Services,
Inc., Strategic Insurance Software, Inc. and 518
Property Management and Leasing, LLC
10(S) First Amendment to the June 1, 1999 Credit Agreement Form 10-K Annual Report for the year
dated November 1, 1999 between State Auto Financial ended December 31, 1999 (see Exhibit
Corporation and State Automobile Mutual Insurance 10(AA) therein)
Company
10(T) Second amendment to the June 1, 1999 Credit Agreement Form 10-Q for the period ended March 31,
dated December 1, 1999 between State Auto Financial 2000 (see Exhibit 10(BB) therein)
Corporation and State Automobile Mutual Insurance
Company
10(U)* Employment Agreement and Executive Agreement between Form 10-K Annual Report for the year
State Auto Financial Corporation and Robert H. Moone ended December 31, 2000 (see Exhibit
10(BB) therein)
10(V)* Form of Executive Agreement between State Auto Form 10-K Annual Report for the year
Financial Corporation and certain executive ended December 31, 2000 (see Exhibit
officers 10(CC) therein)
10(W) First Amendment to the Reinsurance Pooling Agreement Form 10-K Annual Report for the year
Amended and Restated as of January 1, 2000 by and ended December 31, 2000 (see Exhibit
among State Auto Property and Casualty Insurance 10(DD) therein)
Company, State Automobile Mutual Insurance Company,
Milbank Insurance Company, Midwest Security Insurance
Company, Farmers Casualty Insurance Company and State
Auto Insurance Company
10(X) Addendum No. 1 of the Property Catastrophe Overlying Form 10-K Annual Report for the year
Excess of Loss Reinsurance Contract by and among ended December 31, 2000 (see Exhibit
State Auto Property and Casualty Insurance Company, 10(EE) therein)
State Automobile Mutual Insurance Company, State Auto
National Insurance Company, Milbank Insurance
Company, Midwest Security Insurance Company, Farmers
Casualty Insurance Company, Mid-Plains Insurance
Company and State Auto Insurance Company dated
November 17, 2000
|
*Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit
Page 4
10(Y)* 2000 Stock Option Plan Definitive Proxy Statement on Form DEF
14A, File No. 000-19289, for Annual
Meeting of Shareholders held on May 26,
2000 (see Appendix A therein)
10(Z)* 2000 Directors Stock Option Plan Definitive Proxy Statement on Form DEF
14A, File No. 000-19289, for Annual
Meeting of Shareholders held on May 26,
2000 (see Appendix B therein)
10(AA)* First Amendment to 2000 Directors Stock Option Plan Form 10-Q for the period ended March 31,
2001 (see Exhibit 10(HH) therein)
10(BB)* Second Amendment to the Reinsurance Pooling Agreement Form 10-Q for the period ended June 30,
Amended and Restated as of January 1, 2000, by the 2001 (see Exhibit 10(II) therein)
State Automobile Mutual Insurance Company, State Auto
Property and Casualty Insurance Company, Milbank
Insurance Company, Midwest Security Insurance
Company, Farmers Casualty Insurance Company and State
Auto Insurance Company
10(CC)* Second Amendment to 1991 Directors Stock Option Plan Form 10-Q for the period ended September
30, 2001 (see Exhibit 10(JJ) therein)
10(DD)* Second Amendment to 2000 Directors Stock Option Plan Form 10-Q for the period ended September
30, 2001 (see Exhibit 10(KK) therein)
10(EE)* Third Amendment to 2000 Directors Stock Option Plan Included herein
10(FF) Third Amendment to State Auto Reinsurance Pooling Included herein
Agreement, Amended and Restated as of January 1, 2000
10(GG) Stop Loss Reinsurance Agreement dated October 1, 2001 Included herein
among inter alia Mutual and State Auto P&C
10(HH) Amendment No. 2 to the Management and Operations Included herein
Agreement dated January 1, 2000 among, inter alia,
Mutual and State Auto P&C
10(II) $100,000,000 Credit Agreement among SAF Funding Included herein
Corporation, as Borrower, the Lenders and Bank One,
NA as Agent dated as of November 16, 2001
10(JJ) Put Agreement among State Automobile Mutual Insurance Included herein
Company, State Auto Financial Corporation and Bank
One, NA as Agent dated as of November 16, 2001
10(KK) Standby Purchase Agreement between State Auto Included herein
Financial Corporation and SAF Funding Corporation
dated as of November 16, 2001
21 List of Subsidiaries of State Auto Financial Included herein
Corporation
23 Consent of Independent Auditors Included herein
24(A) Powers of Attorney - William J. Lhota, Urlin G. Form 10-Q for the period ended June 30,
Harris, Jr., Paul W. Huesman, George R. Manser, and 1997 (see Exhibit 24(C) therein)
David J. D'Antoni
|
*Constitutes either a management contract or a compensatory plan or arrangement required to be filed as an Exhibit
Page 5
24(B) Power of Attorney - John R. Lowther Form 10-Q for the period ended March 31,
1998 (see Exhibit 24(D) therein)
24(C) Power of Attorney - Robert H. Moone Form 10-K Annual Report for the year
ended December 31, 1998 (see Exhibit
24(E) therein)
24(D) Power of Attorney - Richard K. Smith Form 10-K Annual Report for the year
ended December 31, 2000 (See Exhibit
24(D) therein)
24(E) Power of Attorney - Ramon L. Humke Included herein
|
Item 14(d)
Financial Statement Schedules
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE I(a) - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
Column A Column B Column C Column D
-------- -------- -------- --------
HELD TO MATURITY Amount at
which shown
in the
Type of Investment Cost Value balance sheet
------------------ ---- ----- -------------
(in thousands)
Fixed maturities:
Bonds:
United States Government and
government agencies and authorities $20,395 $21,258 $20,395
States, municipalities and
political subdivisions 7,011 7,414 7,011
-------------- ---------------- -------------------
Total fixed maturities - held to maturity $27,406 $28,672 $27,406
============== ================ ===================
|
SCHEDULE I(b) - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
Column A Column B Column C Column D
-------- -------- -------- --------
AVAILABLE FOR SALE Amount at
which shown
in the
Type of Investment Cost Value balance sheet
------------------ ---- ----- -------------
(in thousands)
Fixed maturities:
Bonds:
United States Government and
government agencies and authorities $91,400 $94,083 $94,083
States, municipalities and
political subdivisions 831,865 836,650 836,650
Public utilities 18,018 18,350 18,350
All other corporate bonds 101,256 102,322 102,322
---------------- ---------------- -------------------
Total fixed maturities $1,042,539 $1,051,405 $1,051,405
---------------- ---------------- -------------------
Equity securities:
Public utilities 10,178 11,572 11,572
Banks, trust and insurance companies 1,415 2,278 2,278
Industrial, miscellaneous and all
other 38,768 45,995 45,995
---------------- ---------------- -------------------
Total equity securities 50,361 59,845 59,845
---------------- ---------------- -------------------
Total investments - available for sale $1,092,900 $1,111,250 $1,111,250
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31
-----------------------------------
ASSETS 2001 2000
---- ----
(dollars in thousands)
Investments in common stock of subsidiaries
(equity method) $440,826 $428,591
Cash 2,005 591
Real estate 408 425
Other assets 887 559
Federal income tax benefit 2,907 1,945
--------------- ----------------
Total assets $447,033 $432,111
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable to affiliate $45,500 $45,500
Due to affiliates 734 102
Accrued expenses 606 450
--------------- ----------------
Total liabilities 46,840 46,052
STOCKHOLDERS' EQUITY
Class A Preferred stock (nonvoting), without
par value. Authorized 2,500,000 shares;
none issued - -
Class B Preferred stock, without par value.
Authorized 2,500,000 shares; none issued - -
Common stock, without par value. Authorized
100,000,000 shares; 43,045,320 and 42,625,723 shares
issued, respectively, at stated value of $2.50 per share 107,613 106,564
Less 4,108,230 and 4,017,012 treasury shares, respectively, at cost (47,613) (47,038)
Additional paid-in capital 47,106 44,208
Accumulated other comprehensive income 12,075 20,367
Retained earnings 281,012 261,958
--------------- ----------------
Total stockholders' equity 400,193 386,059
--------------- ----------------
Total liabilities and stockholders' equity $447,033 $432,111
=============== ================
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED
CONDENSED STATEMENTS OF INCOME
Year ended December 31
---------------------------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Investment income $150 $81 $249
Rental income 38 37 37
Net realized gains on investments - - 1
---------------- --------------- ----------------
Total revenue 188 118 287
---------------- --------------- ----------------
Interest expense to affiliate 2,275 2,730 955
Total operating expenses 1,889 1,859 1,176
---------------- --------------- ----------------
Loss before federal income taxes (3,976) (4,471) (1,844)
Federal income tax benefit (1,383) (1,573) (645)
---------------------------------------------------
Net loss before equity in undistributed
net earnings of subsidiaries (2,593) (2,898) (1,199)
Equity in undistributed net earnings of subsidiaries 23,208 50,612 44,015
---------------- --------------- ----------------
Net Income $20,615 $47,714 $42,816
================ =============== ================
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
---------------------------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income $20,615 $47,714 $42,816
---------------- ---------------- ----------------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization, net 157 484 102
Equity in undistributed earnings of subsidiaries (23,208) (50,612) (43,957)
Changes in operating assets and liabilities:
Change in accrued expenses and due to affiliates 788 60 125
Change in other assets (328) (19) 185
Change in federal income taxes 178 (721) (387)
---------------- ---------------- ----------------
Net cash used in operating activities (1,798) (3,094) (1,116)
---------------- ---------------- ----------------
Cash flows from investing activities:
Capitalization of subsidiary (9,001) - (12,030)
Dividends received from subsidiaries 11,701 3,025 12,663
Additions to real estate - - (1)
---------------- ---------------- ----------------
Net cash provided by investing activities 2,700 3,025 632
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of debt to affiliate - - 45,500
Net proceeds from sale of common stock 2,466 1,707 1,928
Payments to acquire treasury stock (388) (300) (46,199)
Payment of dividends (1,566) (1,397) (1,315)
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities 512 10 (86)
---------------- ---------------- ----------------
Net increase (decrease) in cash and invested cash 1,414 (59) (570)
---------------- ---------------- ----------------
Cash and cash equivalents at beginning of year 591 650 1,220
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $2,005 $591 $650
================ ================ ================
Supplemental Disclosures:
Federal income taxes received $1,561 $852 $517
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED
NOTE A - BASIS OF PRESENTATION
In the parent company-only financial statements, State Auto Financial Corporation's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiares and net unrealized gains and losses on investments. The parent company-only financial statements should be read in conjunction with the Company's consolidated financial statements.
Note B - Stock Repurchase Plan
On March 1, 2002, the Board of Directors of State Auto Financial approved a plan to repurchase up to 1.0 million shares of its common stock over a period extending to and through December 31, 2003.
During 2000, State Auto Financial's Board of Directors approved a plan to repurchase up to 1.0 million shares of its common stock from the public over a period ending December 31, 2001. Through December 31, 2001 State Auto Financial repurchased 50,522 shares.
In May 1999, State Auto Financial's Board of Directors approved a plan to repurchase up to 4.0 million shares of its outstanding common stock over a period ending December 31, 2000. Repurchases were transacted to maintain the same ownership ratios between Mutual and the public as it existed in May 1999, with 69% repurchased from Mutal and 31% from the public. Through December 31, 1999 all 4.0 million shares were repurchased, with approximately 2.7 million shares repurchased from Mutual and 1.3 million shares from the public. In conjunction with the stock repurchase plan, State Auto Finanical entered into a line of credit agreement with Mutual for $45.5 million, at an interest rate of 6.0%. The interest rate adjusts each January 1 based on a formula set forth in the note. During 2001 the interest rate was 5.0% and adjusts to 4.75% in 2002. Principal payment is due on demand from Mutual after December 31, 2000, with final payment to be received on or prior to December 31, 2005.
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Future policy Other policy
benefits, losses, claims and
Deferred policy claims and Unearned benefits Premium
Segment acquisition cost loss expenses premiums payable revenue
------- ---------------- ------------- -------- ------- -------
Year ended December 31, 2001
State Auto standard insurance segment $54,129 $344,746 $244,421 - $444,296
State Auto nonstandard insurance segment 2,310 19,011 15,903 - 35,256
Meridian standard insurance segment 10,363 145,654 65,461 - 69,154
Meridian nonstandard insurance segment 285 14,449 3,710 - 6,501
------------ ------------------- --------------- ---------------- -------------
Total 67,087 523,860 329,495 - 555,207
============ =================== =============== ================ =============
Year ended December 31, 2000
Standard insurance segment $31,292 $228,516 $151,781 - $370,566
Nonstandard insurance segment 1,166 16,067 8,606 - 27,401
------------ ------------------- --------------- ---------------- -------------
Total 32,458 244,583 160,387 - 397,967
============ =================== =============== ================ =============
Year ended December 31, 1999
Standard insurance segment $361,175
Nonstandard insurance segment 30,883
-------------
Total 392,058
=============
|
Column G Column H Column I Column J Column K
-------- -------- -------- -------- --------
Amortization
Benefits,claims, of deferred
losses and policy
Net investment settlement acquisition Other operating Premiums
income expenses costs expenses written
------ -------- ----- -------- -------
Year ended December 31, 2001
State Auto standard insurance segment $37,230 $292,917 $96,127 $42,597 $462,931
State Auto nonstandard insurance segment 1,997 27,243 6,164 1,063 41,540
Meridian standard insurance segment 3,595 95,979 6,551 12,309 64,526
Meridian nonstandard insurance segment 338 10,935 180 2,216 4,944
Investment management services 318 - - - -
All other 193 - - - -
Corporate 150 - - - -
Reclassification adjustments in consolidation 3,554 - - - -
------------ ------------------- --------------- ---------------- -------------
Total 47,375 427,074 109,022 58,185 573,941
============ =================== =============== ================ =============
Year ended December 31, 2000
Standard insurance segment $33,436 $250,071 $92,955 $20,527 $373,867
Nonstandard insurance segment 1,899 22,096 4,828 1,259 27,837
Investment management services 360 - - - -
All other 244 - - - -
Corporate 81 - - - -
Reclassification adjustments in consolidation 2,895 - - - -
------------ ------------------- --------------- ---------------- -------------
Total 38,915 272,167 97,783 21,786 401,704
============ =================== =============== ================ =============
Year ended December 31, 1999
Standard insurance segment $29,060 $242,409 $86,609 $17,465 $359,084
Nonstandard insurance segment 1,839 22,219 5,832 1,866 29,416
Investment management services 272 - - - -
All other 268 - - - -
Corporate 249 - - - -
Reclassification adjustments in consolidation 2,574 - - - -
------------ ------------------- --------------- ---------------- -------------
Total 34,262 264,628 92,441 19,331 388,500
|
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except percentages)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Percentage
Ceded to Assumed from of amount
Outside Affiliated Outside Affiliated assumed
Gross Amount Companies Companies(1) Companies Companies(1) Net Amount to net(2)
------------ --------- ------------ --------- ------------ ---------- ---------
Year ended 12-31-01
property-casualty earned premiums $472,767 $13,623 $426,880 $4,304 $518,639 $555,207 0.8%
Year ended 12-31-00
property-casualty earned premiums $432,318 $10,864 $399,057 $5,166 $370,404 $397,967 1.3%
Year ended 12-31-99
property-casualty earned premiums $429,577 $13,698 $395,698 $10,822 $361,055 $392,058 2.8%
|
EXIBIT 10(EE)
THIRD 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. The first paragraph of Section 1 Purpose; Definitions is hereby deleted in its entirety and replaced by the following:
The 2000 Directors Stock Option Plan (the "Plan") of State Auto Financial Corporation, an Ohio corporation (the "Company"), is intended to encourage directors of the Company who are not full-time employees of the Company, its Subsidiaries or its Parent corporation to acquire or increase and retain a financial interest in the Company and to strengthen the mutuality of interests between such directors and the Company's shareholders by offering such directors options to purchase Common Shares of the Company.
2. 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 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 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.
3. The effective date of this Third Amendment is March 1, 2002 and this Third 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 Third Amendment, the provisions of this Third Amendment shall control. Except as modified by the Third Amendment, the Second Amendment and the First Amendment, the Plan shall continue in full force and effect.
The Third Amendment was approved and adopted by the Board of Directors of State Auto Financial Corporation on March 1, 2002.
EXHIBIT 10(FF)
THIRD AMENDMENT TO THE
REINSURANCE POOLING AGREEMENT
AMENDED AND RESTATED AS OF
JANUARY 1, 2000
This Third Amendment (this "Third Amendment") to the Reinsurance Pooling Agreement, Amended and Restated as of January 1, 2000 as heretofore amended (the "2000 Pooling Agreement") by and among State Automobile Mutual Insurance Company ("State Auto Mutual"), State Auto Property and Casualty Insurance Company ("State Auto P&C"), Milbank Insurance Company ("Milbank"), Midwest Security Insurance Company ("Midwest"), Farmers Casualty Insurance Company ("Farmers Casualty") and State Auto Insurance Company ("State Auto IC") (collectively, the "Pooled Companies") is made this 24th day of October 2001, but is effective as of 12:01 am Columbus, Ohio time October 1, 2001.
Meridian Mutual Insurance Company ("Meridian Mutual") entered into an Agreement to Merge dated October 25, 2000, (the "Merger Agreement") with State Auto Mutual pursuant to which Meridian Mutual merged with and into State Auto Mutual, with State Auto Mutual being the surviving corporation resulting from the merger (the "Merger").
The Merger was effective June 1, 2001 and it affected the business operations of the parties to the 2000 Pooling Agreement as of July 1, 2001, as a result of the Second Amendment thereto.
The purpose of this Third Amendment is to amend the Respective Percentage (as defined in the 2000 Pooling Agreement) of certain parties to the 2000 Pooling Agreement and to amend the definitions of "Net Liabilities" and "Net Premiums" therein.
In consideration of the mutual covenants set forth herein and INTENDING TO BE LEGALLY BOUND HEREBY, the Pooled Companies agree to amend the 2000 Pooling Agreement as follows:
1. Capitalized terms used in this Third Amendment (including the Background Information) which are not otherwise defined herein shall be defined as in the 2000 Pooling Agreement, and those definitions shall apply in this Third Amendment.
2. Section 1 a. of the 2000 Pooling Agreement is hereby amended by the addition of the following:
It is understood and agreed that "Net Liabilities" excludes any amounts received or receivable under that certain Stop Loss Reinsurance Agreement dated October 1, 2001 among State Auto Mutual, State Auto P&C, Farmers Casualty, Milbank, and State Auto IC (the "Stop Loss Agreement") from any party to the Stop Loss Agreement.
3. Section 1 b. of the 2000 Pooling Agreement is hereby amended by the addition of the following:
"Net Premiums" excludes any amounts received or receivable under the Stop Loss Agreement by any party to the Stop Loss Agreement.
4. Section 1c. of the 2000 Pooling Agreement is hereby amended in its entirety to read as follows:
"Respective Percentage" shall be
As to State Auto IC 1% As to Farmers Casualty 3% As to Midwest Security 1% As to Milbank 17% As to State Auto P&C 59% As to State Auto Mutual 19% |
5. The Third Amendment is effective as of 12:01 am Columbus, Ohio time October 1, 2001, provided that Amendment No. 2 to the Management and Operations Agreement dated January 1, 2000 by and among the parties hereto, and the Stop Loss Agreement has become effective concurrently with the effective date and time of this Third Amendment. If such Amendment No. 2 or the Stop Loss Agreement does not become concurrently effective as of October 1, 2001 at 12:01 am, Columbus, Ohio time, then this Third Amendment shall be deemed null and void and shall not be deemed to have amended the 2000 Pooling Agreement in any manner whatsoever. This Third Amendment shall terminate when the 2000 Pooling Agreement terminates, absent the earlier termination hereof by the written consent of all parties hereto.
Except as expressly amended hereby, the 2000 Pooling Agreement shall continue in full force and effect for the balance of the term thereof.
IN WITNESS WHEREOF, by their signatures hereon the parties hereto hereby agree to the foregoing Third Amendment as of the foregoing effective date and time.
State Automobile Mutual Insurance Company
By: /s/ Steven J. Johnston
----------------------------------------------
Steven J. Johnston, Senior Vice President
|
State Auto Property and Casualty Insurance Company
By: /s/ Steven J. Johnston
----------------------------------------------
Steven J. Johnston, Senior Vice President
|
Milbank Insurance Company
By: /s/ Steven J. Johnston
----------------------------------------------
Steven J. Johnston, Senior Vice President
|
Midwest Security Insurance Company
By: /s/ Steven J. Johnston
----------------------------------------------
Steven J. Johnston, Senior Vice President
|
Farmers Casualty Insurance Company
By: /s/ Steven J. Johnston
----------------------------------------------
Steven J. Johnston, Senior Vice President
|
State Auto Insurance Company
By: /s/ Steven J. Johnston
----------------------------------------------
Steven J. Johnston, Senior Vice President
|
EXHIBIT 10(GG)
BETWEEN
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
MILBANK INSURANCE COMPANY
FARMERS CASUALTY INSURANCE COMPANY
AND
STATE AUTO INSURANCE COMPANY
(HEREINAFTER COLLECTIVELY REFERRED TO AS THE "COMPANY")
AND
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
(HEREINAFTER COLLECTIVELY REFERRED TO AS THE "REINSURER")
The Reinsurer shall indemnify the Company for the amounts incurred by the Company as set forth in the Reinsuring Clause under any and all policies, contracts, binders and other evidence of insurance and reinsurance, oral or written (hereinafter referred to as "Policies") that are in force as of the inception date hereof or issued or renewed thereafter by the Company. However, the reinsurance provided herein shall apply only to the net business written by the Company which is reinsured through the Reinsurance Pooling Agreement amended and restated as of January 1, 2000, and as may be amended from time to time (the "State Auto Pooling Agreement"), among the foregoing insurers and State Automobile Mutual Insurance Company ("State Auto Mutual" or the Reinsurer) and Midwest Security Insurance Company ("Midwest Security"). The business written by State Auto Mutual, Midwest Security and the Company that is reinsured under the State Auto Pooling Agreement is sometimes hereafter referred to as the "State Auto Pooled Business".
This Agreement shall not reinsure the Company's liability from any of the following:
1. Insolvency Fund Exclusion Clause (see Exhibit A attached and incorporated).
2. War Risk Exclusion Clause (see Exhibit B attached and incorporated).
3. Nuclear Incident Exclusion Clauses - Physical Damage - Reinsurance - U.S.A. and Canada (see Exhibits C and D attached and incorporated).
The term of this Agreement commences at 12:01 a.m. Eastern Time, October 1, 2001 and shall expire at 12:01 a.m. Eastern Time, January 1, 2004.
In the event the Incurred Loss Ratio (as defined below) of the State Auto Pooled Business in the calendar quarter during the term of this Agreement for which the computation is being made exceeds 70.75%, after the application of the State Auto Pooling Agreement and any other applicable reinsurance, that amount in excess of 70.75% multiplied by Earned Premium shall be deemed a Net Underwriting Loss for the State Auto Pooled Business, for such calendar quarter. In the event of a Net Underwriting Loss for the State Auto Pooled Business, then the Reinsurer shall be obligated to pay to the Company an amount equal to 27% of the Net Underwriting Loss. Notwithstanding the foregoing, the Reinsurer's obligation ceases when the Incurred Loss Ratio of the State Auto Pooled Business, after the application of the State Auto Pooling Agreement and any other applicable reinsurance, exceeds 80% for the calendar quarter for which the computation is being made and in such case, the Reinsurer's payment obligation shall be limited to 27% of the Net Underwriting Loss which would have resulted if the Incurred Loss Ratio of the State Auto Pooled Business for such calendar quarter had been 80%.
It is understood and agreed that the Incurred Loss Ratio means the figure resulting from the following calculation: paid losses plus paid loss adjustment expense of every kind and nature, plus (outstanding losses at the end of the calendar quarter minus outstanding losses at the beginning of the calendar quarter) divided by Earned Premium during that calendar quarter. It is further understood and agreed that outstanding losses, as used above, means all case and IBNR Bulk Reserves relating to the State Auto Pooled Business. It is understood and agreed that Earned Premium means written premium plus (unearned premium at the beginning of the calendar quarter minus unearned premium at the end of the quarter).
In the event the Incurred Loss Ratio for the State Auto Pooled Business in the calendar quarter during the term of this Agreement for which the computation is being made is less than 69.25%, after the application of the State Auto Pooling Agreement and any other applicable reinsurance, that amount less than 69.25% multiplied by Earned Premium shall be deemed a Net Underwriting Gain for such calendar quarter. In the event of a Net Underwriting Gain, the Company shall be obligated to pay to the Reinsurer an amount equal to 27% of the Net Underwriting Gain. Notwithstanding the foregoing, the Company's obligation to pay the Reinsurer
ceases when the Incurred Loss Ratio of the State Auto Pooled Business, after the application of the State Auto Pooling Agreement and any other applicable reinsurance, is less than 60% for the calendar quarter for which the computation is being made and in such case the Company's payment obligation shall be limited to 27% of the Net Underwriting Gain which would have resulted if the Incurred Loss Ratio for the State Auto Pooled Business for such calendar quarter had been 60%.
This Agreement applies to only that portion of any Policy which the Company retains net for its own account and in calculating the amount of any loss hereunder. In computing the amount or amounts in excess of which this Agreement attaches, only loss or losses in respect of that portion of any Policy which the Company retains net for its own account shall be included.
The amount of the Reinsurer's liability hereunder in respect of any loss shall not be increased by reason of the inability of the Company to collect from any other reinsurer, whether specific or general, any amounts which may have become due whether such inability arises from the insolvency of such other reinsurer or otherwise.
Company shall provide the Reinsurer with all necessary data respecting premiums and losses, including reserves thereon, on forms mutually acceptable to the Company and the Reinsurer.
Within 30 days following the end of each calendar quarter, the Company shall provide the Reinsurer with detailed report showing the amount of each of the following, for the calendar quarter.
1. Incurred Loss Ratio for the State Auto Pooled Business, after the application of the State Auto Pooling Agreement and any other applicable reinsurance.
2. Calculation of the Net Underwriting Loss or the Net Underwriting Gain, as the case may be.
3. Computation of amounts due to or from the Reinsurer as per Article IV and Article V of this Agreement.
The debtor party shall pay amounts due from the account within 15 days after receipt of the account. State Auto Property and Casualty Insurance Company shall apportion among the Company in accordance with each such company's Respective Percentage (as defined in the State Auto Pooling Agreement) the amounts paid to the Company by the Reinsurer or paid by the Company to the Reinsurer.
The Company and the Reinsurer, each at its option, may offset any balance or balances, whether on account of premiums, claims and losses, loss expenses or salvages due from one party to the other under this Agreement; provided, however, that in the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with applicable statutes and regulations.
The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect through its designated representatives, during the term of this Agreement and thereafter, all books, records and papers of the Company in connection with any reinsurance hereunder, or the subject matter hereof.
Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to either party if such delay, omission or error had not been made, provided such delay, omission or error is rectified as soon as practicable after discovery.
In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns, or when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or to the District of Columbia.
The reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of one or more of the Companies under the Policy or Policies reinsured without diminution because of the insolvency of one or more of the Companies reinsured or because the liquidator, receiver, conservator or statutory successor of the Company(ies) has failed to pay all or a portion of any claim.
In the event of the insolvency of one or more of the Companies reinsured, the liquidator, receiver, conservator or statutory successor of the Company(ies) shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company(ies) on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company(ies) or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company(ies) as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company(ies) solely as a result of the defense undertaken by the Reinsurer.
Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company(ies).
In the event of the insolvency of one or more of the Companies reinsured, the reinsurance under this Agreement shall be payable by the Reinsurer directly to the Company(ies) or to the liquidator, receiver, conservator or statutory successor, except as provided by subsection (A) of section 4118 of the Insurance Law of New York or except where (I) the Agreement specifies another payee of such Reinsurance in the
event of the insolvency of the Company(ies) and (II) the Reinsurer, with the consent of the direct insureds and, with the prior approval of the Superintendent of Insurance of New York to the certificate of assumption issued to New York direct insureds, has assumed such Policy obligations of the Company(ies) as its direct obligations to the payees under such policies, in substitution for the obligations of the Company(ies) to such payees.
If any irreconcilable differences shall arise between the parties to this Agreement, either before or after its termination, with reference to the interpretation of this Agreement or the rights of either party with respect to any transactions under this Agreement, including the formation or validity thereof, the dispute shall be referred to three (3) arbitrators as a condition precedent to any right of action arising under this Agreement. The arbitrators shall be active or retired disinterested officers of insurance or reinsurance companies or Lloyd's Underwriters other than the parties or their affiliates. One arbitrator shall be chosen by each party and the third by the two so chosen. If either party refuses or neglects to appoint an arbitrator within thirty (30) days after the receipt of written notice from the other party requesting it to do so, the requesting party may nominate two (2) arbitrators who shall choose the third.
In the event the arbitrators do not agree on the selection of the third arbitrator within thirty (30) days after both arbitrators have been named, the Company shall petition the American Arbitration Association to appoint the third arbitrator. If the American Arbitration Association fails to appoint the third arbitrator within thirty (30) days after it has been requested to do so, either party may request a justice of a court of general jurisdiction of the state in which the arbitration is to be held, to appoint an officer or retired officer of an insurance or reinsurance company or Lloyd's Underwriter as the third arbitrator. In the event both parties request the appointment of the third arbitrator, the third arbitrator shall be the soonest named in writing by the justice of the court.
Each party shall submit its case to the arbitrators within thirty
(30) days of the appointment of the arbitrators. The arbitrators
shall consider this Agreement an honorable engagement rather than
merely a legal obligation; they are relieved of all judicial
formalities and may abstain from following the strict rules of law.
The decision of a majority of the arbitrators shall be final and
binding on both the Company and the Reinsurer. Judgment may be
entered upon the award of the arbitrators in any court having
jurisdiction.
Each party shall bear the fee and expenses of its own arbitrator, one half of the fee and the expenses of the third arbitrator and one half of the other expenses of the arbitration. In the event both arbitrators are chosen by one party, the fees of the arbitrators shall be equally divided between the parties.
Any such arbitration shall take place in Columbus, Ohio unless some other location is mutually agreed upon by the parties.
This Agreement shall be governed as to performance, administration and interpretation by the laws of the State of Ohio, exclusive of the rules with respect to conflicts of law.
If any provision of this Agreement should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Agreement.
This Agreement shall be deemed effective as of October 1, 2001 upon receipt (or deemed receipt) of all necessary regulatory approvals, the approval of the Special Independent Committee of the Board of Directors of State Auto Mutual and the approval of the Special Independent Committee of the Board of Directors of State Auto Financial Corporation and the effectiveness (including the receipt or deemed receipt of any required regulatory approvals) of the Third Amendment to the State Auto Pooling Agreement and Amendment No. 2 to the Management and Operations Agreement dated January 1, 2000. Unless and until all such regulatory approvals are received or deemed received, this Agreement shall not bind the parties hereto. If such Amendment No. 2 or the Third Amendment does not become concurrently effective
as of October 1, 2001 at 12:00 am, Columbus, Ohio time, then this Agreement shall be deemed null and void.
In Witness Whereof, by their signatures hereon, the parties hereto do hereby confirm their agreement to the foregoing.
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By: /s/ Robert H. Moone
-------------------------------------------------------
Robert H. Moone, President
|
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
By: /s/ Robert H. Moone
-------------------------------------------------------
Robert H. Moone, President
|
STATE AUTO INSURANCE COMPANY
By: /s/ Robert H. Moone
-------------------------------------------------------
Robert H. Moone, President
|
MILBANK INSURANCE COMPANY
By: /s/ Robert H. Moone
-------------------------------------------------------
Robert H. Moone, President
|
FARMERS CASUALTY INSURANCE COMPANY
By /s/ Robert H. Moone
-------------------------------------------------------
Robert H. Moone, Chairman
|
EXHIBIT 10(HH)
This Amendment No. 2 to Management and Operations Agreement (this "Amendment") is entered into and effective as of October 1, 2001, among State Automobile Mutual Insurance Company, an Ohio corporation ("Mutual"); State Auto Financial Corporation, an Ohio corporation ("State Auto Financial"); State Auto Property and Casualty Insurance Company, a South Carolina corporation ("State Auto P&C"); State Auto National Insurance Company, an Ohio corporation ("National"); Milbank Insurance Company, a South Dakota corporation ("Milbank"); State Auto Insurance Company, an Ohio corporation ("State Auto IC"); Stateco Financial Services, Inc., an Ohio corporation ("Stateco"); Strategic Insurance Software, Inc., an Ohio corporation ("S.I.S."); and 518 Property Management and Leasing, LLC, an Ohio limited liability company ("518 PML").
RECITALS
A. Effective January 1, 2000, Mutual, State Auto Financial, State Auto P&C, National, Milbank, State Auto IC, Stateco, S.I.S. and 518 PML entered into a Management and Operations Agreement and First Amendment thereto dated as of January 1, 2000 (the "Agreement") providing for, among other things, the management of the Managed Companies (as defined therein) by State Auto P&C.
B. The parties to the Agreement now desire to amend the Agreement to change certain of the payment and other obligations of the parties set forth in the Agreement.
NOW, THEREFORE, intending to be legally bound, the parties to this Amendment hereby agree as follows:
1. RECITALS; DEFINITIONS. The Background Information contained in the Agreement and in the Recitals to this Amendment are each hereby incorporated by reference into the body of this Amendment. Capitalized terms not otherwise defined in this Amendment shall have the meanings set forth in the Agreement. All references in the Agreement to "this Agreement" shall be deemed to refer to the Agreement as amended hereby.
2. AMENDMENT OF THE AGREEMENT. Subject to the satisfaction of the conditions set forth in Section 5 below, (i) effective as of the date first written above the Agreement shall be deemed amended and supplemented by this Amendment. To the extent not expressly amended or supplemented by this Amendment, the terms and provisions of the Agreement shall remain in full force and effect without alteration for the remaining term thereof. Until the deemed effective date of this Amendment as set forth in Section 5 below, the Agreement shall be deemed to have governed the rights and obligations of the parties thereto in accordance therewith, without taking into account the amendments contemplated hereby.
3. AMENDMENT OF 2000 POOLING AGREEMENT. As of the deemed effective date hereof, the parties to the 2000 Pooling Agreement (as defined in the Agreement) have entered into an amendment thereto, and all references in the Agreement to the 2000 Pooling Agreement shall be deemed to refer to the 2000 Pooling Agreement as amended by the First Amendment thereto dated as of November 17, 2000, the Second Amendment thereto dated as of June 1, 2001 and the Third Amendment dated as of October 1, 2001.
4. DELETION OF SECTION 7 OF THE AGREEMENT. Section 7 of the Agreement is hereby deleted from the Agreement in its entirety.
5. EFFECTIVENESS. This Amendment shall be deemed effective as of October 1, 2001 upon receipt (or deemed receipt) of all necessary regulatory approvals, the approval of the Special Independent Committee of the Board of Directors of Mutual and the approval of the Special Independent Committee of the Board of Directors of State Auto Financial and the effectiveness (including the receipt or deemed receipt of any required regulatory approvals) of the Third Amendment to the Pooling Agreement and that certain Stop Loss Reinsurance Agreement dated effective October 1, 2001 among State Auto Mutual, State Auto P&C, State Auto IC, and Farmers Casualty Insurance Company. Unless and until all such regulatory approvals are received or deemed received, this Amendment shall not bind the parties hereto or amend or supplement the Agreement.
6. REAFFIRMATION OF BALANCE OF THE AGREEMENT. Except as expressly amended hereby, the Agreement is hereby reaffirmed by the parties hereto. All terms and provisions of Sections 11 through 17 of the Agreement shall apply to and be deemed incorporated into this Amendment.
IN WITNESS WHEREOF, each of the parties hereto has subscribed its name below
effective as of the date first above written, subject to the provisions of
Section 5 above.
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
STATE AUTO FINANCIAL CORPORATION
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
STATE AUTO NATIONAL INSURANCE COMPANY
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
STATE AUTO INSURANCE COMPANY
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
STATECO FINANCIAL SERVICES, INC.
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
MILBANK INSURANCE COMPANY
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
STRATEGIC INSURANCE SOFTWARE, INC.
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
518 PROPERTY AND MANAGEMENT LEASING, LLC
By: /s/ Robert H. Moone
--------------------------------------------------------
Robert H. Moone, President
|
EXHIBIT 10(II)
$100,000,000
AMENDED AND RESTATED CREDIT AGREEMENT
among
SAF FUNDING CORPORATION,
as Borrower,
THE LENDERS NAMED HEREIN,
BANK ONE, NA,
as Agent,
KEYBANK NATIONAL ASSOCIATION,
as Syndication Agent
and
NATIONAL CITY BANK,
as Documentation Agent
Dated as of November 16, 2001
BANC ONE CAPITAL MARKETS, INC.,
as Lead Arranger and Sole Book Runner
TABLE OF CONTENTS
Section Page ------- ---- ARTICLE I DEFINITIONS............................................................................................1 ARTICLE II THE CREDITS..........................................................................................10 2.1 Commitment...............................................................................................10 2.2 Required Payments; Termination...........................................................................10 2.3 Ratable Loans............................................................................................10 2.4 Types of Advances........................................................................................11 2.5 Commitment Fee; Reductions in Aggregate Commitment; Mandatory Reductions in Aggregate Commitment; Mandatory Prepayments.........................................................................................11 2.6 Minimum Amount of Each Advance...........................................................................11 2.7 Optional Principal Payments..............................................................................11 2.8 Method of Selecting Types and Interest Periods for New Advances..........................................12 2.9 Conversion and Continuation of Outstanding Advances......................................................12 2.10 Changes in Interest Rate, etc...........................................................................12 2.11 Rates Applicable After Default..........................................................................13 2.12 Method of Payment.......................................................................................13 2.13 Noteless Agreement; Evidence of Indebtedness............................................................13 2.14 Telephonic Notices......................................................................................14 2.15 Interest Payment Dates; Interest and Fee Basis..........................................................14 2.16 Notification of Advances, Interest Rates, Prepayments and Commitment Reductions.........................15 2.17 Lending Installations...................................................................................15 2.18 Non-Receipt of Funds by the Agent.......................................................................15 2.19 Extension of Commitment Termination Date................................................................15 ARTICLE III YIELD PROTECTION; TAXES.............................................................................17 3.1 Yield Protection.........................................................................................17 3.2 Changes in Capital Adequacy Regulations..................................................................17 3.3 Availability of Types of Advances........................................................................18 3.4 Funding Indemnification..................................................................................18 3.5 Taxes 18 3.6 Lender Statements; Survival of Indemnity.................................................................20 ARTICLE IV CONDITIONS PRECEDENT.................................................................................20 4.1 Conditions to Effectiveness..............................................................................20 4.2 Each Advance.............................................................................................22 ARTICLE V REPRESENTATIONS AND WARRANTIES........................................................................22 5.1 Corporate Existence......................................................................................22 5.2 Financial Condition......................................................................................23 5.3 Litigation...............................................................................................23 5.4 No Breach................................................................................................23 5.5 Action 23 |
5.6 Approvals................................................................................................24 5.7 Taxes....................................................................................................24 5.8 Use of Credit............................................................................................24 5.9 Special Purpose Company..................................................................................24 5.10 Capitalization..........................................................................................24 5.11 ERISA...................................................................................................24 5.12 Investment Company......................................................................................24 5.13 True and Complete Disclosure............................................................................24 ARTICLE VI COVENANTS............................................................................................25 6.1 Financial Statements, Etc................................................................................25 6.2 Litigation...............................................................................................26 6.3 Existence, Etc...........................................................................................26 6.4 Limited Purpose Company..................................................................................26 6.5 Use of Proceeds..........................................................................................27 6.6 Modifications of Certain Documents.......................................................................27 ARTICLE VII DEFAULTS............................................................................................27 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES.....................................................29 8.1 Acceleration.............................................................................................29 8.2 Amendments...............................................................................................29 ARTICLE IX GENERAL PROVISIONS...................................................................................30 9.1 Survival of Representations..............................................................................30 9.2 Governmental Regulation..................................................................................30 9.3 Headings.................................................................................................30 9.4 Entire Agreement.........................................................................................30 9.5 Several Obligations; Benefits of this Agreement..........................................................30 9.6 Expenses; Indemnification................................................................................30 9.7 Numbers of Documents.....................................................................................31 9.8 Accounting...............................................................................................31 9.9 Severability of Provisions...............................................................................31 9.10 Nonliability of Lenders.................................................................................31 9.11 Confidentiality.........................................................................................32 9.12 Nonreliance.............................................................................................32 9.13 Disclosure..............................................................................................32 9.14 Termination of IBJ Commitment...........................................................................32 9.15 Addition of Fifth Third as Lender; Reallocation of Commitments..........................................32 ARTICLE X THE AGENT.............................................................................................32 10.1 Appointment; Nature of Relationship.....................................................................32 10.2 Powers..................................................................................................33 10.3 General Immunity........................................................................................33 10.4 No Responsibility for Loans, Recitals, etc..............................................................33 10.5 Action on Instructions of Lenders.......................................................................33 10.6 Employment of Agents and Counsel........................................................................34 |
10.7 Reliance on Documents; Counsel..........................................................................34 10.8 Agent's Reimbursement and Indemnification...............................................................34 10.9 Notice of Default.......................................................................................34 10.10 Rights as a Lender.....................................................................................35 10.11 Lender Credit Decision.................................................................................35 10.12 Successor Agent........................................................................................35 10.13 Agent's Fee............................................................................................36 10.14 Delegation to Affiliates...............................................................................36 10.15 Execution of Pledge and Put Agreements.................................................................36 10.16 Collateral Releases....................................................................................36 10.17 Consents Under Other Loan Documents....................................................................36 10.18 Co-Agents, Documentation Agent, Syndication Agent, etc.................................................36 ARTICLE XI SETOFF; RATABLE PAYMENTS.............................................................................37 11.1 Setoff..................................................................................................37 11.2 Ratable Payments........................................................................................37 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS...................................................37 12.1 Successors and Assigns..................................................................................37 12.2 Participations..........................................................................................38 12.3 Assignments.............................................................................................39 12.4 Dissemination of Information............................................................................40 12.5 Tax Treatment...........................................................................................40 ARTICLE XIII NOTICES............................................................................................41 13.1 Notices.................................................................................................41 13.2 Change of Address.......................................................................................41 ARTICLE XIV COUNTERPARTS........................................................................................41 ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.........................................41 15.1 CHOICE OF LAW...........................................................................................41 15.2 CONSENT TO JURISDICTION.................................................................................42 15.3 WAIVER OF JURY TRIAL....................................................................................42 ARTICLE XVI NO RECOURSE.........................................................................................42 |
Schedule 1.................Commitments
Exhibit A..................Opinion Exhibit B..................Compliance Certificate Exhibit C..................Form of Assignment Exhibit D..................Money Transfer Instructions Exhibit E..................Note |
AMENDED AND RESTATED CREDIT AGREEMENT
This Agreement, dated as of November 16, 2001, is among SAF Funding Corporation, a Delaware corporation, the Lenders and Bank One, NA, a national banking association having its principal office in Chicago, Illinois, as Agent. The parties hereto agree as follows:
A. The Borrower, the Lenders and the Agent have entered into that certain Credit Agreement, dated as of November 19, 1999 (as heretofore amended, the "EXISTING CREDIT AGREEMENT") pursuant to which the Lenders have made certain term loan facilities available to the Borrower;
B. The Borrower has requested that the Existing Credit Agreement be amended and restated in order to extend the maturity thereof, reduce the amount of the term loan facility available thereunder and to make certain other amendments thereto;
C. The Borrower, the Lenders and the Agent desire to amend and restate the Existing Credit Agreement to effect such amendments;
D. The Industrial Bank of Japan, Limited ("IBJ") has notified the Agent of its desire to terminate its Commitment on the Termination Date (as defined in the Existing Credit Agreement); and
E. Fifth Third Bank ("FIFTH THIRD") proposes to become a Lender under the Credit Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the Agent hereby agree to amend and restate the Existing Credit Agreement as follows:
ARTICLE I
As used in this Agreement:
"ABR Advance" means an Advance which, except as otherwise provided in
SECTION 2.11, bears interest at the Alternate Base Rate.
"Advance" means a borrowing hereunder, (a) made by the Lenders on the same Borrowing Date, or (b) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Loans of the same Type and, in the case of Eurodollar Loans, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise.
"Agent" means Bank One in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to ARTICLE X.
"Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof.
"Agreement" means this credit agreement, as it may be amended or modified and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting principles as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in SECTION 5.2.
"Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (a) the Corporate Base Rate for such day and (b) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum.
"Applicable Margin" shall mean, with respect to any Eurodollar Advance,
(a) 1% per annum from the date of such Eurodollar Advance to but not including
the first anniversary of such Eurodollar Advance, (b) 1.25% per annum from the
first anniversary of such Eurodollar Advance to but not including the third
anniversary of such Eurodollar Advance, and (c) 1.50% per annum from and after
the third anniversary of such Eurodollar Advance.
"Arranger" means Banc One Capital Markets, Inc., a Delaware corporation, and its successors, in its capacity as Lead Arranger and Sole Book Runner.
"Article" means an article of this Agreement unless another document is specifically referenced.
"Authorized Officer" means any of the President, the Treasurer or any Vice President of the Borrower, acting singly.
"Bank One" means Bank One, NA, a national banking association having its principal office in Chicago, Illinois, in its individual capacity, and its successors.
"Basic Documents" shall mean, collectively, the Loan Documents, the Preferred Stock Certificates and the Standby Purchase Agreement.
"Borrower" means SAF Funding Corporation, a Delaware corporation, and its successors and assigns.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in SECTION 2.8.
"Business Day" means (a) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in United States dollars are carried on in the London interbank market and (b) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system.
"Capital Lease Obligations" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under Agreement Accounting Principles, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with Agreement Accounting Principles.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time.
"Commitment" means, (a) for each Lender, the obligation of such Lender to make Loans not exceeding the amount set forth on SCHEDULE 1 hereto and (b) with respect to each Person which becomes a Lender after the Effective Date, the amount specified for such Person on the signature page of any assignment that has become effective pursuant to SECTION 12.3.2, in each case as such amount may be modified from time to time pursuant to the terms hereof.
"Commitment Termination Date" means November 14, 2002, or any later
date as may be specified as the Commitment Termination Date in accordance with
SECTION 2.19 or any earlier date on which the Aggregate Commitment is reduced to
zero or otherwise terminated pursuant to the terms hereof.
"Company Pledge Agreement" shall mean an Amended and Restated Pledge and Security Agreement of even date herewith between the Borrower and the Agent, as the same shall be modified and supplemented and in effect from time to time.
"Conversion/Continuation Notice" is defined in SECTION 2.9.
"Corporate Base Rate" means a rate per annum equal to the corporate base rate or prime rate of interest announced by Bank One or by its parent, Bank One Corporation, from time to time, changing when and as said corporate base rate or prime rate changes.
"Default" means an event described in ARTICLE VII.
"Dividend Payment" shall mean dividends (in cash, Property or obligations) on, or other payments or distributions on account of, or the setting apart of money for a sinking or other
analogous fund for, or the purchase, redemption, retirement or other acquisition of, any shares of any class of stock of the Borrower or of any warrants, options or other rights to acquire the same (or to make any payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market or equity value of the Borrower), but excluding dividends payable solely in shares of common stock of the Borrower.
"Effective Date" means November 16, 2001.
"Equity Rights" shall mean, with respect to any Person, any subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business that is a member of any group of organizations (a) described in Section 414(b) or (c) of the Code of which the Borrower is a member and (b) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Borrower is a member.
"Eurodollar Advance" means an Advance which, except as otherwise provided in SECTION 2.11, bears interest at the applicable Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, PROVIDED that, (a) if Reuters Screen FRBD is not available to the Agent for any reason, the applicable Eurodollar Base Rate for the relevant Interest Period shall instead be the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars as reported by any other generally recognized financial information service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, and (b) if no such British Bankers' Association Interest Settlement Rate is available to the Agent, the applicable Eurodollar Base Rate for the relevant Interest Period shall instead be the rate determined by the Agent to be the rate at which Bank One or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of Bank One's relevant Eurodollar Loan and having a maturity equal to such Interest Period.
"Eurodollar Loan" means a Loan which, except as otherwise provided in
SECTION 2.11, bears interest at the applicable Eurodollar Rate.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base
Rate applicable to such Interest Period, divided by (ii) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
(b) the Applicable Margin.
"Excluded Taxes" means, in the case of each Lender or applicable Lending Installation and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (a) the jurisdiction under the laws of which such Lender or the Agent is incorporated or organized or (b) the jurisdiction in which the Agent's or such Lender's principal executive office or such Lender's applicable Lending Installation is located. The Borrower has no obligation to pay Excluded Taxes.
"Exhibit" refers to an exhibit to this Agreement, unless another document is specifically referenced.
"Existing Credit Agreement" shall have the meaning assigned to such term in the recitals hereto.
"Facility Termination Date" means the date which is the fifth anniversary of the Commitment Termination Date.
"Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion.
"Guarantee" shall mean a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "GUARANTEE" and "GUARANTEED" used as a verb shall have a correlative meaning.
"Indebtedness" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services; (c) Indebtedness of others
secured by a Lien on the Property of such Person, whether or not the respective Indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; and (f) Indebtedness of others Guaranteed by such Person.
"Initial Commitment Termination Date" shall have the meaning assigned to such term in SECTION 2.19 hereof.
"Interest Period" means, with respect to a Eurodollar Advance, a period of three months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such three months thereafter, PROVIDED, HOWEVER, that if there is no such numerically corresponding day in such third succeeding month, such Interest Period shall end on the last Business Day of such third succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, PROVIDED, HOWEVER, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day.
"Interest Rate Protection Agreement" shall mean, for any Person, an interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more financial institutions providing for the transfer or mitigation of interest risks either generally or under specific contingencies. For purposes hereof, the "CREDIT EXPOSURE" at any time of any Person under an Interest Rate Protection Agreement to which such Person is a party shall be determined at such time in accordance with the standard methods of calculating credit exposure under similar arrangements as prescribed from time to time by the Agent, taking into account potential interest rate movements and the respective termination provisions and notional principal amount and term of such Interest Rate Protection Agreement.
"Investment" shall mean, for any Person: (a) the acquisition (whether for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person); (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Interest Rate Protection Agreement.
"Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent, the office, branch, subsidiary or affiliate of such Lender or the Agent listed on the signature pages hereof or on a Schedule or otherwise selected by such Lender or the Agent pursuant to SECTION 2.17.
"Lien" shall mean, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement and the other Loan Documents, a Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property.
"Loan" means, with respect to a Lender, such Lender's term loan made pursuant to ARTICLE II (or any conversion or continuation thereof).
"Loan Documents" means this Agreement and any Notes issued pursuant to
SECTION 2.13, the Pledge Agreements and the Put Agreement.
"Material Adverse Effect" means a material adverse effect on (a) the business, Property, condition (financial or otherwise), results of operations, or prospects of the Borrower, (b) the ability of the Borrower to perform its obligations under the Loan Documents to which it is a party, or (c) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent or the Lenders thereunder.
"Multiemployer Plan" shall mean a multiemployer plan defined as such in
Section 3(37) of ERISA to which contributions have been made by the Borrower and
that is covered by Title IV of ERISA.
"Non-U.S. Lender" is defined in SECTION 3.5(d).
"Note" means any promissory note issued at the request of a Lender pursuant to SECTION 2.13 in the form of EXHIBIT E.
"Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Agent or any indemnified party arising under the Loan Documents.
"Other Taxes" is defined in SECTION 3.5(b).
"Parent" shall mean Broad Street Contract Services, Inc., a Delaware corporation.
"Parent Pledge Agreement" shall mean an Amended and Restated Pledge Agreement of even date herewith between the Parent and the Agent, as the same shall be modified and supplemented and in effect from time to time.
"Participants" is defined in SECTION 12.2.1.
"Payment Date" means the last Business Day of each March, June, September and December.
"Permitted Investments" shall mean: (a) direct obligations of the United States of America, or of any agency thereof, or obligations guaranteed as to principal and interest by the
United States of America, or of any agency thereof, in either case maturing not more than 90 days from the date of acquisition thereof; (b) certificates of deposit issued by any bank or trust company organized under the laws of the United States of America or any state thereof and having capital, surplus and undivided profits of at least $500,000,000, maturing not more than 90 days from the date of acquisition thereof; and (c) commercial paper rated A-1 or better or P-1 by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or Moody's Investors Services, Inc., respectively, maturing not more than 90 days from the date of acquisition thereof; in each case so long as the same (i) provide for the payment of principal and interest (and not principal alone or interest alone) and (ii) are not subject to any contingency regarding the payment of principal or interest.
"Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof.
"Plan" shall mean an employee benefit or other plan established or maintained by the Borrower and that is covered by Title IV of ERISA, other than a Multiemployer Plan.
"Pledge Agreements" shall mean the Company Pledge Agreement and the Parent Pledge Agreement.
"Preferred Stock" shall mean the Class A Preferred Stock issued from time to time by State Auto Financial to the Borrower under the Standby Purchase Agreement.
"Preferred Stock Certificates" shall mean the certificates evidencing the Preferred Stock.
"Principal Payment Dates" shall mean, with respect to any Loan, each of the 2nd, 4th, 6th, 8th, 10th, 12th, 14th, 16th, 18th and 20th Payment Dates immediately following the making of such Loan.
"Property" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.
"Purchasers" is defined in SECTION 12.3.1.
"Put Agreement" shall mean an Amended and Restated Put Agreement of even date herewith between the State Auto Obligors and the Agent, as the same shall be modified and supplemented and in effect from time to time.
"Redemption Value" shall mean, with respect to any Preferred Stock, the "Redemption Value" for such Preferred Stock set forth in the Preferred Stock Certificates evidencing such Preferred Stock.
"Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System.
"Regulations A, D, U and X" shall mean, respectively, Regulations A, D, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time.
"Required Lenders" means Lenders in the aggregate having at least 51% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 51% of the aggregate unpaid principal amount of the outstanding Advances.
"Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities.
"Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced.
"Section" means a numbered section of this Agreement, unless another document is specifically referenced.
"Standby Purchase Agreement" shall mean the Amended and Restated Standby Purchase Agreement of even date herewith between State Auto Financial and the Borrower, as the same shall be modified and supplemented and in effect from time to time.
"State Auto Financial" shall mean State Auto Financial Corporation, an Ohio corporation.
"State Auto Mutual" shall mean State Automobile Mutual Insurance Company, an Ohio mutual insurance company.
"State Auto Obligors" shall mean State Auto Mutual and State Auto Financial.
"State Auto P&C" shall mean State Auto Property and Casualty Insurance Company, a South Carolina corporation.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, limited liability company, association, joint venture or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
"Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but EXCLUDING Excluded Taxes and Other Taxes.
"Transferee" is defined in SECTION 12.4.
"Type" means, with respect to any Advance, its nature as an ABR Advance or a Eurodollar Advance.
"Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default.
"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (b) any partnership, limited liability company, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled.
The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.
ARTICLE II
2.1 COMMITMENT. From and including the date of this Agreement and prior to the Commitment Termination Date, each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make Loans to the Borrower (but only with respect to a single catastrophic event) from time to time in amounts not to exceed in the aggregate at any one time outstanding the amount of its Commitment. Loans paid or prepaid may not be reborrowed. The Commitments to lend hereunder shall expire on the Commitment Termination Date.
2.2 REQUIRED PAYMENTS; TERMINATION. The Borrower hereby promises to pay to the Agent for account of each Lender the principal of each Loan made by such Lender in ten installments payable on the Principal Payment Dates for such Loan. Each of the first four of such installments shall be equal to 7.5% of the principal amount of such Loan, each of the fifth through the eighth of such installments shall be equal to 10% of the principal amount of such Loan, the ninth of such installments shall be equal to 15% of the principal amount of the Loan and the tenth of such installments shall be equal to the balance thereof. Any outstanding Advances and all other unpaid Obligations shall be paid in full by the Borrower on the Facility Termination Date.
2.3 RATABLE LOANS. Each Advance hereunder shall consist of Loans made from the several Lenders ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment.
2.4 TYPES OF ADVANCES. The Advances may be ABR Advances or Eurodollar Advances, or a combination thereof, selected by the Borrower in accordance with SECTIONS 2.8 and 2.9.
2.5 COMMITMENT FEE; REDUCTIONS IN AGGREGATE COMMITMENT; MANDATORY REDUCTIONS IN AGGREGATE COMMITMENT; MANDATORY PREPAYMENTS. (a) The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee of 0.20% per annum on the daily unused portion of such Lender's Commitment from the date hereof to and including the Commitment Termination Date, payable on each Payment Date hereafter and on the Commitment Termination Date.
(b) The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in the minimum amount of $10,000,000 and in multiples of $5,000,000 in excess thereof, upon at least three Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction, PROVIDED, HOWEVER, that the amount of the Aggregate Commitment may not be reduced below the aggregate principal amount of the outstanding Advances. All accrued commitment fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Loans hereunder.
(c) If (i) the Borrower shall sell, assign, transfer or otherwise dispose of all or any portion of the Preferred Stock, (ii) the Agent shall sell the Preferred Stock to State Auto Mutual pursuant to the Put Agreement or (iii) the Preferred Stock shall at any time be repurchased, redeemed or otherwise retired by State Auto Financial (whether pursuant to the terms of such Preferred Stock or otherwise), the Borrower will prepay Loans in a principal amount equal to the aggregate Redemption Value of the Preferred Stock so sold, assigned, transferred or otherwise disposed of. In addition, if the aggregate outstanding principal amount of the Loans shall at any time exceed either (x) the Aggregate Commitment or (y) the aggregate Redemption Value of the Preferred Stock issued and outstanding at such time, the Borrower will prepay the Loans in an amount equal to such excess. Prepayments of the Loans shall be applied to the installments of the Loans in the inverse order or the maturities of the installments thereof.
2.6 MINIMUM AMOUNT OF EACH ADVANCE. Each Eurodollar Advance shall be in the minimum amount of $10,000,000 (and in multiples of $5,000,000 if in excess thereof), and each ABR Advance shall be in the minimum amount of $10,000,000 (and in multiples of $5,000,000 if in excess thereof), PROVIDED, HOWEVER, that any ABR Advance may be in the amount of the unused Aggregate Commitment.
2.7 OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time pay, without penalty or premium, all outstanding ABR Advances, or, in a minimum aggregate amount of $10,000,000 or any integral multiple of $5,000,000 in excess thereof, any portion of the outstanding ABR Advances upon two Business Days' prior notice to the Agent. The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by SECTION 3.4 but without penalty or premium, all outstanding Eurodollar Advances, or, in a minimum aggregate amount of $10,000,000 or any integral multiple of $5,000,000 in excess thereof, any portion of the outstanding Eurodollar Advances upon three Business Days' prior notice to the Agent. Principal payments shall be applied to the principal installments payable under SECTION 2.2 in the inverse order of maturity.
2.8 METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES. The Borrower shall select the Type of Advance. The Borrower shall give the Agent irrevocable notice (a "BORROWING NOTICE") not later than 10:00 a.m. (Chicago time) at least one Business Day before the Borrowing Date of each ABR Advance and three Business Days before the Borrowing Date for each Eurodollar Advance, specifying:
(a) the Borrowing Date, which shall be a Business Day, of such Advance,
(b) the aggregate amount of such Advance, and
(c) the Type of Advance selected.
Not later than noon (Chicago time) on each Borrowing Date, each Lender shall make available its Loan or Loans in funds immediately available in Chicago to the Agent at its address specified pursuant to ARTICLE XIII. The Agent will make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address.
2.9 CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES. ABR Advances
shall continue as ABR Advances unless and until such ABR Advances are converted
into Eurodollar Advances pursuant to this SECTION 2.9 or are repaid in
accordance with SECTION 2.7. Each Eurodollar Advance shall continue as a
Eurodollar Advance until the end of the then applicable Interest Period
therefor, at which time such Eurodollar Advance shall be automatically converted
into an ABR Advance unless (i) such Eurodollar Advance is or was repaid in
accordance with SECTION 2.7 or (ii) the Borrower shall have given the Agent a
Conversion/Continuation Notice (as defined below) requesting that, at the end of
such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance
for another Interest Period. Subject to the terms of SECTION 2.6, the Borrower
may elect from time to time to convert all or any part of an ABR Advance into a
Eurodollar Advance. The Borrower shall give the Agent irrevocable notice (a
"CONVERSION/CONTINUATION NOTICE") of each conversion of an ABR Advance into a
Eurodollar Advance or continuation of a Eurodollar Advance not later than 10:00
a.m. (Chicago time) at least three Business Days prior to the date of the
requested conversion or continuation, specifying:
(a) the requested date, which shall be a Business Day, of such conversion or continuation,
(b) the aggregate amount and Type of the Advance which is to be converted or continued, and
(c) the amount of such Advance which is to be converted into or continued as a Eurodollar Advance.
2.10 CHANGES IN INTEREST RATE, ETC. Each ABR Advance shall bear
interest on the outstanding principal amount thereof, for each day from and
including the date such Advance is made or is automatically converted from a
Eurodollar Advance into an ABR Advance pursuant to SECTION 2.9, to but excluding
the date it is paid or is converted into a Eurodollar Advance pursuant to
SECTION 2.9 hereof, at a rate per annum equal to the Alternate Base Rate for
such day. Changes in the rate of interest on that portion of any Advance
maintained as an ABR Advance
will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Agent as applicable to such Eurodollar Advance based upon the Borrower's selections under SECTIONS 2.8 and 2.9 and otherwise in accordance with the terms hereof. No Interest Period may end after the Facility Termination Date. The Borrower shall select Interest Periods so that it is not necessary to repay any portion of a Eurodollar Advance prior to the last day of the applicable Interest Period in order to make a mandatory repayment required pursuant to SECTION 2.2.
2.11 RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything to the contrary contained in SECTION 2.8 or 2.9, during the continuance of a Default or Unmatured Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of SECTION 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that no Advance may be made as, converted into or continued as a Eurodollar Advance. During the continuance of a Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of SECTION 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (a) each Eurodollar Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (b) each ABR Advance shall bear interest at a rate per annum equal to the Alternate Base Rate in effect from time to time plus 2% per annum, PROVIDED that, during the continuance of a Default under SECTION 7.4, 7.5 or 7.6, the interest rates set forth in clauses (a) and (b) above shall be applicable to all Advances without any election or action on the part of the Agent or any Lender.
2.12 METHOD OF PAYMENT. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to ARTICLE XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by noon (Chicago time) on the date when due and shall be applied ratably by the Agent among the Lenders. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to ARTICLE XIII or at any Lending Installation specified in a notice received by the Agent from such Lender. The Agent is hereby authorized to charge the account of the Borrower maintained with Bank One for each payment of principal, interest and fees as it becomes due hereunder.
2.13 NOTELESS AGREEMENT; EVIDENCE OF INDEBTEDNESS. (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.
(b) The Agent shall also maintain accounts in which it will record
(i) the amount of each Loan made hereunder and the Type thereof, (ii) the amount
of any principal or interest due and payable or to become due and payable from
the Borrower to each Lender
hereunder and (iii) the amount of any sum received by the Agent hereunder from the Borrower and each Lender's share thereof.
(c) The entries maintained in the accounts maintained pursuant to paragraphs (a) and (b) above shall be prima FACIE evidence of the existence and amounts of the Obligations therein recorded; PROVIDED, HOWEVER, that the failure of the Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms.
(d) Any Lender may request that its Loans be evidenced by a promissory note (a "NOTE"). In such event, the Borrower shall prepare, execute and deliver to such Lender a Note payable to the order of such Lender in a form supplied by the Agent. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after any assignment pursuant to SECTION 12.3) be represented by one or more Notes payable to the order of the payee named therein or any assignee pursuant to SECTION 12.3, except to the extent that any such Lender or assignee subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in paragraphs (a) and (b) above.
2.14 TELEPHONIC NOTICES. The Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Agent or any Lender in good faith believes to be acting on behalf of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing Notices and Conversion/Continuation Notices to be given telephonically. The Borrower agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error.
2.15 INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued on each ABR Advance shall be payable on each Payment Date, commencing with the first such Payment Date to occur after the date hereof, on any date on which the ABR Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any ABR Advance converted into a Eurodollar Advance on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest on Eurodollar Loans and commitment fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest on Base Rate Loans shall be calculated for actual days elapsed on the basis of a year of 365 or 366 days, as the case may be. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to noon (Chicago time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment.
2.16 NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND COMMITMENT REDUCTIONS. Promptly after receipt thereof, the Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate.
2.17 LENDING INSTALLATIONS. Each Lender may book its Loans at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans and any Notes issued hereunder shall be deemed held by each Lender for the benefit of any such Lending Installation. Each Lender may, by written notice to the Agent and the Borrower in accordance with ARTICLE XIII, designate replacement or additional Lending Installations through which Loans will be made by it and for whose account Loan payments are to be made.
2.18 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or a Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (a) in the case of a Lender, the proceeds of a Loan or (b) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first three days and, thereafter, the interest rate applicable to the relevant Loan or (ii) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan.
2.19 EXTENSION OF COMMITMENT TERMINATION DATE. (a) The Borrower may, by notice to the Agent (which shall promptly notify the Lenders) given not less than 60 days and not more than 90 days prior to the initial Commitment Termination Date (the "INITIAL COMMITMENT TERMINATION DATE"), request that the Lenders extend the Commitment Termination Date for an additional 364 days from the Initial Commitment Termination Date; PROVIDED that in no event may the Borrower request more than one such extension. Each Lender, acting in its sole discretion, shall, by notice (which shall be irrevocable) to the Borrower and the Agent given no earlier than the date that is 30 days prior to the Initial Commitment Termination Date (herein, the "CONSENT DATE") and no later than the date that is three Business Days after the Consent Date, advise the Borrower whether or not such Lender agrees to such extension; PROVIDED that each Lender that determines not to extend the Commitment Termination Date ("NON-EXTENDING LENDER") shall notify the Agent (which shall notify the Lenders) of such fact promptly after such determination (but in any event no later than the date three Business Days after the Consent Date) and any Lender that does not advise the Borrower on or prior to the date three Business Days after the Consent Date that such Lender agrees to such extension shall be deemed to be a Non-Extending Lender. The election of any Lender to agree to such extension shall not obligate any other Lender to so agree.
(b) The Borrower may, at any time prior to the Initial Commitment Termination Date, replace any Non-Extending Lender, by giving not less than ten Business Days' prior notice to the Agent (which shall promptly notify such Non-Extending Lender), that it intends to replace such Non-Extending Lender with respect to its rights and obligations (including, without limitation, its Commitments) as a "Lender" under this Agreement (collectively, the "TRANSFERRED INTEREST") with one or more banks or other financial institutions (including, but not limited to, any other Lender or an affiliate of any Lender) selected by the Borrower and acceptable to the Agent (each, a "REPLACEMENT LENDER"). Upon the Initial Commitment Termination Date (and as a condition to the extension thereof), (i) the Borrower shall pay or cause to be paid to such Non-Extending Lender being replaced an amount equal to all fees and other amounts then owing to such Non-Extending Lender hereunder and under any other Basic Document in respect of the Transferred Interest (all or a portion of which amount may constitute consideration for an assignment by such Non-Extending Lender of all or a portion of the Transferred Interest) and (ii) such Non-Extending Lender shall assign to each Replacement Lender, pursuant to an Assignment Agreement substantially in the form of EXHIBIT C hereto, a portion of the Transferred Interest specified by the Borrower, whereupon (x) each Replacement Lender shall become a "Lender" for all purposes of this Agreement having the Commitments in the amount of such Non-Extending Lender's Commitments assumed by it and all of the rights and obligations under this Agreement of "Lender(s)" holding the Transferred Interest and (y) such Non-Extending Lender shall cease to be responsible or liable for, and shall cease to be entitled to the rights and benefits of, all or any portion of the Transferred Interest.
(c) If (and only if) the sum of the aggregate amount of the Commitments of Lenders having agreed so to extend the Initial Commitment Termination Date on or prior to the Initial Commitment Termination Date PLUS the aggregate amount of the Commitments of the Replacement Lenders shall equal or exceed 50% of the aggregate amount of the Commitments in effect immediately prior to the Initial Commitment Termination Date, then, effective as of the Initial Commitment Termination Date, the Initial Commitment Termination Date shall be extended to the date falling 364 days after the Initial Commitment Termination Date (except that, if such date is not a Business Day, such Commitment Termination Date as so extended shall be the next preceding Business Day); PROVIDED that the Commitment of each Non-Extending Lender shall terminate on the Initial Commitment Termination Date.
(d) Notwithstanding the foregoing clauses (a) through (c), the extension of the Initial Commitment Termination Date shall not be effective with respect to any Lender unless:
(i) no Unmatured Default or Default shall have occurred and be continuing on each of the date of the notice requesting such extension (the "REQUEST DATE"), the Consent Date and the Initial Commitment Termination Date;
(ii) each of the representations and warranties made by the Borrower in ARTICLE V hereof shall be true and complete on and as of each of the Request Date, the Consent Date and the Initial Commitment Termination Date with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date);
(iii) no Loans shall be outstanding on each of the Request Date, the Consent Date and the Initial Commitment Termination Date; and
(iv) on each of the Request Date and the Initial Commitment Termination Date, the Agent shall have received the respective certificate required to be delivered by State Auto Mutual on such date pursuant to Section 4.20 of the Put Agreement.
ARTICLE III
3.1 YIELD PROTECTION. If, on or after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or applicable Lending Installation with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency:
(a) subjects any Lender or any applicable Lending Installation to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender in respect of its Eurodollar Loans, or
(b) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or
(c) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining its Eurodollar Loans or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with its Eurodollar Loans, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of Eurodollar Loans held or interest received by it, by an amount deemed material by such Lender,
and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Installation of making or maintaining its Eurodollar Loans or Commitment or to reduce the return received by such Lender or applicable Lending Installation in connection with such Eurodollar Loans or Commitment, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction in amount received.
3.2 CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender determines the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such
Lender or any corporation controlling such Lender is increased as a result of a Change, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans or its Commitment to make Loans hereunder (after taking into account such Lender's policies as to capital adequacy). "Change" means (a) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (b) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement.
3.3 AVAILABILITY OF TYPES OF ADVANCES. If any Lender determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Required Lenders determine that (a) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available or (b) the interest rate applicable to Eurodollar Advances does not accurately reflect the cost of making or maintaining Eurodollar Advances, then the Agent shall suspend the availability of Eurodollar Advances and require any affected Eurodollar Advances to be repaid or converted to ABR Advances, subject to the payment of any funding indemnification amounts required by SECTION 3.4.
3.4 FUNDING INDEMNIFICATION. If any payment of a Eurodollar Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance.
3.5 TAXES. (a) All payments by the Borrower to or for the account of any Lender or the Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or the Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this SECTION 3.5) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent the original copy of a receipt evidencing payment thereof within 30 days after such payment is made.
(b) In addition, the Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note ("OTHER TAXES").
(c) The Borrower hereby agrees to indemnify the Agent and each
Lender for the full amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed on amounts payable under this
SECTION 3.5) paid by the Agent or such Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
Payments due under this indemnification shall be made within 30 days of the date
the Agent or such Lender makes demand therefor pursuant to SECTION 3.6.
(d) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "NON-U.S. LENDER") agrees that it will, not less than ten Business Days after the date of this Agreement (or, in the case of a Lender which becomes a party hereto after the date hereof, on or prior to the date such Lender becomes a party hereto), (i) deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to each of the Borrower and the Agent a United States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, UNLESS an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax.
(e) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to CLAUSE (D) above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this SECTION 3.5 with respect to Taxes imposed by the United States; PROVIDED that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (d), above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes.
(f) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate.
(g) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent). The obligations of the Lenders under this SECTION 3.5(G) shall survive the payment of the Obligations and termination of this Agreement.
3.6 LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under SECTIONS 3.1, 3.2 and 3.5 or to avoid the unavailability of Eurodollar Advances under SECTION 3.3, so long as such designation is not, in the judgment of such Lender, disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Agent) as to the amount due, if any, under SECTION 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement. The obligations of the Borrower under SECTIONS 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement.
ARTICLE IV
4.1 CONDITIONS TO EFFECTIVENESS. The amendments to the Existing Credit Agreement embodied in this Agreement shall not become effective (in which case the Existing Credit Agreement shall remain in full force and effect) unless the Borrower has furnished to the Agent (with sufficient copies for the Lenders) each of the following documents:
(a) THIS AGREEMENT. This Agreement, duly executed and delivered by the Borrower, each Lender and the Agent.
(b) PLEDGE AGREEMENT AMENDMENTS. That certain First Amendment to Company Pledge Agreement, duly executed and delivered by the Borrower and the Agent, and that certain First Amendment to Parent Pledge Agreement, duly executed and delivered by the Parent and the Agent.
(c) PUT AGREEMENT. The Put Agreement, duly executed and delivered by the State Auto Obligors and the Agent.
(d) STANDBY PURCHASE AGREEMENT. The Standby Purchase Agreement, duly executed and delivered by the State Auto Obligors and the Borrower.
(e) ARTICLES OF INCORPORATION; GOOD STANDING CERTIFICATES. Copies of the articles or certificate of incorporation of the Borrower and the Parent (each, an "OBLIGOR"), together with all amendments, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation.
(f) BY-LAWS; RESOLUTIONS. Copies, certified by the Secretary or Assistant Secretary of each Obligor, of its by-laws and of its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents to which each such Obligor is a party.
(g) INCUMBENCY CERTIFICATE. An incumbency certificate, executed by the Secretary or Assistant Secretary of each Obligor, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of such Obligor authorized to sign the Loan Documents to which such Obligor is a party, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower.
(h) OFFICER'S CERTIFICATE. A certificate, signed by the chief financial officer of the Borrower, stating that on the Effective Date no Default or Unmatured Default has occurred and is continuing.
(i) OPINION. A written opinion of the Borrower's counsel, addressed to the Lenders in substantially the form of EXHIBIT A.
(j) NOTES. Any Notes requested by a Lender pursuant to SECTION 2.13 payable to the order of each such requesting Lender.
(k) DOCUMENTS REQUIRED BY PUT AGREEMENT. Each of the documents required to be delivered by State Auto Mutual pursuant to Sections 4.18(a) through (e) and (g) of the Put Agreement.
(l) OTHER DOCUMENTS. Such other documents as any Lender or its counsel may have reasonably requested.
4.2 EACH ADVANCE. The Lenders shall not be required to make any Advance unless on the applicable Borrowing Date:
(a) There exists no Default or Unmatured Default;
(b) The representations and warranties contained in ARTICLE V and in Article III of the Put Agreement are true and correct as of such Borrowing Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date and, with respect to the last sentence of SECTION 5.2, excluding the effect of the catastrophic event with respect to which such Advance is being requested;
(c) All legal matters incident to the making of such Advance shall be satisfactory to the Lenders and their counsel;
(d) Concurrently therewith, (i) the Borrower shall receive Preferred Stock having an aggregate liquidation preference equal to the aggregate principal amount of such Loan and shall deliver the same, together with an undated stock power executed in blank, to the Agent in pledge subject to the Company Pledge Agreement and (ii) all of the conditions precedent to the purchase of the Preferred Stock under the Standby Purchase Agreement shall be satisfied (and the Agent shall receive evidence satisfactory to it that such conditions precedent shall be so satisfied) or (with the consent of the Agent and each Lender) waived;
(e) the Agent shall have received each of the documents required to be delivered by State Auto Mutual pursuant to Section 4.19 of the Put Agreement; and
(f) with respect to the initial Advance hereunder, the Agent shall have received the documents required to be delivered by State Auto Mutual pursuant to Section 4.18(f) of the Put Agreement.
Each Borrowing Notice with respect to each such Advance shall constitute a representation and warranty by the Borrower that the conditions contained in SECTIONS 4.2(a) and (b) have been satisfied. Any Lender may require a duly completed compliance certificate in substantially the form of EXHIBIT B as a condition to making an Advance.
ARTICLE V
The Borrower represents and warrants to the Lenders that:
5.1 CORPORATE EXISTENCE. The Borrower: (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; (c) is qualified to do business and is in
good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary; and (d) has no Subsidiaries.
5.2 FINANCIAL CONDITION. The Borrower has heretofore furnished to each of the Lenders the balance sheet of the Borrower as at December 31, 2000 and the related statements of income, retained earnings and cash flows for the Borrower for the fiscal year ended on such date, with the opinion thereon of Ernst & Young LLP, and the unaudited balance sheet of the Borrower as at June 30, 2001 and the related statements of income, retained earnings and cash flows of the Borrower for the three-month period ended on such date. All such financial statements present fairly in all material respects the financial condition of the Borrower as at said dates and the results of its operations for the fiscal year and three-month period ended on said dates (subject, in the case of such financial statements as at June 30, 2001, to normal year-end audit adjustments), all in accordance with Agreement Accounting Principles. The Borrower does not have on the date hereof and will not have on the Effective Date any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said pro forma balance sheet as at said date. Since June 30, 2001, there has been no material adverse change in the condition (financial or otherwise), operations, business or prospects of the Borrower from that set forth in said financial statements as at said date.
5.3 LITIGATION. There are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Borrower) threatened against the Borrower or any of its Property.
5.4 NO BREACH. None of the execution and delivery of this Agreement and the Notes and the other Loan Documents to which it is a party, the consummation of the transactions herein and therein contemplated or compliance with the terms and provisions hereof and thereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of the Borrower, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Borrower is a party or by which it or any of its Property is bound or to which it is subject, or constitute a default under any such agreement or instrument, or (except for the Liens created pursuant to the Company Pledge Agreement) result in the creation or imposition of any Lien upon any Property of the Borrower pursuant to the terms of any such agreement or instrument.
5.5 ACTION. The Borrower has all necessary corporate power, authority and legal right to execute, deliver and perform its obligations under each of the Loan Documents to which it is a party; the execution, delivery and performance by the Borrower of each of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by the Borrower and constitutes, and each of the Loan Documents to which it is a party when executed and delivered will constitute, its legal, valid and binding obligation, enforceable against the Borrower in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
5.6 APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange, are necessary for the execution, delivery or performance by the Borrower of this Agreement or any of the other Loan Documents to which it is a party or for the legality, validity or enforceability hereof or thereof.
5.7 TAXES. As of the date hereof, the Borrower has not been required to file any Federal or other tax returns. As of the date of each borrowing, the Borrower will have filed all Federal income tax returns and all other material tax returns (if any) that are required to be filed by it and will have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower. The charges, accruals and reserves on the books of the Borrower in respect of taxes and other governmental charges are, in the opinion of the Borrower, adequate.
5.8 USE OF CREDIT. No part of the proceeds of any Loan will be used to buy or carry Margin Stock (as such term is defined in Regulations U and X) in violation of Regulation U or X. The Preferred Stock does not constitute Margin Stock (as so defined).
5.9 SPECIAL PURPOSE COMPANY. On the date hereof, the Borrower is not engaged in any business or transaction other than as permitted by SECTION 6.4 hereof.
5.10 CAPITALIZATION. The authorized capital stock of the Borrower consists, on the date hereof, of an aggregate of 1000 shares of common stock, no par value, of which 1000 shares are duly and validly issued and outstanding, each of which shares is fully paid and nonassessable. As of the date hereof, there are no outstanding Equity Rights with respect to the Borrower and there are no outstanding obligations of the Borrower to repurchase, redeem, or otherwise acquire any shares of capital stock of the Borrower nor are there any outstanding obligations of the Borrower to make payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market value or equity value of the Borrower.
5.11 ERISA. The Borrower does not have any ERISA Affiliates. The Borrower does not maintain or contribute to any Plan or Multiemployer Plan.
5.12 INVESTMENT COMPANY. The Borrower is not, nor after giving effect to any Advance will it be, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended.
5.13 TRUE AND COMPLETE DISCLOSURE. The information, reports, financial statements, exhibits and schedules furnished in writing by the Borrower to the Agent or any Lender in connection with the negotiation, preparation or delivery of this Agreement and the other Loan Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by the Borrower to the Agent and the Lenders in connection with this Agreement and the other Loan Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates,
on the date as of which such information is stated or certified. There is no fact known to the Borrower that could have a Material Adverse Effect that has not been disclosed herein, in the other Loan Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Agent for use in connection with the transactions contemplated hereby or thereby.
ARTICLE VI
During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing:
6.1 FINANCIAL STATEMENTS, ETC. The Borrower shall deliver to each of the Lenders:
(a) as soon as available and in any event within 45 days after the end of each quarterly fiscal period of each fiscal year of the Borrower, statements of income, retained earnings and cash flows of the Borrower for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related balance sheet of the Borrower as at the end of such period, setting forth in each case in comparative form the corresponding figures for the corresponding periods in the preceding fiscal year, accompanied by a certificate of a senior officer of the Borrower, which certificate shall state that said financial statements present fairly in all material respects the financial condition and results of operations of the Borrower in accordance with Agreement Accounting Principles, as at the end of, and for, such period (subject to normal year-end audit adjustments);
(b) promptly after the Borrower knows or has reason to believe that any Unmatured Default or Default has occurred, a notice of such Unmatured Default or Default stating that such notice is a "Notice of Default" and describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Borrower has taken or proposes to take with respect thereto;
(c) promptly after its receipt thereof, copies of all written notices, requests, directions, instructions or other communications received by the Borrower from any State Auto Obligor under the Standby Purchase Agreement or otherwise; and
(d) from time to time such other information regarding the financial condition, operations, business or prospects of the Borrower as any Lender or the Agent may reasonably request.
The Borrower will furnish to each Lender, at the time it furnishes each set of financial statements pursuant to paragraph (a) above, a certificate of a senior officer of the Borrower to the effect that no Unmatured Default or Default has occurred and is continuing (or, if any Unmatured Default or Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Borrower has taken or proposes to take with respect thereto).
6.2 LITIGATION. The Borrower will promptly give to each Lender notice of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Borrower.
6.3 EXISTENCE, ETC. The Borrower will:
(a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises;
(b) comply in all material respects with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities;
(c) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained;
(d) maintain all of its Properties used or useful in its business in good working order and condition, ordinary wear and tear excepted;
(e) keep adequate records and books of account, in which complete entries will be made in accordance with Agreement Accounting Principles; and
(f) permit representatives of any Lender or the Agent, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Agent (as the case may be).
6.4 LIMITED PURPOSE COMPANY. Notwithstanding anything herein to the contrary, the Borrower shall not:
(a) create, incur, assume or have outstanding any Indebtedness or other liabilities or obligations except for obligations under or in respect of the Loan Documents;
(b) own any Property except for the Preferred Stock and dividends thereon;
(c) enter into any transaction of merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution);
(d) create, incur or permit to exist any Lien (other than the Lien created by the Company Pledge Agreement) on or in respect of, or convey, sell, lease, assign, transfer or otherwise dispose of, any of its Property;
(e) make or hold any Investment, except operating deposit accounts with banks and Permitted Investments;
(f) declare or make any Dividend Payment at any time;
(g) enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than the Borrower would obtain in a comparable arms-length transaction with a Person which is not an Affiliate;
(h) create or acquire any Subsidiaries; or
(i) otherwise engage in any business or transaction other than the transactions contemplated by (and consistent with) the Basic Documents and incidental thereto.
6.5 USE OF PROCEEDS. The Borrower will use the proceeds of the Loans hereunder solely to finance the purchase from State Auto Financial of the Preferred Stock under the Standby Purchase Agreement (in compliance with all applicable legal and regulatory requirements); PROVIDED, that neither the Agent nor any Lender shall have any responsibility as to the use of any of such proceeds; PROVIDED, FURTHER, that the proceeds of the Loans hereunder shall not be used to finance the purchase of Preferred Shares in respect of catastrophic loss claims and/or adjustment expenses under war-risk, allied perils, terrorism, hijacking, governmental confiscation or expropriation insurance coverage.
6.6 MODIFICATIONS OF CERTAIN DOCUMENTS. The Borrower will not consent to any modification, supplement or waiver of any of the provisions of, or assignment of any rights or obligations of any other Person under, any Basic Document without the prior consent of the Agent (with the approval of the Required Lenders).
ARTICLE VII
The occurrence of any one or more of the following events shall constitute a Default:
7.1 The Borrower shall default in the payment when due (whether at stated maturity or upon mandatory or optional prepayment) of any principal of or interest on any Loan, any fee or any other amount payable by it hereunder or under any other Loan Document to which it is a party; or
7.2 Any representation, warranty or certification made or deemed made herein or in any other Loan Document to which the Borrower or the Parent is a party (or in any modification or supplement hereto or thereto) by the Borrower or the Parent, or any certificate furnished to any Lender or the Agent pursuant to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or furnished in any material respect; or
7.3 The Borrower shall default in the performance of any of its obligations under any of Sections 6.4, 6.5 or 6.6 hereof; the Borrower or the Parent shall default in the performance of
any of its obligations under the Company Pledge Agreement or the Parent Pledge Agreement, as the case may be; or the Borrower or the Parent shall default in the performance of any of its other obligations in this Agreement or any other Loan Document to which it is a party and such default shall continue unremedied for a period of 30 or more days after the occurrence of such default; or
7.4 The Borrower or the Parent shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or
7.5 The Borrower or the Parent shall (a) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (b) make a general assignment for the benefit of its creditors, (c) commence a voluntary case under the Bankruptcy Code, (d) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (e) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (f) take any corporate action for the purpose of effecting any of the foregoing; or
7.6 A proceeding or case shall be commenced, without the application or consent of the Borrower or the Parent, in any court of competent jurisdiction, seeking (a) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (b) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Borrower or the Parent or of all or any substantial part of its respective Property or (c) similar relief in respect of the Borrower or the Parent under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days, or an order for relief against the Borrower shall be entered in an involuntary case under the Bankruptcy Code; or
7.7 The Parent shall fail to own and control, beneficially (free and clear of all Liens other than Liens created pursuant to the Basic Documents), 100% of the capital stock issued by the Borrower (irrespective of whether or not at the time securities or other ownership interests issued by the Borrower or any other class or classes might have voting power by reason of the happening of any contingency); or
7.8 The Liens created by the Pledge Agreements shall at any time not constitute valid and perfected Liens on the collateral intended to be covered thereby (to the extent perfection by filing, registration, recordation or possession is required herein or therein) in favor of the Agent, free and clear of all other Liens, or, except for expiration in accordance with its terms, either Pledge Agreement shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by the Borrower or the Parent; or
7.9 A Put Event under, and as defined in, the Put Agreement.
ARTICLE VIII
8.1 ACCELERATION. If any Default described in SECTION 7.4, 7.5 or 7.6 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent or any Lender. If any other Default occurs, the Required Lenders (or the Agent with the consent of the Required Lenders) may terminate or suspend the obligations of the Lenders to make Loans hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives.
If, within 30 days after acceleration of the maturity of the
Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
SECTION 7.4, 7.5 or 7.6 with respect to the Borrower) and before any judgment or
decree for the payment of the Obligations due shall have been obtained or
entered, the Required Lenders (in their sole discretion) shall so direct, the
Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.
8.2 AMENDMENTS. Subject to the provisions of this ARTICLE VIII, the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; PROVIDED, HOWEVER, that no such supplemental agreement shall, without the consent of all of the Lenders:
(a) Extend the final maturity of any Loan or postpone any regularly scheduled payment of principal of any Loan or forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon.
(b) Reduce the percentage specified in the definition of Required Lenders.
(c) Extend the Facility Termination Date, or reduce the amount or extend the payment date for, the mandatory payments required under SECTION 2.2, or increase the amount of the Aggregate Commitment or of the Commitment of any Lender hereunder, or permit the Borrower to assign its rights under this Agreement.
(d) Amend this SECTION 8.2.
(e) Release, or agree to subordinate the Lenders' Liens with respect to, all or substantially all of the Collateral.
No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent. The Agent may waive payment of the fee required under SECTION 12.3.2 without obtaining the consent of any other party to this Agreement.
(f) PRESERVATION OF RIGHTS. No delay or omission of the Lenders or the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to SECTION 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full.
ARTICLE IX
9.1 SURVIVAL OF REPRESENTATIONS. All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Loans herein contemplated.
9.2 GOVERNMENTAL REGULATION. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation.
9.3 HEADINGS. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents.
9.4 ENTIRE AGREEMENT. The Loan Documents embody the entire agreement and understanding among the Borrower, the Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent and the Lenders relating to the subject matter thereof other than the fee letter described in SECTION 10.13.
9.5 SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, PROVIDED, HOWEVER, that the parties hereto expressly agree that the Arranger shall enjoy the benefits of the provisions of SECTIONS 9.6, 9.10 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement.
9.6 EXPENSES; INDEMNIFICATION. (a) The Borrower shall reimburse the Agent and the Arranger for any costs, internal charges and out-of-pocket expenses (including reasonable
attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent or the Arranger in connection with the preparation, negotiation, execution, delivery, syndication, review, amendment, modification, and administration of the Loan Documents. The Borrower also agrees to reimburse the Agent, the Arranger and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent, the Arranger and the Lenders, which attorneys may be employees of the Agent, the Arranger or the Lenders) paid or incurred by the Agent, the Arranger or any Lender in connection with the collection and enforcement of the Loan Documents.
(b) The Borrower hereby further agrees to indemnify the Agent, the Arranger, each Lender, their respective affiliates, and each of their directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent, the Arranger, any Lender or any affiliate is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification. The obligations of the Borrower under this SECTION 9.6 shall survive the termination of this Agreement.
9.7 NUMBERS OF DOCUMENTS. All statements, notices, closing documents, and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders.
9.8 ACCOUNTING. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles.
9.9 SEVERABILITY OF PROVISIONS. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable.
9.10 NONLIABILITY OF LENDERS. The relationship between the Borrower on the one hand and the Lenders and the Agent on the other hand shall be solely that of borrower and lender. Neither the Agent, the Arranger nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent, the Arranger nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. The Borrower agrees that neither the Agent, the Arranger nor any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross
negligence or willful misconduct of the party from which recovery is sought. Neither the Agent, the Arranger nor any Lender shall have any liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by the Borrower in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby.
9.11 CONFIDENTIALITY. The Agent and each Lender agrees to hold any confidential information which it may receive from the Borrower pursuant to this Agreement in confidence, except for disclosure (a) to its Affiliates and to other Lenders and their respective Affiliates, so long as such Affiliate or other Lender agrees to be bound by the provisions of this Section, (b) to legal counsel, accountants, and other professional advisors to such Lender or to a Transferee, (c) to regulatory officials, (d) to any Person as requested pursuant to or as required by law, regulation, or legal process, (e) to any Person in connection with any legal proceeding to which such Lender is a party, (f) to such Lender's direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, and (g) permitted by SECTION 12.4.
9.12 NONRELIANCE. Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Loans provided for herein.
9.13 DISCLOSURE. The Borrower and each Lender hereby (a) acknowledge and agree that Bank One and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with the Borrower and its Affiliates, and (b) waive any liability of Bank One or such Affiliate of Bank One to the Borrower or any Lender, respectively, arising out of or resulting from such investments, loans or relationships other than liabilities arising out of the gross negligence or willful misconduct of Bank One or its Affiliates.
9.14 TERMINATION OF IBJ COMMITMENT. The Commitment of IBJ shall be terminated and of no further force and effect from and after the Effective Date.
9.15 ADDITION OF FIFTH THIRD AS LENDER; REALLOCATION OF COMMITMENTS. From and after the Effective Date, (a) Fifth Third shall become a Lender under this Agreement, and (b) the Commitments of the Lenders shall be as set forth on SCHEDULE 1 hereto.
ARTICLE X
10.1 APPOINTMENT; NATURE OF RELATIONSHIP. Bank One, NA is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "AGENT") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Agent agrees to act as such contractual representative upon the express conditions contained in this ARTICLE X. Notwithstanding the use of the defined term "Agent," it is expressly understood and agreed that the Agent shall not have
any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Agent is merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual representative, the Agent (a) does not hereby assume any fiduciary duties to any of the Lenders, (b) is a "representative" of the Lenders within the meaning of Section 9-105 of the Uniform Commercial Code and (c) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives.
10.2 POWERS. The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent.
10.3 GENERAL IMMUNITY. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person.
10.4 NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in ARTICLE IV, except receipt of items required to be delivered solely to the Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of the Borrower or any guarantor of any of the Obligations or of any of the Borrower's or any such guarantor's respective Subsidiaries. The Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at such time, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity).
10.5 ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan
Document unless it shall be requested in writing to do so by the Required Lenders. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action.
10.6 EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Agent and the Lenders and all matters pertaining to the Agent's duties hereunder and under any other Loan Document.
10.7 RELIANCE ON DOCUMENTS; COUNSEL. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent.
10.8 AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (or, if all Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (a) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (b) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders) and (c) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, PROVIDED that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Agent and (ii) any indemnification required pursuant to SECTION 3.5(g) shall, notwithstanding the provisions of this SECTION 10.8, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this SECTION 10.8 shall survive payment of the Obligations and termination of this Agreement.
10.9 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such
Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders.
10.10 RIGHTS AS A LENDER. In the event the Agent is a Lender, the Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Loans as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent, in its individual capacity, is not obligated to remain a Lender.
10.11 LENDER CREDIT DECISION. Each Lender acknowledges that it has, independently and without reliance upon the Agent, the Arranger or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent, the Arranger or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents.
10.12 SUCCESSOR AGENT. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. The Agent may be removed at any time with or without cause by written notice received by the Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent. Notwithstanding the previous sentence, the Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Agent hereunder. If the Agent has resigned or been removed and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Agent. Upon the effectiveness of the resignation or removal of the Agent, the resigning or removed Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Agent, the provisions of this ARTICLE X shall
continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Agent by merger, or the Agent assigns its duties and obligations to an Affiliate pursuant to this SECTION 10.12, then the term "Corporate Base Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Agent.
10.13 AGENT'S FEE. The Borrower agrees to pay to the Agent, for its own account, the fees agreed to by the Borrower and the Agent pursuant to that certain letter agreement dated October 15, 2001, or as otherwise agreed from time to time.
10.14 DELEGATION TO AFFILIATES. The Borrower and the Lenders agree that the Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Agent is entitled under ARTICLES IX and X.
10.15 EXECUTION OF PLEDGE AND PUT AGREEMENTS. The Lenders hereby empower and authorize the Agent to execute and deliver to the Borrower on their behalf the Pledge Agreements and all related financing statements and any financing statements, agreements, documents or instruments as shall be necessary or appropriate to effect the purposes of the Pledge Agreements. Each Lender hereby approves the terms of the Put Agreement and agrees to be bound thereby including, without limitation, SECTION 5.11(b) of the Put Agreement and authorizes and directs the Agent to enter into the Put Agreement on behalf of such Lender.
10.16 COLLATERAL RELEASES. The Lenders hereby empower and authorize the Agent to execute and deliver to the Borrower on their behalf any agreements, documents or instruments as shall be necessary or appropriate to effect any releases of collateral which shall be permitted by the terms hereof or of any other Loan Document or which shall otherwise have been approved by the Required Lenders (or, if required by the terms of SECTION 8.2, all of the Lenders) in writing.
10.17 CONSENTS UNDER OTHER LOAN DOCUMENTS. Except as otherwise provided in SECTION 8.2 hereof with respect to this Agreement, the Agent may, with the prior consent of the Required Lenders (but not otherwise), consent to any modification, supplement or waiver under any of the other Loan Documents or the Standby Purchase Agreement, provided that without the prior written consent of each Lender, the Agent shall not (except as provided herein or in the other Loan Documents) terminate any Loan Document, release either State Auto Obligor from its liability under the Put Agreement, release any collateral or otherwise terminate any Lien under any Loan Document providing for collateral security, agree to additional obligations being secured by such collateral security (unless the Lien for such additional obligation shall be junior to the Lien in favor of the other obligations secured by such Loan Document) or modify, supplement or waive any provision in Section 3 of the Standby Purchase Agreement.
10.18 CO-AGENTS, DOCUMENTATION AGENT, SYNDICATION AGENT, ETC. Neither any of the Lenders identified in this Agreement as the Documentation Agent or the Syndication Agent shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of such
Lenders shall have or be deemed to have a fiduciary relationship with any Lender. Each Lender hereby makes the same acknowledgments with respect to such Lenders as it makes with respect to the Agent in SECTION 10.11.
ARTICLE XI
11.1 SETOFF. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or any Affiliate of any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part thereof, shall then be due.
11.2 RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Loans (other than payments received pursuant to
SECTION 2.19(b), 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that
received by any other Lender, such Lender agrees, promptly upon demand, to
purchase a portion of the Loans held by the other Lenders so that after such
purchase each Lender will hold its ratable proportion of Loans. If any Lender,
whether in connection with setoff or amounts which might be subject to setoff or
otherwise, receives collateral or other protection for its Obligations or such
amounts which may be subject to setoff, such Lender agrees, promptly upon
demand, to take such action necessary such that all Lenders share in the
benefits of such collateral ratably in proportion to their Loans. In case any
such payment is disturbed by legal process, or otherwise, appropriate further
adjustments shall be made.
ARTICLE XII
12.1 SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (a) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (b) any assignment by any Lender must be made in compliance with SECTION 12.3. The parties to this Agreement acknowledge that clause (b) of this SECTION 12.1 relates only to absolute assignments and does not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank; PROVIDED, HOWEVER, that no such pledge or assignment creating a security interest shall release the transferor Lender from its obligations hereunder unless and until the parties thereto have complied with the provisions of SECTION 12.3. The Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such
Person complies with SECTION 12.3; PROVIDED, HOWEVER, that the Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Loan or which holds any Note to direct payments relating to such Loan or Note to another Person. Any assignee of the rights to any Loan or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Loan.
12.2 PARTICIPATIONS.
12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("PARTICIPANTS") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Loans and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents.
12.2.2. VOTING RIGHTS. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Loan or Commitment, extends the Facility Termination Date, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan or Commitment, releases any guarantor of any such Loan or releases all or substantially all of the collateral, if any, securing any such Loan.
12.2.3. BENEFIT OF SETOFF. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in SECTION 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, PROVIDED that each Lender shall retain the right of setoff provided in SECTION 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in SECTION 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with SECTION 11.2 as if each Participant were a Lender.
12.3 ASSIGNMENTS.
12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("PURCHASERS") all or any part of its rights and obligations under the Loan Documents. Such assignment shall be substantially in the form of EXHIBIT C or in such other form as may be agreed to by the parties thereto. The consent of the Borrower and the Agent shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof; PROVIDED, HOWEVER, that if a Default has occurred and is continuing, the consent of the Borrower shall not be required. Such consent shall not be unreasonably withheld or delayed. Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate thereof shall (unless each of the Borrower and the Agent otherwise consents) be in an amount not less than the lesser of (a) $5,000,000 or (b) the remaining amount of the assigning Lender's Commitment (calculated as at the date of such assignment) or outstanding Loans (if the applicable Commitment has been terminated).
12.3.2. EFFECT; EFFECTIVE DATE. Upon (a) delivery to
the Agent of an assignment, together with any consents required by
SECTION 12.3.1, and (b) payment of a $3,500 fee to the Agent for
processing such assignment (unless such fee is waived by the Agent),
such assignment shall become effective on the effective date specified
in such assignment. The assignment shall contain a representation by
the Purchaser to the effect that none of the consideration used to make
the purchase of the Commitment and Loans under the applicable
assignment agreement constitutes "plan assets" as defined under ERISA
and that the rights and interests of the Purchaser in and under the
Loan Documents will not be "plan assets" under ERISA. On and after the
effective date of such assignment, such Purchaser shall for all
purposes be a Lender party to this Agreement and any other Loan
Document executed by or on behalf of the Lenders and shall have all the
rights and obligations of a Lender under the Loan Documents, to the
same extent as if it were an original party hereto, and no further
consent or action by the Borrower, the Lenders or the Agent shall be
required to release the transferor Lender with respect to the
percentage of the Aggregate Commitment and Loans assigned to such
Purchaser. Upon the consummation of any assignment to a Purchaser
pursuant to this SECTION 12.3.2, the transferor Lender, the Agent and
the Borrower shall, if the transferor Lender or the Purchaser desires
that its Loans be evidenced by Notes, make appropriate arrangements so
that new Notes or, as appropriate, replacement Notes are issued to such
transferor Lender and new Notes or, as appropriate, replacement Notes,
are issued to such Purchaser, in each case in principal amounts
reflecting their respective Commitments, as adjusted pursuant to such
assignment.
12.3.3 ASSIGNMENT TO SPC. Notwithstanding anything to the contrary set forth above, any Lender may (without requesting the consent of the Borrower or the Agent) pledge its Loans to a Federal Reserve Bank in accordance with applicable regulations. Notwithstanding anything to the contrary contained herein, any Lender (a "GRANTING LENDER") may grant to a special purpose funding vehicle (an "SPC"), identified as such in writing from time to time by the Granting Lender to the Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such
Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; PROVIDED that (i) nothing herein shall constitute a commitment by any SPC to make any Loan, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Agreement, any SPC may (i) with notice to, but without the prior written consent of, the Borrower and the Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrower and Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC. This section may not be amended without the written consent of each Granting Lender, all or any of whose Loans are being funded by an SPC at the time of such amendment. It is understood and acknowledged that the Granting Lender shall for all purposes, including, without limitation, the approval of any amendment or waiver of any provision of any Loan Document or the obligation to pay any amount otherwise payable by the Granting Lender under the Loan Documents, continue to be the Lender of record hereunder.
12.4 DISSEMINATION OF INFORMATION. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries, including without limitation any information contained in any Reports; PROVIDED that each Transferee and prospective Transferee agrees to be bound by SECTION 9.11 of this Agreement.
12.5 TAX TREATMENT. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of SECTION 3.5(d).
ARTICLE XIII
13.1 NOTICES. Except as otherwise permitted by SECTION 2.14 with respect to borrowing notices, all notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party: (a) in the case of the Borrower or the Agent, at its address or facsimile number set forth on the signature pages hereof, (b) in the case of any Lender, at its address or facsimile number set forth on SCHEDULE 1 hereto or (c) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower in accordance with the provisions of this SECTION 13.1. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the address specified in this Section; PROVIDED that notices to the Agent under ARTICLE II shall not be effective until received.
13.2 CHANGE OF ADDRESS. The Borrower, the Agent and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto.
ARTICLE XIV
This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Agent and the Lenders and each party has notified the Agent by facsimile transmission or telephone that it has taken such action.
ARTICLE XV
15.1 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION, 735 ILCS SECTION 105/5-1 ET SEQ, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
15.2 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO, ILLINOIS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS.
15.3 WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
ARTICLE XVI
The obligations of the Borrower and the Parent under the Loan Documents shall be satisfied solely from the Preferred Stock and the stock required to be pledged to the Agent and the Lenders under the Parent Pledge Agreement and the proceeds thereof. Moreover, no recourse shall be had for any obligation owing to any Lender or the Administrative Agent under any Loan Document or for the payment of any fee due to any Lender or the Agent under any Loan Document or any other obligation or claim arising out of or based upon any Loan Document against any stockholder, employee, officer, director, affiliate or incorporator of the Borrower, the Parent or Lord Securities Corporation based on their status as such or their actions in connection therewith, except to the extent resulting from the fraud or willful misconduct of such stockholder, employee, officer, director, affiliate or incorporator, as the case may be. The provisions of this ARTICLE XVI shall survive the termination of any or all Loan Documents and, with respect to any Lender or the Agent, the resignation or replacement thereof.
[signature pages follow]
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written.
SAF FUNDING CORPORATION
By:
--------------------------------------------
Title:
-----------------------------------------
Address: 2 Wall Street
New York, New York 10005
Attn: Richard Taiano
|
Telephone: (212) 346-9006 Facsimile: (212) 346-9012
BANK ONE, NA, Individually and as Agent
By: /s/ Thomas A. Kiepura
--------------------------------------------
Title: Assistant Vice President
-----------------------------------------
|
Address: 1 Bank One Plaza
Chicago, Illinois 60670
Attn: Cynthia W. Priest
|
Telephone: (312) 732-9565 Facsimile: (312) 732-4033
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written.
SAF FUNDING CORPORATION
By: /s/ Andy Yan
--------------------------------------------
Title: VICE PRESIDENT
-----------------------------------------
|
Address: 48 Wall Street
New York, New York 10005
Attn: Andy Yan
|
Telephone: (212) 346-9864 Facsimile: (212) 346-9012
BANK ONE, NA, Individually and as Agent
By:
--------------------------------------------
Title:
-----------------------------------------
Address: 1 Bank One Plaza
Chicago, Illinois 60670
Attn: Cynthia W. Priest
|
Telephone: (312) 732-9565 Facsimile: (312) 732-4033
NATIONAL CITY BANK, Individually and as Documentation Agent
By: /s/ Rick Mariotti
--------------------------------------------
Title: Vice President
---------------
|
Address: 155 E. Broad Street
3rd Floor
Columbus, Ohio 43251-0033
Attn: Rick Mariotti
|
Telephone: (614) 463-7305 Facsimile: (614) 463-6770
KEYBANK NATIONAL ASSOCIATION, Individually and as Syndication Agent
By: /s/ Sherrie I. Manson
--------------------------------------------
Title: VICE PRESIDENT
-----------------------------------------
|
Address: 127 Public Square
Large Corporate - 6th Floor
Cleveland, Ohio 44114
Attn: Sherrie Manson
|
Telephone: (216) 689-3443 Facsimile: (216) 689-4981
FIRSTAR BANK, NA, Individually
By: /s/ Robert H. Friend
--------------------------------------------
Title: Vice President
-----------------------------------------
|
Address: 175 South Third Street
4th Floor
Columbus, Ohio 43215-5134
Attn: Robert H. Friend
|
Telephone: (614) 232-2249 Facsimile: (614) 232-8098
THE HUNTINGTON NATIONAL BANK, Individually
By: /s/ Nancy J. Cracolice
--------------------------------------------
Title: Vice President
-----------------------------------------
|
Address: 41 South High Street HC0810
8th Floor
Columbus, Ohio 43215
Attn: Nancy J. Cracolice
|
Telephone: (614) 480-4401 Facsimile: (614) 480-5791
FIFTH THIRD BANK
By: /s/ John K. Beardslee
--------------------------------------------
Title: Vice President
-----------------------------------------
|
Address: 21 East State Street Columbus, Ohio 43215 Attn: John K. Beardslee
Telephone: (614) 223-3982 Facsimile: (614) 341-2606
PARK NATIONAL BANK
By: /s/ Thomas Button
--------------------------------------------
Title: V. P.
-----------------------------------------
|
Address: 140 East Town Street
Columbus, Ohio 43215
Attn: Tom Button
|
Telephone: (614) 228-0283 Facsimile: (614) 228-0205
The undersigned hereby executes this Agreement for the purpose of acknowledging and consenting to the termination of its Commitment under the Existing Credit Agreement.
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: /s/ Hideki Shirato
------------------------------------------------
Hideki Shirato
Title: Deputy General Manager/ Senior Vice President
----------------------------------------------
|
SCHEDULE 1
----------
COMMITMENTS
----------------------------------------------- --------------------------------
Lender Commitment
------ ----------
----------------------------------------------- --------------------------------
Bank One, NA $ 18,000,000
----------------------------------------------- --------------------------------
National City Bank $ 18,000,000
----------------------------------------------- --------------------------------
Keybank National Association $ 18,000,000
----------------------------------------------- --------------------------------
Firstar Bank, NA $ 15,500,000
----------------------------------------------- --------------------------------
The Huntington National Bank $ 15,500,000
----------------------------------------------- --------------------------------
Fifth Third Bank $ 10,000,000
----------------------------------------------- --------------------------------
Park National Bank $ 5,000,000
----------------------------------------------- --------------------------------
Aggregate Commitment $ 100,000,000
--------------------
----------------------------------------------- --------------------------------
|
EXHIBIT A
OPINION
[KAYE SCHOLER LLP LETTERHEAD]
November 16, 2001
To each of the Lenders party to the
Credit Agreement referred to
below and Bank One, NA, as Agent
Ladies and Gentlemen:
We have acted as counsel to SAF Funding Corporation, a Delaware corporation (the "COMPANY") in connection with (i) the Amended and Restated Credit Agreement dated as of November 16, 2001 (the "CREDIT AGREEMENT") among the Company, the lenders party thereto (the "LENDERS") and Bank One, NA, in its capacity as agent for said Lenders (the "AGENT"), providing for, among other things, extensions of credit to be made by the Lenders to the Company in an aggregate principal or stated amount not exceeding $100,000,000 and (ii) the agreements, instruments and other documents referred to in the next paragraph. All capitalized terms used but not defined herein have the respective meanings given to such terms in the Credit Agreement. This opinion letter is delivered to you pursuant to Section 4.1(i) of the Credit Agreement.
In rendering the opinions expressed below, we have examined the following agreements, instruments and other documents:
(a) the Credit Agreement;
(b) the Standby Purchase Agreement (together with the Credit Agreement, the "CREDIT DOCUMENTS"); and
(c) such records of the Company and such other documents as we have deemed necessary as a basis for the opinions expressed below.
In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon certificates of governmental officials and
[KAY SCHOLER LLP LETTERHEAD]
2 November 16, 2001
appropriate representatives of the Company and upon representations made in or pursuant to the Credit Documents.
In rendering the opinions expressed below, we have assumed, with respect to all of the documents referred to in this opinion letter, that (expect to the extent set forth in the opinions expressed below, as to the Company):
(i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties to such documents;
(ii) all signatories to such documents have been duly authorized; and
(iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate, partnership or other) to execute, deliver and perform such documents.
Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware.
2. The Company has all requisite corporate power to execute and deliver, and to perform its obligations and to incur liabilities under, the Credit Documents.
3. The execution, delivery and performance by the Company of, and the incurrence by the Company of liabilities under, the Credit Documents have been duly authorized by all necessary corporate action on the part of the Company.
4. The Credit Documents have been duly executed and delivered by the Company.
5. Each Credit Document constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Credit Documents is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability
[KAY SCHOLER LLP LETTERHEAD]
3 November 16, 2001
of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing.
6. Except with respect to any authorization, approval or consent of, and any filing or registration with, any governmental or regulatory authority or agency of the United States of America or any State as may be required with respect to any or all of the State Auto Obligors or any affiliates thereof or any of their participation in the transactions contemplated by the Basic Documents (whether such participation is direct or indirect by means of participation in such transactions by the Company), no authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the State of New York is required on the part of the Company for the execution, delivery or performance by the Company of, or for the incurrence by the Company of any liabilities under, any of the Credit Documents.
7. The execution, delivery and performance by the Company of, and
the consummation by the Company of the transactions contemplated by, the
Credit Documents do not and will not (a) violate any provision of the
charter or by-laws of the Company, (b) violate any provision of the
Delaware General Corporation Law or (c) violate any applicable law, rule or
regulation of the United States of America or the State of New York. Based
solely upon a certificate of an officer of each of the Company, Broad
Street Contract Services, Inc. (the "PARENT") and Lord Securities
Corporation ("LORD SECURITIES") attached hereto upon which we have relied
without any independent investigation of our own, the execution, delivery
and performance by the Company of, and the consummation by the Company of
the transactions contemplated by, the Credit Documents do not and will not
(y) violate any order, writ, injunction or decree of any court or
governmental authority or agency or any arbitral award applicable to the
Company or (z) result in a breach of, constitute a default under, require
any consent under,or result in the acceleration or required prepayment of
any indebtedness pursuant to the terms of, any agreement or instrument to
which the Company is a party or by which it is bound or to which it is
subject, or (except for the Liens created pursuant to the Pledge
Agreements) result in the creation or imposition of any Lien upon any
Property of the Company pursuant to the terms of any such agreement or
instrument.
8. Based solely on a certificate of an officer of each of the Company, the Parent and Lord Securities attached hereto upon which we have relied without any independent investigation of our own, there are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or threatened against or affecting the Company or any of its Properties that, if adversely determined, could have a material adverse effect.
[KAY SCHOLER LLP LETTERHEAD]
4 November 16, 2001
The foregoing opinions are subject to the following comments and qualifications:
(A) Inasmuch as the Credit Documents are governed by and to be construed in accordance with the laws of the State of Illinois, upon your direction to us, we have assumed that all relevant laws as in effect in the State of Illinois are identical to all relevant laws in effect in the State of New York, and we have based our opinions expressed in paragraph 5 above on such laws of the State of New York. We have not researched or formed or expressed any opinion concerning the validity of the foregoing assumption regarding the identity of the laws of the State of Illinois and the laws of the State of New York.
(B) The enforceability of provisions in the Credit Documents to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances.
(C) We express no opinion as to (i) the effect of the laws of any
jurisdiction in which any Lender is located (other than the State of New
York) that limit the interest, fees or other charges such Lender may impose
for any loan or use of money or other credit, (ii) Section 11.1 of the
Credit Agreement, (iii) Section 8.2(f) of the Credit Agreement and (iv)
Section 15.2 of the Credit Agreement (and any similar provisions in any of
the other Credit Documents).
The foregoing opinions are limited to matters involving the Federal laws of the United States of America, the Delaware General Corporation Law and the law of the State of New York, and we do not express any opinion as to the laws of any other jurisdiction.
At the request of our clients, this opinion letter is provided to you by us in our capacity as counsel to the Company, and this opinion letter may not be relied upon by any other Person or for any purpose other than in connection with the transactions contemplated by the Credit Agreement without, in each instance, our prior written consent.
Very truly yours,
Kaye Scholer LLP
EXHIBIT B
COMPLIANCE CERTIFICATE
To: The Lenders parties to the
Credit Agreement Described Below
This Compliance Certificate is furnished pursuant to that certain Amended and Restated Credit Agreement dated as of November 16, 2001 (as amended, modified, renewed or extended from time to time, the "AGREEMENT") among SAF Funding Corporation (the "BORROWER"), the lenders party thereto and Bank One, NA, as Agent for the Lenders. Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
2. I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower during the accounting period covered by the attached financial statements;
3. The examinations described in PARAGRAPH 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Default or Unmatured Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; and
Described below are the exceptions, if any, to PARAGRAPH 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event:
EXHIBIT C
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "ASSIGNMENT AGREEMENT") between _______________________________ (the "ASSIGNOR") and ________________________ (the "ASSIGNEE") is dated as of __________________ , ________. The parties hereto agree as follows:
1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement (which, as it may be amended, modified, renewed or extended from time to time is herein called the "CREDIT AGREEMENT") described in Item 1 of SCHEDULE 1 attached hereto ("SCHEDULE 1"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement.
2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement and the other Loan Documents, such that after giving effect to such assignment the Assignee shall have purchased pursuant to this Assignment Agreement the percentage interest specified in Item 3 of SCHEDULE 1 of all outstanding rights and obligations under the Credit Agreement and the other Loan Documents relating to the facilities listed in Item 3 of Schedule 1. The aggregate Commitment (or Loans, if the applicable Commitment has been terminated) purchased by the Assignee hereunder is set forth in Item 4 of SCHEDULE 1.
3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the "EFFECTIVE DATE") shall be the later of the date specified in Item 5 of SCHEDULE 1 or two Business Days (or such shorter period agreed to by the Agent) after this Assignment Agreement, together with any consents required under the Credit Agreement, are delivered to the Agent. In no event will the Effective Date occur if the payments required to be made by the Assignee to the Assignor on the Effective Date are not made on the proposed Effective Date.
4. PAYMENT OBLIGATIONS. In consideration for the sale and assignment of Loans hereunder, the Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. On and after the Effective Date, the Assignee shall be entitled to receive from the Agent all payments of principal, interest and fees with respect to the interest assigned hereby. The Assignee will promptly remit to the Assignor any interest on Loans and fees received from the Agent which relate to the portion of the Commitment or Loans assigned to the Assignee hereunder for periods prior to the Effective Date and not previously paid by the Assignee to the Assignor. In the event that either party hereto receives any payment to which the other party hereto is entitled under this Assignment Agreement, then the party receiving such amount shall promptly remit it to the other party hereto.
5. RECORDATION FEE. The Assignor and Assignee each agree to pay one-half of the recordation fee required to be paid to the Agent in connection with this Assignment Agreement unless otherwise specified in Item 6 of SCHEDULE 1.
6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S
LIABILITY. The Assignor represents and warrants that (i) it is the legal and
beneficial owner of the interest being assigned by it hereunder, (ii) such
interest is free and clear of any adverse claim created by the Assignor and
(iii) the execution and delivery of this Assignment Agreement by the Assignor is
duly authorized. It is understood and agreed that the assignment and assumption
hereunder are made without recourse to the Assignor and that the Assignor makes
no other representation or warranty of any kind to the Assignee. Neither the
Assignor nor any of its officers, directors, employees, agents or attorneys
shall be responsible for (i) the due execution, legality, validity,
enforceability, genuineness, sufficiency or collectability of any Loan Document,
including without limitation, documents granting the Assignor and the other
Lenders a security interest in assets of the Borrower or any guarantor, (ii) any
representation, warranty or statement made in or in connection with any of the
Loan Documents, (iii) the financial condition or creditworthiness of the
Borrower or any guarantor, (iv) the performance of or compliance with any of the
terms or provisions of any of the Loan Documents, (v) inspecting any of the
property, books or records of the Borrower, (vi) the validity, enforceability,
perfection, priority, condition, value or sufficiency of any collateral securing
or purporting to secure the Loans or (vii) any mistake, error of judgment, or
action taken or omitted to be taken in connection with the Loans or the Loan
Documents.
7. REPRESENTATIONS AND UNDERTAKINGS OF THE ASSIGNEE. The Assignee (i)
confirms that it has received a copy of the Credit Agreement, together with
copies of the financial statements requested by the Assignee and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment Agreement, (ii) agrees that
it will, independently and without reliance upon the Agent, the Assignor or any
other Lender and based on such documents and information at it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Loan Documents, (iii) appoints and authorizes the
Agent to take such action as agent on its behalf and to exercise such powers
under the Loan Documents as are delegated to the Agent by the terms thereof,
together with such powers as are reasonably incidental thereto, (iv) confirms
that the execution and delivery of this Assignment Agreement by the Assignee is
duly authorized, (v) agrees that it will perform in accordance with their terms
all of the obligations which by the terms of the Loan Documents are required to
be performed by it as a Lender, (vi) agrees that its payment instructions and
notice instructions are as set forth in the attachment to SCHEDULE 1, (vii)
confirms that none of the funds, monies, assets or other consideration being
used to make the purchase and assumption hereunder are "plan assets" as defined
under ERISA and that its rights, benefits and interests in and under the Loan
Documents will not be "plan assets" under ERISA, (viii) agrees to indemnify and
hold the Assignor harmless against all losses, costs and expenses (including,
without limitation, reasonable attorneys' fees) and liabilities incurred by the
Assignor in connection with or arising in any manner from the Assignee's
non-performance of the obligations assumed under this Assignment Agreement, and
(ix) if applicable, attaches the forms prescribed by the Internal Revenue
Service of the United States certifying that the Assignee is entitled to receive
payments under the Loan Documents without deduction or withholding of any United
States federal income taxes.
8. GOVERNING LAW. This Assignment Agreement shall be governed by the internal law, and not the law of conflicts, of the State of Illinois.
9. NOTICES. Notices shall be given under this Assignment Agreement in the manner set forth in the Credit Agreement. For the purpose hereof, the addresses of the parties hereto (until notice of a change is delivered) shall be the address set forth in the attachment to SCHEDULE 1.
10. COUNTERPARTS; DELIVERY BY FACSIMILE. This Assignment Agreement may be executed in counterparts. Transmission by facsimile of an executed counterpart of this Assignment Agreement shall be deemed to constitute due and sufficient delivery of such counterpart and such facsimile shall be deemed to be an original counterpart of this Assignment Agreement.
IN WITNESS WHEREOF, the duly authorized officers of the parties hereto have executed this Assignment Agreement by executing SCHEDULE 1 hereto as of the date first above written.
[ASSIGNOR]
[ASSIGNEE]
SCHEDULE 1
to Assignment Agreement
1. Description and Date of Credit Agreement: Credit Agreement, dated as of November 16, 2001, among SAF Funding Corporation, the financial institutions party thereto (the "LENDERS") and Bank One, NA, as agent for the Lenders.
2. Date of Assignment Agreement: ___________ , ____
3. Amounts (As of Date of Item 2 above):
a. Assignee's percentage
of Commitment purchased
under the Assignment
Agreement* %
-----------
b. Amount of
each Term Loan
purchased
under the Assignment
Agreement** $
-----------------
4. Assignee's Commitment (or Loans
with respect to terminated
Commitments) purchased
hereunder: $
-----------------
5. Proposed Effective Date: ,
------------------- ------
6. Non-standard Recordation Fee
Arrangement N/A**
[Assignor/Assignee
to pay 100% of fee]
[Fee waived by Agent]
Accepted and Agreed:
[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]
By: By:
------------------------------------ ------------------------------
Title: Title:
--------------------------------- ---------------------------
|
ACCEPTED AND CONSENTED TO*** ACCEPTED AND CONSENTED TO***
BY [NAME OF BORROWER] BY BANK ONE, NA, AS AGENT
By: By:
------------------------------ ---------------------------------
Title: Title:
--------------------------- ------------------------------
|
* Percentage taken to 10 decimal places ** If fee is split 50-50, pick N/A as option *** Delete if not required by Credit Agreement
Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT
Attach Assignor's Administrative Information Sheet, which must include notice addresses for the Assignor and the Assignee
(Sample form shown below)
Name: Telephone No.:
------------------------------ ----------------------
Fax No.: Telex No.:
-------------------------- --------------------------
Answerback:
-------------------------
PAYMENT INFORMATION:
--------------------
Name & ABA # of Destination Bank:
----------------------------------------------
----------------------------------------------
Account Name & Number for Wire Transfer:
------------------------------------
------------------------------------
Other Instructions:
-------------------------------------------------------------
|
Name: Telephone No.:
--------------------------------- ------------------------
Fax No.: Telex No.:
----------------------------- ----------------------------
Answerback:
---------------------------
|
Booking Installation: Booking Installation:
----------------- ------------------
Name: Name:
--------------------------------- ----------------------------------
Telephone No.: Telephone No.:
------------------------ -------------------------
Fax No.: Fax No.:
----------------------------- -------------------------------
Telex No.: Telex No.:
--------------------------- -----------------------------
Answerback: Answerback:
--------------------------- ----------------------------
|
Assignee will be called promptly upon receipt of the signed agreement.
INITIAL FUNDING CONTACT: SUBSEQUENT OPERATIONS CONTACT:
----------------------- -----------------------------
Name: Name:
-------------------------- ------------------------------------
Telephone No.: (312) Telephone No.: (312)
--------------------- --------------------------
Fax No.: (312) Fax No.: (312)
--------------------------- --------------------------------
|
Bank One Telex No.: 190201 (ANSWERBACK: FNBC UT)
Libor - Fund 2 days after rates are set.
BANK ONE WIRE INSTRUCTIONS: Bank One, NA, ABA # 071000013
-------------------------- LS2 Incoming Account # 481152860000
Ref:________________
ADDRESS FOR NOTICES FOR BANK ONE: 1 Bank One Plaza, Chicago, IL 60670
-------------------------------- Attn: Agency Compliance Division,
Suite IL1-0353
Fax No. (312) 732-2038 or (312) 732-4339
|
EXHIBIT D
LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION
To Bank One, NA,
as Agent (the "AGENT") under the Credit Agreement
Described Below.
Re: Amended and Restated Credit Agreement, dated as of November 16, 2001 (as the same may be amended or modified, the "CREDIT AGREEMENT"), among SAF Funding Corporation (the "BORROWER"), the Lenders named therein and the Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement.
The Agent is specifically authorized and directed to act upon the
following standing money transfer instructions with respect to the proceeds of
Advances or other extensions of credit from time to time until receipt by the
Agent of a specific written revocation of such instructions by the Borrower;
PROVIDED, HOWEVER, that the Agent may otherwise transfer funds as hereafter
directed in writing by the Borrower in accordance with Section 13.1 of the
Credit Agreement or based on any telephonic notice made in accordance with
Section 2.14 of the Credit Agreement.
For Account No.
-----------------------------------------------------------------
Reference/Attention To
----------------------------------------------------------
Authorized Officer (Customer Representative) Date
----------------------
--------------------------------------- -------------------------------------
(Please Print) Signature
Bank Officer Name Date
--------------------------------
--------------------------------------- -------------------------------------
(Please Print) Signature
|
(Deliver Completed Form to Credit Support Staff For Immediate Processing)
EXHIBIT E
NOTE
[Date]
SAF Funding Corporation, a Delaware corporation (the "BORROWER"), promises to pay to the order of ____________________________________ (the "LENDER") the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to Article II of the Agreement (as hereinafter defined), in immediately available funds at the main office of Bank One, NA in Chicago, Illinois, as Agent, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay the principal of and accrued and unpaid interest on the Loans in full on the Facility Termination Date.
The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment hereunder.
This Note is one of the Notes issued pursuant to, and is entitled to the benefits of, the Amended and Restated Credit Agreement dated as of November 16, 2001 (which, as it may be amended or modified and in effect from time to time, is herein called the "AGREEMENT"), among the Borrower, the lenders party thereto, including the Lender, and Bank One, NA, as Agent, to which Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. This Note is secured pursuant to the Pledge Agreements and guaranteed pursuant to the Guaranty, all as more specifically described in the Agreement, and reference is made thereto for a statement of the terms and provisions thereof. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement.
SAF FUNDING CORPORATION
SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
TO
NOTE OF SAF FUNDING CORPORATION
DATED _______________, ____
Principal Maturity Principal
Amount of of Interest Amount Unpaid
Date Loan Period Paid Balance
----------------------------------------------------------------------------------------------------------------
|
EXHIBIT 10(JJ)
AMENDED AND RESTATED PUT AGREEMENT
among
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY,
STATE AUTO FINANCIAL CORPORATION,
and
BANK ONE, NA,
as Agent
Dated as of November 16, 2001
AMENDED AND RESTATED PUT AGREEMENT
This Amended and Restated Put Agreement, dated as of November 16, 2001, is among State Automobile Mutual Insurance Company, a mutual insurance company duly organized and validly existing under the laws of the State of Ohio ("STATE AUTO MUTUAL"), State Auto Financial Corporation, a corporation duly organized and validly existing under the laws of the State of Ohio ("STATE AUTO FINANCIAL" and, together with State Auto Mutual, the "STATE AUTO OBLIGORS"), and Bank One, NA, as agent (in such capacity, together with its successors in such capacity, the "AGENT") for the Lenders party to the Credit Agreement referred to below.
RECITALS:
A. SAF Funding Corporation (the "BORROWER"), the lenders party thereto from time to time (the "LENDERS") and the Agent have entered into that certain Credit Agreement, dated as of November 19, 1999 (as heretofore amended, the "EXISTING CREDIT AGREEMENT").
B. To induce the Lenders to enter into the Credit Agreement, the State Auto Obligors and the Agent entered into that certain Put Agreement dated as of November 19, 1999 (the "EXISTING PUT AGREEMENT").
C. Substantially concurrently herewith, the Borrower, the Lenders and the Agent are entering into that certain Amended and Restated Credit Agreement (the Existing Credit Agreement, as so amended and restated and as further modified and supplemented from time to time, is hereinafter referred to as the "CREDIT AGREEMENT"), which agreement amends and restates the Existing Credit Agreement.
D. In connection with the aforementioned amendment, the State Auto Obligors and the Agent desire to amend and restate the Existing Put Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend and restate the Existing Put Agreement as follows:
ARTICLE I
1.1 DEFINITIONS AND ACCOUNTING TERMS. Capitalized terms used but not defined herein shall have the respective meanings, assigned to such terms in the Credit Agreement. In addition, as used herein, the following terms shall have the following meanings (all terms defined in this SECTION 1.1 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and VICE VERSA):
"AFFILIATE" shall mean any Person that directly or indirectly controls, or is under common control with, or is controlled by, State Auto Mutual. As used in this definition,
"CONTROL" (including, with its correlative meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), PROVIDED that, in any event, any Person that owns directly or indirectly securities having 5% or more of the voting power for the election of directors or other governing body of a corporation or 5% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding the foregoing, (a) no individual shall be an Affiliate solely by reason of his or her being a director, officer or employee of State Auto Mutual or any of its Subsidiaries and (b) State Auto Mutual and its Subsidiaries shall not be deemed to be Affiliates of one another.
"AGREEMENT ACCOUNTING PRINCIPLES" means generally accepted accounting principles as in effect from time to time.
"APPLICABLE INSURANCE REGULATORY AUTHORITY" shall mean, when used with respect to any Insurance Entity, the insurance department or similar administrative authority or agency located in the State in which such Insurance Entity is domiciled.
"ASSUMED REINSURANCE" shall mean reinsurance assumed by any Insurance Entity from another Person (other than from another Insurance Entity).
"CAPITAL EXPENDITURES" shall mean, for any period,
expenditures (including, without limitation, the aggregate amount of Capital
Lease Obligations incurred during such period) made by State Auto Mutual or any
of its Subsidiaries to acquire or construct fixed assets, plant and equipment
(including renewals, improvements and replacements, but excluding repairs)
during such period computed in accordance with Agreement Accounting Principles.
"CEDED REINSURANCE" shall mean reinsurance ceded by any Insurance Entity to any other Person (other than to another Insurance Entity), other than Surplus Relief Reinsurance.
"ENVIRONMENTAL CLAIM" shall mean, with respect to any Person, any written or oral notice, claim, demand or other communication (collectively, a "CLAIM") by any other Person alleging or asserting such Person's liability for investigatory costs, cleanup costs, governmental response costs, damages to natural resources or other Property, personal injuries, fines or penalties arising out of, based on or resulting from (a) the presence, or Release into the environment, of any Hazardous Material at any location, whether or not owned by such Person, or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. The term "Environmental Claim" shall include, without limitation, any claim by any governmental authority for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment.
"ENVIRONMENTAL LAWS" shall mean any and all present and future Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or
hereafter in effect, relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or toxic or hazardous substances or wastes.
"EQUITY PUBLIC OFFERING" shall mean a public issuance or sale by State Auto Mutual or any of its Material Subsidiaries after the Closing Date pursuant to a registration statement filed under the Securities Act of 1933, as amended, of any common stock.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.
"ERISA AFFILIATE" shall mean any corporation or trade or
business that is a member of any group of organizations (a) described in Section
414(b) or (c) of the Code of which State Auto Mutual is a member and (b) solely
for purposes of potential liability under Section 302(c)(11) of ERISA and
Section 412(c)(11) of the Code and the lien created under Section 302(f) of
ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the
Code of which State Auto Mutual is a member.
"EXCLUDED TAXES" means, in the case of each Lender or applicable Lending Installation and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (a) the jurisdiction under the laws of which such Lender or the Agent is incorporated or organized or (b) the jurisdiction in which the Agent's or such Lender's principal executive office or such Lender's applicable Lending Installation is located.
"FARMERS CASUALTY" means Farmers Casualty Insurance Company, an Iowa domiciled property and casualty insurance company.
"FIXED CHARGE COVERAGE RATIO" means the ratio of (a) the sum of (i) the greater of (A) 10% of the aggregate amount of statutory capital and surplus of each Subsidiary of State Auto Financial which is engaged in the insurance business as of the most recently ended calendar year (determined without duplication in accordance with SAP) or (B) the aggregate net income earned by each Subsidiary of State Auto Financial which is engaged in the insurance business for the most recently ended four fiscal quarters (determined without duplication in accordance with SAP), PLUS (ii) cash on hand at State Auto Financial at the end of the most recently ended fiscal quarter, PLUS (iii) the aggregate net income of each Subsidiary of State Auto Financial which is not engaged in the insurance business for the most recently ended four fiscal quarters (determined without duplication in accordance with Agreement Accounting Principles) to (b) the sum of (i) interest payments on the Loans for the most recent four quarters, PLUS (ii) scheduled principal amortization payments on the Loans for the four fiscal quarters following the date of determination.
"HAZARDOUS MATERIAL" shall mean, collectively, (a) any petroleum or petroleum products, flammable materials, explosives, radioactive materials, asbestos, urea formaldehyde
foam insulation, and transformers or other equipment that contain polychlorinated biphenyls ("PCB'S"), (b) any chemicals or other materials or substances that are now or hereafter become defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", "contaminants", "pollutants" or words of similar import under any Environmental Law and (c) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated under any Environmental Law.
"INDEBTEDNESS" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; and (f) Indebtedness of others Guaranteed by such Person; PROVIDED that Indebtedness shall not include (i) obligations with respect to insurance policies, annuities, guaranteed investment contracts and similar products underwritten by, or Reinsurance Agreements or Retrocession Agreements entered into by, an Insurance Entity in the ordinary course of its business and (ii) obligations with respect to Surplus Relief Reinsurance ceded by an Insurance Entity.
"INSURANCE ENTITY" shall mean, collectively, State Auto Mutual and the Subsidiaries of State Auto Mutual licensed to underwrite property and casualty insurance.
"INTERCOMPANY POOLING ARRANGEMENT" shall mean the pooling arrangement among State Auto Mutual, State Auto P&C, Milbank, Midwest Security, Farmers Casualty and State Auto Insurance pursuant to which (a) State Auto P&C cedes to State Auto Mutual all of its insurance business, (b) Milbank cedes to State Auto Mutual its property and casualty insurance business, (c) Midwest Security cedes to State Auto Mutual its property and casualty insurance business, (d) Farmers Casualty cedes to State Auto Mutual its property and casualty insurance business, (e) State Auto Insurance cedes to State Auto Mutual its property and casualty insurance business and (f) State Auto Mutual retains its property and casualty insurance business, whereupon all such businesses are pooled and a portion thereof is then ceded from State Auto Mutual to each of State Auto P&C, Milbank, Midwest Security, Farmers Casualty and State Auto Insurance and the balance thereof is retained by State Auto Mutual, as such arrangement may be modified and supplemented and in effect from time to time.
"INTEREST RATE PROTECTION AGREEMENT" shall mean, for any Person, an interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more financial institutions providing for the transfer or mitigation of interest risks either generally or under specific contingencies. For purposes hereof, the "CREDIT EXPOSURE" at any time of any Person under an Interest Rate Protection Agreement to which such Person is a party shall be
determined at such time in accordance with the standard methods of calculating credit exposure under similar arrangements as prescribed from time to time by the Agent, taking into account potential interest rate movements and the respective termination provisions and notional principal amount and term of such Interest Rate Protection Agreement.
"INVESTMENT" shall mean, for any Person: (a) the acquisition (whether for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit or capital contribution to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person), but excluding any such advance, loan or extension of credit having a term not exceeding 90 days arising in connection with the sale of inventory or supplies by such Person in the ordinary course of business; (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Interest Rate Protection Agreement.
"LICENSE" shall have the meaning assigned to such term in
SECTION 3.17 hereof.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the Property, business, operations, financial condition, prospects, liabilities or capitalization of State Auto Mutual and its Subsidiaries taken as a whole, (b) the ability of State Auto Mutual to perform its obligations under this Agreement, (c) the validity or enforceability of any of the Basic Documents or (d) the rights and remedies of the Lenders and the Agent under any of the Basic Documents.
"MATERIAL SUBSIDIARY" shall mean, as at any time, any of State Auto Financial, State Auto P&C, Milbank, State Auto National Insurance Company, and any other Subsidiary of State Auto Mutual that holds, directly or indirectly, more than 5% of the consolidated assets of State Auto Mutual and its Subsidiaries at such time or that accounts for more than 5% of the consolidated revenues of State Auto Mutual and its Subsidiaries at such time.
"MIDWEST SECURITY" means Midwest Security Insurance Company, a Wisconsin domiciled property and casualty insurance company.
"MILBANK" shall mean Milbank Insurance Company, a South Dakota domiciled property and casualty insurance company.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by State Auto Mutual or any ERISA Affiliate and that is covered by Title IV of ERISA.
"NAIC" shall mean the National Association of Insurance Commissioners and any successor thereto.
"NET AVAILABLE PROCEEDS" shall mean, with respect to any Equity Public Offering, the aggregate amount of all cash received by State Auto Mutual and its Material Subsidiaries in respect of such Equity Public Offering net of reasonable expenses incurred by State Auto Mutual and its Material Subsidiaries in connection therewith.
"OBLIGATIONS" shall have the meaning assigned to such term in
SECTION 2.4 hereof.
"OTHER TAXES" is defined in SECTION 2.7(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.
"PLAN" shall mean an employee benefit or other plan established or maintained by State Auto Mutual or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan.
"PLEDGED STOCK" shall mean the Preferred Stock pledged pursuant to the Company Pledge Agreement to the Agent for the benefit of the Lenders and all related rights in connection therewith.
"PREMIUM TO SURPLUS RATIO" shall mean, with respect to any Person as at any date of determination thereof, the ratio (determined with respect to such Person and its Subsidiaries in accordance with SAP) of (a) net premiums written during the four consecutive calendar quarters ending on or most recently ended prior to such date of determination to (b) Statutory Surplus as at the last day of the calendar quarter ending on or most recently ended prior to such date of determination.
"PUT EVENT" shall mean one or more of the following events shall have occurred and be continuing:
(a) a Default;
(b) either State Auto Obligor shall default in the payment when due of any amount payable by it hereunder or State Auto Financial shall default in the payment when due of any amount payable by it under the Standby Purchase Agreement;
(c) State Auto Mutual or any of its Material Subsidiaries shall default in the payment when due of any principal of or interest on any of its other Indebtedness aggregating $5,000,000 or more; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity or to have the interest rate thereon reset to a level so that securities evidencing such Indebtedness trade at a level specified in relation to the par value thereof; or State Auto Mutual or any of its Material Subsidiaries shall default in the payment when due of any amount aggregating $10,000,000 or more under any Interest Rate Protection
Agreement; or State Auto Mutual or any of its Material Subsidiaries shall default under any Interest Rate Protection Agreement if the effect of such default is to cause, or (with the giving of any notice or the lapse of time or both) to permit, termination or liquidation payment or payments by State Auto Mutual or any of its Material Subsidiaries aggregating $5,000,000 or more to become due;
(d) any representation, warranty or certification made or deemed made herein or in any other Basic Document (or in any modification or supplement hereto or thereto) by either State Auto Obligor party thereto, or any certificate furnished to any Lender or the Agent pursuant to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or furnished in any material respect;
(e) State Auto Mutual shall default in the performance of any of its obligations under any of SECTIONS 4.5 through 4.9 or 4.12 through 4.17 hereof, State Auto Financial shall default in the performance of any of its obligations under the Standby Purchase Agreement; or either State Auto Obligor shall default in the performance of any of its other obligations under this Agreement and such default shall continue unremedied for a period of 30 or more days after the occurrence of such default;
(f) State Auto Mutual or any of its Material Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due;
(g) State Auto Mutual or any of its Material Subsidiaries
shall (i) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee, examiner or liquidator
of itself or of all or a substantial part of its Property, (ii) make a
general assignment for the benefit of its creditors, (iii) commence a
voluntary case under the Bankruptcy Code, (iv) file a petition seeking
to take advantage of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement or winding-up, or
composition or readjustment of debts, (v) fail to controvert in a
timely and appropriate manner, or acquiesce in writing to, any petition
filed against it in an involuntary case under the Bankruptcy Code or
(vi) take any corporate action for the purpose of effecting any of the
foregoing;
(h) a proceeding or case shall be commenced, without the application or consent of State Auto Mutual or any of its Material Subsidiaries, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of State Auto Mutual or such Material Subsidiary or of all or any substantial part of its Property or (iii) similar relief in respect of State Auto Mutual or such Material Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against State Auto Mutual or such Material Subsidiary shall be entered in an involuntary case under the Bankruptcy Code;
(i) any Applicable Insurance Regulatory Authority shall appoint a rehabilitator, receiver, custodian, trustee, conservator or liquidator or the like (collectively, a "CONSERVATOR") for any Insurance Entity, or cause possession of all or any substantial portion of the property of any Insurance Entity to be taken by any conservator (or any Insurance Regulatory Authority shall commence any action to effect any of the foregoing);
(j) a final judgment or judgments for the payment of money of $10,000,000 or more in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) or of $25,000,000 or more in the aggregate (regardless of insurance coverage) shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against State Auto Mutual or any of its Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and State Auto Mutual or the relevant Material Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal;
(k) an event or condition specified in SECTION 4.1(j) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, State Auto Mutual or any ERISA Affiliate shall incur or in the opinion of the Required Lenders shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) that, in the determination of the Required Lenders, would (either individually or in the aggregate) have a Material Adverse Effect;
(l) a reasonable basis shall exist for the assertion against State Auto Mutual or any of its Subsidiaries, or any predecessor in interest of State Auto Mutual or any of its Subsidiaries or Affiliates, of (or there shall have been asserted against State Auto Mutual or any of its Subsidiaries) an Environmental Claim that, in the judgment of the Required Lenders is reasonably likely to be determined adversely to State Auto Mutual or any of its Subsidiaries, and the amount thereof (either individually or in the aggregate) is reasonably likely to have a Material Adverse Effect (insofar as such amount is payable by State Auto Mutual or any of its Subsidiaries but after deducting any portion thereof that is reasonably expected to be paid by other creditworthy Persons jointly and severally liable therefor);
(m) during any period of (i) 12 consecutive months if no Loans are outstanding or (ii) 25 consecutive months if any Loans are outstanding, a majority of the Board of Directors of State Auto Mutual, State Auto Financial or State Auto P&C, as the case may be, shall no longer be composed of individuals (x) who were members of said Board on the first day of such period, (y) whose election or nomination to said Board was approved by individuals referred to in clause (x) above constituting at the time of such election or nomination at least a majority of said Board or (z) whose election or nomination to said Board was approved by individuals referred to in clauses (x) and (y) above constituting at the time of such election or nomination at least a majority of said Board;
(n) except for expiration in accordance with its terms, any material provision of this Agreement or the Standby Purchase Agreement shall for whatever reason be terminated or cease to be in full force and effect without the consent of the Lenders as specified in Section 10.17 of the Credit Agreement, or the validity or enforceability thereof shall be contested by either State Auto Obligor;
(o) any "person" or "group" of "persons" (within the meaning of Section 13(d) of the Securities and Exchange Act of 1934, as amended) shall have the power, directly or indirectly, to vote or direct the voting of a greater number of the voting capital stock issued by State Auto Financial than State Auto Mutual; or State Auto Financial shall fail to own and control, beneficially (free and clear of all Liens), all of the capital stock issued by State Auto P&C (in each case irrespective of whether or not at the time securities or other ownership interests issued by State Auto Financial or State Auto P&C, as the case may be, or any other class or classes might have voting power by reason of the happening of any contingency); or
(p) the rating published by A.M. Best & Co. for (i) State Auto Mutual shall be less than (x) "A", at any time prior to the date of the occurrence of the catastrophe relating to the initial Loans under the Credit Agreement, (y) "B+", at any time during the period commencing on the first anniversary of the date of the occurrence of such catastrophe to but excluding the fourth anniversary thereof, and (z) "A-", at any time thereafter, or (ii) State Auto P&C shall be less than "A" at any time prior to the date of the occurrence of such catastrophe.
"PUT NOTICE" shall mean an instrument executed by the Agent substantially in the form of EXHIBIT A hereto.
"PUT PURCHASE DATE" shall mean the date specified in a Put Notice as the date on which State Auto Mutual shall purchase all of the Loans or the Pledged Stock, as specified therein.
"REINSURANCE AGREEMENT" shall mean any agreement, contract, treaty or other arrangement providing for Ceded Reinsurance by any Insurance Entity or any Subsidiary of such Insurance Entity.
"RELEASE" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata.
"RETROCESSION AGREEMENT" shall mean any agreement, contract, treaty or other arrangement (other than Surplus Relief Reinsurance) whereby any Insurance Entity or any Subsidiary of such Insurance Entity cedes reinsurance to other insurers (other than to another Insurance Entity or any of its Subsidiaries).
"RISK-BASED CAPITAL RATIO" shall mean, with respect to any Person as at any date of determination thereof, the ratio of (a) Total Adjusted Capital (as defined by the NAIC) for
such Person as at such date of determination to (b) Authorized Control Level Risk-Based Capital (as defined by the NAIC) for such Person as at such date of determination.
"SAP" shall mean, with respect to any Insurance Entity, the accounting procedures and practices prescribed or permitted by the Applicable Insurance Regulatory Authority, applied on a basis consistent with those that, in accordance with the last sentence of SECTION 1.2(a) hereof, are to be used in making the calculations for purposes of determining compliance with this Agreement.
"STATE AUTO INSURANCE" means State Auto Insurance Company, an Ohio corporation.
"STATE AUTO P&C" shall mean State Auto Property and Casualty Insurance Company, a South Carolina corporation.
"STATUTORY STATEMENT" shall mean, as to any Insurance Entity, a statement of the condition and affairs of such Insurance Entity, prepared in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority, and filed with the Applicable Insurance Regulatory Authority.
"STATUTORY SURPLUS" shall mean, as at any date for any Insurance Entity, the aggregate amount of surplus as regards policyholders (determined without duplication in accordance with SAP) of such Insurance Entity.
"SURPLUS RELIEF REINSURANCE" shall mean any transaction in which any Insurance Entity or any Subsidiary of such Insurance Entity cedes business under a reinsurance agreement that would be considered a "financing-type" reinsurance agreement as determined by the independent certified public accountants of State Auto Mutual in accordance with principles published by the Financial Accounting Standards Board or the Second Edition of the AICPA Audit Guide for Stock Life Insurance Companies (pp. 91-92), as the same may be revised from time to time.
"TAXES" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but EXCLUDING Excluded Taxes and Other Taxes.
"TAX SHARING AGREEMENT" shall mean any tax sharing or allocation agreement to which State Auto Mutual or any of its Subsidiaries is a party and all tax indemnity agreements as to which State Auto Mutual or any of its Subsidiaries is the beneficiary or obligor.
"WHOLLY OWNED SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are directly or indirectly owned or controlled by such Person or one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person.
1.2 ACCOUNTING TERMS AND DETERMINATIONS.
(a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Agent hereunder shall (unless otherwise disclosed to the Agent in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared, in accordance with Agreement Accounting Principals or with statutory accounting practices applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Agent hereunder (which, prior to the delivery of the first financial statements under SECTION 4.1 hereof, shall mean the audited, or annual statutory, financial statements as at December 31, 2000 referred to in SECTION 3.2 hereof). All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of Agreement Accounting Principles or with statutory accounting practices applied on a basis consistent with those used in the preparation of the latest annual or quarterly financial statements furnished to the Agent pursuant to SECTION 4.1 hereof (or, prior to the delivery of the first financial statements under SECTION 4.1 hereof, used in the preparation of the audited, or annual statutory, financial statements as at December 31, 2000 referred to in SECTION 3.2 hereof) unless (i) State Auto Mutual shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) the Required Lenders (through the Agent) shall so object in writing within 30 days after delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under SECTION 4.1 hereof, shall mean the audited, or annual statutory, financial statements referred to in SECTION 3.2 hereof).
(b) State Auto Mutual shall deliver to the Agent at the same
time as the delivery of any annual or quarterly financial statement under
SECTION 4.1 hereof (i) a description in reasonable detail of any material
variation between the application of accounting principles, or statutory
accounting practices, employed in the preparation of such statement and the
application of accounting principles, or statutory accounting practices,
employed in the preparation of the next preceding annual or quarterly financial
statements as to which no objection has been made in accordance with the last
sentence of subsection (a) above and (ii) reasonable estimates of the difference
between such statements arising as a consequence thereof.
(c) To enable the ready and consistent determination of compliance with the covenants set forth in ARTICLE IV hereof, State Auto Mutual will not change the last day of its fiscal year from December 31, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30 and September 30 of each year, respectively.
ARTICLE II
2.1 PUT. At any time after the occurrence and during the continuance of a Put Event, the Agent may (with the approval of the Required Lenders but not otherwise), by delivering to State Auto Mutual a Put Notice, require State Auto Mutual to purchase (a) from
each Lender, all (but not less than all) of such Lender's Loans, Notes and Commitment or (b) from the Agent, all (but not less than all) of the Pledged Stock. In the event that a Put Event has occurred and the Agent (with the consent of the Required Lenders) has elected to deliver a Put Notice, it shall first attempt to require State Auto Mutual to purchase the Pledged Stock; PROVIDED that if the Agent shall not be able, promptly (and in any event within 5 Business Days of any such election) after the occurrence of such Put Event, to sell the Pledged Stock to State Auto Mutual as contemplated hereby, it may deliver a Put Notice requiring the purchase of each Lender's Loans, Notes and Commitments.
2.2 PURCHASE OF LOANS.
(a) If such Put Notice requires that State Auto Mutual
purchase each Lender's Loans, Notes and Commitment, then, on the Put Purchase
Date specified in such Put Notice (which Put Purchase Date shall be at least
three Business Days after the date of delivery of such Put Notice), (i) State
Auto Mutual shall purchase from each Lender, and each Lender shall sell, assign
and transfer to State Auto Mutual, all of such Lender's Loans, Notes and
Commitment, as specified in such Put Notice and (ii) State Auto Mutual shall pay
to the Agent for account of each Lender an aggregate amount equal to the sum of
(x) the aggregate outstanding principal amount of Loans of such Lender PLUS (y)
all accrued and unpaid interest thereon to the Put Purchase Date PLUS (z) all
other amounts then payable to such Lender under the Basic Documents in respect
thereof (including all amounts that would be payable under Section 3.4 of the
Credit Agreement as if such portion of such Lender's Loans were being prepaid on
the Put Purchase Date) (such amounts to be determined by the Agent and notified
in writing by the Agent to State Auto Mutual prior to such Put Purchase Date).
Upon the occurrence of any Put Event referred to in clause (g), (h) or (i) of
the definition of such term in SECTION 1.1 hereof, State Auto Mutual shall
automatically and without any action (including, without limitation the giving
of notice) on the part of any other Person be required to purchase the entire
principal amount of the Loans then outstanding.
(b) Such sale, assignment and transfer shall be without recourse to each Lender and without representation and warranty by such Lender, except that such Lender will represent and warrant to State Auto Mutual that, on the Put Purchase Date, such Lender is the legal and beneficial owner of such portion of such Lender's Loans, Notes and Commitment so sold, assigned and transferred, free and clear of any adverse claim. Upon such sale, assignment and transfer and to the extent thereof, State Auto Mutual shall have the obligations, rights and benefits of a "Lender" under the Credit Agreement holding the Commitment and Loans so sold, assigned and transferred and each Lender shall be released from the Commitment so sold, assigned and transferred.
2.3 PURCHASE OF PLEDGED STOCK. If such Put Notice requires that State Auto Mutual purchase the Pledged Stock, then, on the Put Purchase Date specified in such Put Notice (which Put Purchase Date shall be at least three Business Days after the date of delivery of such Put Notice), (a) State Auto Mutual shall purchase from the Agent, and the Agent shall sell, assign and transfer to State Auto Mutual, the Pledged Stock, (b) State Auto Mutual shall pay to the Agent, for account of the Lenders, an amount equal to the aggregate liquidation preference of such Pledged Stock and all accrued but unpaid dividends thereon (such amount to be determined by the Agent and notified in writing by the Agent to State Auto Mutual prior to such Put
Purchase Date) and (c) the Agent shall apply such amount to the payment of the Obligations owing to the Lenders under the Credit Documents.
2.4 OBLIGATIONS UNCONDITIONAL. The obligations of State Auto Mutual under SECTIONS 2.1, 2.2, 2.3 and 5.3 hereof are absolute, unconditional and irrevocable, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Borrower or any other Person under the Credit Agreement, the Notes, the Pledge Agreements or any other agreement or instrument referred to therein (collectively, the "OBLIGATIONS"), or any substitution, release or exchange of any other guarantee of or security for any of the Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense available to State Auto Mutual, it being the intent of this SECTION 2.4 that the obligations of State Auto Mutual hereunder shall be absolute, unconditional and irrevocable under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of State Auto Mutual hereunder which shall remain absolute, unconditional and irrevocable as described above:
(a) at any time or from time to time, without notice to State Auto Mutual, the time for any performance of or compliance with any of the Obligations shall be extended, or such performance or compliance shall be waived;
(b) any of the acts mentioned in any of the provisions of the Credit Agreement, the Notes, the Pledge Agreements or any other agreement or instrument referred to therein shall be done or omitted;
(c) the maturity of any of the Obligations shall be accelerated, or any of the Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement, the Notes, the Pledge Agreements or any other agreement or instrument referred to therein shall be waived or any guarantee of any of the Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; or
(d) any change in the financial condition (including, without limitation, insolvency or bankruptcy) of the Borrower.
State Auto Mutual hereby expressly waives all of the defenses referred to above and diligence, presentment, demand of payment, protest and all notices whatsoever (other than the Put Notice), and any requirement that the Agent or any Lender exhaust any right, power or remedy or proceed against the Borrower under the Credit Agreement, the Notes, the Pledge Agreements or any other agreement or instrument referred therein, or against any other Person under any other guarantee of, or security for, any of the Obligations.
2.5 REINSTATEMENT. If for any reason any payment received by the Agent in respect of any of the Obligations prior to the consummation by State Auto Mutual of a purchase contemplated by SECTION 2.2 or 2.3 hereof is rescinded or must be otherwise restored by any Lender for any reason, whether as a result of any proceedings in bankruptcy, insolvency or reorganization or otherwise, following the consummation of such purchase, State Auto shall
purchase from such Lender, and such Lender shall sell, assign and transfer to State Auto Mutual, all of the right, title and interest of such Lender in and to the payment so rescinded or otherwise restored, and upon such sale, assignment and transfer, State Auto Mutual shall pay to such Lender an amount equal to the payment so rescinded or otherwise restored. State Auto Mutual hereby agrees that it will indemnify the Agent and such Lender on demand for all reasonable costs and expenses (including, without limitation, fees of counsel) incurred by the Agent or such Lender in connection with such rescission or restoration.
2.6 PAYMENTS.
(a) Except to the extent otherwise provided herein, all payments to be made by State Auto Mutual under this Agreement shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Agent at an account designated by the Agent to State Auto Mutual in writing, not later than 12:00 noon (Chicago time) time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day).
(b) The Agent may (but shall not be obligated to) debit the amount of any such payment that is not made by such time to any ordinary deposit account of State Auto Mutual with the Agent (with notice to State Auto Mutual), PROVIDED that the Agent's failure to give such notice shall not affect the validity thereof.
2.7 TAXES. (a) All payments by State Auto Mutual to or for the
account of any Lender or the Agent hereunder shall be made free and clear of and
without deduction for any and all Taxes. If State Auto Mutual shall be required
by law to deduct any Taxes from or in respect of any sum payable hereunder to
any Lender or the Agent, (i) the sum payable shall be increased as necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this SECTION 2.7) such Lender or the Agent (as the
case may be) receives an amount equal to the sum it would have received had no
such deductions been made, (ii) State Auto Mutual shall make such deductions,
(iii) State Auto Mutual shall pay the full amount deducted to the relevant
authority in accordance with applicable law and (iv) State Auto Mutual shall
furnish to the Agent the original copy of a receipt evidencing payment thereof
within 30 days after such payment is made.
(b) In addition, State Auto Mutual hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution or delivery of, or otherwise with respect to, this Agreement ("OTHER TAXES").
(c) State Auto Mutual hereby agrees to indemnify the Agent and
each Lender for the full amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed on amounts payable under this
SECTION 2.7) paid by the Agent or such Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
Payments due under this indemnification shall be made within 30 days of the date
the Agent or such Lender makes demand therefor.
(d) For any period during which a Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "NON-U.S. LENDER") has failed to provide the Borrower with an appropriate form pursuant to Section 3.5(d) of the Credit Agreement (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this SECTION 2.7 with respect to Taxes imposed by the United States; PROVIDED that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under Section 3.5(d) of the Credit Agreement, State Auto Mutual shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each State Auto Obligor represents and warrants (with respect to itself and its Subsidiaries only) to the Agent and the Lenders that:
3.1 CORPORATE EXISTENCE. Each of such State Auto Obligor and its Material Subsidiaries: (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could (either individually or in the aggregate) have a Material Adverse Effect.
3.2 FINANCIAL CONDITION.
(a) State Auto Mutual has heretofore furnished to each of the Lenders consolidated balance sheets of State Auto Financial and its Subsidiaries as at December 31, 2000 and the related consolidated statements of income, retained earnings and cash flows of State Auto Financial and its Subsidiaries for the fiscal year ended on said date, with the opinion thereon of Ernst & Young LLP, and the unaudited consolidated balance sheets of State Auto Financial and its Subsidiaries as at June 30, 2001 and the related consolidated statements of income, retained earnings and cash flows of State Auto Financial and its Subsidiaries for the three-month period ended on such date. All such financial statements present fairly in all material respects the consolidated financial condition of State Auto Financial and its Subsidiaries as at said dates and the consolidated results of their operations for the fiscal year and three-month period ended on said dates (subject, in the case of such financial statements as at June 30, 2001, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles and practices applied on a consistent basis. None of State Auto Financial nor any of its Material Subsidiaries has on the date hereof any material contingent liabilities, liabilities for
taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said balance sheets as at said dates. Since June 30, 2001, there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of State Auto Financial and its Subsidiaries from that set forth in said financial statements as at June 30, 2001.
(b) State Auto Mutual has heretofore furnished to each of the Lenders the annual Statutory Statement of each Insurance Entity for the fiscal year ended December 31, 2000, and the quarterly Statutory Statement of each Insurance Entity for the fiscal quarter ended June 30, 2001, in each case as filed with the Applicable Insurance Regulatory Authority. All such Statutory Statements present fairly in all material respects the financial condition of each Insurance Entity as at, and the results of operations for, the fiscal year ended December 31, 2000, and fiscal quarter ended June 30, 2001, in accordance with statutory accounting practices prescribed or permitted by the Applicable Insurance Regulatory Authority. Since June 30, 2001, there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of State Auto Mutual from that set forth in said Statutory Statement as at June 30, 2001.
3.3 LITIGATION. There are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge such State Auto Obligor) threatened against State Auto Mutual or any of its Subsidiaries that, if adversely determined could (either individually or in the aggregate) have a Material Adverse Effect.
3.4 NO BREACH. None of the execution and delivery of this Agreement and the other Basic Documents to which such State Auto Obligor is a party, the consummation of the transactions herein and therein contemplated or compliance with the terms and provisions hereof and thereof (including, without limitation, issuance of the Preferred Stock) will conflict with or result in a breach of, or require any consent under, the charter or by-laws (or equivalent documents) of such State Auto Obligor, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which State Auto Mutual or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any Property of State Auto Mutual or any of its Subsidiaries pursuant to the terms of any such agreement or instrument.
3.5 ACTION. Such State Auto Obligor has all necessary corporate power, authority and legal right to execute, deliver and perform its obligations under each of the Basic Documents to which it is a party and, in the case of State Auto Financial, to issue the Preferred Stock; the execution, delivery and performance by such State Auto Obligor of each of the Basic Documents to which it is a party (and, in the case of State Auto Financial, the issuance of the Preferred Stock) have been duly authorized by all necessary corporate action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by such State Auto Obligor and constitutes, and each of the other Basic Documents to which such State Auto Obligor is a party when executed and delivered will constitute, its legal, valid and binding obligation, enforceable against such State
Auto Obligor in accordance with its terms, except as such enforceability may be
limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar
laws of general applicability affecting the enforcement of creditors' rights and
(b) the application of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
3.6 APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange (other than any authorizations, approvals, consents, filings and registrations heretofore duly made or obtained and in full force and effect), are necessary for the execution, delivery or performance by either State Auto Obligor of this Agreement or any of the other Basic Documents to which it is a party (or, in the case of State Auto Financial, for the issuance of the Preferred Stock) or for the legality, validity or enforceability hereof or thereof.
3.7 ERISA. Each Plan, and, to the knowledge of the such State
Auto Obligor, each Multiemployer Plan, is in compliance in all material respects
with, and has been administered in all material respects in compliance with, the
applicable provisions of ERISA, the Code and any other Federal or state law, and
no event or condition has occurred and is continuing as to which State Auto
Mutual would be under an obligation to furnish a report to the Agent under
SECTION 4.1(j) hereof.
3.8 TAXES. State Auto Mutual and its Subsidiaries are members of an affiliated group of corporations filing consolidated returns for Federal income tax purposes, of which State Auto Mutual is the "common parent" (within the meaning of Section 1504 of the Code) of such group. State Auto Mutual and its Material Subsidiaries have filed all Federal income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by State Auto Mutual or any of its Material Subsidiaries. The charges, accruals and reserves on the books of State Auto Mutual and its Material Subsidiaries in respect of taxes and other governmental charges are, in the opinion of State Auto Mutual, adequate. State Auto Mutual has not given or been requested to give a waiver of the statute of limitations relating to the payment of any Federal, state, local and foreign taxes or other impositions.
3.9 INVESTMENT COMPANY ACT. Neither State Auto Mutual nor any of its Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended.
3.10 PUBLIC UTILITY HOLDING COMPANY ACT. Neither State Auto Mutual nor any of its Subsidiaries is a "holding company" or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended.
3.11 MATERIAL AGREEMENTS AND LIENS.
(a) Part A of SCHEDULE I hereto is a complete and correct list of each credit agreement, loan agreement, indenture, purchase agreement, guarantee, letter of credit or other arrangement providing for or otherwise relating to any Indebtedness or any extension of credit
(or commitment for any extension of credit) to, or guarantee by, State Auto Mutual or any of its Subsidiaries, outstanding on the date hereof the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $5,000,000, and the aggregate principal or face amount outstanding or that may become outstanding under each such arrangement is correctly described in Part A of said SCHEDULE I.
(b) Part B of SCHEDULE I hereto is a complete and correct list of each Lien securing Indebtedness of any Person outstanding on the date hereof the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $5,000,000 and covering any Property of State Auto Mutual or any of its Subsidiaries, and the aggregate Indebtedness secured (or that may be secured) by each such Lien and the Property covered by each such Lien is correctly described in Part B of said SCHEDULE I.
3.12 ENVIRONMENTAL MATTERS. Each of State Auto Mutual and its Subsidiaries has obtained all environmental, health and safety permits, licenses and other authorizations required under all Environmental Laws to carry on its business as now being or as proposed to be conducted, except to the extent failure to have any such permit, license or authorization would not (either individually or in the aggregate) have a Material Adverse Effect. Each of such permits, licenses and authorizations is in full force and effect and each of State Auto Mutual and its Subsidiaries is in compliance with the terms and conditions thereof, and is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent failure to comply therewith would not (either individually or in the aggregate) have a Material Adverse Effect.
3.13 CAPITALIZATION. The authorized capital stock of State Auto Financial consists, on the date hereof, of an aggregate of 105,000,000 shares consisting of (a) 100,000,000 shares of common stock, no par value, of which 38,866,955 shares are duly and validly issued and outstanding, each of which shares is fully paid and nonassessable, (b) 2,500,000 shares of Class A Preferred Stock, no par value, none of which shares are issued and outstanding and (c) 2,500,000 shares of Class B Preferred Stock, no par value, none of which shares are issued and outstanding. Upon issuance, each share of Class A Preferred Stock will benefit from the Terms and Conditions of Class A Preferred Stock attached to form of Class A Preferred Stock Certificate attached to the Standby Purchase Agreement as Exhibit A. As of the date hereof, 68% of such issued and outstanding shares of common stock are owned beneficially and of record by State Auto Mutual. As of the date hereof, (i) except for this Agreement and the Standby Purchase Agreement and as set forth in Part A of SCHEDULE III hereto, there are no outstanding Equity Rights with respect to State Auto Financial and (ii) except as set forth in Part B of SCHEDULE III hereto, there are no outstanding obligations of State Auto Financial or any of its Subsidiaries to repurchase, redeem, or otherwise acquire any shares of capital stock of State Auto Financial nor are there any outstanding obligations of State Auto Financial or any of its Subsidiaries to make payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market value or equity value of State Auto Financial or any of its Subsidiaries.
3.14 SUBSIDIARIES, ETC.
(a) Set forth in Part A of SCHEDULE II hereto is a complete and correct list of all Subsidiaries of State Auto Mutual on the date hereof and a specification of which of such Subsidiaries are Insurance Entities and which are Material Subsidiaries.
(b) Set forth in Part B of SCHEDULE II hereto is a complete and correct list of all Investments (other than (x) Investments disclosed in Part A of said SCHEDULE II hereto and any other Investments existing as of the date hereof permitted under SECTION 4.9 hereof and (y) Guarantees of Indebtedness the aggregate principal or face amount of which Indebtedness is less than $5,000,000) held by State Auto Mutual or any of its Subsidiaries in any Person on the date hereof and, for each such Investment, (i) the identity of the Person or Persons holding such Investment and (ii) the nature of such Investment. Except as disclosed in Part B of SCHEDULE II hereto, each of State Auto Mutual and its Subsidiaries owns, free and clear of all Liens, all such Investments.
3.15 TRUE AND COMPLETE DISCLOSURE. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the State Auto Obligors to the Agent or any Lender in connection with the negotiation, preparation or delivery of this Agreement and the other Basic Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by State Auto Mutual and its Subsidiaries to the Agent and the Lenders in connection with this Agreement and the other Basic Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to either State Auto Obligor that could have a Material Adverse Effect that has not been disclosed herein, in the other Basic Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Agent for use in connection with the transactions contemplated hereby or thereby.
3.16 NO RELIANCE. State Auto Mutual has made, independently and without reliance upon the Agent or any Lender, and based on such documents and information as it has deemed appropriate, its own decision to enter into this Agreement and has made (and will continue to make), independently and without reliance upon the Agent or any Lender, and based on such documents and information as it has deemed appropriate (or shall deem appropriate at the time), its own legal, credit and tax analysis of the transactions contemplated hereby.
3.17 INSURANCE LICENSES. Schedule T to the most recent Statutory Statement of each Insurance Entity described in SECTION 3.2(b) hereof lists, as of the date hereof, all of the jurisdictions in which each of the Insurance Entities holds active licenses (including, without limitation, licenses or certificates of authority from Applicable Insurance Regulatory Authorities), permits or authorizations to transact insurance and reinsurance business or to act as an insurance agent or broker (collectively, the "LICENSES"). Each Insurance Entity is in compliance in all material respects with each license held by it. No License (to the extent
material) is the subject of a proceeding for suspension or revocation or any similar proceedings, there is no sustainable basis for such a suspension or revocation, and to the knowledge of each State Auto Obligor no such suspension or revocation has been threatened by any licensing authority except in any such case where such proceedings would not have a Material Adverse Effect.
ARTICLE IV
State Auto Mutual covenants and agrees with the Agent that, so long as any Obligations are outstanding or any Commitments are in effect:
4.1 FINANCIAL STATEMENTS ETC. State Auto Mutual shall deliver to the Agent (with sufficient copies for each of the Lenders):
(a) as soon as available and in any event within 60 days after the end of each quarterly fiscal period of each fiscal year of State Auto Financial, consolidated statements of income, retained earnings and cash flows of State Auto Financial and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheets of State Auto Financial and its Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding periods in the preceding fiscal year (except that, in the case of balance sheets, such comparison shall be to the last day of the prior fiscal year), accompanied by a certificate of a senior financial officer of State Auto Financial, which certificate shall state that said consolidated financial statements present fairly in all material respects the consolidated financial condition and results of operations of State Auto Financial and its Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments);
(b) as soon as available and in any event within 90 days after the end of each fiscal year of State Auto Financial, consolidated statements of income, retained earnings and cash flows of State Auto Financial and its Subsidiaries for such fiscal year and the related consolidated balance sheets of State Auto Financial and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements present fairly in all material respects the consolidated financial condition and results of operations of State Auto Financial and its Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles;
(c) promptly after filing with the Applicable Insurance Regulatory Authority and in any event within 45 days after the end of each for the first three quarterly fiscal periods of each fiscal year of each Insurance Entity, its quarterly Statutory Statement for such quarterly fiscal period, together with the opinion thereon of a senior financial officer
of such Insurance Entity stating that such Statutory Statement presents the financial condition of such Insurance Entity for such quarterly fiscal period in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority;
(d) promptly after filing with the Applicable Insurance Regulatory Authority and in any event within 90 days after the end of each fiscal year of each Insurance Entity, the annual Statutory Statement of such Insurance Entity for such year, together with (i) the opinion thereon of a senior financial officer of such Insurance Entity stating that said annual Statutory Statement presents the financial condition of such Insurance Entity for such fiscal year in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority and (ii) a certificate of a valuation actuary affirming the adequacy of reserves taken by such Insurance Entity in respect of future policyholder benefits as at the end of such fiscal year (as shown on such Statutory Statement);
(e) within 180 days after the end of each fiscal year of each Insurance Entity, the report of Ernst & Young LLP (or other independent certified public accountants of recognized national standing) on the annual Statutory Statements delivered pursuant to SECTION 4.1(d) hereof;
(f) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, that State Auto Mutual or any of its Material Subsidiaries shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange;
(g) promptly upon the mailing thereof to the policyholders of State Auto Mutual generally and to the shareholders of State Auto Financial, copies of all financial statements, reports and proxy statements so mailed;
(h) promptly after State Auto Mutual receives the results of a triennial examination by the NAIC of the financial condition and operations of State Auto Mutual and/or any of its Material Subsidiaries, a copy thereof;
(i) promptly following the delivery or receipt by State Auto Mutual or any of its Material Subsidiaries of any correspondence, notice or report to or from any Applicable Insurance Regulatory Authority that relates, to any material extent, to the financial viability of State Auto Mutual or any of its Material Subsidiaries, a copy thereof;
(j) as soon as possible, and in any event within ten days after either State Auto Obligor knows or has reason to believe that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of State Auto Mutual setting forth details respecting such event or condition and the action, if any, that State Auto Mutual or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice
required to be filed with or given to the PBGC by State Auto Mutual or an ERISA Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section 4043(c) of
ERISA and the regulations issued thereunder, with respect to a Plan, as
to which the PBGC has not by regulation waived the requirement of
Section 4043(a) of ERISA that it be notified within 30 days of the
occurrence of such event (PROVIDED that a failure to meet the minimum
funding standard of Section 412 of the Code or Section 302 of ERISA,
including, without limitation, the failure to make on or before its due
date a required installment under Section 412(m) of the Code or Section
302(e) of ERISA, shall be a reportable event regardless of the issuance
of any waivers in accordance with Section 412(d) of the Code); and any
request for a waiver under Section 412(d) of the Code for any Plan;
(ii) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by State Auto Mutual or an ERISA Affiliate to terminate any Plan;
(iii) the institution by the PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by State Auto Mutual or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer Plan by State Auto Mutual or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by State Auto Mutual or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against State Auto Mutual or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; and
(vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if State Auto Mutual or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections;
(k) within five Business Days after receipt, notice from any Applicable Insurance Regulatory Authority of any threatened or actual proceeding for suspension or revocation of any License or any similar proceeding with respect to any such License;
(l) promptly, notice of any denial of coverage, litigation, or arbitration arising out of any Reinsurance Agreements to which any Insurance Entity is a party which denial, litigation or arbitration involves $5,000,000 or more;
(m) promptly after either State Auto Obligor knows or has reason to believe that any Put Event (or any event that with notice or lapse of time or both would become a Put Event) has occurred, a notice of such Put Event (or such event) describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that State Auto Mutual has taken or proposes to take with respect thereto;
(n) at the time it furnishes each set of financial statements
pursuant to paragraph (a) or (b) above, a certificate of a senior
financial officer of State Auto Mutual (i) to the effect that no Put
Event (or any event that with notice or lapse of time or both would
become a Put Event) has occurred and is continuing (or, if any Put
Event (or any such event) has occurred and is continuing, describing
the same in reasonable detail and describing the action that State Auto
Mutual has taken or proposes to take with respect thereto) and (ii)
setting forth in reasonable detail the computations necessary to
determine whether the State Auto Obligors are in compliance with
SECTION 4.10 hereof as of the end of the respective quarterly fiscal
period or fiscal year; and
(o) from time to time such other information regarding the financial condition, operations, business or prospects of State Auto Mutual or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as the Agent may reasonably request.
4.2 LITIGATION. State Auto Mutual will promptly give to the Agent (with sufficient copies for each Lender) notice of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting State Auto Mutual or any of its Subsidiaries, except proceedings that, if adversely determined, would not (either individually or in the aggregate) have a Material Adverse Effect.
4.3 EXISTENCE. ETC. State Auto Mutual will:
(a) and will cause each of its Material Subsidiaries to, preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (PROVIDED that nothing in this SECTION 4.3 shall prohibit any transaction expressly permitted under SECTION 4.5 hereof);
(b) and will cause each of its Subsidiaries to, comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could (either individually or in the aggregate) have a Material Adverse Effect;
(c) and will cause each of its Material Subsidiaries to, pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except
for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained;
(d) and will cause each of its Material Subsidiaries to, keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles (or, in the case of an Insurance Entity, statutory accounting principles) consistently applied; and
(e) and will cause each of its Material Subsidiaries to, permit representatives of any Lender or the Agent, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Agent (as the case may be).
4.4 INSURANCE. State Auto Mutual will, and will cause each of
its Material Subsidiaries to, maintain insurance with financially sound and
reputable insurance companies, and with respect to Property and risks of a
character usually maintained by corporations engaged in the same or similar
business similarly situated, against loss, damage and liability of the kinds and
in the amounts customarily maintained by such corporations (including general
liability insurance, director's and officer's liability insurance, property
insurance and worker's compensation insurance), PROVIDED that, nothing in this
SECTION 4.4 shall be deemed to require State Auto Mutual or any of its Material
Subsidiaries to enter into any Reinsurance Agreement and PROVIDED, FURTHER, that
State Auto Mutual and its Material Subsidiaries may self-insure against such
hazards and risks, and in such amounts as is customary for corporations of a
similar size and in similar lines of business.
4.5 PROHIBITION OF FUNDAMENTAL CHANGES.
(a) State Auto Mutual will not, nor will it permit any of its Material Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution).
(b) State Auto Mutual will not, nor will it permit any of its Material Subsidiaries to, acquire any business or Property from, or capital stock of, or be a party to any acquisition of, any Person except for purchases of inventory and other Property to be sold or used in the ordinary course of business, Assumed Reinsurance in the ordinary course of business, Investments permitted under SECTION 4.9 hereof, and Capital Expenditures.
(c) State Auto Mutual will not, nor will it permit any of its Material Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its business or Property, whether now owned or hereafter acquired.
(d) Notwithstanding the foregoing provisions of this SECTION 4.5:
(i) any Subsidiary of State Auto Mutual may be merged or consolidated with or into: (x) State Auto Mutual if State Auto Mutual shall be the continuing or surviving
corporation or (y) any other such Subsidiary; PROVIDED that (A) if any such transaction (other than a transaction described in clause (B) below) shall be between a Subsidiary and a Wholly Owned Subsidiary, the Wholly Owned Subsidiary shall be the continuing or surviving corporation and (B) if any such transaction shall be between State Auto Financial and any other such Subsidiary, State Auto Financial shall be the surviving corporation;
(ii) any Material Subsidiary of State Auto Mutual may sell, lease, transfer or otherwise dispose of any or all of its Property (upon voluntary liquidation or otherwise) to State Auto Mutual or a Wholly Owned Subsidiary of State Auto Mutual;
(iii) State Auto Mutual may merge or consolidate with or acquire any other Person if (w) in the case of a merger or consolidation, State Auto Mutual is the surviving corporation, (x) after giving effect thereto, no Put Event (and no event that with notice or lapse of time or both would constitute a Put Event) would exist hereunder, (y) the business activity engaged in by such other Person would be permitted under SECTION 4.13 hereof if such other Person were a Subsidiary of State Auto Mutual prior to such merger or consolidation and (z) the aggregate amount of the Statutory Surplus (determined as at the date of the relevant merger, consolidation or acquisition) of all such other Persons that have been the subject of any merger, consolidation or acquisition pursuant to this clause (iii) after the date hereof (other than any such merger, consolidation or acquisition financed solely with Net Available Proceeds) shall be less than $250,000,000; and
(iv) any Material Subsidiary of State Auto Mutual may merge or
consolidate with or acquire any other Person if (w) in the case of a
merger or consolidation, the surviving corporation is a Wholly Owned
Subsidiary of State Auto Mutual; PROVIDED, that in the case of any
merger or consolidation involving State Auto Financial, the surviving
corporation is State Auto Financial, (x) after giving effect thereto,
no Put Event (and no event that with notice or lapse of time or both
would constitute a Put Event) would exist hereunder, (y) the business
activity engaged in by such other Person would be permitted under
SECTION 4.13 hereof if such other Person were a Subsidiary of State
Auto Mutual prior to such merger or consolidation and (z) the aggregate
amount of the Statutory Surplus (determined as at the date of the
relevant merger, consolidation or acquisition) of all such other
Persons that have been the subject of any merger, consolidation or
acquisition pursuant to this clause (iv) during any calendar year
(other than any such merger, consolidation or acquisition financed
solely with Net Available Proceeds) shall be less than $100,000,000.
4.6 LIMITATION ON LIENS. State Auto Mutual will not, nor will it permit any of its Material Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except:
(a) Liens in existence on the date hereof and listed in Part B of SCHEDULE I hereto;
(b) Liens imposed by any governmental authority for taxes, assessments or charges not yet due or that are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the books of State Auto Mutual or the affected Material Subsidiaries, as the case may be, in accordance with Agreement Accounting Principles (or, in the case of any Insurance Entity, SAP);
(c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business that are not overdue for a period of more than 30 days or that are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in a Put Event under clause (j) of the definition of "Put Event" in SECTION 1.1 hereof;
(d) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation;
(e) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;
(f) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto that do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of State Auto Mutual or any of its Material Subsidiaries;
(g) Liens arising under escrows, trusts, custodianships, separate accounts, funds withheld procedures, and similar deposits, arrangements, or agreements established with respect to insurance policies, annuities, guaranteed investment contracts and similar products underwritten by, or Reinsurance Agreements entered into by, any Insurance Entity in the ordinary course of business;
(h) deposits with insurance regulatory authorities;
(i) Liens on Property of any corporation that becomes a Subsidiary of State Auto Mutual after the date hereof, PROVIDED that such Liens are in existence at the time such corporation becomes a Subsidiary of State Auto Mutual and were not created in anticipation thereof;
(j) Liens upon real and/or tangible personal Property acquired after the date hereof (by purchase, construction or otherwise) by State Auto Mutual or any of its Material Subsidiaries, each of which Liens either (i) existed on such Property before the time of its acquisition and was not created in anticipation thereof or (ii) was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including the cost of construction) of such Property; PROVIDED that (x) no such Lien shall extend to or cover any Property of State Auto Mutual or -------- such Material Subsidiary other than the Property so acquired and improvements thereon and (y) the principal amount of Indebtedness secured by any such Lien shall at no
time exceed 80% of the fair market value (as determined in good faith by a senior financial officer of State Auto Mutual) of such Property at the time it was acquired (by purchase, construction or otherwise); and
(k) additional Liens upon real and/or personal Property created after the date hereof, PROVIDED that the aggregate Indebtedness secured thereby and incurred on and after the date hereof shall not exceed $15,000,000 in the aggregate at any one time outstanding.
4.7 INDEBTEDNESS. State Auto Mutual will not, nor will it permit any of its Material Subsidiaries to, create, incur or suffer to exist any Indebtedness except:
(a) Indebtedness created pursuant hereto;
(b) Indebtedness outstanding on the date hereof and listed in Part A of SCHEDULE I hereto;
(c) Indebtedness of Material Subsidiaries of State Auto Mutual to State Auto Mutual or to other Material Subsidiaries of State Auto Mutual; and
(d) additional Indebtedness of State Auto Mutual and its Material Subsidiaries (including, without limitation, Capital Lease Obligations and other Indebtedness secured by Liens permitted under SECTIONS 4.6(j) or 4.6(k) hereof) up to but not exceeding $15,000,000 at any one time outstanding.
4.8 SALE/LEASEBACK TRANSACTIONS. State Auto Mutual will not,
nor will it permit any of its Material Subsidiaries to, enter into any an
arrangement with any Person (other than State Auto Mutual or any of its Material
Subsidiaries) providing for the leasing to State Auto Mutual or any of its
Material Subsidiaries for a period of more than five years of any Property which
has been or is to be sold or transferred by State Auto Mutual or such Material
Subsidiary to such Person or to any other Person (other than State Auto Mutual
or any of its Material Subsidiaries), to which funds have been or are to be
advanced by such Person on the security of the Property subject to such lease (a
"SALE/LEASEBACK TRANSACTION") if, after giving effect thereto, the Value (as
defined below) of all Sale/Leaseback Transactions at such time would exceed 10%
of the Statutory Surplus of State Auto Mutual at such time. For purposes of this
SECTION 4.8, "VALUE" shall mean, with respect to any Sale/Leaseback Transaction
as at any time, the amount equal to the greater of (a) the net proceeds of the
sale or transfer of the Property subject to such Sale/Leaseback Transaction and
(b) the fair value, in the opinion of the board of directors of State Auto
Mutual of such Property at the time of entering into such Sale/Leaseback
Transaction, in either case divided first by the number of full years of the
term of the lease and then multiplied by the number of full years of such term
remaining at the time of determination, without regard to any renewal or
extension options contained in such lease.
4.9 INVESTMENTS.
(a) State Auto Mutual will not, nor will it permit any of its Material Subsidiaries to, make or permit to remain outstanding any Investments except (i) Investments outstanding on the date hereof and identified in Part B of SCHEDULE II hereto, (ii) operating
deposit accounts with banks, (iii) Permitted Investments, (iv) Investments by State Auto Mutual and its Material Subsidiaries in State Auto Mutual and its Subsidiaries, (v) Interest Rate Protection Agreements, PROVIDED that, without limiting the obligation of State Auto Mutual under SECTION 4.12 hereof, when entering into any Interest Rate Protection Agreement that at the time has, or at any time in the future may give rise to, any credit exposure, the aggregate credit exposure under all Interest Rate Protection Agreements (excluding the Interest Rate Protection Agreement being entered into pursuant to SECTION 4.12 hereof) shall not exceed $10,000,000, and (vi) Investments of Insurance Entities not prohibited by clause (b) of this SECTION 4.9.
(b) State Auto Mutual will not permit any Insurance Entity to make any Investment if, on the date of which such Investment is made and after giving effect thereto, the aggregate value of Investments (other than equity Investments) held by such Insurance Entity that are rated lower than "2" by the NAIC or are not rated by the NAIC would exceed 5% of the value of total invested assets. As used in this SECTION 4.9(b), the "value" of an Investment refers to the value of such Investment that would be shown on the most recent Statutory Statement of the relevant Insurance Entity prepared in accordance with SAP.
4.10 CERTAIN FINANCIAL COVENANTS.
(a) STATUTORY SURPLUS. State Auto Mutual will not permit its
Statutory Surplus at any time to be less than (a) $621,000,000, at any time
prior to the occurrence of a catastrophe giving rise to Loans being outstanding
under the Credit Agreement (PROVIDED that no Loans are outstanding at such time)
and (b) $585,000,000, at any time during the period from and including the date
of occurrence of a catastrophe giving rise to Loans being outstanding under the
Credit Agreement to but excluding the date all Loans shall have been required to
be repaid in full pursuant to the terms of the Credit Agreement. State Auto
Mutual will not permit the Statutory Surplus of State Auto P&C to be less than
(a) $202,000,000, at any time prior to the occurrence of a catastrophe giving
rise to Loans being outstanding under the Credit Agreement (PROVIDED that no
Loans are outstanding at such time) and (b) $191,000,000, at any time during the
period from and including the date of occurrence of a catastrophe giving rise to
Loans being outstanding under the Credit Agreement to but excluding the date all
Loans shall have been required to be repaid in full pursuant to the terms of the
Credit Agreement.
(b) RISK-BASED CAPITAL RATIO. State Auto Mutual will not permit its Risk-Based Capital Ratio at any time to be less than (a) 5.00 to 1, at any time prior to the occurrence of a catastrophe giving rise to Loans being outstanding under the Credit Agreement (PROVIDED that no Loans are outstanding at such time) and (b) 3.00 to 1, at any time during the period from and including the date of occurrence of a catastrophe giving rise to Loans being outstanding under the Credit Agreement to but excluding the date all Loans shall have been required to be repaid in full pursuant to the terms of the Credit Agreement. State Auto Mutual will not permit the Risk-Based Capital Ratio of State Auto P&C to be less than (a) 4.00 to 1, at any time prior to the occurrence of a catastrophe giving rise to Loans being outstanding under the Credit Agreement (PROVIDED that no Loans are outstanding at such time) and (b) 3.00 to 1, at any time during the period from and including the date of occurrence of a catastrophe giving rise to Loans being outstanding under the Credit Agreement to but excluding the date all Loans shall have been required to be repaid in full pursuant to the terms of the Credit Agreement.
(c) PREMIUM TO SURPLUS. State Auto Mutual will not permit its
Premium to Surplus Ratio at any time to exceed (a) 2.00 to 1, at any time prior
to the occurrence of a catastrophe giving rise to Loans being outstanding under
the Credit Agreement (PROVIDED that no Loans are outstanding at such time) and
(b) 2.50 to 1, at any time during the period from and including the date of
occurrence of a catastrophe giving rise to Loans being outstanding under the
Credit Agreement to but excluding the date all Loans shall have been required to
be repaid in full pursuant to the terms of the Credit Agreement. State Auto
Mutual will not permit the Premium to Surplus Ratio of State Auto P&C to exceed
(a) 2.50 to 1, at any time prior to the occurrence of a catastrophe giving rise
to Loans being outstanding under the Credit Agreement (PROVIDED that no Loans
are outstanding at such time) and (b) 3.00 to 1, at any time during the period
from and including the date of occurrence of a catastrophe giving rise to Loans
being outstanding under the Credit Agreement to but excluding the date all Loans
shall have been required to be repaid in full pursuant to the terms of the
Credit Agreement.
(d) FIXED CHARGE COVERAGE RATIO. State Auto Financial will not permit its Fixed Charge Coverage Ratio, determined as of the end of each of its fiscal quarters, to be less than 1.00 to 1.00 at any time during the period from and including the date of occurrence of a catastrophe giving rise to Loans being outstanding under the Credit Agreement to but excluding the date all Loans shall have been required to be repaid in full pursuant to the terms of the Credit Agreement.
4.11 NAIC RATIO. In the event that the NAIC or any Applicable Insurance Regulatory Authority shall at any time promulgate any risk-based capital ratio requirements or guidelines, State Auto Mutual will cause each Insurance Entity to comply with the minimum requirements or guidelines applicable to it as established by the NAIC or such Applicable Insurance Regulatory Authority.
4.12 INTEREST RATE PROTECTION AGREEMENTS. State Auto Mutual will within five days after the date of each purchase of Preferred Stock under the Standby Purchase Agreement, cause State Auto Financial to enter into, and thereafter maintain in full force and effect, one or more Interest Rate Protection Agreements with one or more of the Lenders (and/or with a bank or other financial institution having capital, surplus and undivided profits of at least $500,000,000), that effectively would enable State Auto Financial (in a manner satisfactory to the Agent) to protect itself against floating interest rates as to a notional principal amount at least equal to 100% of the aggregate Redemption Value of the Preferred Stock for a period of at least five years measured from the date of the purchase of the Preferred Stock.
4.13 LINES OF BUSINESS. State Auto Mutual will not, nor will it permit any of its Subsidiaries to, engage to any substantial extent in any line or lines of business activity other than the business of owning and operating property and casualty insurance companies as conducted on the date hereof and businesses related or incidental thereto (it being understood that the businesses of Strategic Insurance Software, Inc., Stateco Financial Services, Inc. and 518 Property Management and Leasing, LLC, to the extent conducted as of the date hereof, are related to the business of owning and operating property and casualty insurance companies). It is also understood and agreed that the foregoing includes State Auto Mutual assuming reinsurance with premiums in an aggregate amount not to exceed $30,000,000 from third parties.
4.14 CEDED REINSURANCE. State Auto Mutual will not, nor will it permit any other Insurance Entity to:
(a) enter into any Reinsurance Agreement with any Person other
than (i) another Insurance Entity, (ii) any Person for which the most
recently published rating by A.M. Best & Co. is "B+" or higher or, if
such Person is not rated by A.M. Best & Co., which has a Statutory
Surplus (or the equivalent thereof) of not less than $100,000,000,
(iii) any Person that posts security under such Reinsurance Agreement
in an amount equal to the total liabilities assumed by such Person,
through a letter of credit issued by an "authorized bank" (as such term
is defined by the Applicable Insurance Regulatory Authority) or cash
collateral deposit or (iv) any other reinsurers acceptable to the
Agent, PROVIDED however, that for purposes of the foregoing clause
(ii), any "NA" designation shall not be considered a rating of A.M.
Best & Co.;
(b) enter into any Reinsurance Agreement or Reinsurance Agreements with Lloyd's of London if the aggregate amount of reinsurance ceded thereby would exceed 15% of the aggregate premium volume of reinsurance ceded by the Insurance Entities.
(c) enter into any Surplus Relief Reinsurance except with another Insurance Entity; or
(d) enter into any Reinsurance Agreement or Reinsurance Agreements if such Reinsurance Agreements will result in a 20% or more reduction of net premium volume for the Insurance Entities in any 12-month period.
4.15 TRANSACTIONS WITH AFFILIATES. Except as expressly
permitted by this Agreement, State Auto Mutual will not, nor will it permit any
of its Material Subsidiaries to, directly or indirectly: (a) make any Investment
in an Affiliate; (b) transfer, sell, lease, assign or otherwise dispose of any
Property to an Affiliate; (c) merge into or consolidate with or purchase or
acquire Property from an Affiliate; or (d) enter into any other transaction
directly or indirectly with or for the benefit of an Affiliate (including,
without limitation, Guarantees and assumptions of obligations of an Affiliate);
PROVIDED that (i) any Affiliate who is an individual may serve as a director,
officer or employee of State Auto Mutual or any of its Material Subsidiaries and
receive reasonable compensation for his or her services in such capacity and
(ii) State Auto Mutual and its Material Subsidiaries may enter into transactions
(other than extensions of credit by State Auto Mutual or any of its Material
Subsidiaries to an Affiliate) providing for the leasing of Property, the
rendering or receipt of services or the purchase or sale of inventory and other
Property in the ordinary course of business if the monetary or business
consideration arising therefrom would be substantially as advantageous to State
Auto Mutual and its Material Subsidiaries as the monetary or business
consideration that would obtain in a comparable transaction with a Person not an
Affiliate.
4.16 MODIFICATIONS OF CERTAIN DOCUMENTS. State Auto Mutual will not, and will not permit any of its Subsidiaries to, (a) consent to any modification, supplement or waiver of (i) the charter or by-laws of State Auto Mutual, (ii) the charter or by-laws of State Auto Financial, (iii) any material term of any Retrocession Agreement or Reinsurance Agreement relating to property and catastrophic risk insurance other than the Intercompany Pooling
Arrangement or (iv) without the prior consent of the Agent (with the approval of the Required Lenders, such approval not to be unreasonably withheld), the Intercompany Pooling Agreement if such modification, supplement or waiver would result in the ceding to State Auto Mutual of 70% or more of the catastrophic loss risk subject to such arrangement or (b) in any manner alter or change the preferences, rights or powers of the Preferred Stock or permit State Auto Financial to issue any additional securities so as to affect adversely the Preferred Stock.
4.17 INDEMNITY FOR CERTAIN COSTS. State Auto Financial agrees with the Agent that it will indemnify the Borrower, promptly upon demand therefor, for all or any portion of (a) the fees, costs and expenses payable by the Borrower under Article III of the Credit Agreement including, without limitation, in the event that interest for any Lender in respect of any period is computed at the Base Rate, for the excess (if any) of the amount of such interest computed at the Base Rate for such period over the amount of interest that would have been payable in respect of such period had such interest been computed at the relevant Eurodollar Rate for such period and (b) the excess of interest in respect of any period payable by the Borrower under Section 2.11 of the Credit Agreement at 2% over the interest in respect of such period that would have been payable had the relevant Default not occurred. Each of State Auto Financial, State Auto Mutual and the Agent agrees that the Borrower shall be a third-party beneficiary of this Agreement.
4.18 DELIVERY OF DOCUMENTS ON THE CLOSING DATE. Except with respect to the item set forth in CLAUSE (f) (which shall be delivered on or before the date of the initial Advance under the Credit Agreement), on the Closing Date, State Auto Mutual will deliver to the Agent (with sufficient copies for each Lender) each of the following documents each of which shall be satisfactory to the Agent in form and substance:
(a) certified copies of the charter and by-laws (or equivalent documents) of each State Auto Obligor and of all corporate authority for such State Auto Obligor (including, without limitation, board of director resolutions and evidence of the incumbency, including specimen signatures, of officers) with respect to the execution, delivery and performance of such of the Basic Documents to which such State Auto Obligor is intended to be a party and each other document to be delivered by such State Auto Obligor from time to time in connection herewith (and the Agent and each Lender may conclusively rely on such certificate until it receives notice in writing from State Auto Mutual to the contrary);
(b) a certificate of a senior officer of State Auto Mutual, dated the Closing Date, to the effect that (i) no Put Event (and no event that with notice or lapse of time or both would become a Put Event) shall have occurred and be continuing and (ii) the representations and warranties made by the State Auto Obligors in ARTICLE III hereof shall be true and complete on and as of the Closing Date with the same force and effect as if made on and as of the Closing Date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date);
(c) an opinion, dated the Closing Date, of John Lowther, general counsel of each State Auto Obligor, substantially in form of EXHIBIT B hereto and covering such other matters as the Agent or any Lender may reasonably request (and each State Auto
Obligor hereby instructs such counsel to deliver such opinion to the Lenders and the Agent);
(d) certified true, correct and complete copies of all Retrocession Agreements and Reinsurance Agreements in effect on the Closing Date;
(e) certified true, correct and complete copies of all Tax Sharing Agreements in effect on the Closing Date;
(f) evidence that the transactions contemplated by the Basic Documents shall have been approved by each Applicable Insurance Regulatory Authority with respect to State Auto Mutual; and
(g) such other documents as the Agent or any Lender or counsel to Bank One may reasonably request.
4.19 DELIVERY OF DOCUMENTS ON EACH BORROWING DATE. On the date of each borrowing by the Borrower under the Credit Agreement (and as a condition thereto), State Auto Mutual will deliver to the Agent (with sufficient copies for each Lender) each of the following documents each of which shall be satisfactory to the Agent in form and substance:
(a) a certificate of a senior officer of State Auto Mutual, dated the date of such borrowing, (1) to the effect that, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof, (i) no Put Event (and no event that with notice or lapse of time or both would become a Put Event) shall have occurred and be continuing and (ii) the representations and warranties made by the State Auto Obligors in ARTICLE III hereof (excluding, in the case of the representation and warranty made by the State Auto Obligors in the last sentence of clauses (a) and (b) of SECTION 3.2 hereof, any such change to the extent such change results from the catastrophic loss claims and/or loss adjustment expenses to which the borrowing by the Borrower under the Credit Agreement and related issuance of Preferred Stock relates) shall be true and complete on and as of such date of borrowing with the same force and effect as if made on and as of such date of borrowing (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date) and (2) describing in reasonable detail the catastrophic loss claims and/or loss adjustment expenses to which such borrowing relates;
(b) such other documents as the Agent or any Lender or counsel to Bank One may reasonably request (including, without limitation, opinions of counsel to the State Auto Obligors relating to the issuance of the Preferred Stock in connection with such borrowing).
4.20 DELIVERY OF DOCUMENTS IN CONNECTION WITH THE EXTENSION OF
THE COMMITMENT TERMINATION DATE. On each of the "Request Date" and the "Existing
Commitment Termination Date" (in each case as defined in Section 2.19 of the
Credit Agreement) State Auto Mutual will deliver to the Agent (with sufficient
copies for each Lender) each of the following documents each of which shall be
satisfactory to the Agent in form and substance:
(a) a certificate of a senior officer of State Auto Mutual, dated such date, to the effect that (i) no Put Event (and no event that with notice or lapse of time or both would become a Put Event) shall have occurred and be continuing and (ii) the representations and warranties made by the State Auto Obligors in ARTICLE III hereof shall be true and complete on and as of such date of borrowing with the same force and effect as if made on and as of such date of borrowing (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date).
(b) a certificate of a senior officer of State Auto Mutual, dated such date, to the effect that (i) the "Probable Maximum Loss" (as defined below) of the State Auto Obligors for the 250-year return period shall not exceed (x) $100,000,000 for earthquake peril, (y) $75,000,000 for hurricane peril and (z) $160,000,000 for thunderstorm peril and (ii) attached thereto is a true, correct and complete copy of the report prepared by the applicable Modelling Firm (as defined below) in connection with the calculation referred to in the definition of "Probable Maximum Loss" below. For purposes of this clause (b), "PROBABLE MAXIMUM LOSS" shall mean, for any date, the "probable maximum loss" as most recently calculated prior to such date by Risk Management Solutions, Inc., Applied Insurance Research, EQECAT Inc., Tillinghast (a Towers Perrin Company) or another independent modelling firm satisfactory to the Agent (each, a "MODELLING FIRM") and "THUNDERSTORM PERIL" shall mean peril caused by lightning, straight line wind, rain, hail and/or tornado.
4.21 CONSENT TO ASSIGNMENT, ETC.
(a) To the extent contemplated by the Company Pledge Agreement, or otherwise after and during the continuance of a Default, the Agent and any designee or assignee thereof shall be entitled to exercise any and all rights of the Borrower under the Standby Purchase Agreement and the Pledged Stock in accordance with the terms of the Standby Purchase Agreement and such Pledged Stock, and State Auto Financial shall comply in all respects with such exercise. Without limiting the generality of the foregoing, to the extent contemplated by the Company Pledge Agreement, or otherwise after and during the continuance of a Default, the Agent and any designee or assignee thereof shall have the full right and power to enforce directly against State Auto Financial all obligations of State Auto Financial under the Standby Purchase Agreement and the Pledged Stock and otherwise to exercise all remedies thereunder and to make all demands and give all notices and make all requests required or permitted to be made by the Borrower under the Standby Purchase Agreement or the Pledged Stock. Nothing herein shall require the Agent or such designee or assignee to cure any default of the Borrower under the Standby Purchase Agreement or to perform any act, duty or obligation of the Borrower under the Standby Purchase Agreement, but shall only give them the option so to do.
(b) State Auto Financial will not, without the prior written consent of the Agent, (i) cancel, suspend or terminate the Standby Purchase Agreement or consent to or accept any such cancellation, suspension or termination thereof, (ii) amend, supplement or otherwise modify the Standby Purchase Agreement or (iii) petition, request or take any other legal or administrative action which seeks, or may reasonably be expected, to so rescind, cancel, terminate or suspend or amend or modify the Standby Purchase Agreement.
(c) A foreclosure of, or other exercise of remedies under, the Company Pledge Agreement or any sale thereunder by the Agent or its assignee or designee, whether by judicial proceedings or under any power of sale contained therein, or any conveyance from the Borrower to the Agent, the Lenders or any such assignee or designee, in lieu thereof, shall not require the consent of State Auto Financial.
(d) Upon the exercise by the Agent of any of the remedies set forth in Section 5.05 of the Company Pledge Agreement, the Agent may assign its rights and interests and the rights and interests of the Borrower under the Standby Purchase Agreement and/or the Pledged Stock to any other Person.
(e) State Auto Financial will not be released from any of its obligations under the Standby Purchase Agreement or the Pledged Stock pursuant to any assignment or transfer (including by reason of a merger, consolidation, sale of substantially all of its assets or otherwise), and shall not delegate any of its obligations under the Standby Purchase Agreement or the Pledged Stock, unless the Agent shall have previously consented in writing to such release or delegation, as the case may be.
ARTICLE V
5.1 WAIVER. No failure on the part of the Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
5.2 NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party at its address or facsimile number set forth on the signature pages hereof or at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower in accordance with the provisions of this SECTION 5.2. Each such notice, request or other communication shall be effective (a) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (b) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (c) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the address specified in this Section.
5.3 EXPENSES; INDEMNIFICATION. (a) State Auto Mutual and State Auto Financial jointly and severally agree to reimburse the Agent for any costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent in connection with the preparation, negotiation, execution, delivery, syndication, review, amendment, modification, and administration of the Basic Documents. State Auto Mutual and
State Auto Financial also jointly and severally agree to reimburse the Agent and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent and the Lenders, which attorneys may be employees of the Agent or the Lenders) paid or incurred by the Agent or any Lender in connection with the collection and enforcement of the Loan Documents.
(b) State Auto Mutual and State Auto Financial hereby jointly and severally agree to indemnify the Agent, each Lender, their respective affiliates, and each of their directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent any Lender or any affiliate is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Basic Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification. The obligations of State Auto Mutual and State Auto Financial under this SECTION 5.3 shall survive the termination of this Agreement.
5.4 AMENDMENTS, ETC. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by each State Auto Obligor and the Agent (with the consent of the Lenders as specified in Section 10.17 of the Credit Agreement), and any provision of this Agreement may be waived by the Agent (with the consent of the Lenders as specified in Section 10.17 of the Credit Agreement).
5.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, PROVIDED, that neither State Auto Obligor may assign any of its rights or obligations hereunder without the prior consent of the Agent (with the consent of all of the Lenders).
5.6 CAPTIONS. The captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement.
5.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart.
5.8 CHOICE OF LAW. THE BASIC DOCUMENTS (OTHER THAN THOSE
CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION, 735 ILCS
SECTION 105/5-1 ET SEQ, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
5.9 CONSENT TO JURISDICTION. EACH STATE AUTO OBLIGOR HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO, ILLINOIS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND EACH STATE AUTO OBLIGOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST ANY STATE AUTO OBLIGOR IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY ANY STATE AUTO OBLIGOR AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS.
5.10 WAIVER OF JURY TRIAL. EACH STATE AUTO OBLIGOR, THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
5.11 TREATMENT OF CERTAIN INFORMATION; CONFIDENTIALITY.
(a) Each State Auto Obligor acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to State Auto Mutual or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Lender or by one or more subsidiaries or affiliates of such Lender and such State Auto Obligor hereby authorizes each Lender to share any information delivered to such Lender by or on behalf of State Auto Mutual and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Lender to enter into the Credit Agreement, to any such subsidiary or affiliate, it being understood that any such subsidiary or affiliate receiving such information shall be bound by the provisions of paragraph (b) below as if it were a Lender hereunder. Such authorization shall survive the termination of this Agreement.
(b) The Agent and each Lender agrees to hold any confidential
information which it may receive from either State Auto Obligor pursuant to this
Agreement in confidence, except for disclosure (i) to its Affiliates and to
other Lenders and their respective Affiliates, so long as such Affiliate or
other Lender agrees to be bound by the provisions of this Section, (ii) to legal
counsel, accountants, and other professional advisors to such Lender or to a
Transferee, (iii) to regulatory officials, (iv) to any Person as requested
pursuant to or as required by law, regulation, or legal process, (v) to any
Person in connection with any legal proceeding to which such Lender is a party,
(vi) to such Lender's direct or indirect contractual counterparties in swap
agreements or to legal counsel, accountants and other professional advisors to such counterparties, and (vii) permitted by Section 12.4 of the Credit Agreement.
5.12 NO LIABILITY. Except as expressly provided herein,
neither the Agent nor any Lender shall be responsible or have any liability for
(a) any statements, warranties or representations made in or in connection with
the Credit Agreement, any other Basic Document or any other instrument or
document furnished pursuant thereto, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of the Credit Agreement, any
other Basic Document or any other instrument or document furnished pursuant
thereto and (b) the financial condition of the Borrower or any other Person or
any other obligation of or the performance or observance by the Borrower, any
other Person or any other obligor of any of their respective obligations under
the Credit Agreement or any other Basic Document or any other instrument or
document furnished pursuant thereto.
5.13 FURTHER ASSURANCES. Each State Auto Obligor agrees that, from time to time upon the written request of the Agent, such State Auto Obligor will execute and deliver such further documents and do such other acts and things as the Lender may reasonably request in order fully to effect the purposes of this Agreement.
5.14 SEVERABILITY OF PROVISIONS. Any provision in any Basic Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Basic Documents are declared to be severable.
5.15 THIRD-PARTY BENEFICIARIES. Each State Auto Obligor agrees that each Lender shall be a third-party beneficiary of this Agreement and shall be entitled to enforce its rights hereunder as fully as if it were a party hereto.
[signature page follows]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.
STATE AUTOMOBILE MUTUAL INSURANCE COMPANY
By: /s/ John R. Lowther
---------------------------------------------
Title: Senior Vice President, General Counsel
------------------------------------------
& Secretary
|
Address for Notices:
State Automobile Mutual Insurance Company
518 East Broad Street
Columbus, Ohio 43215
Attention: John Lowther, Esq.
Telecopier No.: (614) 464-4911
Telephone No.: (614) 464-5052
STATE AUTO FINANCIAL CORPORATION
By: /s/ John R. Lowther
---------------------------------------------
Title: Senior Vice President, General Counsel
------------------------------------------
& Secretary
|
Addresses for Notices:
State Automobile Mutual Insurance Company
518 East Broad Street
Columbus, Ohio 43215
Attention: John Lowther, Esq.
Telecopier No.: (614) 464-4911
Telephone No.: (614) 464-5052
BANK ONE, NA
By: /s/ Thomas A. Kiepura
---------------------------------------------
Title: Assistant Vice President
------------------------------------------
|
Addresses for Notices:
1 Bank One Plaza
Chicago, Illinois 60670
Attention: Cynthia W. Priest
Telecopier No.: (312) 732-4033
Telephone No.: (312) 732-9565
Put Agreement
Schedule I
Part A
Indebtedness in Excess of $5,000,000
State Auto Financial owes State Auto Mutual approximately $45 million under a Credit Agreement dated May 1999 as amended by the First Amendment. A copy of this document has been provided to Bank One.
Agreemen/Put Agreement-Schedule I, Part A
Put Agreement
Schedule I
Part B
Liens
None
Put Agreement
Schedule II
Part A
Subsidiaries of State Auto Mutual
See attached Organizational Chart.
ORGANIZATIONAL STRUCTURE
OF
STATE AUTO HOLDING COMPANY SYSTEM
(MATERIAL SUBSIDIARIES)
Public
32%
-------
| Meridian Citizens Mutual Insurance
-- State Auto Financial Corporation --68%------ State Automobile Mutual Insurance Company Company
| Ohio Corporation | Ohio Corporation* Indiana Corporation*
| | | 100% |
| | 100% ----------------------------------------- | |
100% State Auto Property & Casualty |--- Midwest Security Ins. Co. Meridian Insurance Group, Inc.
| South Carolina Corporation* |- 15% | Wisconsin Corporation* Indiana Corporation
| | | |
100% State Auto National Ins. Co. | 518 Property | 100% | 100%
| Ohio Corporation* | Management and ------ Columbus Marketing, Inc. Meridian Security Insurance Company
| | Leasing, LLC Ohio Corporation | Indiana Corporation*
| | | |
100% Stateco Financial Services, Inc. | |
| Ohio Corporation ----- 85% 100% | |
| Meridian Citizens 100%
100% Strategic Ins. Software, Inc. Security Insurance Co. Insurance Company of Ohio
| Ohio Corporation Indiana Corporation* Ohio Corporation*
|
100% Milbank Insurance Company
| South Dakota Corporation*
|
100% Farmers Casualty Insurance 100%
| Company -------------------- Mid-Plains Insurance Company
| Iowa Corporation Iowa Corporation*
|
100% State Auto Insurance Company
Ohio Corporation*
|
*Insurance Companies
misc/orgchartMM Reg approval
PUT AGREEMENT
SCHEDULE II
PART B
INVESTMENTS
1. See Forms "Schedule D" attached for:
State Auto Mutual
State Auto P&C
State Auto National
Milbank Insurance Company
Midwest Security Insurance Company
Farmers Casualty Insurance Company
Mid-Plains Insurance Company
518 Property Management and Leasing, LLC
Stateco Financial Services, Inc.
Strategic Insurance Software, Inc.
Meridian Security Insurance Company
Meridian Citizens Security Insurance Company
Meridian Citizens Mutual Insurance Company
State Auto Insurance Company
Reflecting information as of September 30, 2001.
2. As of September 30, 2001, State Auto Mutual had in please 39 loans to its independent agencies with a total amount outstanding of $3,238,343.45.
Agreemen/Put Agreement-Schedule II, Part B
PUT AGREEMENT
SCHEDULE III
PART A
State Auto Financial has in place several stock option plans, all of which are registered with the SEC. These plans are disclosed in the footnotes to the financial statements of State Auto Financial filed with the SEC form 10K for the year 2000. A copy of these Stock Option Plan footnotes is attached hereto as Exhibit A.
Agreemen/put agreement schedule III part B 11-6-01
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) PREFERRED STOCK
State Auto Financial has authorized two classes of preferred stock. For
both classes, upon issuance, the Board of Directors has authority to fix and
determine the significant features of the shares issued, including, among other
things, the dividend rate, redemption price, redemption rights, conversion
features and liquidation price payable in the event of any liquidation,
dissolution, or winding up of the affairs of State Auto Financial. See note 6(a)
regarding State Auto Financial's obligation to issue redeemable preferred
shares to SPC in connection with its catastrophic reinsurance arrangements with
a financial institution.
The Class A preferred stock is not entitled to voting rights until, for
any period, dividends are in arrears in the amount of six or more quarterly
dividends.
(11) STOCK INCENTIVE PLANS
The Company follows Accounting Principals Board Opinion No. 25, "Accounting for Stock issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock incentive plans. For stock options granted to employees of Mutual in 1999, the Company also followed APB 25 and related Interpretations, as the Company deemed such employees to be common law employees of the Company, Compensation cost charged against operations in 2000 and 1999 were $31,000 and $137,000, respectively, for those employee stock options granted where the exercise price was less than the market price of the underlying stock on the date of grant. Had compensation cost for the Company's plans been determined based on the fair values at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123), the Company's pro forma net earnings and net earnings per share information would have been as follows:
2000 1999 1998
---- ---- ----
(in thousands, except
per share figures)
Pro forma net earnings....................... $45,784 41,414 35,700
Pro forma net earnings per common share
Basic................................... $ 1.19 1.02 0.85
Diluted................................. $ 1.17 1.00 0.83
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The fair value of options granted in 2000, 1999 and 1998 were estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair values and related assumptions for options granted were as follows:
2000 1999 1998
---- ---- ----
Fair value......................... $4.66 $4.49 $6.10
Dividend yield..................... 90% .90% .75%
Risk free interest rate ........... 6.51% 5.77% 5.31%
Expected volatility factor......... .34 .32 .31
Expected life (years).............. 7.2 5.7 6.6
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The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The Company has stock option plans for certain directors and key employees. The nonemployee directors' plan provides each nonemployee director an option to purchase 1,500 shares of common stock following each annual meeting of the shareholders at an option price equal to the fair market value at the last business day prior to the annual meeting. The Company has reserved 300,000 shares of common stock under this plan. These options are exercisable at issuance to 10 years from date of grant. The key employee's plan provides that qualified stock options
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
may be granted at an option price not less than fair market value at date of grant and that nonqualified stock options may be granted at any price determined by the options committee of the Board of Directors. The Company has reserved 5,000,000 shares of common stock under this plan. These options are exercisable at such time or times as may be determined by a committee of the Company's Board of Directors. Normally, for certain employees these options are exercisable from 1 to 10 years from date of grant and 3 to 10 years for remaining employees.
The Company has an employee stock purchase plan with a dividend reinvestment feature, under which employees of the Company may choose at two different specified time intervals each year to have up to 6% of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of its beginning-of-interval or end-of- interval market price. The Company has reserved 2,400,000 shares of common stock under this plan. At December 31, 2000, 1,699,000 shares have been purchased under this plan.
The Company has a stock option incentive plan for certain designated independent insurance agencies that represent the Company and its affiliates. The Company has reserved 400,000 shares of common stock under this plan. The plan provides that the options become exercisable on the first day of the calendar year following the agency's achievement of specific production and profitability requirements over a period not greater than two calendar years from date of grant or a portion thereof in the first calendar year in which an agency commences participation under the plan. Options granted and vested under this plan have a 10-year term. The Company has accounted for the plan in its accompanying financial statements at fair value. The fair value of options granted was estimated at the reporting date or vesting date using the Black-Scholes option-pricing model. The weighted average fair value and related assumptions for 2000 and 1999, respectively, were as follows: fair value of $10.91 and $4.02; dividend yield of .90% for both years; expected volatility factor of .32 and .30; risk-free interest rate of 5.19% and 6.80%; and expected life of the option of 9.0 and 9.7 years. Expense of $493,000 and $105,000 associated with this plan was recognized in 2000 and 1999, respectively.
A summary of the Company's stock option activity and related information for these plans for the years ended December 31, 2000, 1999 and 1998, follows:
2000 1999 1998
------------------------ ------------------------ ------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
(numbers in thousands, except per share figures)
Outstanding, beginning
of year 2,546 $ 7.76 2,272 $ 6.76 2,019 $ 5.04
Granted 492 10.29 453 11.24 339 16.31
Exercised (129) 4.32 (165) 3.34 (86) 4.02
Canceled (57) 11.15 (14) 10.52 -- --
----- ----- -----
Outstanding, end of year 2,852 8.28 2,546 7.76 2,272 6.76
===== ===== =====
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A summary of information pertaining to options outstanding and exercisable as of December 31, 2000 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
------------------------ ------ ---------------- ---------------- ------ ----------------
(numbers in thousands, except per share figures)
Less than $5.00 734 2.0 $ 3.98 734 $ 3.98
$5.01 - $10.00 1,004 4.9 6.66 961 6.56
Greater than $10.01 1,114 8.5 12.58 537 13.89
----- -----
2,852 5.5 8.28 2,232 7.47
===== =====
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Put Agreement Schedule III
Part B
During 2001, the common shares of STFC became a permitted investment in the State Auto 401(k) Capital Accumulation Plan (the "CAP") plan and in non-qualified deferred compensation plans for key employees and directors. The CAP and the Employee Non-Qualified Deferred Compensation Plan were registered with the SEC. The Directors' Non-Qualified Deferred Compensation Plan was not registered with the SEC, since it is within the scope of an exception to registration. The participants in the non-qualified deferred compensation plans are unsecured creditors of State Auto and part of the obligations under those plans will reflect the value of STFC common shares to the extent any participants investments are so directed. Fidelity Investments is the Trustee of the CAP.
Agreemen/put agreement schedule III 11-6-01
EXHIBIT A to the Put Agreement
[Form of Put Notice]
[Date]
State Automobile Mutual Insurance Company
State Auto Financial Corporation
[Address]
Re: Put Agreement dated as of November 16, 2001, between State Automobile Mutual Insurance Company, State Auto Financial Corporation and Bank One, NA, as Agent.
Dear Ladies and Gentlemen:
Reference is made to the Amended and Restated Put Agreement dated as of November 16, 2001 (as modified and supplemented and in effect from time to time, the "PUT AGREEMENT"), among State Automobile Mutual Insurance Company ("STATE AUTO MUTUAL"), State Auto Financial Corporation and Bank One, NA, as Agent. Capitalized terms used but not defined herein shall have the respective meanings assigned to such terms in the Put Agreement.
[Pursuant to Section 2.2 of the Put Agreement, the undersigned hereby requires that State Auto Mutual purchase all of each Lender's Loans, Note and Commitment. The aggregate purchase price payable by State Auto Mutual for all such Loans, Notes and Commitments shall be $_______________ representing the sum of (a) principal of such Loans in the amount of $_______________, PLUS (b) accrued and unpaid interest thereon in the amount of $______________, PLUS (c) other amounts payable under the Basic Documents in respect thereof in the amount of $_______________.]
[Pursuant to Section 2.3 of the Put Agreement, the undersigned hereby requires that State Auto Mutual purchase all of the Pledged Stock for an aggregate purchase price equal to $_______________ representing the sum of (a) the aggregate Redemption Value of such Pledged Stock in the amount of $_____________, PLUS (b) accrued and unpaid dividends thereon in the amount of $_______________.]
The Put Purchase Date for such purchase shall be _______________, _____.
BANK ONE, NA, as Agent
EXHIBIT B
OPINION OF GENERAL COUNSEL OF THE
STATE AUTO OBLIGORS
[STATE AUTO INSURANCE COMPANIES LETTERHEAD]
November 16, 2001
To each of the Lenders party to the
Credit Agreement referred to
below and Bank One, NA,
as Agent
Ladies and Gentlemen:
I am the general counsel of State Automobile Mutual Insurance Company ("STATE AUTO MUTUAL") and State Auto Financial Corporation ("STATE AUTO FINANCIAL" and, together with State Auto Mutual, the "STATE AUTO OBLIGORS") and have acted as counsel to the State Auto Obligors in connection with (i) the Amended and Restated Put Agreement dated as of November 16, 2001 (the "PUT AGREEMENT") among the State Auto Obligors and Bank One, NA, in its capacity as Agent (the "AGENT") on behalf of the lenders party to an Amended and Restated Credit Agreement dated as of November 16, 2001, among SAF Funding Corporation, the Agent and (ii) the agreements, instruments and other documents referred to in the next paragraph. All capitalized terms used but not defined herein have the respective meanings given to such terms in the Put Agreement. This opinion letter is delivered to you pursuant to Section 4.18(c) of the Put Agreement.
In rendering the opinions expressed below, I have examined the following agreements, instruments and other documents:
(a) the Credit Agreement;
(b) the Pledge Agreements;
(c) the Put Agreement;
(d) the Standby Purchase Agreement (collectively with the Put Agreement, the "STATE AUTO AGREEMENTS"); and
(e) such records of the State Auto Obligors and such other documents as I have deemed necessary as a basis for the opinions expressed below.
In my examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with authentic original documents of all documents submitted to me as copies. When relevant facts were not independently established, I have relied upon certificates of governmental officials and appropriate representatives of the State Auto Obligors and upon representations made in or pursuant to the State Auto Agreements.
In rendering the opinions expressed below, I have assumed, with respect to all of the documents referred to in this opinion letter, that (except, to the extent set forth in the opinions expressed below, as to the State Auto Obligors):
(i) such documents have been duly authorized by, have been duly executed and delivered by, and constitute legal, valid, binding and enforceable obligations of, all of the parties to such documents;
(ii) all signatories to such documents have been duly authorized; and
(iii) all of the parties to such documents are duly organized and validly existing and have the power and authority (corporate, partnership or other) to execute, deliver and perform such documents.
Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as I have deemed necessary as a basis for the opinions expressed below, I am of the opinion that:
1. State Auto Mutual is a mutual insurance company duly organized, validly existing and in good standing under the laws of the State of Ohio. State Auto Financial is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio.
2. Each State Auto Obligor has all requisite corporate power and authority to execute and deliver, and to perform its obligations and to incur liabilities under, the State Auto Agreements to which it is a party.
3. The execution, delivery and performance by each State Auto Obligor of, and the incurrence by such State Auto Obligor of liabilities under, each State Auto Agreement to which such State Auto Obligor is a party, have been duly authorized by all necessary corporate action on the part of such State Auto Obligor.
4. Each State Auto Agreement has been duly executed and delivered by each State Auto Obligor party thereto.
5. Under Ohio conflict of laws principles, the stated choice of Illinois law to govern the State Auto Agreements will be honored by the courts of the State of Ohio and the State Auto Agreements will be construed in accordance with, and will be treated as being governed by, the law of the State of Illinois. However, if the State Auto Agreements were stated to be governed by and construed in accordance with the law of the State of Ohio, or if an Ohio court were to apply the law of the State of Ohio to the State Auto Agreements, each State Auto Agreement would constitute the legal, valid and binding obligation of each State Auto Obligor party thereto, enforceable against such State Auto Obligor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar laws relating to or affecting the rights of creditors generally and
except as the enforceability of the State Auto Agreements is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including, without limitation, (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing.
6. No authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the State of Ohio (other than any authorizations, approvals, consents, filings and registrations heretofore duly made or obtained and in full force and effect) is required on the part of either State Auto Obligor for the execution, delivery or performance by such State Auto Obligor of, or for the incurrence by such State Auto Obligor of any liabilities under, the State Auto Agreements to which such State Auto Obligor is a party.
7. The execution, delivery and performance by each State Auto Obligor of, and the consummation by such State Auto Obligor of the transactions contemplated by, the State Auto Agreements to which such State Auto Obligor is a party do not and will not (a) violate any provision of the Articles of Incorporation or Code of Regulations of such State Auto Obligor, (b) violate any applicable law, rule or regulation of the United States of America or the State of Ohio, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to such State Auto Obligor of which I have knowledge (after due inquiry) or (d) result in a breach of, constitute a default under, require any consent under, or result in the acceleration or required prepayment of any indebtedness pursuant to the terms of, any agreement or instrument of which I have knowledge (after due inquiry) to which such State Auto Obligor or any of its Subsidiaries is a party or by which any of them is bound or to which any of them is subject, or result in the creation or imposition of any Lien upon any Property of such State Auto Obligor or any of its Subsidiaries pursuant to the terms of any such agreement or instrument.
8. I have no knowledge (after due inquiry) of any legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or threatened against or affecting either State Auto Obligor or any of their respective Properties that, if adversely determined, could have a Material Adverse Effect.
9. State Auto Financial has duly authorized and reserved for issuance 2,500,000 shares of Class A Preferred Stock.
The foregoing opinions are subject to the following comments and qualifications:
(A) The enforceability of Section 5.3 of the Put Agreement and
Section 7.6 of the Standby Purchase Agreement may be limited by (i)
laws rendering
unenforceable indemnification contrary to Federal or state securities laws and the public policy underlying such laws and (ii) laws limiting the enforceability of provisions exculpating or exempting a party from, or requiring indemnification of a party for, its own action or inaction, to the extent such action or inaction involves gross negligence, recklessness or willful or unlawful conduct.
(B) The enforceability of provisions in the State Auto Agreements to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances.
(C) I express no opinion as to the first sentence of Section 5.08 of the Put Agreement or the second sentence of Section 8.7 of the Standby Purchase Agreement, insofar as either such sentence relates to the subject matter jurisdiction of the United States District Court for the Northern District of Illinois sitting in Chicago, Illinois to adjudicate any controversy related to the applicable State Auto Agreement.
The foregoing opinions are limited to matters involving the Federal laws of the United States of America and the law of the State of Ohio, and I do not express any opinion as to the laws of any other jurisdiction. The opinions contained in this letter are rendered only as of the date hereof and I undertake no obligation to update this letter or the opinions contained herein after the date hereof. The opinions contained in this letter only constitute my professional judgment as to the consequences of and the applicability of certain laws to the documents and agreements referred to and the parties thereto and should not be considered to be a guarantee of any particular result.
At the request of my clients, this opinion letter is provided to you by me in my capacity as counsel to the State Auto Obligors, and this opinion letter may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Basic Documents without, in each instance, my prior written consent.
Very truly yours,
/s/ John R. Lowther |
EXHIBIT 10(KK)
AMENDED AND RESTATED STANDBY PURCHASE AGREEMENT
between
STATE AUTO FINANCIAL CORPORATION
and
SAF FUNDING CORPORATION
Dated as of November 16, 2001
TABLE OF CONTENTS
Section Page
------- ----
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS.......................................................................1
1.1 Definitions and Accounting Terms........................................................................1
ARTICLE II PURCHASE OF PREFERRED STOCK...........................................................................6
2.1 Purchases...............................................................................................6
2.2 Notices of Purchases....................................................................................6
2.3 Commitment Fee..........................................................................................6
ARTICLE III CONDITIONS TO PURCHASE...............................................................................6
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF STATE AUTO FINANCIAL................................................7
4.1 Corporate Existence.....................................................................................7
4.2 Litigation..............................................................................................7
4.3 No Breach...............................................................................................7
4.4 Action ...............................................................................................8
4.5 Approvals...............................................................................................8
4.6 Capitalization..........................................................................................8
4.7 True and Complete Disclosure............................................................................9
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................................................9
5.1 Investment..............................................................................................9
5.2 No Agreement to Transfer................................................................................9
5.3 Knowledge and Experience................................................................................9
5.4 Access to Information...................................................................................9
5.5 Risk.... ..............................................................................................10
5.6 Restrictions on Transfer...............................................................................10
ARTICLE VI COVENANTS............................................................................................10
6.1 Transfer ..............................................................................................10
6.2 Redemption.............................................................................................10
6.3 Use of Proceeds........................................................................................10
ARTICLE VII REGISTRATION RIGHTS.................................................................................11
7.1 Demand Registration....................................................................................11
7.2 Piggyback Registrations................................................................................12
7.3 Registration Procedures................................................................................14
7.4 Underwritten Offerings.................................................................................17
7.5 Holdback Agreements By State Auto Financial and Other Securityholders..................................18
7.6 Indemnification........................................................................................19
7.7 Covenants Relating to Rule 144.........................................................................22
7.8 References to holders of Registrable Securities........................................................22
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ARTICLE VIII MISCELLANEOUS......................................................................................22
8.1 Waiver.................................................................................................22
8.2 Notices................................................................................................23
8.3 Amendments, Etc........................................................................................23
8.4 Successors and Assigns.................................................................................23
8.5 Captions...............................................................................................23
8.6 Counterparts...........................................................................................23
8.7 Governing Law; Submission to Jurisdiction..............................................................23
8.8 Waiver of Jury Trial...................................................................................23
8.9 Further Assurances.....................................................................................24
8.10 Payments by State Auto Financial......................................................................24
8.11 Payments Received by the Company under Basic Documents................................................24
8.12 Third-Party Beneficiaries.............................................................................24
8.13 Severability..........................................................................................24
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SCHEDULES
Schedule I Equity Rights and Repurchase Obligations
EXHIBITS
Exhibit A Class A Preferred Stock Certificate Exhibit B Purchase Notice Exhibit C Opinion of General Counsel of State Auto Financial |
AMENDED AND RESTATED STANDBY PURCHASE AGREEMENT
This Amended and Restated Standby Purchase Agreement, dated as of November 16, 2001, is by and between State Auto Financial Corporation, a corporation duly organized and validly existing under the laws of the State of Ohio ("STATE AUTO FINANCIAL"), and SAF Funding Corporation, a Delaware corporation (the "COMPANY").
A. In order to raise funds for catastrophic loss claims and/or loss adjustment expenses that may be made from time to time for residential and commercial property under insurance coverage underwritten by State Automobile Mutual Insurance Company, an Ohio mutual insurance company ("STATE AUTO MUTUAL"), and certain of its affiliates, which have been reinsured by State Auto Property and Casualty Insurance Company, a South Carolina corporation ("STATE AUTO P&C"), through the issuance and sale by State Auto Financial and the purchase by the Company, from time to time, of State Auto Financial's Class A Preferred Stock, no par value per share (the "CLASS A PREFERRED STOCK"), State Auto Financial and the Company entered into that certain Standby Purchase Agreement dated as of November 19, 1999 (the "EXISTING SPA").
B. State Auto Financial and the Company desire to amend and restate the Existing SPA in order to make certain modifications thereto.
NOW, THEREFORE, for and in consideration of the mutual representations, warranties, covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree to amend and restate the Existing SPA as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.1 DEFINITIONS AND ACCOUNTING TERMS. As used herein, the following terms shall have the following meanings (all terms defined in this SECTION 1.1 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and VICE VERSA):
"AGENT" shall mean Bank One, NA, as agent under the Credit Agreement.
"BASIC DOCUMENTS" shall have the meaning assigned thereto in the Credit Agreement.
"COMMISSION" shall mean the United States Securities and Exchange Commission, or any successor governmental agency or authority.
"COMMITMENT" shall have the meaning assigned thereto in the Credit Agreement.
"COMPANY PLEDGE AGREEMENT" shall mean the Pledge and Security Agreement, dated as of the date hereof, among the Company and the Agent, as modified and supplemented and in effect from time to time.
"CREDIT AGREEMENT" shall mean the Amended and Restated Credit Agreement, dated as of the date hereof, among the Company, the Agent and the Lenders, as modified and supplemented and in effect from time to time.
"CUTBACK REGISTRATION" shall mean any Demand Registration or Piggyback Registration to be effected as an underwritten Public Offering in which the Managing Underwriter with respect thereto advises State Auto Financial and the Requesting Holders in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of State Auto Financial which are not Registrable Securities) exceed the number which can be sold in such offering without a material reduction in the selling price anticipated to be received for the securities to be sold in such Public Offering.
"DEMAND REGISTRATION" shall mean any registration of
Registrable Securities under the Securities Act effected in accordance with
SECTION 7.1 hereof.
"EFFECTIVE LONG-FORM REGISTRATION" shall mean a Long-Form Registration that results in an Effective Registration.
"EFFECTIVE REGISTRATION" shall mean a Demand Registration which (a) has been declared or ordered effective in accordance with the rules of the Commission, (b) has been kept effective for the period of time contemplated by SECTION 7.3(B) hereof and (c) has resulted in the Registrable Securities requested to be included in such registration actually being sold (except by reason of some act or omission on the part of the Requesting Holders); PROVIDED that for purposes of this Agreement (i) a Cutback Registration shall not be an Effective Registration and (ii) a Demand Registration in which State Auto Financial includes securities for sale for the account of State Auto Financial shall not be an Effective Registration.
"EFFECTIVE SHORT-FORM REGISTRATION" shall mean a Short-Form Registration that results in an Effective Registration.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"FORM S-1" shall mean Form S-1 promulgated by the Commission under the Securities Act, or any successor or similar long-form registration statement.
"FORM S-2" shall mean Form S-2 promulgated by the Commission under the Securities Act, or any successor or similar short-form registration statement.
"FORM S-3" shall mean Form S-3 promulgated by the Commission under the Securities Act, or any successor or similar short-form registration statement.
"INDEMNIFIED PARTY" shall mean a party entitled to indemnity in accordance with SECTION 7.6 hereof.
"INDEMNIFYING PARTY" shall mean a party obligated to provide indemnity in accordance with SECTION 7.6 hereof.
"INSPECTORS" shall have the meaning assigned thereto in
SECTION 7.3(J) hereof.
"LENDERS" shall have the meaning assigned thereto in the Credit Agreement.
"LIEN" shall mean, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property.
"LOANS" shall have the meaning assigned thereto in the Credit Agreement.
"LONG-FORM REGISTRATION" shall mean a Demand Registration effected by the filing of a registration statement on Form S-1 with the Commission.
"LOSSES" shall have the meaning assigned thereto in SECTION 7.6(a) hereof.
"MAJORITY LENDERS" shall have the meaning assigned thereto in the Credit Agreement.
"MANAGING UNDERWRITER" shall mean, with respect to any Public Offering, the underwriter or underwriters managing such Public Offering.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the Property, business, operations, financial condition, prospects, liabilities or capitalization of State Auto Mutual and its Subsidiaries taken as a whole, (b) the ability of State Auto Financial to issue the Class A Preferred Stock to or perform its obligations under this Agreement, (c) the ability of State Auto Mutual or State Auto Financial to perform its respective obligations under the Put Agreement, (d) the validity or enforceability of any of the Basic Documents or (e) the rights and remedies of the Lenders and the Agent under any of the Basic Documents.
"NASD" shall mean the National Association of Securities Dealers.
"NOTICE OF DEMAND REGISTRATION" shall have the meaning assigned thereto in SECTION 7.1(a) hereof.
"NOTICE OF PIGGYBACK REGISTRATION" shall have the meaning assigned thereto in SECTION 7.2(a) hereof.
"PIGGYBACK REGISTRATION" shall mean any registration of equity securities of State Auto Financial under the Securities Act (other than a registration in respect of a dividend reinvestment or similar plan for stockholders of State Auto Financial or on Form S-4 or Form S-8 promulgated by the Commission, or any successor or similar forms thereto), whether for sale for the account of State Auto Financial or for the account of any holder of securities of State Auto Financial (other than Registrable Securities).
"PROPERTY" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.
"PUBLIC OFFERING" shall mean any offering of any equity securities of State Auto Financial to the public, either on behalf of State Auto Financial or any of its securityholders, pursuant to an effective registration statement under the Securities Act.
"PURCHASE COMMITMENT" shall mean the obligation of the Company to purchase Class A Preferred Stock with an aggregate original Redemption Value of not more than $100,000,000.
"PURCHASE COMMITMENT TERMINATION DATE" shall mean November 14, 2002; PROVIDED that if the "Commitment Termination Date" under the Credit Agreement is extended as provided therein, the Purchase Commitment Termination Date shall, automatically and without any action on the part of State Auto Financial or the Company, be extended to the date to which said "Commitment Termination Date" has been so extended.
"PURCHASE DATE" shall have the meaning assigned thereto in
SECTION 2.2 hereof.
"PURCHASE NOTICE" shall mean a Purchase Notice substantially in the form of EXHIBIT B hereto.
"PUT AGREEMENT" shall mean the Amended and Restated Put Agreement, dated as of the date hereof, among State Auto Mutual, State Auto Financial and the Agent, as modified and supplemented and in effect from time to time.
"PUT DISHONOR" shall mean the failure of State Auto Mutual for any reason after its receipt of a Put Notice (as defined in the Put Agreement) to comply with its obligations under the Put Agreement to purchase each Lender's Loans, Notes and Commitment (each, as defined in the Put Agreement) or the Class A Preferred Stock, as specified in such Put Notice.
"PUT EVENT" shall have the meaning assigned thereto in the Put Agreement.
"QUARTERLY DATES" shall mean the last Business Day of March, June, September and December in each year, the first of which shall be the first such day after the day hereof.
"RECORDS" shall have the meaning assigned thereto in SECTION 7.3(j) hereof.
"REDEMPTION VALUE" shall mean, with respect to any Class A Preferred Stock, the "Redemption Value" for such Class A Preferred Stock set forth in the certificate evidencing such Class A Preferred Stock.
"REGISTRABLE SECURITIES" shall mean (a) any shares of Class A Preferred Stock purchased pursuant to SECTION 2.1 hereof and (b) any additional shares of Class A Preferred Stock issued or distributed by way of a dividend, stock split or other distribution in respect of such Class A Preferred Stock purchased pursuant to SECTION 2.1 hereof, or acquired by way of any rights offering or similar offering made in respect of such Class A Preferred Stock. As to any particular Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (ii) they shall have been distributed to the public pursuant to Rule 144 or (iii) they shall have ceased to be outstanding.
"REGISTRATION EXPENSES" shall mean all expenses incident to State Auto Financial's performance of or compliance with its obligations under this Agreement to effect the registration of Registrable Securities in a Demand Registration or a Piggyback Registration, including, without limitation, all registration, filing, securities exchange listing and NASD fees, all registration, filing, qualification and other fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for State Auto Financial and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, the reasonable fees and disbursements of a single counsel and single firm of accountants retained by the holders of a majority of the Registrable Securities being registered, premiums and other costs of policies of insurance against liabilities arising out of the Public Offering of the Registrable Securities being registered and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any, in respect of Registrable Securities, which shall be payable by each holder thereof.
"REGISTRATION REQUEST" shall have the meaning assigned thereto in SECTION 7.1 hereof.
"REQUESTING HOLDERS" shall mean, with respect to any Demand Registration or Piggyback Registration, the holders of Registrable Securities requesting to have Registrable Securities included in such registration in accordance with this Agreement.
"RULE 144" shall mean Rule 144 promulgated by the Commission under the Securities Act, and any successor provision thereto.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
"SHORT-FORM REGISTRATION" shall mean a Demand Registration effected by the filing of a registration statement on Form S-2 or Form S-3 with the Commission.
"STATE AUTO MUTUAL" shall mean the meaning assigned thereto in the first Whereas clause of this Agreement.
"STATE AUTO P&C" shall mean the meaning assigned thereto in the first Whereas clause of this Agreement.
"SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes
of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person.
ARTICLE II
PURCHASE OF PREFERRED STOCK
2.1 PURCHASES. The Company agrees, on the terms and conditions of this Agreement, to purchase from State Auto Financial in one or more transactions, Class A Preferred Stock with an aggregate Redemption Value of not more than $100,000,000. The purchase price payable by the Company for each share of Class A Preferred Stock shall be equal to the Redemption Value thereof.
2.2 NOTICES OF PURCHASES. State Auto Financial shall give the Company notice of each purchase hereunder by delivering to the Company a Purchase Notice not less than four Business Days prior to the date of such purchase (the "PURCHASE DATE"). Not later than 2:00 p.m. New York time on the Purchase Date specified for each such purchase, the Company shall make available the amount of the purchase price of the Class A Preferred Stock to be purchased by it by depositing in immediately available funds such purchase price in an account designated by State Auto Financial.
2.3 COMMITMENT FEE. State Auto Financial shall pay to the Company a commitment fee on the daily average unused amount (based on the aggregate Redemption Value of not more than $100,000,000 of Class A Preferred Stock) of the Company's Purchase Commitment, for the period from and including the date hereof to but not including the earlier of the date such Purchase Commitment is terminated and the Purchase Commitment Termination Date, at a rate per annum equal to 0.20%. Accrued commitment fees shall be payable on each Quarterly Date and on the earlier of the date the Purchase Commitments are terminated and the Purchase Commitment Termination Date.
ARTICLE III
CONDITIONS TO PURCHASE
The obligations of the Company to purchase any Class A Preferred Stock hereunder is subject to the following conditions:
(a) PURCHASE NOTICE. The Company shall have received a Purchase Notice with respect to such purchase, duly completed and executed.
(b) OPINION OF COUNSEL TO THE COMPANY. The Company shall have received an opinion, dated the Purchase Date, of John Lowther, general counsel of State Auto Financial, substantially in the form of EXHIBIT C hereto and covering such other matters as the Company may reasonably request.
(c) CERTIFICATES. The Company shall have received duly executed stock certificates, substantially in the form of EXHIBIT A hereto, evidencing the aggregate number of shares of Class A Preferred Stock to be purchased by the Company on such Purchase Date.
(d) CATASTROPHIC LOSS. Any one or more of State Auto Mutual, State Auto P&C, Milbank Insurance Company, Farmers Casualty Insurance Company, Midwest Security Insurance Company, State Auto National Insurance Company, Meridian Security Insurance Company, Meridian Citizens Security Insurance Company and Meridian Citizens Mutual Insurance Company shall have incurred liability in excess of $120,000,000 in the aggregate in respect of catastrophic loss claims and/or loss adjustment expenses resulting from the occurrence of a single catastrophic event (but excluding catastrophic loss claims and/or adjustment expenses under war-risk, allied perils, terrorism, hijacking, governmental confiscation or expropriation insurance coverage) and the Company shall have received a certificate of a senior financial officer of State Auto Financial to such effect.
(e) OFFICER'S CERTIFICATE. The Company shall have received a certificate of a senior financial officer of State Auto Financial to the effect that, both immediately prior to such purchase and also after giving effect thereto and to the intended use thereof (i) no Put Event (or an event with notice or lapse of time or both would become a Put Event) shall have occurred and be continuing; and (ii) the representations and warranties made by State Auto Financial in ARTICLE IV hereof shall be true and complete on and as of the date of such purchase with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF STATE AUTO FINANCIAL
State Auto Financial represents and warrants to the Company that:
4.1 CORPORATE EXISTENCE. Each of State Auto Financial and its Subsidiaries: (a) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could (either individually or in the aggregate) have a Material Adverse Effect.
4.2 LITIGATION. There are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of State Auto Financial) threatened against State Auto Financial or any of its Subsidiaries that, if adversely determined could (either individually or in the aggregate) have a Material Adverse Effect.
4.3 NO BREACH. None of the execution and delivery of this Agreement, the consummation of the transactions herein and therein contemplated or compliance with the terms
and provisions hereof and thereof (including issuance of the Class A Preferred Stock) will conflict with or result in a breach of, or require any consent under, the charter or by-laws (or equivalent documents) of State Auto Financial, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which State Auto Financial or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any Property of State Auto Financial or any of its Subsidiaries pursuant to the terms of any such agreement or instrument.
4.4 ACTION. State Auto Financial has all necessary corporate power, authority and legal right to execute, deliver and perform its obligations under this Agreement and to issue the Class A Preferred Stock; the execution, delivery and performance by State Auto Financial of this Agreement (and the issuance of the Class A Preferred Stock) have been duly authorized by all necessary corporate action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by State Auto Financial and constitutes, its legal, valid and binding obligation, enforceable against State Auto Financial in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
4.5 APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange (other than any authorizations, approvals, consents, filings and registrations heretofore duly made or obtained and in full force and effect), are necessary for the execution, delivery or performance by State Auto Financial of this Agreement (or for the issuance of the Class A Preferred Stock) or for the legality, validity or enforceability hereof.
4.6 CAPITALIZATION. The authorized capital stock of State Auto
Financial consists, on the date hereof, of an aggregate of 105,000,000 shares
consisting of (a) 100,000,000 shares of common stock, no par value, of which
38,866,955 shares are duly and validly issued and outstanding, each of which
shares is fully paid and nonassessable, (b) 2,500,000 shares of Class A
Preferred Stock, no par value, none of which shares issued and outstanding and
(c) 2,500,000 shares of Class B Preferred Stock, no par value, none of which
shares are issued and outstanding. As of the date hereof, 68% of such issued and
outstanding shares of common stock are owned beneficially and of record by State
Auto Mutual. Upon issuance, each share of Class A Preferred Stock will benefit
from the Terms and Conditions of Class A Preferred Stock attached to form of
Class A Preferred Stock Certificate attached hereto as EXHIBIT A. As of the date
hereof, (i) except for this Agreement, the Put Agreement and as set forth in
Part A of SCHEDULE I hereto, there are no outstanding Equity Rights with respect
to State Auto Financial and (ii) except as set forth in Part B of SCHEDULE I
hereto, there are no outstanding obligations of State Auto Financial or any of
its Subsidiaries to repurchase, redeem, or otherwise acquire any shares of
capital stock of State Auto Financial nor are there any outstanding obligations
of State Auto Financial or any of its Subsidiaries to make payments to any
Person, such as "phantom stock" payments, where the amount thereof is calculated
with reference to the fair market value or equity value of State
Auto Financial or any of its Subsidiaries. All shares of Class A Preferred Stock purchased by the Company hereunder will, when so purchased, be duly and validly issued and outstanding, fully paid and nonassessable.
4.7 TRUE AND COMPLETE DISCLOSURE. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of State Auto Financial and State Auto Mutual to the Company, the Agent or any Lender in connection with the negotiation, preparation or delivery of this Agreement and the other Basic Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by State Auto Mutual and its Subsidiaries to the Company, the Agent and the Lenders in connection with this Agreement and the other Basic Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to State Auto Financial that could have a Material Adverse Effect that has not been disclosed herein, in the other Basic Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Agent for use in connection with the transactions contemplated hereby or thereby.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to State Auto Financial that:
5.1 INVESTMENT. The Company will purchase the Class A Preferred Stock only for its own account, for investment purposes and not with a view to resale or distribution, and not on behalf of any other person or entity.
5.2 NO AGREEMENT TO TRANSFER. Except as set forth in this Agreement, the Credit Agreement, the Put Agreement and the Company Pledge Agreement, the Company is not a party to any agreement, arrangement or understanding concerning the transfer of the Class A Preferred Stock or any interest therein to any other person or entity.
5.3 KNOWLEDGE AND EXPERIENCE. The Company has (a) adequate knowledge and experience in financial and business matters to be able to evaluate the merits and risks of its investment in State Auto Financial and the Class A Preferred Stock under this Agreement, or (b) the advice or representation of a person or entity having such knowledge and experience.
5.4 ACCESS TO INFORMATION. The Company has access to sufficient information regarding State Auto Financial, including, without limitation, State Auto Financial's filings under the Securities Exchange Act of 1934, as amended. The Company has requested information concerning State Auto Financial and has been given an opportunity to ask questions and receive answers concerning State Auto Financial and the terms and conditions of this
Agreement in order to evaluate the merits and risks of its investment in State Auto Financial and the Class A Preferred Stock under this Agreement.
5.5 RISK. The Company is able to bear the economic risk of its investment in State Auto Financial and the Class A Preferred Stock under this Agreement and to hold the Class A Preferred Stock for purposes of investment.
5.6 RESTRICTIONS ON TRANSFER.
(a) The Class A Preferred Stock which the Company will acquire hereunder (i) will not be registered by reason of an exemption from registration under Section 3(b) or 4(2) of the Securities Act of 1933, as amended (the "SECURITIES ACT"), or Regulation D promulgated thereunder and (ii) is not publicly traded, no market exists for the Class A Preferred Stock and the Company must hold the Class A Preferred Stock indefinitely unless a subsequent transfer or other disposition is registered under the Securities Act or is exempt from registration at the time of such transfer or other disposition.
(b) In the absence of an effective registration with respect to any proposed transfer of the Class A Preferred Stock (other than any transfer thereof as contemplated by the Company Pledge Agreement or the Put Agreement), State Auto Financial may require, as a condition to such transfer, a legal opinion by counsel of its choice, in form and substance as it may determine, or other documentation satisfactory to its Board of Directors, that an exemption from registration is available for the proposed transfer, and a restrictive legend to that effect will be set forth on the stock certificates representing the Class A Preferred Stock.
ARTICLE VI
COVENANTS
6.1 TRANSFER. Except as contemplated by the Company Pledge Agreement and the Put Agreement, the Company shall not sell, offer for sale or otherwise transfer or dispose of the Class A Preferred Stock or any interest therein, unless pursuant to a registration or exemption from registration under the Securities Act and all applicable state securities laws then in effect.
6.2 REDEMPTION. State Auto Financial shall redeem the Class A Preferred Stock at the times, in the amounts, at the prices and on such other terms and conditions as are described in the stock certificates evidencing such Class A Preferred Stock.
6.3 USE OF PROCEEDS. State Auto Financial shall use the proceeds of the sale of Class A Preferred Stock hereunder solely for the purpose of contributing such proceeds to State Auto P&C for it to use to pay direct and assumed catastrophic loss claims and/or loss adjustment expenses resulting from the catastrophic event to which such sale relates.
ARTICLE VII
REGISTRATION RIGHTS
7.1 DEMAND REGISTRATION.
(a) DEMAND REGISTRATION. At any time after the occurrence of a
Put Dishonor, upon the written request of the holders of a majority of the
Registrable Securities requesting that State Auto Financial effect the
registration under the Securities Act of all or part of such holders'
Registrable Securities and specifying the number of Registrable Securities to be
registered and the intended method of disposition thereof (a "REGISTRATION
REQUEST"), State Auto Financial will promptly, and in no event more than ten
(10) Business Days after receipt of such Registration Request, give written
notice (a "NOTICE OF DEMAND REGISTRATION") of such request to all other holders
of Registrable Securities, and thereupon will use its best efforts to effect the
registration under the Securities Act of:
(i) the Registrable Securities which State Auto Financial has been so requested to register by such holders of a majority of the Registrable Securities; and
(ii) all other Registrable Securities the holders of which have made written requests to State Auto Financial for registration thereof within 20 days after the giving of the Notice of Demand Registration (which requests shall specify the intended method of disposition thereof),
all to the extent requisite to permit the disposition (in accordance with the
intended methods thereof) of the Registrable Securities so to be registered. If
requested by the holders of a majority of the Registrable Securities requested
to be included in any Demand Registration, the method of disposition of all
Registrable Securities included in such registration shall be an underwritten
offering effected in accordance with SECTION 7.4(a) hereof. Subject to paragraph
(e) of this SECTION 7.1, State Auto Financial may include in such registration
other securities for sale for its own account or for the account of any other
Person. If any security holders of State Auto Financial (other than the holders
of Registrable Securities in such capacity) register securities of State Auto
Financial in a Demand Registration in accordance with this SECTION 7.1, such
holders shall pay the fees and expenses of their counsel and their pro rata
share, on the basis of the respective amounts of the securities included in such
registration on behalf of each such holder, of the Registration Expenses if the
Registration Expenses for such registration are not paid by State Auto Financial
for any reason.
(b) LIMITATIONS ON DEMAND REGISTRATIONS. Notwithstanding anything herein to the contrary, State Auto Financial shall not be required to honor a request for a Demand Registration if:
(i) a Put Dishonor shall not have occurred;
(ii) in the case of a Long-Form Registration, State Auto Financial has previously effected one Effective Long-Form Registration;
(iii) in the case of a Short-Form Registration, State Auto Financial has previously effected one Effective Short-Form Registration; or
(iv) such request is received by State Auto Financial less than 90 days following the effective date of any previous registration statement filed in connection with a Demand Registration, regardless of whether any holder of Registrable Securities exercised its rights under this Agreement with respect to such registration.
(c) REGISTRATION STATEMENT FORM. Demand Registrations shall be on such appropriate registration form promulgated by the Commission as shall be selected by State Auto Financial, and shall be reasonably acceptable to the holders of a majority of the Registrable Securities to which such registration relates, and shall permit the disposition of such Registrable Securities in accordance with the intended method or methods specified in their request for such registration; PROVIDED that such registration form is available under the terms of this Agreement. Notwithstanding the foregoing, if State Auto Financial selects a Form S-3 and the use of such form is available under the terms of this Agreement and is permitted by law, the holders of a majority of the Registrable Securities to which such registration relates may notify State Auto Financial in writing that, in the judgment of such holders (or, if applicable, the Managing Underwriter), the inclusion of some or all of the information required in a more detailed form specified in such notice is of material importance to the success of the Public Offering of such Registrable Securities, in which case State Auto Financial shall supplement or amend the Form S-3 to include such information.
(d) REGISTRATION EXPENSES. State Auto Financial will pay all Registration Expenses incurred in connection with any Demand Registration.
(e) PRIORITY IN CUTBACK REGISTRATIONS. If a Demand Registration becomes a Cutback Registration, State Auto Financial will include in any such registration to the extent of the number which the Managing Underwriter advises State Auto Financial can be sold in such offering (i) FIRST, Registrable Securities requested to be included in such registration by the Requesting Holders, pro rata on the basis of the number of Registrable Securities requested to be included by such holders and (ii) SECOND, other securities of State Auto Financial proposed to be included in such registration, allocated among the holders thereof in accordance with the priorities then existing among State Auto Financial and the holders of such other securities; and any securities so excluded shall be withdrawn from and shall not be included in such Demand Registration.
7.2 PIGGYBACK REGISTRATIONS.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If, at any time after the occurrence of a Put Dishonor, State Auto Financial at any time proposes after any shares of Class A Preferred Stock have been purchased hereunder to effect a Piggyback Registration, it will each such time give prompt written notice (a "NOTICE OF PIGGYBACK REGISTRATION"), at least 30 days prior to the anticipated filing date, to all holders of Registrable Securities of its intention to do so and of such holders' rights under this SECTION 7.2, which Notice of Piggyback Registration shall include a description of the intended method of disposition of such securities. Upon the written request of any such holder made within 15 days after receipt of a Notice of
Piggyback Registration (which request shall specify the Registrable Securities
intended to be disposed of by such holder and the intended method of disposition
thereof), State Auto Financial will use its best efforts to include in the
registration statement relating to such Piggyback Registration all Registrable
Securities which State Auto Financial has been so requested to register.
Notwithstanding the foregoing, if, at any time after giving a Notice of
Piggyback Registration and prior to the effective date of the registration
statement filed in connection with such registration, State Auto Financial shall
determine for any reason not to register or to delay registration of such
securities, State Auto Financial may, at its election, give written notice of
such determination to each holder of Registrable Securities and, thereupon, (i)
in the case of a determination not to register, shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), without prejudice, however, to the rights of any
Requesting Holder entitled to do so to request that such registration be
effected as a Demand Registration under SECTION 7.1 hereof, and (ii) in the case
of a determination to delay registering, shall be permitted to delay registering
any Registrable Securities for the same period as the delay in registering such
other securities. No registration effected under this SECTION 7.2 shall relieve
State Auto Financial of its obligations to effect a Demand Registration under
SECTION 7.1 hereof.
(b) REGISTRATION EXPENSES. State Auto Financial will pay all Registration Expenses incurred in connection with each Piggyback Registration.
(c) PRIORITY IN CUTBACK REGISTRATIONS. If a Piggyback Registration becomes a Cutback Registration, State Auto Financial will include in such registration to the extent of the amount of the securities which the Managing Underwriter advises State Auto Financial can be sold in such offering:
(i) if such registration as initially proposed by State Auto Financial was solely a primary registration of its securities, (x) FIRST, the securities proposed by State Auto Financial to be sold for its own account, and (y) SECOND any Registrable Securities requested to be included in such registration by Requesting Holders, PRO RATA on the basis of the number of Registrable Securities requested to be included by such holders, and (z) THIRD, any other securities of State Auto Financial proposed to be included in such registration, allocated among the holders thereof in accordance with the priorities then existing among State Auto Financial and such holders; and
(ii) if such registration as initially proposed by State Auto Financial was in whole or in part requested by holders of securities of State Auto Financial, other than holders of Registrable Securities in their capacities as such, pursuant to demand registration rights, (x) FIRST, such securities held by the holders initiating such registration and, if applicable, any securities proposed by State Auto Financial to be sold for its own account, allocated in accordance with the priorities then existing among State Auto Financial and such holders, and (y) SECOND any Registrable Securities requested to be included in such registration by Requesting Holders, PRO RATA on the basis of the number of Registrable Securities requested to be included by such holders, and (z) THIRD, any other securities of State Auto Financial proposed to be included in such registration, allocated among the holders thereof in accordance with the priorities then existing among State Auto Financial and the holders of such other securities;
and any securities so excluded shall be withdrawn from and shall not be included in such Piggyback Registration.
7.3 REGISTRATION PROCEDURES. If and whenever State Auto Financial is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act pursuant to SECTION 7.1 or 7.2 hereof, State Auto Financial will use its best efforts to effect the registration and sale of such Registrable Securities in accordance with the intended methods of disposition thereof specified by the Requesting Holders. Without limiting the foregoing, State Auto Financial in each such case will, as expeditiously as possible:
(a) prepare and file with the Commission the requisite registration statement to effect such registration and use its best efforts to cause such registration statement to become effective as soon as practicable, PROVIDED that as far in advance as practical before filing such registration statement or any amendment or supplement thereto, State Auto Financial will furnish to the Requesting Holders copies of reasonably complete drafts of all such documents proposed to be filed (including exhibits), and any such holder shall have the opportunity to object to any information pertaining solely to such holder that is contained therein and State Auto Financial will make the corrections reasonably requested by such holder with respect to such information prior to filing any such registration statement or amendment;
(b) prepare and file with the Commission such amendments and supplements to such registration statement and any prospectus used in connection therewith as may be necessary to maintain the effectiveness of such registration statement and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement, in accordance with the intended methods of disposition thereof, until the earlier of (i) such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (ii) 180 days after such registration statement becomes effective;
(c) promptly notify each Requesting Holder and the underwriter or underwriters, if any
(i) when such registration statement or any prospectus used in connection therewith, or any amendment or supplement thereto, has been filed and, with respect to such registration statement or any post-effective amendment thereto, when the same has become effective;
(ii) of any written request by the Commission for amendments or supplements to such registration statement or prospectus;
(iii) of the notification to State Auto Financial by the Commission of its initiation of any proceeding with respect to the issuance by the Commission of, or of the issuance by the Commission of, any stop order suspending the effectiveness of such registration statement (and State Auto Financial shall promptly attempt to have such order withdrawn); and
(iv) of the receipt by State Auto Financial of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the applicable securities or blue sky laws of any jurisdiction;
(d) furnish to each seller of Registrable Securities covered by such registration statement such number of conformed copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits and documents incorporated by reference), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 promulgated under the Securities Act relating to such holder's Registrable Securities, and such other documents, as such seller may reasonably request to facilitate the disposition of its Registrable Securities;
(e) use its best efforts to register or qualify all Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as each holder thereof shall reasonably request, to keep such registration or qualification in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such holder, except that State Auto Financial shall not for any such purpose be required (i) to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this paragraph (e) be obligated to be so qualified, (ii) to subject itself to taxation in any such jurisdiction or (iii) to consent to general service of process in any jurisdiction;
(f) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable each holder thereof to consummate the disposition of such Registrable Securities;
(g) furnish to each Requesting Holder a signed counterpart addressed to such holder (and the underwriters, if any), of
(i) an opinion of counsel for State Auto Financial, dated the effective date of such registration statement (or, if such registration includes an underwritten Public Offering, dated the date of any closing under the underwriting agreement), reasonably satisfactory in form and substance to such holder, and
(ii) a "comfort" letter, dated the effective date of such registration statement (and, if such registration includes an underwritten Public Offering, dated the date of any closing under the underwriting agreement), signed by the independent public accountants who have certified State Auto Financial's financial statements included in such registration statement,
in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten
Public Offerings of securities and, in the case of the accountants' letter, such other financial matters, as such holder (or the underwriters, if any) may reasonably request;
(h) notify each holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which any prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and at the request of any such holder promptly prepare and furnish to such holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(i) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
securityholders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve (12) months, but not more than eighteen
(18) months, beginning with the first full calendar month after the effective
date of such registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 promulgated
thereunder;
(j) make available for inspection by any Requesting Holder, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter (collectively, the "INSPECTORS"), all financial and other records, pertinent corporate documents and properties of State Auto Financial (collectively, the "RECORDS") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause State Auto Financial's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration statement, and permit the Inspectors to participate in the preparation of such registration statement and any prospectus contained therein and any amendment or supplement thereto. Records which State Auto Financial determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in the registration statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) the information in such Records has been made generally available to the public. The seller of Registrable Securities agrees by acquisition of such Registrable Securities that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to State Auto Financial and allow State Auto Financial, at State Auto Financial's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential;
(k) provide a transfer agent and registrar for all Registrable Securities covered by such registration statement not later than the effective date of such registration statement; and
(l) use its best efforts to cause all Registrable Securities covered by such registration statement to be listed, upon official notice of issuance, on any securities exchange on which any of the securities of the same class as the Registrable Securities are then listed.
State Auto Financial may require each holder of Registrable Securities as to which any registration is being effected to, and each such holder, as a condition to including Registrable Securities in such registration, shall, furnish State Auto Financial with such information and affidavits regarding such holder and the distribution of such securities as State Auto Financial may from time to time reasonably request in writing in connection with such registration.
Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that upon receipt of any notice from State Auto
Financial of the happening of any event of the kind described in paragraph (h)
of this SECTION 7.3, such holder will forthwith discontinue such holder's
disposition of Registrable Securities pursuant to the registration statement
relating to such Registrable Securities until such holder's receipt of the
copies of the supplemented or amended prospectus contemplated by such paragraph
(h) and, if so directed by State Auto Financial, will deliver to State Auto
Financial (at State Auto Financial's expense) all copies, other than permanent
file copies, then in such holder's possession of the prospectus relating to such
Registrable Securities current at the time of receipt of such notice. In the
event State Auto Financial shall give any such notice, the period referred to in
paragraph (b) of this SECTION 7.3 shall be extended by a number of days equal to
the number of days during the period from and including the giving of notice
pursuant to paragraph (h) of this SECTION 7.3 and to and including the date when
each holder of any Registrable Securities covered by such registration statement
shall receive the copies of the supplemented or amended prospectus contemplated
by such paragraph (h).
7.4 UNDERWRITTEN OFFERINGS.
(a) UNDERWRITTEN DEMAND OFFERINGS. In the case of any underwritten Public Offering being effected pursuant to a Demand Registration, the Managing Underwriter and any other underwriter or underwriters with respect to such offering shall be selected, after consultation with State Auto Financial, by the holders of a majority of the Registrable Securities to be included in such underwritten offering with the consent of State Auto Financial, which consent shall not be unreasonably withheld. State Auto Financial shall enter into an underwriting agreement in customary form with such underwriter or underwriters, which shall include, among other provisions, indemnities to the effect and to the extent provided in SECTION 7.6 hereof and shall take all such other actions as are reasonably requested by the Managing Underwriter in order to expedite or facilitate the registration and disposition of the Registrable Securities. The holders of Registrable Securities to be distributed by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, State Auto Financial to and for the benefit of such underwriters also be made to and for their benefit and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement also be conditions precedent to their obligations. No holder of Registrable Securities shall be required to make any representations or warranties to or agreements with State Auto Financial or the underwriters other than representations, warranties
or agreements regarding such holder and its ownership of the securities being registered on its behalf and such holder's intended method of distribution and any other representation required by law. No Requesting Holder may participate in such underwritten offering unless such holder agrees to sell its Registrable Securities on the basis provided in such underwriting agreement and completes and executes all questionnaires, powers of attorney, indemnities and other documents reasonably required under the terms of such underwriting agreement. If any Requesting Holder disapproves of the terms of an underwriting, such holder may elect to withdraw therefrom and from such registration by notice to State Auto Financial and the Managing Underwriter, and each of the remaining Requesting Holders shall be entitled to increase the number of Registrable Securities being registered to the extent of the Registrable Securities so withdrawn in the proportion which the number of Registrable Securities being registered by such remaining Requesting Holder bears to the total number of Registrable Securities being registered by all such remaining Requesting Holders.
(b) UNDERWRITTEN PIGGYBACK OFFERINGS. If State Auto Financial at any time proposes to register any of its securities in a Piggyback Registration and such securities are to be distributed by or through one or more underwriters, State Auto Financial will, subject to the provisions of SECTION 7.2(c) hereof, use its best efforts, if requested by any holder of Registrable Securities, to arrange for such underwriters to include the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters, and such holders shall be obligated to sell their Registrable Securities in such Piggyback Registration through such underwriters on the same terms and conditions as apply to the other Company securities to be sold by such underwriters in connection with such Piggyback Registration. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between State Auto Financial and such underwriter or underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, State Auto Financial to and for the benefit of such underwriters also be made to and for their benefit and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement also be conditions precedent to their obligations. No holder of Registrable Securities shall be required to make any representations or warranties to or agreements with State Auto Financial or the underwriters other than representations, warranties or agreements regarding such holder and its ownership of the securities being registered on its behalf and such holder's intended method of distribution and any other representation required by law. No Requesting Holder may participate in such underwritten offering unless such holder agrees to sell its Registrable Securities on the basis provided in such underwriting agreement and completes and executes all questionnaires, powers of attorney, indemnities and other documents reasonably required under the terms of such underwriting agreement. If any Requesting Holder disapproves of the terms of an underwriting, such holder may elect to withdraw therefrom and from such registration by notice to State Auto Financial and the Managing Underwriter, and each of the remaining Requesting Holders shall be entitled to increase the number of Registrable Securities being registered to the extent of the Registrable Securities so withdrawn in the proportion which the number of Registrable Securities being registered by such remaining Requesting Holder bears to the total number of Registrable Securities being registered by all such remaining Requesting Holders.
7.5 HOLDBACK AGREEMENTS BY STATE AUTO FINANCIAL AND OTHER SECURITYHOLDERS. Unless the Managing Underwriter otherwise agrees, State Auto Financial and each holder of
Registrable Securities agrees not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the 14 days prior to and the 180 days after the effective date of the registration statement filed in connection with an underwritten offering made pursuant to a Demand Registration (or for such shorter period of time as is sufficient and appropriate, in the opinion of the Managing Underwriter, in order to complete the sale and distribution of the securities included in such registration), except as part of such underwritten registration and except pursuant to registrations on Form S-4 or Form S-8 promulgated by the Commission or any successor or similar forms thereto. State Auto Financial also agrees, unless the Managing Underwriter otherwise agrees, to cause each holder of its equity securities which is a party to a registration rights agreement with State Auto Financial entered into on or after the date hereof, and each holder of its equity securities, or of any securities convertible into or exchangeable or exercisable for such securities, in each case purchased from State Auto Financial, at any time after the date of this Agreement (other than in a Public Offering), to agree, to the extent permitted by law, not to effect any such public sale or distribution of such securities (including a sale under Rule 144), during such period, except as part of such underwritten registration.
7.6 INDEMNIFICATION.
(a) INDEMNIFICATION BY STATE AUTO FINANCIAL. State Auto Financial shall, to the full extent permitted by law, indemnify and hold harmless each seller of Registrable Securities included in any registration statement filed in connection with a Demand Registration or a Piggyback Registration, its directors and officers, and each other Person, if any, who controls any such seller within the meaning of the Securities Act, against any losses, claims, damages, expenses or liabilities, joint or several (together, "LOSSES"), to which such seller or any such director or officer or controlling Person may become subject under the Securities Act or otherwise, insofar as such Losses (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, and State Auto Financial will reimburse such seller and each such director, officer and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such Loss (or action or proceeding in respect thereof); PROVIDED that State Auto Financial shall not be liable in any such case to the extent that any such Loss (or action or proceeding in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to State Auto Financial through an instrument duly executed by such seller specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer or controlling Person, and shall survive the transfer of such securities by such seller. State Auto Financial shall also indemnify each other Person who participates (including as an underwriter) in the offering or sale of Registrable Securities, their officers and directors and each other Person, if any, who controls
any such participating Person within the meaning of the Securities Act to the same extent as provided above with respect to sellers of Registrable Securities.
(b) INDEMNIFICATION BY THE SELLERS. Each holder of Registrable
Securities which are included or are to be included in any registration
statement filed in connection with a Demand Registration or a Piggyback
Registration, as a condition to including Registrable Securities in such
registration statement, shall, to the full extent permitted by law, indemnify
and hold harmless State Auto Financial, its directors and officers, and each
other Person, if any, who controls State Auto Financial within the meaning of
the Securities Act, against any Losses to which State Auto Financial or any such
director or officer or controlling Person may become subject under the
Securities Act or otherwise, insofar as such Losses (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein (in the case of a prospectus, in the light of the circumstances under
which they were made) not misleading, if such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to State Auto Financial through an
instrument duly executed by such seller specifically stating that it is for use
in the preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement; PROVIDED however, that
the obligation to provide indemnification pursuant to this SECTION 7.6(b) shall
be several, and not joint and several, among such Indemnifying Parties on the
basis of the number of Registrable Securities included in such registration
statement and the aggregate amount which may be recovered from any holder of
Registrable Securities pursuant to the indemnification provided for in this
SECTION 7.6(B) in connection with any registration and sale of Registrable
Securities shall be limited to the total proceeds received by such holder from
the sale of such Registrable Securities. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of State
Auto Financial or any such director, officer or controlling Person and shall
survive the transfer of such securities by such seller. Such holders shall also
indemnify each other Person who participates (including as an underwriter) in
the offering or sale of Registrable Securities, their officers and directors and
each other Person, if any, who controls any such participating Person within the
meaning of the Securities Act to the same extent as provided above with respect
to State Auto Financial.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
Indemnified Party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding paragraph (a) or (b) of this
SECTION 7.6, such Indemnified Party will, if a claim in respect thereof is to be
made against an Indemnifying Party pursuant to such paragraphs, give written
notice to the latter of the commencement of such action, PROVIDED that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under the preceding paragraphs
of this SECTION 7.6, except to the extent that the Indemnifying Party is
actually prejudiced by such failure to give notice. In case any such action is
brought against an Indemnified Party, the Indemnifying Party shall be entitled
to participate in and, unless, in the reasonable judgment of any Indemnified
Party, a conflict of interest between such Indemnified Party and any
Indemnifying Party exists with respect to such claim, to assume
the defense thereof, jointly with any other Indemnifying Party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such Indemnified Party, and after notice from the Indemnifying Party to such Indemnified Party of its election so to assume the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; PROVIDED that the Indemnified Party may participate in such defense at the Indemnified Party's expense; and PROVIDED further that the Indemnified Party or Indemnified Parties shall have the right to employ one counsel to represent it or them if, in the reasonable judgment of the Indemnified Party or Indemnified Parties, it is advisable for it or them to be represented by separate counsel by reason of having legal defenses which are different from or in addition to those available to the Indemnifying Party, and in that event the reasonable fees and expenses of such one counsel shall be paid by the Indemnifying Party. If the Indemnifying Party is not entitled to, or elects not to, assume the defense of a claim, it will not be obligated to pay the fees and expenses of more than one counsel for the Indemnified Parties with respect to such claim, unless in the reasonable judgment of any Indemnified Party a conflict of interest may exist between such Indemnified Party and any other Indemnified Parties with respect to such claim, in which event the Indemnifying Party shall be obligated to pay the fees and expenses of such additional counsel for the Indemnified Parties or counsels. No Indemnifying Party shall consent to entry of any judgment or enter into any settlement without the consent of the Indemnified Party. No Indemnifying Party shall be subject to any liability for any settlement made without its consent, which consent shall not be unreasonably withheld.
(d) CONTRIBUTION. If the indemnity and reimbursement obligation provided for in any paragraph of this SECTION 7.6 is unavailable or insufficient to hold harmless an Indemnified Party in respect of any Losses (or actions or proceedings in respect thereof) referred to therein, then the Indemnifying Party shall contribute to the amount paid or payable by the Indemnified Party as a result of such Losses (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other hand in connection with statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this paragraph were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this paragraph. The amount paid by an Indemnified Party as a result of the Losses referred to in the first sentence of this paragraph shall be deemed to include any legal and other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any Loss which is the subject of this paragraph.
No Indemnified Party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from the Indemnifying Party if the Indemnifying Party was not guilty of such fraudulent misrepresentation.
(e) OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding paragraphs of this SECTION 7.6 (with appropriate
modifications) shall be given by State Auto Financial and each seller of
Registrable Securities with respect to any required registration or other
qualification of securities under any federal or state law or regulation of any
governmental authority other than the Securities Act. The provisions of this
SECTION 7.6 shall be in addition to any other rights to indemnification or
contribution which an Indemnified Party may have pursuant to law, equity,
contract or otherwise.
(f) INDEMNIFICATION PAYMENTS. The indemnification required by this SECTION 7.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Losses are incurred.
7.7 COVENANTS RELATING TO RULE 144. The Company will file reports in compliance with the Exchange Act, will comply with all rules and regulations of the Commission applicable in connection with the use of Rule 144 and take such other actions and furnish such holder with such other information as such holder may request in order to avail itself of such rule or any other rule or regulation of the Commission allowing such holder to sell any Registrable Securities without registration and will, at its expense, forthwith upon the request of any holder of Registrable Securities, deliver to such holder a certificate, signed by State Auto Financial's principal financial officer, stating (a) State Auto Financial's name, address and telephone number (including area code), (b) State Auto Financial's Internal Revenue Service identification number, (c) State Auto Financial's Commission file number, (d) the number of shares of each class of Stock outstanding as shown by the most recent report or statement published by State Auto Financial, and (e) whether State Auto Financial has filed the reports required to be filed under the Exchange Act for a period of at least 90 days prior to the date of such certificate and in addition has filed the most recent annual report required to be filed thereunder.
7.8 REFERENCES TO HOLDERS OF REGISTRABLE SECURITIES. For purposes of this Agreement, references to holders of the Registrable Securities or holders of a majority of the Registrable Securities shall be deemed to refer to the pledgee of the Registered Securities under the Pledge and Security Agreement dated as of even date herewith between the Company and the Agent (as modified and supplemented and in effect from time to time, the "PLEDGE AGREEMENT") for so long as the Pledge Agreement shall remain in effect.
ARTICLE VIII
MISCELLANEOUS
8.1 WAIVER. No failure on the part of the either party hereto to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
8.2 NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party at its address or facsimile number set forth on the signature pages hereof at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower in accordance with the provisions of this SECTION 8.2. Each such notice, request or other communication shall be effective (a) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (b) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (c) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the address specified in this Section.
8.3 AMENDMENTS, ETC. Except as otherwise expressly provided in this Agreement and subject to the Credit Agreement and the Put Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by each of State Auto Financial and the Company (with the consent of the Agent and the Lenders as specified in the Credit Agreement), and any provision of this Agreement may be waived by the Company (with the consent of the Agent and the Lenders as specified in the Credit Agreement).
8.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, PROVIDED, that State Auto Financial may not assign any of its rights or obligations hereunder without the prior consent of the Company (with the consent of the Agent and all of the Lenders).
8.5 CAPTIONS. The captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement.
8.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart.
8.7 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement shall be governed by, and construed in accordance with, the law of the State of Illinois. Each of State Auto Financial and the Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Northern District of Illinois and of the Supreme Court of the State of Illinois sitting in Cook County (including its Appellate Division), and of any other appellate court in the State of Illinois, for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each of State Auto Financial and the Company hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.
8.8 WAIVER OF JURY TRIAL. EACH OF STATE AUTO FINANCIAL AND THE COMPANY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
8.9 FURTHER ASSURANCES. State Auto Financial agrees that, from time to time upon the written request of the Agent, State Auto Financial will execute and deliver such further documents and do such other acts and things as the Company, the Agent or any Lender (through the Agent) may reasonably request in order fully to effect the purposes of this Agreement.
8.10 PAYMENTS BY STATE AUTO FINANCIAL. The Company hereby instructs State Auto Financial to make any payments required to be made by State Auto Financial hereunder or otherwise in respect of the Class A Preferred Stock (including, without limitation, any amounts payable upon any redemption of the Class A Preferred Stock, any dividends payable on the Class A Preferred Stock and the commitment fee payable under SECTION 2.3 hereof) directly to the Agent, for the benefit of the Lenders. Each such payment shall be made by State Auto Financial in accordance with the provisions of the Credit Agreement.
8.11 PAYMENTS RECEIVED BY THE COMPANY UNDER BASIC DOCUMENTS. Any amounts paid to the Company under any of the Basic Documents (other than the proceeds of the Loans made under the Credit Agreement) shall be applied as directed by State Auto Financial.
8.12 THIRD-PARTY BENEFICIARIES. Each of State Auto Financial and the Company agrees that the Agent and each Lender shall be third-party beneficiaries of this Agreement and shall be entitled to enforce its respective rights hereunder as fully as if it were a party hereto.
8.13 SEVERABILITY. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction.
[signature page follows]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.
STATE AUTO FINANCIAL CORPORATION
By /s/ John R. Lowther -------------------------------------- Title: Senior Vice President |
Address for Notices:
State Auto Financial Corporation
518 East Broad Street
Columbus, Ohio 43215
Attention: John Lowther, Esq.
Telecopier No.: 614-464-4911
Telephone No.: 614-464-5052
SAF FUNDING CORPORATION
Address for Notices:
SAF Funding Corporation
2 Wall Street
New York, New York 10005
Attention: Richard Taiano
Telecopier No.: 212-346-9012
Telephone No.: 212-346-9006
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.
STATE AUTO FINANCIAL CORPORATION
By /s/ John R. Lowther -------------------------------------- Title: Senior Vice President |
Address for Notices:
State Auto Financial Corporation
518 East Broad Street
Columbus, Ohio 43215
Attention: John Lowther, Esq.
Telecopier No.: 614-464-4911
Telephone No.: 614-464-5052
SAF FUNDING CORPORATION
By /s/ Andy Yan -------------------------------------- Title: VICE PRESIDENT |
Address for Notices:
SAF Funding Corporation
2 Wall Street
New York, New York 10005
Attention: Andy Yan
Telecopier No.: 212-346-9012
Telephone No.: 212-346-9006
STANDBY PURCHASE AGREEMENT
SCHEDULE 1
PART A
EQUITY RIGHTS
State Auto Financial has in place several stock option plans, all of which are registered with the SEC. These plans are disclosed in the footnotes to the financial statements of State Auto Financial filed with the SEC form 10K for the year 2000. A copy of these Stock Option Plan footnotes is attached hereto as Exhibit A.
Agreemen/Standby Purchase Agreement 11-05-01
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) PREFERRED STOCK
State Auto Financial has authorized two classes of preferred stock. For
both classes, upon issuance, the Board of Directors has authority to fix and
determine the significant features of the shares issued, including, among other
things, the dividend rate, redemption price, redemption rights, conversion
features and liquidation price payable in the event of any liquidation,
dissolution, or winding up of the affairs of State Auto Financial. See note 6
(a) regarding State Auto Financial's obligation to issue redeemable preferred
shares to SPC in connection with its catastrophic reinsurance arrangements with
a financial institution.
The Class A preferred stock is not entitled to voting rights until, for any period, dividends are in arrears in the amount of six or more quarterly dividends.
(11) STOCK INCENTIVE PLANS
The Company follows Accounting Principles Board Option No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock incentive plans. For stock options granted to employees of Mutual in 1999, the Company also followed APB 25 and related interpretations, as the Company deemed such employees to be common law employees of the Company. Compensation cost charged against operations in 2000 and 1999 were $31,000 and $137,000, respectively, for those employee stock options granted where the exercise price was less than the market price of the underlying stock on the date of grant. Had compensation cost for the Company's plans been determined based on the fair values at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," SFAS No. 123), the Company's pro forma net earnings and net earnings per share information would have been as follows:
2000 1999 1998
---- ---- ----
(in thousands, except
per share figures)
Pro forma net earnings .......................... $45,784 41,414 35,700
Pro forma net earnings per common share
Basic ......................................... $ 1.19 1.02 0.85
Diluted ....................................... $ 1.17 1.00 0.83
|
The fair value of options granted in 2000, 1999 and 1998 were estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair values and related assumptions for options granted were as follows:
2000 1999 1998
---- ---- ----
Fair value ...................................... $4.66 $4.49 $6.10
Dividend yield .................................. .90% .90% .75%
Risk free interest rate ......................... 6.51% 5.77% 5.31%
Expected volatility factor ...................... .34 .32 .31
Expected life (years) ........................... 7.2 5.7 6.6
|
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The Company has stock option plans for certain directors and key employees. The nonemployee directors' plan provides each nonemployee director an option to purchase 1,500 shares of common stock following each annual meeting of the shareholders at an option price equal to the fair market value at the last business day prior to the annual meeting. The Company has reserved 300,000 shares of common stock under this plan. These options are exercisable at issuance to 10 years from date of grant. The key employee's plan provides that qualified stock options
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
may be granted at an option price not less than fair market value at date of grant and that nonqualified stock options may be granted at any price determined by the options committee of the Board of Directors. The Company has reserved 5,000,000 shares of common stock under this plan. These options are exercisable at such time or times as may be determined by a committee of the Company's Board of Directors. Normally, for certain employees these options are exercisable from 1 to 10 years from date of grant and 3 to 10 years for remaining employees.
The Company has an employee stock purchase plan with a dividend reinvestment feature, under which employees of the Company may choose at two different specified time intervals each year to have up to 6% of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of its beginning-of-interval or end-of- interval market price. The Company has reserved 2,400,000 shares of common stock under this plan. At December 31, 2000, 1,699,000 shares have been purchased under this plan.
The Company has a stock option incentive plan for certain designated independent insurance agencies that represent the Company and its affiliates. The Company has reserved 400,000 shares of common stock under this plan. The plan provides that the options become exercisable on the first day of the calendar year following the agency's achievement of specific production and profitability requirements over a period not greater than two calendar years from date of grant or a portion thereof in the first calendar year in which an agency commences participation under the plan. Options granted and vested under this plan have a 10-year term. The Company has accounted for the plan in its accompanying financial statements at fair value. The fair value of options granted was estimated at the reporting date or vesting date using the Black-Scholes option-pricing model. The weighted average fair value and related assumptions for 2000 and 1999, respectively, were as follows: fair value of $10.91 and $4.02; dividend yield of .90% for both years; expected volatility factor of .32 and .30; risk-free interest rate of 5.19% and 6.80%; and expected life of the option of 9.0 and 9.7 years. Expense of $493,000 and $105,000 associated with this plan was recognized in 2000 and 1999, respectively.
A summary of the Company's stock option activity and related information for these plans for the years ended December 31, 2000, 1999 and 1998, follows:
2000 1999 1998
------------------------ ------------------------ ------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
(numbers in thousands, except per share figures)
Outstanding, beginning
of year 2,546 $ 7.76 2,272 $ 6.76 2,019 $ 5.04
Granted 492 10.29 453 11.24 339 16.31
Exercised (129) 4.32 (165) 3.34 (86) 4.02
Canceled (57) 11.15 (14) 10.52 -- --
----- ----- -----
Outstanding, end of year 2,852 8.28 2,546 7.76 2,272 6.76
===== ===== =====
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A summary of information pertaining to options outstanding and exercisable as of December 31, 2000 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
------------------------- ------ ---------------- ---------------- ------ ----------------
(numbers in thousands, except per share figures)
Less than $5.00 734 2.0 $ 3.98 734 $ 3.98
$5.01 - $10.00 1,004 4.9 6.66 961 6.56
Greater than $10.01 1,114 8.5 12.58 537 13.89
----- -----
2,852 5.5 8.28 2,232 7.47
===== =====
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STANDBY PURCHASE AGREEMENT
SCHEDULE 1
PART B
During 2001, the common shares of STFC became a permitted investment in the State Auto 401(k) Capital Accumulation Plan (the "CAP") plan and in non-qualified deferred compensation plans for key employees and directors. The CAP and Employee Non-Qualified Deferred Compensation Plan were registered with the SEC. The Directors' Non-Qualified Deferred Compensation Plan was not registered with the SEC, since it is within the scope of an exception to registration. The participants in the non-qualified deferred compensation plans are unsecured creditors of State Auto and part of the obligations under those plans will reflect the value of STFC common shares to the extent any participants investments are so directed. Fidelity Investments is the Trustee of the CAP.
State Auto Financial has an active program of share repurchases ongoing as authorized by its board of directors.
Agreemen/Standby Purchase Agreement part B 11-05-01
EXHIBIT A to the Standby Purchase Agreement
[Form Class A Preferred Stock Certificate]
[Front of Class A Preferred Stock Certificate]
CERTIFICATE NUMBER SHARES ------ ------ _________________ ________________ |
STATE AUTO FINANCIAL CORPORATION
Incorporated under the laws
of the State of Ohio
CUSIP __________
SEE REVERSE SIDE FOR CERTAIN TRANSFER
RESTRICTIONS AND OTHER IMPORTANT INFORMATION
This is to Certify that ______________________________ is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF
CLASS A PREFERRED STOCK NO PAR VALUE OF
State Auto Financial Corporation
transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed.
WITNESS the seal of the Corporation and the signatures of its duly authorized officers.
______________________________ __________________________________
Secretary Chief Executive Officer
__________________________________
President
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[Reverse of Class A Preferred Stock Certificate]
STATE AUTO FINANCIAL CORPORATION
The Corporation will furnish upon request and without charge to each shareholder the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock series within a class of stock of the Corporation, as well as the qualifications, limitations and restrictions relating to those preferences and/or rights.
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED AND SOLD ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF SAID SECURITIES ACT OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
In addition, the shares evidenced by this certificate are subject to the restrictions on transfer set forth in the Terms and Conditions attached hereto.
TERMS AND CONDITIONS
of
CLASS A PREFERRED STOCK
of
STATE AUTO FINANCIAL CORPORATION
Section 1. GENERAL.
The certificate to which these Terms and Conditions are attached represents one or more shares of Class A Preferred Stock, no par value (the "CLASS A PREFERRED STOCK"), of State Auto Financial Corporation, an Ohio corporation (the "CORPORATION"). The stated value and liquidation preference per share of the Class A Preferred Stock shall be equal to $1,000,000 (the "REDEMPTION VALUE").
Section 2. DEFINITIONS.
Capitalized terms used herein shall have the meanings set forth in this
SECTION 2:
"APPLICABLE REDEMPTION DATES" means, with respect to any shares of Class A Preferred Stock, each of the 2nd, 4th, 6th, 8th, 10th, 12th, 14th, l6th, 18th and 20th Quarterly Dates immediately following the date of issuance of such shares of Class A Preferred Stock.
"BANK ONE" means Bank One, NA and any successor entity.
"BOARD OF DIRECTORS" means the Board of Directors of the Corporation.
"BUSINESS DAY" shall mean any day on which (a) commercial banks are not authorized or required to close in New York City or Chicago and (b) (prior to the Rate Conversion Date) dealings in Dollar deposits are carried out in the London interbank market.
"BY-LAWS" means the Code of Regulations of the Corporation, as amended or restated from time to time.
"CERTIFICATE OF INCORPORATION" means the Articles of Incorporation of the Corporation as amended or restated from time to time.
"CLASS A PREFERRED STOCK" has the meaning assigned to such term in
SECTION 1 hereof.
"CLASS B PREFERRED STOCK" means all Class B Preferred Stock, no par value, issued by the Corporation.
"COMMON STOCK" means all common stock, of any series and of any par value or no par value issued by the Corporation.
"CORPORATION" means State Auto Financial Corporation, an Ohio corporation.
"CREDIT AGREEMENT" means the Amended and Restated Credit Agreement dated as of November 16, 2001, between SAF Funding, the Lenders party thereto and Bank One, as Agent, as modified and supplemented and in effect from time to time, a copy of which is maintained on file in the Principal Corporate Office.
"DIVIDEND RATE" means, for each Eurodollar Rate Period relating to any Class A Preferred Stock, the Eurodollar Rate for such Eurodollar Rate Period PLUS (a) 1% per annum from the date of purchase of such Class A Preferred Stock to but not including the first anniversary of such purchase, (b) 1.25% per annum from the first anniversary of such purchase to but not including the third anniversary of such purchase, and (c) 1.50% per annum from and after the third anniversary of such purchase.
"DOLLARS" and "$" mean lawful money of the United States of America.
"EURODOLLAR BASE RATE" means, with respect to any shares of Class A Preferred Stock for the relevant Eurodollar Rate Period, the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Eurodollar Rate Period, PROVIDED that, (a) if Reuters Screen FRBD is not available to Bank One for any reason, the applicable Eurodollar Base Rate for the relevant Eurodollar Rate Period shall instead be the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars as reported by any other generally recognized financial information service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Rate Period, and having a maturity equal to such Eurodollar Rate Period, and (b) if no such British Bankers' Association Interest Settlement Rate is available to Bank One, the applicable Eurodollar Base Rate for the relevant Eurodollar Rate Period shall instead be the rate determined by Bank One to be the rate at which Bank One or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Rate Period, in the approximate amount of the aggregate Redemption Value of such shares of Class A Preferred Stock and having a maturity equal to such Interest Period.
"EURODOLLAR RATE" means, for any shares of Class A Preferred Stock for any Eurodollar Rate Period, the sum of (a) the quotient of (i) the Eurodollar Base Rate applicable to such Eurodollar Rate Period, divided by (ii) one minus the Reserve Requirement (expressed as a decimal) applicable to such Eurodollar Period.
"EURODOLLAR RATE PERIOD" means, with respect to any shares of Class A Preferred Stock, each period commencing on the date such Class A Preferred Stock is issued or (in the case
of a continuation of one Eurodollar Rate Period to the next) the last day of the
next preceding Eurodollar Rate Period for such Class A Preferred Stock and
ending on the numerically corresponding day in the third calendar month
thereafter, except that each Eurodollar Rate Period that commences on the last
Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (a) no Eurodollar Rate Period may commence before
and end after any Applicable Redemption Date unless, after giving effect
thereto, the aggregate Redemption Value of shares of Class A Preferred Stock
having Eurodollar Rate Periods that end after such Applicable Redemption Date
shall be equal to or less than the aggregate Redemption Value of shares of Class
A Preferred Stock scheduled to be outstanding after giving effect to the
redemption payments required to be made on such Applicable Redemption Date; and
(b) each Eurodollar Rate Period that would otherwise end on a day that is not a
Business Day shall end on the next succeeding Business Day (or, if such next
succeeding Business Day falls in the next succeeding calendar month, on the next
preceding Business Day); and (c) notwithstanding clause (a) above, no Eurodollar
Rate Period shall have a duration of less than three months.
"FEDERAL FUNDS EFFECTIVE RATE" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by Bank One from three Federal funds brokers of recognized standing selected by Bank One in its sole discretion.
"HOLDER" means SAF Funding or any subsequent holder of shares of Class A Preferred Stock.
"LOANS" means the Loans made to SAF Funding under the Credit Agreement.
"PERSON" means any person or entity of any nature whatsoever, specifically including an individual, a firm, a company, a corporation, a partnership, a trust, a limited liability company or other entity.
"PRINCIPAL CORPORATE OFFICE" means the principal corporate office of the Corporation located at 518 East Broad Street, Columbus, Ohio 43215.
"QUARTERLY DATES" means the last Business Day of March, June, September and December in each year, the first of which shall be the last Business Day of December, 2001.
"RATE CONVERSION DATE" shall mean the first date upon which the Holder is a person or entity other than any of SAF Funding, State Automobile Mutual Insurance Company, an Ohio mutual insurance company, any Lender party to the Credit Agreement or the Agent under the Credit Agreement.
"REDEMPTION VALUE" has the meaning assigned to such term in SECTION 1 hereof.
"RESERVE REQUIREMENT" has the meaning assigned to such term in the Credit Agreement.
"SAF FUNDING" means SAF Funding Corporation, a Delaware corporation.
"SECRETARY" means the Secretary of the Corporation.
"TRIGGER EVENT" means the occurrence of (a) any "Event of Default" described in the Credit Agreement (other than those events described in Section 7.5 or 7.6 thereof) and the acceleration of the Loans thereunder; or (b) an "Event of Default" described in Section 7.5 or 7.6 of the Credit Agreement.
Section 3. DIVIDENDS AND DISTRIBUTIONS.
(a) The Holder, in preference to the holders of shares of Class B Preferred Stock and the holders of shares of Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds of the Corporation legally available for the payment of dividends, dividends at the Dividend Rate on the Redemption Value of each share, payable in arrears in cash. Accrued dividends on the Class A Preferred Stock shall be payable on the last day of each Eurodollar Rate Period for the applicable Class A Preferred Stock and upon the redemption of any Class A Preferred Stock (but only on the aggregate Redemption Value of the Class A Preferred Stock so redeemed), PROVIDED that after the Rate Conversion Date, said dividends shall be payable quarterly on the last Business Day of March, June, September and December of each year.
(b) Dividends payable with respect to any share of Class A Preferred Stock shall begin to accrue at the Dividend Rate and be cumulative from the date of issuance of such Class A Preferred Stock (whether or not such dividends have been declared and whether or not there shall be net profits or net assets of the Corporation legally available for the payment of such dividends). Dividends paid on the shares of Class A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated PRO RATA on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of Holder entitled to receive payment of a dividend declared thereon, which record date shall be no more than thirty (30) days prior to the date fixed for the payment thereof.
(c) The Holder shall not be entitled to receive any dividends or other distributions except as provided in these Terms and Conditions.
(d) Whenever (i) any dividend payable pursuant to paragraph (a) of this
SECTION 3 has not been paid when due, thereafter and until all accrued and
unpaid dividends payable pursuant to paragraph (a) of this SECTION 3 have been
paid in full or (ii) the Corporation shall not have redeemed shares of Class A
Preferred Stock on the date such redemption is required pursuant to SECTION 5
hereof, thereafter and until such redemption payment shall have been made the
Corporation shall not (A) declare or pay dividends on any shares of Class B
Preferred Stock or Common Stock or make any other distributions on any shares of
Class B Preferred Stock or Common Stock, whether upon liquidation, redemption or
otherwise; or
(B) redeem or purchase or otherwise acquire for consideration any shares of Class B Preferred Stock or Common Stock, whether upon liquidation, redemption, or otherwise.
Section 4. VOTING RIGHTS.
Except as provided in the Certificate of Incorporation, and except for any voting rights provided by law, the Holder shall have no voting rights and its consent shall not be required for the taking of any corporate action.
Section 5. REDEMPTION.
(a) On each of the first four Applicable Redemption Dates for any shares of Class A Preferred Stock the Corporation shall redeem, without prior notice to the Holder, out of funds legally available therefor, 7.5% of the number of shares of Class A Preferred Stock issued on the date of issuance of such shares of Class A Preferred Stock, on each of the fifth through eighth Applicable Redemption Dates for any shares of Class A Preferred Stock the Corporation shall redeem, without prior notice to the Holder, out of funds legally available therefor, 10% of the number of shares of Class A Preferred Stock issued on the date of issuance of such shares of Class A Preferred Stock, and on the ninth Applicable Redemption Date for any shares of Class A Preferred Stock the Corporation shall redeem, without prior notice to the Holder, out of funds legally available therefor, 15% of the number of shares of Class A Preferred Stock issued on the date of issuance of such shares of Class A Preferred Stock, in each case by paying to the Holder the aggregate Redemption Value for such Class A Preferred Stock so redeemed plus any accrued but unpaid dividends thereon. On the tenth Applicable Redemption Date for such shares of Class A Preferred Stock the Corporation shall redeem, without prior notice to the Holder, out of funds legally available therefor, the balance of the number of shares of Class A Preferred Stock issued on such date of issuance, by paying to the Holder the aggregate Redemption Value for such Class A Preferred Stock so redeemed plus any accrued but unpaid dividends thereon.
(b) Upon the occurrence and during the continuance of any Trigger Event, the Holder may require the Corporation to redeem out of funds of the Corporation legally available therefor, all or any portion of the Class A Preferred Stock for a redemption price equal to the aggregate Redemption Value for the Class A Preferred Stock so redeemed plus any accrued but unpaid dividends thereon. Upon written notice delivered by the Holder to the President of the Corporation, such Redemption Value plus such dividends shall be immediately due and payable.
(c) The Corporation may, by delivering written notice that is received by the Holder not later than 10:00 a.m. New York time on the third Business Day prior to the date of the relevant redemption, redeem out of funds of the Corporation legally available therefor, all or any portion of the Class A Preferred Stock for a redemption price equal to the aggregate Redemption Value for the Class A Preferred Stock so redeemed plus any accrued but unpaid dividends thereon.
(d) From and after the date of a redemption, unless default shall be made by the Corporation in providing for the payment of the aggregate Redemption Value for the Class A Preferred Stock so redeemed plus accrued but unpaid dividends thereon, all dividends on the Class A Preferred Stock so redeemed shall cease to accrue, and from and after the date of
redemption so specified, unless default shall be made by the Corporation as aforesaid, all rights of the Holder with respect to such shares, except the right to receive such Redemption Value and dividends, shall cease and terminate.
Section 6. REACQUIRED SHARES.
Any shares of Class A Preferred Stock redeemed, purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof and shall be restored to the
status of authorized but unissued shares of Class A Preferred Stock of the
Corporation and may thereafter be issued. Upon any redemption pursuant to
SECTION 5 hereof of a fractional number of shares of Class A Preferred Stock,
the Corporation shall reissue to the Holder Class A Preferred Stock having an
aggregate Redemption Value equal to the $1,000,000 MULTIPLIED BY the sum of 1
MINUS such fractional number.
Section 7. LIQUIDATION, DISSOLUTION OR WINDING UP.
In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the Holder shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders an amount equal to the Redemption Value per share plus all accrued and unpaid dividends thereon to the date of such payment, and no distribution shall be made to the holders of shares of Common Stock, the Class B Preferred Stock or any other capital stock of the Corporation unless prior thereto the Holder shall have received an amount equal to the Redemption Value per share plus all accrued and unpaid dividends thereon, to the date of such payment.
Section 8. RANK.
The Class A Preferred Stock shall rank as to dividends and distribution of assets prior to the Class B Preferred Stock, the Common Stock and all other shares of stock of the Corporation.
Section 9. PAYMENTS.
Except to the extent otherwise provided herein, all payments to be made by the Corporation in respect of the Class A Preferred Stock shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Holder at an account designated by the Holder, not later than 12:00 p.m. New York time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). If the due date of any payment hereunder would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and dividends shall be payable on the aggregate Redemption Value of any shares of Class A Preferred Stock for the period of such extension.
Section 10. FISCAL YEAR.
The Corporation will not change the last day of its fiscal year from December 31 of each year.
EXHIBIT B to the Standby Purchase Agreement
[Form of Purchase Notice]
[Date]
SAF Funding Corporation
Re: Standby Purchase Agreement dated as of November 16, 2001, among State Auto Financial Corporation and SAF Funding Corporation (as modified and supplemented and in effect from time to time, the "STANDBY PURCHASE AGREEMENT").
Ladies and Gentlemen:
Reference is made to the Standby Purchase Agreement referred to above. Capitalized terms used but not defined herein shall have the respective meanings assigned to such terms in the Standby Purchase Agreement.
Pursuant to Section 2.2 of the Standby Purchase Agreement, State Auto Financial hereby notifies you that it intends to sell to you ________ shares of Class A Preferred Stock with an aggregate Redemption Value of $____________________(1) on _____________, 200__(2).
STATE AUTO FINANCIAL CORPORATION
By ___________________________________
Title: ____________________________
(1) Insert an amount at least equal to $10,000,000 or a larger multiple of $1,000,000.
(2) Insert a date falling on or after the fourth Business Day following the date of this Purchase Notice.
EXHIBIT C to the Standby Purchase Agreement
[Form of Opinion of General Counsel of State Auto Financial)
__________________,_____
SAF Funding Corporation (the "COMPANY")
To Bank One, NA,
as Agent (the "AGENT") under, and
each of the Lenders party to, the
Amended and Restated Credit Agreement dated
as of November 16, 2001, among the
Company, the Agent and such Lenders
Ladies and Gentlemen:
I am the general counsel of State Auto Financial Corporation ("STATE AUTO FINANCIAL") and have acted as counsel to State Auto Financial in connection with the Amended and Restated Standby Purchase Agreement dated as of November 16, 2001 (the "STANDBY PURCHASE AGREEMENT") between State Auto Financial and the Company, pursuant to which the Company has agreed to purchase, from time to time, a certain number of shares of State Auto Financial's Class A Redeemable Preferred Stock, no par value per share (the "CLASS A PREFERRED Stock"). This opinion letter is delivered to you pursuant to Section 3(b) of the Standby Purchase Agreement in connection with the proposed issuance and sale by State Auto Financial, and the purchase by the Company, on the date hereof, of ____ shares of the Class A Preferred Stock (the "PURCHASED STOCK").
In rendering the opinions expressed below, I have examined the following agreements, instruments and other documents:
(a) the Standby Purchase Agreement;
(b) certificates evidencing the Purchased Stock (the "PURCHASED STOCK CERTIFICATES"); and
(c) such records of State Auto Financial and such other documents as I have deemed necessary as a basis for the opinions expressed below.
In my examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with authentic original documents of all documents submitted to me as copies. When relevant facts were not independently established, I have relied upon certificates of governmental officials and appropriate representatives of State Auto Financial and upon representations made in or pursuant to the Standby Purchase Agreement.
Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as I have deemed necessary as a basis for the opinions expressed below, I am of the opinion that:
1. State Auto Financial is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio.
2. State Auto Financial has all requisite corporate power and authority to issue and sell the Purchased Stock and execute and deliver the Purchased Stock Certificates.
3. The issuance and sale of the Purchased Stock to the Company and execution and delivery by State Auto Financial of the Purchased Stock Certificates have been duly authorized by all necessary corporate action on the part of State Auto Financial.
4. The Purchased Stock Certificates have been duly executed and delivered by State Auto Financial.
5. No authorization, approval or consent of, and no filing or registration with, any governmental or regulatory authority or agency of the United States of America or the State of Ohio (other than any authorizations, approvals, consents, filings and registrations heretofore duly made or obtained and in full force and effect) is required on the part of State Auto Financial for issuance and sale of the Purchased Stock to the Company and the execution and delivery of the Purchased Stock Certificates.
6. The issuance and sale of the Purchased Stock to the Company
and the execution and delivery of the Purchased Stock do not and will
not (a) violate any provision of the Articles of Incorporation or Code
of Regulations of State Auto Financial, (b) violate any applicable law,
rule or regulation of the United States of America or the State of
Ohio, (c) violate any order, writ, injunction or decree of any court or
governmental authority or agency or any arbitral award applicable to
State Auto Financial of which I have knowledge (after due inquiry) or
(d) result in a breach of, constitute a default under, require any
consent under, or result in the acceleration or required prepayment of
any indebtedness pursuant to the terms of, any agreement or instrument
of which I have knowledge (after due inquiry) to which such State Auto
Financial or any of its Subsidiaries is a party or by which any of them
is bound or to which any of them is subject, or result in the creation
or imposition of any Lien upon any Property of State Auto Financial or
any of its Subsidiaries pursuant to the terms of any such agreement or
instrument.
7. The Purchased Shares are validly issued and outstanding, are fully paid and non-assessable and have, and entitle the holders thereof to, the relative rights and preferences set forth with respect to the Class A Preferred Stock in the Purchased Stock Certificates.
8. I have no knowledge (after due inquiry) of any legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or
agency, now pending or threatened against or affecting State Auto Financial or any of its Property that, if adversely determined, could have a Material Adverse Effect (excluding any Material Adverse Effect resulting from the catastrophic loss claims and/or loss adjustment expenses to which the issuance of the Purchased Stock relates).
The foregoing opinions are limited to matters involving the Federal laws of the United States of America and the law of the State of Ohio, and I do not express any opinion as to the laws of any other jurisdiction. The opinions contained in this letter are rendered only as of the date hereof and I undertake no obligation to update this letter or the opinions contained herein after the date hereof. The opinions contained in this letter only constitute my professional judgment as to the consequences of and the applicability of certain laws to the documents and agreements referred to and the parties thereto and should not be considered to be a guarantee of any particular result.
At the request of my clients, this opinion letter is provided to you by me in my capacity as counsel to State Auto Financial, and this opinion letter may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Basic Documents without, in each instance, my prior written consent.
Very truly yours,
John R. Lowther
Exhibit 21
List of Subsidiaries of
State Auto Financial Corporation
State Auto Property and Casualty Insurance Company, a South Carolina corporation
State Auto National Insurance Company, an Ohio corporation
Stateco Financial Services, Inc., an Ohio corporation
Strategic Insurance Software, Inc., an Ohio corporation
Milbank Insurance Company, a South Dakota corporation
Farmers Casualty Insurance Company, an Iowa corporation
Mid-Plains Insurance Company, an Iowa corporation
State Auto Insurance Company, an Ohio corporation
518 Property Management and Leasing, LLC, an Ohio limited liability company
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the 1991 Stock Option Plan, the 1991 Directors' Stock Option Plan, the 1991 Employee Stock Purchase and Dividend Reinvestment Plan, the State Auto Property & Casualty Insurance Company Amended and Restated Accumulation Plan, the 2000 Directors Stock Option Plan, the 2000 Stock Option Plan, and on Form S-3 pertaining to the Monthly Stock Purchase Plan for Independent agents of our report dated February 26, 2002, with respect to the consolidated financial statements and schedules of State Auto Financial Corporation and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2001.
/s/ Ernst & Young LLP
Columbus, Ohio
March 25, 2002
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Exhibit 23 (Continued)
STATE AUTO FINANCIAL CORPORATION AND SUBSIDIARIES
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Report of Independent Auditors
The Board of Directors and Stockholders
State Auto Financial Corporation
We have audited the accompanying consolidated balance sheets of State Auto Financial Corporation and subsidiaries as of December 31, 2001, and 2000, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the Index at Item 14(a)(2). These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of State Auto Financial Corporation and subsidiaries as of December 31, 2001, and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Ernst & Young, LLP
Columbus, Ohio
February 26, 2002
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Exhibit 24(E)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director or officer of State Auto Financial Corporation, an Ohio corporation (the "Company"), hereby constitutes and appoints Robert H. Moone, John R. Lowther, and Steven J. Johnston and each of them, my true and lawful attorney-in-fact and agents, with full power to act without the other, with full power of substitution and resubstitution, for me and in my name, place and stead, in my capacity as director or officer of the Company, to execute the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Company's fiscal year ended December 31, 2001, for each fiscal year thereafter and any amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full powers and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 19th day of March 2002.
Signature Position(s) with the Company
--------- ----------------------------
/s/ Ramon L. Humke Director
------------------ --------
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