| þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| o | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| Exhibit 10.58 | ||||||||
| Exhibit 10.59 | ||||||||
| Exhibit 10.60 | ||||||||
| Exhibit 10.61 | ||||||||
| Exhibit 10.62 | ||||||||
| Exhibit 10.63 | ||||||||
| Exhibit 10.64 | ||||||||
| Exhibit 10.65 | ||||||||
| Exhibit 10.66 | ||||||||
| Exhibit 31.01 | ||||||||
| Exhibit 31.02 | ||||||||
| Exhibit 32.01 | ||||||||
| Exhibit 32.02 | ||||||||
| ($ millions, except per share amount) | June 30 | December 31 | ||||||
| 2005 | 2004 | |||||||
| (unaudited) | (see note 1) | |||||||
|
Assets
|
||||||||
|
Fixed maturities, available for sale, at fair value
(amortized cost $1,587.8 and $1,451.9, respectively)
|
$ | 1,643.0 | 1,502.1 | |||||
|
Equity securities, available for sale, at fair value
(cost $190.3 and $163.4, respectively)
|
214.1 | 193.6 | ||||||
|
Other invested assets, at fair value (cost $6.0 and $3.2, respectively)
|
6.4 | 3.4 | ||||||
|
|
||||||||
|
Total investments
|
1,863.5 | 1,699.1 | ||||||
|
|
||||||||
|
Cash and cash equivalents
|
41.9 | 64.3 | ||||||
|
Deferred policy acquisition costs
|
107.6 | 97.5 | ||||||
|
Accrued investment income and other assets
|
48.5 | 49.9 | ||||||
|
Due from affiliate
|
50.5 | 10.5 | ||||||
|
Net prepaid pension expense
|
53.3 | 54.9 | ||||||
|
Reinsurance recoverable on losses and loss expenses payable
(affiliates $5.9 and $5.7, respectively)
|
14.4 | 25.9 | ||||||
|
Prepaid reinsurance premiums (affiliates $2.7 and $3.0, respectively)
|
8.4 | 8.3 | ||||||
|
Current federal income taxes
|
0.1 | — | ||||||
|
Property and equipment, at cost, net of accumulated depreciation of $4.8
|
13.2 | 13.3 | ||||||
|
|
||||||||
|
Total assets
|
$ | 2,201.4 | 2,023.7 | |||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Losses and loss expenses payable (affiliates $310.5 and $296.9, respectively)
|
$ | 707.8 | 681.8 | |||||
|
Unearned premiums (affiliates $135.1 and $112.9, respectively)
|
444.6 | 415.0 | ||||||
|
Notes payable (affiliates $61.0)
|
164.4 | 164.5 | ||||||
|
Postretirement benefit liabilities
|
84.6 | 80.1 | ||||||
|
Other liabilities
|
60.0 | 20.2 | ||||||
|
Current federal income taxes
|
— | 0.7 | ||||||
|
Deferred federal income taxes
|
— | 3.2 | ||||||
|
|
||||||||
|
Total liabilities
|
1,461.4 | 1,365.5 | ||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Class A Preferred stock (nonvoting), without par value.
Authorized 2.5 shares; none issued
|
— | — | ||||||
|
Class B Preferred stock, without par value. Authorized 2.5 shares; none issued
|
— | — | ||||||
|
Common stock, without par value. Authorized 100.0 shares;
45.0 and 44.7 shares issued, respectively, at stated value of $2.50 per share
|
112.5 | 111.8 | ||||||
|
Less 4.6 treasury shares, at cost
|
(56.5 | ) | (56.5 | ) | ||||
|
Additional paid-in capital
|
67.7 | 64.1 | ||||||
|
Accumulated other comprehensive income
|
52.3 | 53.1 | ||||||
|
Retained earnings
|
564.0 | 485.7 | ||||||
|
|
||||||||
|
Total stockholders’ equity
|
740.0 | 658.2 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,201.4 | 2,023.7 | |||||
|
|
||||||||
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions, except per share amounts)
Three months ended
June 30
(unaudited)
2005
2004
$
263.7
252.4
19.3
17.8
—
1.3
1.2
1.6
284.2
273.1
140.7
146.0
83.6
73.5
2.2
1.8
3.3
2.6
229.8
223.9
54.4
49.2
15.6
14.6
$
38.8
34.6
$
0.96
0.87
$
0.94
0.85
$
0.045
0.040
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions, except per share amounts)
Six months ended
June 30
(unaudited)
2005
2004
$
526.8
501.1
38.3
35.3
2.4
6.7
2.6
3.1
570.1
546.2
279.5
293.7
167.4
148.6
4.4
3.5
6.6
5.2
457.9
451.0
112.2
95.2
32.6
28.2
$
79.6
67.0
$
1.98
1.69
$
1.94
1.65
$
0.090
0.080
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
Six months ended
June 30
(unaudited)
2005
2004
$
79.6
67.0
4.8
4.7
(2.4
)
(6.7
)
(4.8
)
(8.6
)
1.2
1.9
1.6
0.7
4.4
3.3
11.5
(2.6
)
(23.5
)
(65.3
)
(9.3
)
11.4
5.6
14.3
(2.3
)
1.5
54.0
—
120.4
21.6
(327.6
)
(240.8
)
(38.3
)
(28.9
)
(2.8
)
(0.1
)
49.7
46.1
163.3
180.0
11.7
4.8
(0.2
)
(0.6
)
(144.2
)
(39.5
)
2.7
3.7
(1.3
)
(1.0
)
—
2.3
1.4
5.0
(22.4
)
(12.9
)
64.3
40.0
$
41.9
27.1
$
34.9
26.4
$
4.6
4.1
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions, except per share amounts)
Three months ended
Six months ended
June 30
June 30
2005
2004
2005
2004
$
38.8
34.6
$
79.6
67.0
40.3
39.8
40.2
39.7
0.7
1.0
0.7
1.0
41.0
40.8
40.9
40.7
$
0.96
0.87
$
1.98
1.69
$
0.94
0.85
$
1.94
1.65
(number of options in millions)
Three months ended
Six months ended
June 30
June 30
2005
2004
2005
2004
0.4
0.4
0.4
0.9
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Six months
($ millions, except per share amounts)
Three months ended
ended
Pro-Forma Fair Value Method
June 30
June 30
2005
2004
2005
2004
$
38.8
34.6
$
79.6
67.0
(0.9
)
(0.7
)
(1.7
)
(1.1
)
$
37.9
33.9
$
77.9
65.9
$
0.96
0.87
$
1.98
1.69
$
0.94
0.85
$
1.94
1.66
$
0.94
0.85
$
1.94
1.65
$
0.91
0.81
$
1.87
1.59
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Three and six
months ended
June 30
2005
2004
$
14.67
18.06
0.7
%
0.8
%
3.8
%
4.6
%
36.9
%
36.2
%
7.0
9.3
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
(number of options in millions)
Three months ended
Six months ended
June 30
June 30
2005
2004
2005
2004
Weighted
Weighted
Weighted
Weighted
Number
Average
Number
Average
Number
Average
Number
Average
of
Exercise
of
Exercise
of
Exercise
of
Exercise
Options
Price
Options
Price
Options
Price
Options
Price
2.5
$
17.11
2.5
$
13.22
2.6
$
16.48
2.6
$
12.84
0.3
26.45
0.4
30.84
0.3
26.41
0.4
30.33
(0.1
)
10.88
(0.2
)
9.62
(0.2
)
8.23
(0.3
)
9.41
—
—
—
—
—
17.45
—
—
2.7
$
18.59
2.7
$
16.15
2.7
$
18.59
2.7
$
16.15
(number of options in millions)
Options Outstanding
Options Exercisable
Weighted
Average
Weighted
Weighted
Remaining
Average
Average
Contractual
Exercise
Exercise
Range of Exercise Prices
Number
Life
Price
Number
Price
0.2
1.4
$
7.76
0.2
$
7.76
1.7
5.6
15.07
1.6
14.80
0.8
9.3
28.46
0.2
30.21
2.7
6.4
$
18.59
2.0
$
15.35
($ millions)
Three months ended
Six months ended
June 30
June 30
2005
2004
2005
2004
$
38.8
34.6
$
79.6
67.0
19.9
(37.2
)
(0.8
)
(27.2
)
$
58.7
(2.6
)
$
78.8
39.8
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
Three months ended
Six months ended
June 30
June 30
2005
2004
2005
2004
$
1.6
1.5
$
3.0
2.9
250.0
234.1
498.5
462.9
(4.1
)
(0.6
)
(8.0
)
(7.4
)
(171.3
)
(166.8
)
(340.4
)
(322.8
)
$
76.2
68.2
$
153.1
135.6
$
2.3
0.7
$
3.7
2.6
131.7
135.9
260.0
268.5
(1.4
)
0.9
(1.5
)
(3.9
)
(95.6
)
(93.7
)
(186.4
)
(182.0
)
$
37.0
43.8
$
75.8
85.2
($ millions)
Pension
Postretirement
Pension
Postretirement
Three months ended June 30
Six months ended June 30
2005
2004
2005
2004
2005
2004
2005
2004
$
2.0
2.0
$
1.1
0.9
$
4.0
4.0
$
2.2
1.8
2.8
2.6
1.6
1.3
5.6
5.2
3.2
2.6
(4.2
)
(4.2
)
(0.1
)
(0.1
)
(8.4
)
(8.4
)
(0.1
)
(0.2
)
0.1
0.1
0.1
0.1
0.2
0.2
0.2
0.2
(0.1
)
(0.2
)
—
—
(0.3
)
(0.4
)
—
—
0.3
0.1
0.2
—
0.6
0.2
0.4
—
$
0.9
0.4
$
2.9
2.2
$
1.7
0.8
$
5.9
4.4
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
Three months ended
Six months ended
June 30
June 30
2005
2004
2005
2004
$
267.8
249.9
$
533.9
495.4
14.7
20.1
30.4
40.5
0.7
0.7
1.4
1.4
0.7
0.9
1.4
1.8
$
283.9
271.6
$
567.1
539.1
$
0.1
—
$
0.1
0.1
1.8
1.6
3.6
3.3
0.4
0.5
0.8
0.9
$
2.3
2.1
$
4.5
4.3
($ millions)
Three months ended
Six months ended
June 30
June 30
2005
2004
2005
2004
$
53.6
44.8
$
109.0
83.8
2.1
2.7
3.3
3.7
2.3
2.1
4.5
4.2
(0.1
)
0.2
(0.3
)
0.7
57.9
49.8
116.5
92.4
(3.5
)
(1.9
)
(6.7
)
(3.9
)
—
1.3
2.4
6.7
$
54.4
49.2
$
112.2
95.2
$
2,126.8
1,833.8
124.7
137.4
6.7
4.6
15.3
15.7
$
2,273.5
1,991.5
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
$
35.3
24.0
(5.3
)
$
54.0
STFC Pooled Companies
Mutual Pooled Companies
State
Meridian
Auto
SA
Sub
SA
SA
Meridian
Citizens
Sub
Period
P&C
Milbank
Farmers
Ohio
Total
Mutual
Wisconsin
Florida
Security
Mutual
Total
59.0
%
17.0
3.0
1.0
80.0
18.3
1.0
0.7
N/A
N/A
20.0
%
59.0
%
17.0
3.0
1.0
80.0
19.5
0.0
0.0
0.0
0.5
20.0
%
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
Three months ended
Six months ended
June 30
June 30
GAAP Basis:
2005
2004
2005
2004
$
284.2
273.1
$
570.1
546.2
$
38.8
34.6
$
79.6
67.0
$
740.0
586.8
$
740.0
586.8
53.3
%
57.9
%
53.0
%
58.6
%
31.7
%
29.1
%
31.8
%
29.7
%
85.0
%
87.0
%
84.8
%
88.3
%
1.2
5.1
2.0
3.1
4.5
%
3.1
%
7.9
%
4.9
%
4.5
%
4.4
%
5.1
%
5.7
%
4.3
%
4.6
%
4.3
%
4.6
%
Twelve months ended June 30
Statutory Basis:
2005
2004
1.5
1.7
*
Defined below.
**
4.6% of the increase for the six months ended June 30, 2005 relates to the
unearned premium transferred to the Company in connection with the addition of the
Meridian Insurers to the Pooling Arrangement, effective January 1, 2005.
***
The Company uses the statutory net premiums written to surplus ratio as there is
no comparable GAAP measure. This ratio, also called the leverage ratio, measures a
company’s statutory surplus available to absorb losses.
($ millions)
Three months ended
Six months ended
June 30
June 30
2005
2004
2005
2004
$
53.6
44.8
$
109.0
83.8
2.1
2.7
3.3
3.7
2.3
2.1
4.5
4.2
(0.1
)
0.2
(0.3
)
0.7
$
57.9
49.8
$
116.5
92.4
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
Three Months Ended June 30, 2005
%
%
%
Standard
Ratio
Nonstandard
Ratio
Total
Ratio
$
263.2
$
11.0
$
274.2
250.0
13.7
263.7
131.7
52.7
9.0
66.0
140.7
53.3
80.6
32.2
3.0
21.6
83.6
31.7
$
37.7
84.9
$
1.7
87.6
$
39.4
85.0
16.1
0.9
17.0
($ millions)
Three Months Ended June 30, 2004
%
%
%
Standard
Ratio
Nonstandard
Ratio
Total
Ratio
$
247.1
$
15.3
$
262.4
233.4
19.0
252.4
133.1
57.0
12.9
68.3
146.0
57.9
70.0
30.0
3.5
18.7
73.5
29.1
$
30.3
87.0
$
2.6
87.0
$
32.9
87.0
14.9
1.0
15.9
($ millions)
Six Months Ended June 30, 2005
%
%
%
Standard
Ratio
Nonstandard
Ratio
Total
Ratio
$
530.0
(1)
$
26.2
$
556.2
(1)
498.5
28.3
526.8
259.8
52.1
19.7
69.7
279.5
53.0
161.4
32.4
6.0
21.1
167.4
31.8
$
77.3
84.5
$
2.6
90.8
$
79.9
84.8
32.0
1.9
33.9
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
Six Months Ended June 30, 2004
%
%
%
Standard
Ratio
Nonstandard
Ratio
Total
Ratio
$
478.5
$
36.8
$
515.3
463.0
38.1
501.1
265.7
57.4
28.0
73.2
293.7
58.6
141.6
30.6
7.0
18.3
148.6
29.7
$
55.7
88.0
$
3.1
91.5
$
58.8
88.3
29.4
2.0
31.4
(1)
Includes $23.9 million of unearned premiums transferred to the Company
in connection with the addition of the Meridian Insurers to the Pooling
Arrangement, effective January 1, 2005.
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
Three months ended June 30
Six months ended June 30
2005
2004
2005
2004
State
% of
State
% of
State
% of
State
% of
Auto
Total
Auto
Total
Auto
Total
Auto
Total
$
98.1
37.2
96.5
38.2
$
196.4
37.3
192.3
38.4
25.9
9.8
25.0
9.9
51.6
9.8
49.8
9.9
48.5
18.4
41.3
16.4
96.4
18.3
81.8
16.3
20.9
7.9
19.7
7.8
41.4
7.8
39.4
7.9
8.2
3.1
7.3
2.9
16.9
3.2
15.0
3.0
21.3
8.1
19.2
7.6
42.5
8.1
37.4
7.5
19.0
7.2
16.7
6.6
37.1
7.0
32.2
6.4
8.1
3.1
7.7
3.1
16.2
3.1
15.1
3.0
250.0
94.8
233.4
92.5
498.5
94.6
463.0
92.4
13.7
5.2
19.0
7.5
28.3
5.4
38.1
7.6
$
263.7
100.0
252.4
100.0
$
526.8
100.0
501.1
100.0
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Three months ended
Six months ended
June 30
June 30
Change
Change
2005
2004
inc (dec)
2005
2004
inc (dec)
52.7
%
57.0
(4.3
)
52.1
%
57.4
(5.3
)
66.0
%
68.3
(2.3
)
69.7
%
73.2
(3.5
)
53.3
%
57.9
(4.6
)
53.0
%
58.6
(5.6
)
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
June 30, 2005
December 31, 2004
$
1,643.0
88.2
%
1,502.1
88.4
214.1
11.5
%
193.6
11.4
6.4
0.3
%
3.4
0.2
$
1,863.5
100.0
%
1,699.1
100.0
Gross
Number
Gross
Cost or
unrealized
of
unrealized
Number
($ millions, except # of positions)
amortized
holding
gain
holding
of
Fair
Investment Category
cost
gains
positions
losses
loss positions
Value
$
266.5
$
5.4
65
$
(0.6
)
40
$
271.3
1,027.5
44.0
454
(0.8
)
40
1,070.7
23.4
1.9
15
—
1
25.3
264.7
6.4
44
(1.1
)
31
270.0
5.7
—
—
—
—
5.7
1,587.8
57.7
578
(2.5
)
112
1,643.0
57.1
8.2
22
(1.0
)
9
64.3
19.0
2.0
5
(0.6
)
6
20.4
15.1
0.8
2
(0.7
)
3
15.2
51.2
7.5
21
(0.9
)
6
57.8
47.9
9.5
23
(1.0
)
7
56.4
190.3
28.0
73
(4.2
)
31
214.1
6.0
0.4
4
—
—
6.4
$
1,784.1
$
86.1
655
$
(6.7
)
143
$
1,863.5
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
Amortized
Fair
Cost
Value
$
26.0
26.0
57.6
58.8
251.4
263.9
988.1
1,024.3
264.7
270.0
$
1,587.8
1,643.0
($ millions)
Three months ended
Six months ended
June 30, 2005
June 30, 2005
Realized
Fair Value
Realized
Fair Value
Gains/Losses
at Sale
Gains/Losses
at Sale
$
2.4
$
64.2
$
3.2
$
116.6
—
—
1.9
9.1
2.4
64.2
5.1
125.7
1.1
34.7
1.3
46.7
1.3
1.3
1.4
2.6
2.4
36.0
2.7
49.3
$
—
$
100.2
$
2.4
$
175.0
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
($ millions)
June 30,
December 31,
January 1,
Percent
2005
2004
2005
(a)
Change
(b)
$
194.7
184.9
193.2
0.8
%
32.1
35.6
35.6
(9.8
)
91.2
86.2
90.5
0.8
53.7
40.4
48.3
11.2
90.4
89.2
93.2
(3.0
)
86.3
81.6
88.6
(2.3
)
15.7
18.2
19.0
(17.4
)
124.6
115.7
118.6
5.1
4.7
4.1
4.2
11.9
$
693.4
655.9
691.2
0.3
%
(a)
December 31, 2004 reserve balances have been adjusted for comparison
purposes to reflect the loss and loss expense reserves assumed by the Company on
January 1, 2005 from the Pooling Arrangement amendment discussed above.
(b)
Calculated based on June 30, 2005 change from January 1, 2005.
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
•
The Company maintains loss reserves to cover its estimated ultimate unpaid
liability for losses and loss expenses with respect to reported and unreported claims
incurred as of the end of each accounting period. Reserves do not represent an exact
calculation of liability, but instead represent estimates, generally using actuarial
projection techniques at a given accounting date. The Company refines reserve estimates
in a regular ongoing process as historical loss experience develops and additional
claims are reported and settled. The Company records adjustments to reserves in the
results of operations for the periods in which the estimates are changed. Because
establishing reserves is an inherently uncertain process involving estimates, currently
established reserves may not be adequate. If the Company concludes that estimates are
incorrect and reserves are inadequate, the Company is obligated to increase its
reserves. An increase in reserves results in an increase in losses and a reduction in
the Company’s net income for the period in which the deficiency in reserves is
identified. Accordingly, an increase in reserves could have a material adverse effect
on the Company’s results of operations, liquidity, and financial condition.
•
The Company’s insurance operations expose it to claims arising out of
catastrophic events. The Company has experienced, and will in the future experience,
catastrophe losses that may cause substantial volatility in the Company’s financial
results for any fiscal quarter or year and could materially reduce the Company’s
profitability or harm the Company’s financial condition. Catastrophes can be caused by
various natural events, including hurricanes, hailstorms, windstorms, earthquakes,
explosions, severe winter weather, and fires, none of which are within the Company’s
control. The extent of losses from a catastrophe is a function of both the total amount
of insured exposure in the area affected by the event and the severity of the event.
The geographic distribution of the Company’s business subjects it to catastrophe
exposure from hailstorms and earthquakes in the Midwest as well as catastrophe exposure
from hurricanes in Florida and the Gulf Coast, southern coastal states, and Mid-Atlantic
regions. In those areas most exposed to natural catastrophes, the Company does have in
place very specific underwriting guidelines designed to not only provide a spread of
risk but also to control aggregate exposures. Catastrophe losses can vary widely and
could significantly exceed the Company’s recent historic results. The frequency and
severity of catastrophes are inherently unpredictable.
•
The Company uses reinsurance to help manage its exposure to insurance
risks. The availability and cost of reinsurance are subject to prevailing market
conditions, both in terms of price and available capacity, which can affect the
Company’s business volume and profitability. Although the reinsurer is liable to the
Company to the extent of the ceded reinsurance, the Company remains liable as the direct
insurer on all risks reinsured. As a result, ceded reinsurance arrangements do not
eliminate the Company’s obligation to pay claims. The Company is subject to credit risk
with respect to the Company’s ability to recover amounts due from
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
•
The Company’s current property reinsurance treaties exclude certified acts
of terrorism, as defined by TRIA. If TRIA expires, those treaties will exclude acts of
terrorism as defined within the treaties. Likewise, if TRIA expires, the Company will
pursue changes to its direct, commercial policies to exclude acts of terrorism as
defined within its policies. It is uncertain if TRIA will be extended in its current
form, extended with material revision, or allowed to expire as scheduled at the end of
2005. It is also uncertain how state regulators will react to filings excluding all
acts of terrorism from coverage. It is also uncertain how market pressures created by
how the Company’s competitors react to changes in TRIA will affect the Company.
•
Insurance companies are subject to financial strength ratings produced by
external rating agencies. Higher ratings generally indicate financial stability and a
strong ability to pay claims. Ratings are assigned by rating agencies to insurers based
upon factors that they believe are relevant to policyholders. Ratings are important to
maintaining public confidence in the Company and in its ability to market its products.
A downgrade in the Company’s financial strength ratings could, among other things,
negatively affect the Company’s ability to sell certain insurance products, the
Company’s relationships with agents, new sales, and the Company’s ability to compete.
•
The Company markets its insurance products through independent,
non-exclusive insurance agents, whereas some of the Company’s competitors sell their
insurance products through insurance agents who sell products exclusively for one
insurance company. If the Company is unsuccessful in attracting and retaining
productive agents to sell the Company’s insurance products, the Company’s sales and
results of operations could be adversely affected. The agents that market and sell the
Company’s products also sell the Company’s competitors’ products. These agents may
recommend the Company’s competitors’ products over the Company’s products or may stop
selling the Company’s products altogether. Additionally, the Company competes with the
Company’s competitors for productive agents, primarily on the basis of the Company’s
financial position, support services and compensation and product features.
•
State Auto Mutual and the Company have acquired other insurance companies,
and it is anticipated that State Auto 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 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,
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
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. The
Company competes with numerous insurance companies, many of which are substantially
larger and have considerably greater financial resources. 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.
•
The Company is subject to numerous other factors which affect 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
and unexpected challenges to the control of the Company by State Auto Mutual.
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Maximum
Number (or
Total Number of
Approximate
Shares
Dollar Value) of
Purchased as
Shares that May
Total Number
Part of Publicly
Yet Be
of Shares
Announced
Purchased
Purchased * (in
Average Price
Plans or
under the Plans
Period
whole numbers)
Paid Per Share
Programs
or Programs
—
—
—
—
—
—
—
—
1,358
$
29.04
—
—
1,358
$
29.04
—
—
*
All shares repurchased were acquired as a result of stock swap option exercises.
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
1.
The election of David J. D’Antoni, William J. Lhota and S. Elaine Roberts as Class II
directors, each to hold office until the 2008 annual meeting of shareholders and until a
successor is elected and qualified, with each director nominee receiving the votes indicated:
NUMBER OF VOTES
FOR
WITHHELD
37,153,684
1,157,534
37,169,227
1,141,991
37,197,772
1,113,445
2.
A proposal to approve the Amended and Restated Equity Incentive Compensation Plan.
OPPOSED
BROKER
FOR THE PROPOSAL
TO PROPOSAL
ABSTAIN
NON-VOTES
30,988,487
1,220,686
39,780
6,062,265
3.
A proposal to approve the Outside Directors Restricted Share Unit Plan.
OPPOSED
BROKER
FOR THE PROPOSAL
TO PROPOSAL
ABSTAIN
NON-VOTES
31,131,258
1,083,491
34,203
6,062,266
4.
A proposal to ratify the selection of Ernst & Young LLP as the Company’s independent public
accountants for 2005.
OPPOSED
FOR THE PROPOSAL
TO PROPOSAL
ABSTAIN
38,217,534
75,310
18,373
Table of Contents
(a majority-owned subsidiary of State Automobile Mutual Insurance Company)
Exhibit
No.
Description of Exhibits
Amended and Restated Executive Agreement between State Auto Financial
Corporation and Robert H. Moone dated as of May 11, 2005
First Amendment to Employment Agreement between State Auto Financial
Corporation and Robert H. Moone dated as of May 11, 2005
Amended and Restated Equity Incentive Compensation Plan of State Auto
Financial Corporation
Directors Restricted Share Unit Plan of State Auto Financial Corporation
Form of Non-Qualified Stock Option Agreement under the Amended and
Restated Equity Incentive Compensation Plan of State Auto Financial
Corporation
Form of Incentive Stock Option Agreement under the Amended and Restated
Equity Incentive Compensation Plan of State Auto Financial Corporation
Form of Restricted Share Unit Agreement for the Outside Directors
Restricted Share Unit Plan of State Auto Financial Corporation
Form of Designation of Beneficiary for the Outside Directors Restricted
Share Unit Plan of State Auto Financial Corporation
Fifth Amendment to 2000 Directors Stock Option Plan of State Auto
Financial Corporation
CEO certification required by Section 302 of Sarbanes Oxley Act of 2002
CFO certification required by Section 302 of Sarbanes Oxley Act of 2002
CEO certification required by Section 906 of Sarbanes Oxley Act of 2002
CFO certification required by Section 906 of Sarbanes Oxley Act of 2002
Table of Contents
State Auto Financial Corporation
Date: August 5, 2005
/s/ Steven J. Johnston
Steven J. Johnston
Treasurer and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Table of Contents
Exhibit
No.
Description of Exhibits
Amended and Restated Executive Agreement between State Auto Financial
Corporation and Robert H. Moone dated as of May 11, 2005
First Amendment to Employment Agreement between State Auto Financial
Corporation and Robert H. Moone dated as of May 11, 2005
Amended and Restated Equity Incentive Compensation Plan of State Auto
Financial Corporation
Directors Restricted Share Unit Plan of State Auto Financial Corporation
Form of Non-Qualified Stock Option Agreement under the Amended and
Restated Equity Incentive Compensation Plan of State Auto Financial
Corporation
Form of Incentive Stock Option Agreement under the Amended and Restated
Equity Incentive Compensation Plan of State Auto Financial Corporation
Form of Restricted Share Unit Agreement for the Outside Directors
Restricted Share Unit Plan of State Auto Financial Corporation
Form of Designation of Beneficiary for the Outside Directors Restricted
Share Unit Plan of State Auto Financial Corporation
Fifth Amendment to 2000 Directors Stock Option Plan of State Auto
Financial Corporation
CEO certification required by Section 302 of Sarbanes Oxley Act of 2002
CFO certification required by Section 302 of Sarbanes Oxley Act of 2002
CEO certification required by Section 906 of Sarbanes Oxley Act of 2002
CFO certification required by Section 906 of Sarbanes Oxley Act of 2002
2
3
4
5
6
7
8
9
10
11
12
13
14
| State Auto Financial Corporation: | ||||||
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By: | /s/ William J. Lhota | ||||
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Chairman Compensation Committee | |||||
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| Executive: | ||||||
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| /s/Robert H. Moone | ||||||
15
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Beneficiary Name | |||||
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| Agreement/Executive Agreement RHM | ||||||
| 1. | Recitals; Definitions . The Background Information contained in the Agreement and in the Background Information 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 condition set forth in Section 4 below, 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 4 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. |
| 4. | Effectiveness . This Amendment shall be deemed effective as of May 11, 2005, upon the unanimous approval of the Board of Directors of State Auto. Unless and until such approval is received, this Amendment shall not bind the parties hereto or amend or supplement the Agreement. | ||
| 5. | 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 Article X of the Agreement shall apply to and be deemed incorporated into this Amendment. |
|
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Attest | State Auto Financial Corporation | ||||
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By /s/ John R. Lowther | By /s/William J. Lhota | ||||
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John R. Lowther, Secretary | William J. Lhota, Chairman | ||||
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Compensation Committee | |||||
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Executive | |||||
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/s/ Robert H. Moone | |||||
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Robert H. Moone | |||||
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| Amendmen/first Amd to RHM 5-03 employment agrmt | ||||||
STATE AUTO FINANCIAL CORPORATION
AMENDED AND RESTATED
Background Information
The directors and shareholders of State Auto Financial Corporation, an Ohio Corporation (the “Company”), previously approved the Company’s 2000 Stock Option Plan (the “2000 Plan”) to provide for stock option awards to key employees of the Company and its affiliates in order to more closely align the interests of the recipient key employees with the interests of Company’s shareholders. The 2000 Plan is hereby amended and restated in its entirety and renamed the Amended and Restated Equity Incentive Compensation Award Plan (the “Plan”).
Section 1. Purposes of Plan
The Plan is intended to advance the interests of the Company and its shareholders by enhancing the ability of the Company and its subsidiaries to attract and retain highly qualified key employees and by providing additional incentives and compensation to such employees to achieve the Company’s long-term business plans and objectives. The Plan is also intended to encourage and enable key employees to participate in the Company’s future prosperity and growth by providing the participants with incentives and compensation based on the Company’s performance, development and financial success. The Plan is not intended to be, and shall not be construed as, a deferred compensation plan.
These purposes will be achieved by granting to key employees equity-based awards (the “Awards”) under the Plan in the form of: (A) Incentive Stock Options (“ISOs”), which are intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”); (B) stock options which are not intended to qualify as ISOs (“NQSOs”) (ISOs and NQSOs are referred to together hereinafter as “Stock Options”); (C) common shares of the Company (the “Shares”), which will be subject to a vesting schedule based on the recipient’s continued employment (“Restricted Shares”); (D) Shares which will be subject to a vesting schedule based on certain performance objectives (“Performance Shares”), (E) Performance Units as described in Section 9, and (F) Other Stock-Based Awards as described in Section 10. For purposes of this Plan, the terms “parent” and “subsidiary” mean “parent corporation” and “subsidiary corporation” respectively, as those terms are defined in Code Section 424.
Section 2. Administration
The Plan shall be administered by a committee (the “Committee”) which shall be the Compensation Committee of the Company’s Board of Directors (the “Board”). The members of the Committee shall serve at the pleasure of the Board, which may remove members from the Committee or appoint new members to the Committee from time to time and members of the Committee may resign by written notice to the Chairman of the Board or the Secretary of the Company. The members of the Committee shall not be eligible to participate in the Plan while serving on the Committee, and each member shall be a “non-employee director” within the meaning of Rule 16b-3, as amended,
1
Unless otherwise determined by the Board, the Committee shall have full and final authority to administer the Plan in accordance with its terms, including, without limitation, authority, to the extent not inconsistent with the specific provisions of the Plan, to: (A) interpret all provisions of the Plan consistent with law; (B) designate the key employees to receive Awards under the Plan (such recipients, “Participants”); (C) determine the frequency of Awards; (D) determine the number and type of Awards to be granted to each key employee; (E) determine the terms and conditions, not inconsistent with the terms hereof, of any Award, including without limitation, time and performance restrictions; (F) prescribe the form and terms of instruments evidencing any Awards granted under this Plan; (G) determine the vesting requirement, if any, for Awards; (H) make special Award grants when appropriate; (I) adopt, amend and rescind general and special rules and regulations for the Plan’s administration including administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; (J) direct employees of the Company, its parent and subsidiary corporations, and advisors to prepare such materials or perform such analyses as the Committee deems necessary and appropriate; (K) interpret the terms and provisions of the Plan and any Award granted and any agreements relating thereto; (L) make all other determinations necessary or advisable for the administration of this Plan; and (M) take any other actions the Committee considers appropriate in connection with, and otherwise supervise the administration of, the Plan.
The Committee may designate selected Committee members or certain employees of the Company to assist the Committee in the administration of the Plan and may grant authority to such persons to execute documents on behalf of the Committee.
Any interpretation or administration of the Plan by the Committee, and all actions of the Committee, shall be made in the Committee’s sole discretion and shall be final, binding and conclusive on the Company, its shareholders, its parent and subsidiary corporations, and all Participants in the Plan, their respective legal representatives, successors and assigns, and upon all persons claiming under it through any of them.
Service on the Committee shall constitute service as a member of the Board of Directors of the Company, so that members of the Committee shall be entitled to indemnification, reimbursement and other protections as directors of the Company as set forth in the Company’s Amended and Restated Articles of Incorporation and Amended and Restated Code of Regulations, as each may be further amended from time to time, as set forth in the Indemnity Agreements between the Company and each of its directors, and additionally as provided, and to the full extent not prohibited, by law.
| Section 3. | Eligibility and Factors to be Considered in Granting Awards |
The employees eligible to receive Awards under the Plan (“Eligible Employees”) shall include only employees of the Company or its parent or subsidiary corporations who are executive, administrative, professional, or technical personnel who, in the opinion of the Committee, have responsibilities affecting the management, development, or financial success of the Company or one or more of its subsidiaries or other affiliated entities. No director of the Company who is not also an employee of the Company or its subsidiary corporations shall be eligible to participate in the Plan.
In making any determination as to the employees to whom Awards shall be granted, the Committee shall take into account, in each case, the level and responsibility of the employee’s
2
Section 4. Shares Subject to Plan
The maximum aggregate number of common shares, without par value, of the Company (“Shares”) which may be issued under the Plan shall be 3,500,000 Shares, which shall include Shares subject to Awards granted under the 2000 Plan which are outstanding as of the Effective Date (as defined in Section 11(P)). No more than 33% of the Shares authorized for issuance under the Plan may be granted in the form of Awards other than Stock Options.
For each calendar year, the maximum number of Shares which may be granted to Participants during that year in the form of Awards of Stock Options, Restricted Shares and Performance Shares shall not exceed 1.5% of the total number of Shares outstanding as of December 31 of the prior year. For each calendar year, the maximum number of Shares which may be granted to any individual during that year in the form of Awards of Stock Options, Restricted Shares and Performance Shares shall not exceed 250,000 Shares.
The Shares which may be issued under the Plan may be authorized but unissued Shares or issued Shares reacquired by the Company and held as treasury Shares. If any Shares subject to a Stock Option granted under the Plan or the 2000 Plan are forfeited by the holder thereof, or if any Restricted Shares or Performance Shares granted under the Plan are forfeited by the holder thereof, or if any Stock Option or other Award granted under the Plan or the 2000 Plan terminates without a payment or transfer being made to the Award recipient in the form of Shares, then such Shares shall again be available for distribution in connection with future Awards under the Plan. If any Award granted under the Plan expires or terminates for any reason without having been fully exercised, the unpurchased Shares which had been subject to that Award shall again be available for other Awards to be granted under the Plan. The aggregate number of Shares shall be subject to adjustment under Section 11(A) of the Plan.
Section 5. Grant of Awards
Any Awards may be granted alone or in addition to other Awards granted under the Plan. Any Awards granted under the Plan shall be in such form as the Committee may from time to time approve, consistent with the Plan, and the provisions of Awards need not be the same with respect to each Participant.
Each Award granted under the Plan shall be authorized by the Committee and shall be evidenced by a written award agreement (the “Award Agreement”), in the form approved by the Committee from time to time, which shall be dated as of the date approved by the Committee in connection with the grant, signed by an officer of the Company authorized by the Committee, and signed by the Participant, and which shall describe the Award and state that the Award is subject to all the terms and provisions of the Plan and such other terms and provisions, not inconsistent with the Plan, as the Committee may approve. The date on which the Committee approves the granting of an Award shall be deemed to be the date on which the Award is granted for all purposes, unless the Committee otherwise specifies. The granting of an Award under the Plan, however, shall be effective only if and
3
Section 6. Stock Options
The Committee may, in its sole discretion and subject to the provisions of the Plan, grant to Eligible Employees at such times as it deems appropriate, Stock Options to purchase Shares. Stock Options granted under this Plan may be: (i) Options which are intended to qualify as ISOs under Code Section 422; and/or (ii) Stock Options which are not intended to qualify under Code Section 422. Stock Options may be allotted to Eligible Employees in such amounts, subject to the limitations specified in this Section and Sections 3 and 4 of the Plan, as the Committee, in its sole discretion, may from time to time determine.
Stock Options granted hereunder shall be evidenced by a Stock Option Award Agreement executed as set forth in Section 5 above, containing such terms and provisions not inconsistent with the terms of the Plan as are recommended and approved from time to time by the Committee. Each Stock Option Award Agreement shall be consistent with the Plan, including, without limitation, the following provisions:
| (A) Exercise Price. The exercise price per Share at which each Stock Option granted under the Plan may be exercised shall not be less than the Fair Market Value per Share at the time such Stock Option is granted. In the case of an Eligible Employee who owns Shares representing more than 10% of the total combined voting power of all classes of the Company’s stock, or the stock of any subsidiary, at the time an ISO is granted, the exercise price of the ISO shall not be less than 110% of the Fair Market Value of the Shares at the time the ISO is granted. | |
| For the purposes of the Plan “Fair Market Value” means, as of any given date, the following: (1) if the Company’s Shares are listed on a national securities exchange at the time of granting a Stock Option, then the Fair Market Value of each Share shall be no less than the average of the highest and lowest selling price on such exchange on the date such Stock Option is granted or, if there were no sales on said date, then on the next prior business day on which there were sales; (2) if the Company’s Shares are traded other than on a national securities exchange at the time of the granting of a Stock Option, then the Fair Market Value of each Share shall be not less than the last sale price as reported on the Nasdaq National Market System as of the close of the regular trading day or the mean between the bid and asked price as reported on the National Association of Securities Dealers as the case may be, on the date the Stock Option is granted or, if there is no sale price or bid and asked price on said date, then on the next prior business date on which there was a sale price or bid or asked price. | |
| If the Company’s Shares are not traded on any security exchange or reported on the Nasdaq National Market System or by the National Association of Securities Dealers, then the Committee shall exercise its best judgment to make a good faith determination of the fair market value per Share. Such determination shall include a valuation of the Company’s present and future earnings capacity for the purpose of determining the fair market value of a Share of the Company’s Shares as of a specified date. The value determined shall be defined as the fair market value of a Share of stock for a specified period of time as defined by the Committee. |
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| The Committee retains the right to determine the price per Share at which each NQSO granted under the Plan may be exercised, provided that no NQSO shall be granted at less than Fair Market Value. | |
| (B) Option Period and Vesting. Stock Options granted under the Plan are exercisable at such time or times as may be determined by the Committee (the “Vesting Date”). A Stock Option shall be exercisable only with respect to the Shares which have become vested pursuant to the terms of that Stock Option. Each Stock Option shall become vested with respect to Shares subject to that Stock Option on such date or dates and on the basis of such other criteria, including, without limitation, the performance of the Company, as the Committee may determine, in its discretion, and as shall be specified in the applicable Stock Option Award Agreement. The Committee shall have the authority, in its discretion, to accelerate the time at which a Stock Option shall be exercisable whenever it may determine that such action is appropriate by reason of changes in applicable tax or other law or other changes in circumstances occurring after the grant of such Stock Option. | |
| A Stock Option granted under the Plan shall terminate, and the right of the Participant (or the Participant’s estate, personal representative, or beneficiary) to purchase Shares upon exercise of the Stock Option shall expire, after the date determined by the Committee at the time the Stock Option is granted (the “Expiration Date”). No Stock Option, however, may have a life of more than ten years after the date the Stock Option is granted. In the case of a Participant who owns stock representing more than 10% of the total combined voting power of all classes of the Company’s stock, or the stock of any subsidiary at the time an ISO is granted, the ISO may not have a life of more than five years after the date on which it is granted. The date on which the Committee approves the granting of a Stock Option shall be deemed the date on which the Stock Option is granted, unless the Committee specifically designates a different date on which the Stock Option shall be deemed to have been granted, subject to Section 6(A) of the Plan. | |
| (C) Exercise of Stock Options |
| (1) By an Eligible Employee During Continuous Employment. Subject to Section 6(E) below, during the lifetime of an Eligible Employee to whom a Stock Option is granted, the Stock Option may be exercised only by the Eligible Employee. | |
| An Eligible Employee who has been continuously employed by the Company or its subsidiaries since the date of the Stock Option grant is eligible to exercise all Stock Options granted beginning on the Vesting Date, or on the date on which the Stock Option is granted, whichever is later, and continuing up to and including the Expiration Date. The Committee will decide in each case to what extent leaves of absence for government or military service, illness, temporary disability, or other reasons shall not for this purpose be deemed interruptions of continuous employment. | |
| (2) By a Former Employee. If a Participant’s employment by the Company and its subsidiaries terminates for any reason other than death, disability, or retirement (as each is defined below) then (a) to the extent any Stock Option held by such Participant is not vested as of the date of such termination, such Stock Option shall automatically terminate on such date; and (b) to the extent any Stock Option held by such Participant is vested as of the date of such termination, such Stock Option may thereafter be exercised for a period of 90 days (or, with respect to NQSOs, such longer period as the Committee may specify at or after |
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| grant) from the date of such termination or until the expiration of the stated term of such Stock Option, whichever period is shorter; provided that, upon the termination of the Participant’s employment by the Company or its subsidiaries for illegal conduct, any and all unexercised Stock Options granted to such Participant shall immediately lapse and be of no further force or effect. | |
| (3) In Case of Retirement. If a Participant who was granted a Stock Option terminates employment due to retirement, as such term is defined in the State Auto Insurance Companies Employee Retirement Plan, the Stock Option must be exercised as follows: (a) ISOs must be exercised within ninety (90) days of such termination (but no later than the Expiration Date) and (b) NQSOs must be exercised on or before the Expiration Date. If the Participant should become permanently and totally disabled, as defined in Code Section 22(e)(3), or die within the aforementioned 90-day period following termination due to retirement, the provisions contained in Section 6(C), paragraphs 4 and 5 hereof respectively, shall apply. Notwithstanding Section 6(B), all Stock Options previously granted to the Participant may be immediately exercised by a Participant whose employment terminates due to retirement prior to the Vesting Date. | |
| (4) In Case of Permanent and Total Disability. If a Participant who was granted a Stock Option terminates employment with the Company and its subsidiaries because of permanent and total disability, as defined in Code Section 22(e)(3), such Stock Option must be exercised as follows: (a) ISOs must be exercised within one year of such termination (but no later than the Expiration Date) and (b) NQSOs must be exercised on or before the Expiration Date. If the Participant should die within the aforementioned one-year period following termination due to such permanent and total disability, the provisions contained in Section 6(C), paragraph 5 hereof, shall apply. Notwithstanding Section 6(B), all Stock Options previously granted to the Participant may be immediately exercised by the Participant who becomes permanently and totally disabled, as defined in Code Section 22(e)(3), prior to the Vesting Date. | |
| (5) In Case of Death. If a Participant who was granted a Stock Option dies, such Stock Options must be exercised as follows: (a) ISOs must be exercised within one year of such death (but no later than the Expiration Date) and (b) NQSOs must be exercised on or before the Expiration Date, provided that if such Participant dies with less than ninety (90) days remaining prior to the Expiration Date, the estate or successor(s) in interest of such Participant shall have a period of 180 days from the date of death of such Participant to exercise such Stock Option, regardless of the Expiration Date. | |
| (6) Sequential Exercise Requirement. ISOs and NQSOs may be exercised in any order the Participant may deem appropriate. | |
| (7) Termination of Stock Options. A Stock Option granted under this Plan shall be considered terminated in whole or in part, to the extent that, in accordance with the provisions of this Plan, it can no longer be exercised for Shares originally subject to the Stock Option. Except as otherwise permitted by the Committee in its sole discretion, no Stock Option held by a transferee of a Participant pursuant to Section 6(E)(3), below, shall remain exercisable for any period of time longer than would otherwise be permitted under |
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| Sections 6(C)(2),(3),(4) and (5) without specification of other periods by the Committee as provided therein. |
| (D) Method of Exercise. Any Stock Option granted hereunder shall be exercisable at such times and under such conditions as shall be permissible under terms of the Plan and of the Stock Option Award Agreement between the Company and the Participant. | |
| Each Stock Option granted under this Plan shall be deemed exercised, in whole or in part, when the Participant shall indicate the decision to do so by written notice delivered in person or by facsimile or electronic transmission or by certified mail to the Secretary of the Company. The notice shall state the election to exercise the Stock Option, the number of Shares with respect to which it is being exercised, the person in whose name the stock certificate or certificates is to be registered and the address and Social Security Number of such recipient. The notice shall be signed by the person or persons entitled to exercise the Stock Option and, if the Stock Option is being exercised by any person or persons other than the Participant, be accompanied by proof, satisfactory to legal counsel of the Company, of the right of such person to exercise the Stock Option. The Participant shall at the same time tender to the Company payment in full, in cash or by certified bank cashier’s or teller’s check, for the Shares for which the Stock Option is exercised and shall comply with such other reasonable requirements as the Committee may establish, pursuant to Section 11(D) of the Plan. These provisions shall not preclude exercise of, or payment for a Stock Option by any other proper legal method specifically approved by the Committee, including, but not limited to, the constructive delivery or actual delivery of eligible, unrestricted Shares with a Fair Market Value equal to the total option price at the time of exercise in accordance with rules and procedures prescribed or approved by the Committee. | |
| Except as otherwise set forth in any agreement between the Participant and the Company with respect to the Stock Option, as approved by the Committee, no person, estate or other entity shall have any of the rights of the shareholder with reference to Shares subject to a Stock Option until a certificate for the Shares has been issued by the Company. | |
| A Stock Option granted under this Plan may be exercised for any lesser number of Shares than the full amount for which it could be exercised. Such a partial exercise of a Stock Option shall not affect the right to exercise the Stock Option from time to time in accordance with this Plan for the remaining Shares subject to the Stock Option. The Stock Option may be exercised only with respect to full Shares and no fractional Shares of common stock shall be issued upon exercise of the Option. | |
| (E) Non-Transferability. Except as provided in this paragraph, no Stock Option granted to an Eligible Employee under the Plan shall be transferable other than by will or the laws of descent and distribution and shall be exercisable during the Participant’s lifetime only by such Participant, or the Participant’s legal representative. Any attempted transfer (other than as provided in this paragraph) shall be null and void. Without limiting the generality of the foregoing, (1) ISOs may be transferred only upon the Participant’s death and only by will or the laws of descent and distribution and, in the case of such a transfer, shall be exercisable only by the transferee or such transferee’s legal representative, (2) NQSOs may be transferred by will or the laws of descent and distribution and, in the case of such a transfer, shall be exercisable only by the transferee or such transferee’s legal representative, and (3) the Committee may, in its sole discretion and in the manner established by the Committee, provide for the irrevocable transfer, |
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| without payment of consideration, of any NQSO by a Participant to such Participant’s parent(s), spouse, children, grandchildren, nieces, or nephews or to the trustee of a trust for the principal benefit of one or more such persons or to a partnership whose only partners are one or more such persons, and, in the case of such transfer, such NQSO shall be exercisable only by the transferee or such transferee’s legal representative. In addition, NQSOs and, if permitted by applicable law, ISOs may be transferred pursuant to Qualified Domestic Relations Orders, as defined in Code Section 414(p), to a Participant’s former spouse. Any such Stock Option which is transferred shall continue to be subject to all provisions and conditions of the Plan and the Stock Option Award Agreement applicable to the Stock Option prior to its transfer, including without limitation, vesting requirements, restrictions on transferability and limitations on exercise following termination of employment or death or disability, provided that the person receiving the transfer shall have the same right to exercise as the Participant who transferred the Option, notwithstanding Section 11(D) to the contrary. Notwithstanding the foregoing, the Committee shall only have authority to grant Stock Options which may be transferred pursuant to this Section if it is reasonably satisfied that such grant will not cause other Stock Options under the Plan to lose the exemption provided by Rule 16b-3 promulgated under the Exchange Act, as amended from time to time. | |
| (F) No Stock Option Repricing without Shareholder Approval. The exercise price per Share of any Stock Option granted under the Plan shall not be changed or modified after the time such Stock Option is granted unless such change or modification is made with the prior approval of the Company’s shareholders. |
Section 7. Restricted Shares
Restricted Shares awarded under the Plan shall be subject to the following terms and conditions and such additional terms and conditions not inconsistent with the terms of the Plan as the Committee deems appropriate. Each Restricted Share grant shall be evidenced by a Restricted Share Award Agreement, executed as set forth in Section 5, above, which shall be consistent with the Plan, including without limitation, the following provisions:
| (A) Price. The purchase price for Restricted Shares shall be any price set by the Committee and may be zero. Payment in full of the purchase price shall be made by certified or bank cashier’s check or other form of payment acceptable to the Company, or, if approved by the Committee, by (1) actual or constructive delivery of unrestricted Shares having a fair market value on the date of such delivery equal to the total purchase price, or (2) a combination of the preceding methods. | |
| (B) Acceptance of Restricted Shares. At the time of the Restricted Share Award, the Committee may determine that such Shares shall, after vesting, be further restricted as to transferability or be subject to repurchase by the Company or forfeiture upon the occurrence of certain events determined by the Committee, in its sole discretion, and specified in the Restricted Share Award Agreement. Awards of Restricted Shares must be accepted by the Participant within 30 days (or such other period as the Committee may specify at grant) after the grant date by executing the Restricted Share Award Agreement. The Participant shall not have any rights with respect to the grant of Restricted Shares unless and until the Participant has executed the Restricted Share Award Agreement, delivered a fully executed copy thereof to the Company, and otherwise complied with the applicable terms and conditions of the Award. |
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| (C) Share Restrictions. Subject to the provisions of the Plan and the applicable Restricted Share Award Agreement, during such period as may be set by the Committee, in its discretion, and as shall be set forth in the applicable Restricted Share Award Agreement (the “Restriction Period”), the Participant shall not be permitted to sell, transfer, pledge, assign, or otherwise encumber the Restricted Shares. Furthermore, the Committee shall have the authority, in its sole discretion, to determine the voting rights (which may be full or limited), dividend rights (which may be full or limited), or other shareholder rights associated with the Restricted Shares during the Restriction Period, which rights shall be set forth in the applicable Restricted Share Award Agreement. | |
| The Committee shall have the authority, in its sole discretion, to accelerate the time at which any or all of the restrictions shall lapse with respect to any Restricted Shares or to remove any or all restrictions after the grant of such Restricted Shares. Unless otherwise determined by the Committee at or after grant or termination of the Participant’s employment, if the Participant’s employment by the Company and its parent or subsidiaries terminates during the Restriction Period, all Restricted Shares held by such Participant and still subject to restriction shall be forfeited by the Participant. | |
| (D) Stock Issuances and Restrictive Legends. Upon execution and delivery of the Restricted Share Award Agreement as described above and receipt of payment of the full purchase price for the Restricted Shares subject to such Restricted Share Award Agreement, the Company shall, no later than 30 days thereafter, issue the Restricted Shares. Restricted Shares may be issued in the form of a certificate, by book entry, or otherwise, in the Company’s sole discretion, and shall bear an appropriate restrictive legend. Notwithstanding the foregoing to the contrary, the Company may, in the Committee’s sole discretion, issue Restricted Shares (whether or not such Restricted Shares are, at the time of such issuance, the subject of an Award) to the trustee of a trust set up by the Committee, consistent with the terms and conditions of the Plan, to hold such Restricted Shares until the restrictions thereon have lapsed (in full or in part, in the Committee’s sole discretion), and the Committee may require that, as a condition of any Restricted Share Award, the Participant shall have delivered to the Company or such trustee, as appropriate, a stock power, endorsed in blank, relating to the Restricted Shares covered by the Award. | |
| (E) Stockholder Rights. Unless otherwise provided in the applicable Restricted Share Award Agreement, no Participant (or his executor or administrator or other transferee) shall have any rights of a stockholder in the Company with respect to the Restricted Shares covered by an Award unless and until the Restricted Shares have been duly issued and delivered to him under the Plan. | |
| (F) Expiration of Restriction Period. Upon the expiration of the Restriction Period without prior forfeiture of the Restricted Shares (or rights thereto) subject to such Restriction Period, unrestricted Shares shall be issued and delivered to the Participant. |
Section 8. Performance Shares
Performance Shares awarded under the Plan shall be subject to the following terms and conditions and such additional terms and conditions not inconsistent with the terms of the Plan as the Committee deems appropriate. Each Performance Share grant shall be evidenced by a Performance
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| (A) Performance Periods and Goals |
| (1) The performance period for each Award of Performance Shares shall be of such duration as the Committee shall establish at the time of the Award (the “Performance Period”), but in no event less than one calendar year. There may be more than one Award in existence at any one time, and Performance Periods may differ. | |
| (2) The Committee shall establish in writing a range of performance goals (the “Performance Goals”) to be achieved during the established Performance Period at the time of each Award of Performance Shares (but in no event later than 90 days after the commencement of the Performance Period). The Performance Goals shall be determined by the Committee using such measures of the performance of the Company over the Performance Period as the Committee shall select, including, without limitation, earnings, return on capital, revenue, premiums, net income, earnings per share, combined ratio, loss ratio, expense ratio, assets, equity, cash flows, stock price, total shareholders return, or any other performance goal approved by the stockholders of the Company in accordance with Code Section 162(m). Performance Shares awarded to Participants will be earned as determined by the Committee with respect to the attainment of the Performance Goals set for the Performance Period. At the end of each Performance Period, the Committee shall certify the extent to which the Performance Goals were met during the Performance Period. Attainment of the highest Performance Goal for the Performance Period will earn 100% of the Performance Shares awarded for the Performance Period; failure to attain the lowest Performance Goal for the Performance Period will earn none of the Performance Shares awarded for the Performance Period. | |
| (3) Attainment of the Performance Goals will be calculated from the consolidated financial statements of the Company but shall exclude (a) the effects of changes in federal income tax rates, (b) the effects of unusual, non-recurring, and extraordinary items as defined by United States generally accepted accounting principles (“GAAP”), and (c) the cumulative effect of changes in accounting principles in accordance with GAAP. The Performance Goals may vary for different Performance Periods and need not be the same for each Participant receiving an Award for a Performance Period. The Committee may, in its sole discretion, subject to the limitations of Section 11(J), vary the terms and conditions of any Performance Share Award, including, without limitation, the Performance Period and Performance Goals, without stockholder approval, as applied to any recipient who is not a “covered employee” with respect to the Company as defined in Code Section 162(m). In the event applicable tax or securities laws change to permit the Committee discretion to alter the governing performance measures as they pertain to covered employees without obtaining stockholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining stockholder approval. |
| (B) Price. The purchase price for Performance Shares shall be any price set by the Committee and may be zero. Payment in full of the purchase price shall be made by certified or bank cashier’s check or other form of payment acceptable to the Company, or, if approved by |
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| the Committee, by (1) delivery of unrestricted Shares having a fair market value on the date of such delivery equal to the total purchase price, or (2) a combination of the preceding methods. | |
| (C) Acceptance of Performance Shares. At the time of the Performance Share Award, the Committee may determine that such Shares shall, after vesting pursuant to the Performance Period and Performance Goal provisions described above, be further restricted as to transferability or be subject to repurchase by the Company or forfeiture upon the occurrence of certain events determined by the Committee, in its sole discretion, and specified in the Performance Share Award Agreement. Awards of Performance Shares must be accepted by the Participant within 30 days (or such other period as the Committee may specify at grant) after the grant date by executing the Performance Share Award Agreement. The Participant shall not have any rights with respect to the grant of Performance Shares unless and until the Participant has executed the Performance Share Award Agreement, delivered a fully executed copy thereof to the Company, and otherwise complied with the applicable terms and conditions of the Award. | |
| (D) Share Restrictions. Subject to the provisions of the Plan and the applicable Performance Share Award Agreement, during the Performance Period and any additional Restriction Period (as defined in Section 7(C), above), the Participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber the Performance Shares. Furthermore, the Committee shall have the authority, in its sole discretion, to determine the voting rights (which may be full or limited), dividend rights (which may be full or limited), or other shareholder rights associated with the Performance Shares during the Restriction Period, which rights shall be set forth in the applicable Performance Share Award Agreement. | |
| The Committee shall have the authority, in its sole discretion, to accelerate the time at which any or all of the restrictions shall lapse with respect to any Performance Shares. Unless otherwise determined by the Committee at or after grant or termination of the Participant’s employment, if the Participant’s employment by the Company and its subsidiaries terminates during the Performance Period or the Restriction Period, all Performance Shares held by such Participant and still subject to restriction shall be forfeited by the Participant. | |
| (E) Stock Issuances and Restrictive Legends. Despite the execution and delivery of the Performance Share Award Agreement as described above, the Company shall have no obligation to issue the Performance Shares prior to the vesting of the Performance Shares, provided that the Company shall issue the Performance Shares no later than 30 days after such vesting and after payment in full of the purchase price for such Performance Shares. Performance Shares may be issued, whenever issued, in the form of a certificate, by book entry, or otherwise, in the Company’s sole discretion, and shall bear such restrictive legend as is consistent with applicable restrictions, if any, including without limitation those represented by the Performance Period and Performance Goals and those described in Section 8(D), above. The Committee may require that, whenever issued, the Performance Shares be issued to and held by the Company or a trustee until the restrictions on such Performance Shares have lapsed (in full or in part), and that, as a condition of any Performance Share Award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Performance Shares covered by the Award. | |
| (F) Stockholder Rights. Unless otherwise provided in the applicable Performance Share Award Agreement, no Participant (or his executor or administrator or other transferee) shall have any rights of a stockholder in the Company with respect to the Performance Shares covered by |
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| an Award unless and until the Performance Shares have been duly issued and delivered to him under the Plan. | |
| (G) Expiration of Restriction Period. Subject to fulfillment of the terms and conditions of the applicable Performance Share Award Agreement and any other vesting requirements related to the applicable Performance Period or Performance Goals, upon the expiration of the Restriction Period without prior forfeiture of the Performance Shares (or rights thereto) subject to such Restriction Period, unrestricted Shares shall be issued and delivered to the Participant. | |
| (H) Termination of Employment. If a Participant’s employment by the Company and its subsidiaries terminates before the end of any Performance Period due to the Participant’s death, disability (as defined by the Committee in its discretion at the time of grant and set forth in the Performance Share Award Agreement), or Change in Control, the Committee, taking into consideration the performance of such Participant, the level of attainment of the Participant’s Performance Goals and the performance of the Company over the Performance Period, may authorize the issuance to such Participant (or his legal representative or designated beneficiary) of all or a portion of the Performance Shares which would have been issued to him had his employment continued to the end of the Performance Period. If the Participant’s employment by the Company and its subsidiaries terminates before the end of any Performance Period for any other reason, all Performance Shares shall be forfeited. |
Section 9. Performance Units
The Committee may award performance units under the Plan (“Performance Units”), which shall represent the right of the Participant to receive an amount equal to the value related to the Performance Units awarded, such value to be determined in the manner established by the Committee at the time of the Award, but may not be less than a value per Performance Unit equal to the Fair Market Value of a Share. For each calendar year, the maximum number of Performance Units which may be granted to any individual during that year shall not exceed 100,000 Performance Units. Each Performance Unit grant shall be evidenced by a Performance Unit Award Agreement as provided in Section 5, above, which shall be consistent with the Plan, including without limitation the following provisions:
| (A) Establishment of Performance Accounts. At the time of an Award consisting in whole or in part of Performance Units, the Company shall establish an account (the “Performance Account”) in the name of the Participant to whom such Performance Units are awarded. Performance Units awarded to a Participant shall be credited to such Participant’s Performance Account. | |
| (B) Performance Periods and Goals. |
| (1) The Performance Period for each Award of Performance Units shall be of such duration as the Committee shall establish at the time of the Award, but in no event less than one calendar year. There may be more than one Award outstanding at any one time, and Performance Periods may differ for different Awards. | |
| (2) The Committee shall establish in writing a range of Performance Goals to be achieved during the established Performance Period at the time of each Award of Performance Units (but in no event later than 90 days after the commencement of the |
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| Performance Period). The Performance Goals shall be determined by the Committee using such measures of the performance of the Company over the Performance Period as the Committee shall select, including without limitation earnings, return on capital, revenue, premiums, net income, earnings per share, combined ratio, loss ratio, expense ratio, assets, equity, cash flows, stock price, total shareholders return, or any other performance goal approved by the stockholders of the Company in accordance with Code Section 162(m). Performance Units awarded to Participants will be earned as determined by the Committee with respect to the attainment of the Performance Goals set for the Performance Period. At the end of each Performance Period, the Committee shall certify the extent to which the Performance Goals were met during the Performance Period. Attainment of the highest Performance Goal for the Performance Period will earn 100% of the Performance Units awarded for the Performance Period; failure to attain the lowest Performance Goal for the Performance Period will earn none of the Performance Units awarded for the Performance Period. | |
| (3) Attainment of the Performance Goals will be calculated from the consolidated financial statements of the Company but shall exclude (a) the effects of changes in federal income tax rates, (b) the effects of unusual, non-recurring, and extraordinary items as defined by GAAP, and (c) the cumulative effect of changes in accounting principles in accordance with GAAP. The Performance Goals may vary for different Performance Periods and need not be the same for each Participant receiving an Award for a Performance Period. The Committee may, in its sole discretion, subject to the limitations of Section 11(J), vary the terms and conditions of any Performance Unit Award, including without limitation the Performance Period and Performance Goals, without stockholder approval, as applied to any recipient who is not a “covered employee” with respect to the Company as defined in Code Section 162(m). In the event applicable tax or securities laws change to permit the Committee discretion to alter the governing performance measures as they pertain to covered employees without obtaining stockholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining stockholder approval. |
| (C) Rights and Benefits During Performance Period. The Committee may provide that amounts equivalent to interest at such rates as the Committee may determine shall be payable with respect to Performance Units. All amounts payable pursuant to this Section 9(C) shall be credited for valuation purposes to the Participant’s Performance Account. | |
| (D) Payment Respecting Performance Units. |
| (1) Performance Units shall be earned to the extent that the terms and conditions of the Plan and the applicable Performance Unit Award Agreement are met. Notwithstanding the foregoing, Performance Units and any other amounts credited to the Participant’s Performance Account shall be payable to the Participant only when, if, and to the extent that the Committee determines to make such payment. | |
| (2) Any payment determination with respect to each Award of Performance Units and the corresponding Performance Period shall be made by the Committee during the first two months following the end of the Performance Period. |
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| (3) Payment for Performance Units and any related amounts equivalent to interest may be made in a lump sum or in installments, in cash, Shares, other Awards, other property, or a combination thereof, and may have such other terms as the Committee may determine. |
| (E) Termination of Employment. If a Participant’s employment by the Company and its subsidiaries terminates before the end of any Performance Period due to the Participant’s death, disability (as defined by the Committee in its discretion at the time of Grant and set forth in the Performance Unit Award Agreement), or Change in Control, the Committee, taking into consideration the performance of such Participant, the level of attainment of the Participant’s Performance Goals and the performance of the Company over the Performance Period, may authorize the payment to such Participant (or his legal representative or designated beneficiary) of all or a portion of the amount which would have been paid to him had his employment continued to the end of the Performance Period. If the Participant’s employment by the Company and its subsidiaries terminates for any other reason, all Performance Units and amounts credited to the Participant’s Performance Account shall be forfeited. |
Section 10. Other Stock-Based Awards
The Committee is authorized, subject to limitations under applicable law, to grant such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, the Stock and factors that may influence the value of the Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified Subsidiaries (“Other Stock-Based Awards”). The Committee shall determine the terms and conditions of such Awards. Stock issued pursuant to an Award in the nature of a purchase right granted under this Section 10 shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may be granted pursuant to this Section 10.
Section 11. Other Provisions
(A) Adjustments upon Changes in Capitalization. In the event the Company changes its outstanding Shares by reason of stock splits, stock dividends, or any other increase or reduction of the number of outstanding Shares without receiving consideration in the form of money, services, or property deemed appropriate by the Board, the aggregate number of Shares subject to the Plan shall be proportionately adjusted, and the number of Shares and the option price for each Share subject to the unexercised portion of any then outstanding Award shall be proportionately adjusted with the objective that the Participant’s proportionate interest in the Company shall remain the same as before the change without any change in the total option price applicable to the unexercised portion of the then outstanding Awards, all as determined by the Committee in its sole discretion.
In the event of any other recapitalization or any merger, consolidation, or other reorganization of the Company, the Committee shall make such adjustment, if any, as it may deem appropriate to
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The Committee’s determination of the adjustments appropriate to be made under this Section 11(A) shall be conclusive upon all Participants and other Eligible Employees under the Plan. Notwithstanding anything in this Section 11(A) to the contrary, any adjustment made under this Section 11(A) shall be made in a manner that will not constitute a “modification” within the meaning defined in Code Section 424(h).
(B) Change in Control
| (1) Impact of Event. Notwithstanding any provision of this Plan or any Award Agreement to the contrary (unless such Award Agreement contains a provision referring specifically to this Section 11(B) and stating that this Section 11(B) shall not be applicable to the Award evidenced by such Award Agreement), if a Change in Control or a Potential Change in Control (each as defined below) occurs, then: |
| (a) Any and all Stock Options theretofore granted and not fully vested shall thereupon become vested and exercisable in full and shall remain so exercisable in accordance with their terms, and the restrictions applicable to any or all Restricted Shares, Performance Shares, and Performance Units shall lapse and such Shares and Awards shall be fully vested; provided that no Stock Option or other Award right which has previously been exercised or otherwise terminated shall become exercisable; and | |
| (b) The Company may, at its option, terminate any or all outstanding, unexercised Stock Options and portions thereof not more than 30 days after such Change in Control or Potential Change in Control; provided that the Company shall, upon such termination and with respect to each Stock Option so terminated, pay to the Participant of each terminated Stock Option (or such Participant’s transferee, if applicable) cash, less applicable withholding taxes, in an amount equal to the difference between the option price, as described in Section 6(C), and the “Change in Control Price” (as defined in Section 11(B)(4)) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Company may determine prior to the Change in Control; and provided further that if such Change in Control Price is less than such option price, then the Board may, in its sole discretion, terminate such Stock Option without any payment. |
| (2) Definition of Change in Control. For purposes of Section 11(B)(1), a Change in Control means the happening of any of the following: |
| (a) When any “person” as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) of the Exchange Act, but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee) and excluding State Automobile Mutual Insurance Company, directly or indirectly, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing |
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| 20% or more of the combined voting power of the Company’s then outstanding securities; or | |
| (b) When, during any period of 24 consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the “Incumbent Directors”) cease for any reason other than death to constitute at least a majority of the Board; provided, however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 11(B)(2)(b); or | |
| (c) The occurrence of a transaction requiring shareholder approval for the acquisition of the Company by an entity other than the Company or subsidiary through purchase of assets, by merger or otherwise; or | |
| (d) The occurrence of a “Rule 13e-3 transaction” (as defined in Rule 13e-3 under the Exchange Act) requiring approval by the shareholders of the Company. |
| (3) Definition of Potential Change in Control. For purposes of Section 11(B)(1), a Potential Change in Control means the happening of any one of the following: |
| (a) The approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 11(B)(2) above; or | |
| (b) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company, a subsidiary or any Company employee benefit plan (including any trustee of such plan acting as such trustee) and other than State Automobile Mutual Insurance Company) of securities of the Company representing 20% or more of the combined voting power of the Company’s outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan. |
| (4) Definition of Change in Control Price. For purposes of this Section 11, Change in Control Price means the highest price per share bid or paid, as applicable, in any transaction reported by the National Association of Securities Dealers on the Nasdaq National Market System or otherwise or on any stock exchange on which the Shares are listed or paid or offered in any bona fide transaction related to a potential or actual Change in Control of the Company at any time during the 60-day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event). |
(D) Compliance with Law and Approval of Regulatory Bodies. No right under the Plan shall be exercisable and no Shares will be delivered under this Plan except in compliance with all applicable Federal and State laws and regulations including, without limitation, compliance with withholding tax requirements, compliance with Federal and State securities laws and regulations and with the rules of all domestic stock exchanges on which the Company’s Shares may be listed. Any Share certificate issued to evidence shares for which a Stock Option is exercised may bear legends and statements the Committee shall deem advisable to assure compliance with Federal and State laws
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In the case of the exercise of any Stock Option by a person or estate acquiring the right to exercise the Stock Option by bequest or inheritance, the Committee may require reasonable evidence as to the ownership of the Stock Option and may require consents and releases of taxing authorities that it may deem advisable.
The Committee may require each person acquiring Shares under the Plan (1) to represent and warrant to and agree with the Company in writing that such person is acquiring the Shares without a view to the distribution thereof, and (2) to make such additional representations, warranties, and agreements with respect to the investment intent of such person or persons as the Committee may reasonably request. Any certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer.
All Shares or other securities delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any certificates evidencing such Shares to make appropriate reference to such restrictions.
(E) No Right to Employment. The adoption of the Plan, its operation, any document describing or referring to the Plan, or any part thereof, or the grant of one or more Awards to an Eligible Employee of the Company or any of its subsidiaries shall not confer upon any Participant under this Plan any right to continue in the employ of the Company or its subsidiaries or any other affiliated entity, or shall not in any way affect the right and power of the Company to terminate the employment of any Participant under this Plan at any time with or without assigning a reason therefor, to the same extent as the Company might have done if this Plan had not been adopted.
(F) Restriction on Exercise After Termination. Notwithstanding any provision of this Plan to the contrary, no unexercised right created under this Plan (an “Unexercised Right”) and held by a Participant on the date of termination of such Participant’s employment by the Company and its subsidiaries for any reason shall be exercisable after such termination if, prior to such exercise, the Participant violates any non-competition or confidentiality agreement or similar provision set forth in the Award Agreement pursuant to which such Unexercised Right was awarded.
(G) Successors in Interest. This Plan shall be binding upon, inure to the benefit of, and be enforceable by and against successors, assignees and transferees of the Company and, if appropriate, the personal representatives and heirs of the Eligible Employee.
(H) Rights as a Stockholder. No Participant or his executor or administrator or other transferee shall have any rights of a stockholder in the Company with respect to the Shares covered by an Award unless and until such Shares have been duly issued and delivered to him under the Plan.
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(I) Acceleration of Rights. The Committee shall have the authority, in its discretion, to accelerate the time at which a Stock Option or other Award right shall be exercisable whenever it may determine that such action is appropriate by reason of changes in applicable tax or other laws or other changes in circumstances occurring after the grant of the Award.
(J) Interpretation, Amendment or Termination of the Plan. The interpretation by the Committee of any provision of the Plan or of any Award Agreement executed pursuant to the grant of an Award under the Plan shall be final and conclusive upon all Participants or transferees under the Plan. The Board, without further action on the part of the stockholders of the Company, may from time to time alter, amend, or suspend the Plan or may at any time terminate the Plan, provided that: (1) no such action shall materially and adversely affect any outstanding Stock Option or other right under the Plan without the consent of the holder of such Stock Option or other right; and (2) except for the adjustments provided for in Section 11(A), above, no amendment may be made by Board action without stockholder approval if the amendment would (a) materially increase the benefits accruing to Participants under the Plan, (b) materially increase the number of Shares which may be issued under the Plan, (c) materially modify the requirements as to eligibility for participation in the Plan, (d) extend the maximum option period of Stock Options, or (e) effect any other change which requires stockholder approval under applicable law or regulation. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in applicable tax and securities laws and accounting rules, as well as other developments.
(K) Unfunded Status of the Plan. The Plan is intended to constitute an “unfunded” plan for incentive compensation. With respect to any payments or deliveries of Shares not yet made by the Company to a Participant or transferee nothing contained herein shall give any such Participant or transferee any rights that are greater than those of a general creditor of the Company. The Committee may authorize the creation of trusts or other arrangements to meet obligations created under the Plan to deliver Shares or payments hereunder consistent with the foregoing.
(L) Protection of Board and Committee. No member of the Board or the Committee shall have any liability for any determination or other action made or taken in good faith with respect to the Plan or any Award granted under the Plan.
(M) Government Regulations. Notwithstanding any provision of the Plan or any Award Agreement executed pursuant to the Plan, the Company’s obligations under the Plan and such Award Agreement shall be subject to all applicable laws, rules, and regulations and to such approvals as may be required by any governmental or regulatory agencies, including without limitation any stock exchange on which the Company’s Shares may then be listed.
(N) Genders and Numbers. When permitted by the context, each pronoun used in the Plan shall include the same pronoun in other genders and numbers.
(O) Captions. The captions of the various sections of the Plan are not part of the context of the Plan, but are only labels to assist in locating those sections, and shall be ignored in construing the Plan.
(P) Effective Date of the Plan. This Plan was originally effective on July 1, 2000. This Plan as amended and restated shall be effective upon approval by the shareholders of the Company (the “Effective Date”). This Plan as amended and restated shall be submitted to the shareholders of the
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(Q) Duration of the Plan. Unless previously terminated by the Board, this Plan shall terminate ten years from the original effective date of July 1, 2000 and no Award shall be granted under it thereafter, but such termination shall not affect any Award theretofore granted.
(R) Governing Law. The Plan shall be construed and governed by the laws of the State of Ohio.
(S) Withholding Tax. The Company, at its option, shall have the right to require the Participant or any other person receiving Shares, Restricted Shares, Performance Shares or Performance Units (including cash payments) to pay the Company the amount of any taxes which the Company is required to withhold with respect to such Shares, Restricted Shares, Performance Shares, or Performance Units or, in lieu of such payment, to retain or sell without notice a number of such Shares subject to the applicable Award sufficient to cover the amount required to be so withheld. The Company, at its option, shall have the right to deduct from all dividends paid with respect to Shares, Restricted Shares, Performance Shares, and Performance Units the amount of any taxes which the Company is required to withhold with respect to such dividend payments. The Company, at its option, shall also have the right to require a Participant to pay to the Company the amount of any taxes which the Company is required to withhold with respect to the receipt by the Participant of Shares pursuant to the exercise of a Stock Option, or, in lieu thereof, to retain, or sell without notice, a number of Shares sufficient to cover the amount required to be withheld. The obligations of the Company under the Plan shall be conditional on such payment or other arrangements acceptable to the Company.
(T) Savings Clause. In case any one or more of the provisions of this Plan or any Award shall be held invalid, illegal, or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and the invalid, illegal, or unenforceable provision shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted, or revised retroactively to permit this Plan or such Award, as applicable, to be construed so as to foster the intent of this Plan. This Plan and all Awards are intended to comply in all respects with applicable law and regulation, including Code Section 422, Rule 16b-3 under the 1934 Act (with respect to persons subject to Section 16 of the 1934 Act (“Reporting Persons”)), and Code Section 162(m) (with respect to covered employees as defined under Code Section 162(m) (“Covered Employees”)). In case any one or more of the provisions of this Plan or any Award shall be held to violate or be unenforceable in any respect under Code Section 422, Rule 16b-3, or Code Section 162(m), then, to the extent permissible by law, any provision which could be deemed to violate or be unenforceable under Code Section 422, Rule 16b-3, or Code Section 162(m) shall first be construed, interpreted, or revised retroactively to permit the Plan or such Award, as applicable, to be in compliance with Code Section 422, Rule 16b-3, and Code Section 162(m). Notwithstanding anything in this Plan to the contrary, the Committee, in its sole discretion, may bifurcate the Plan so as to restrict, limit, or condition the use of any provision of this Plan to Participants who are Reporting Persons or Covered Employees without so restricting, limiting, or conditioning this Plan with respect to other Participants.
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Exhibit 10.61
STATE AUTO FINANCIAL CORPORATION
OUTSIDE DIRECTORS
RESTRICTED SHARE UNIT PLAN
Effective Upon Approval by Shareholders
TABLE OF CONTENTS
| Page | |||||
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ARTICLE I DEFINITIONS AND GENERAL
PROVISIONS
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1 | ||||
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1.1 Definitions
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1 | ||||
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1.2 General Provisions
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3 | ||||
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ARTICLE II ELIGIBILITY AND
PARTICIPATION
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3 | ||||
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2.1 General Eligibility Conditions
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3 | ||||
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2.2 Specific Conditions for Active
Participation
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4 | ||||
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2.3 Termination of Participation
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4 | ||||
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ARTICLE III RESTRICTED SHARE
UNITS
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4 | ||||
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3.1 Annual Awards of Restricted Share Units
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4 | ||||
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3.2 Record of Account
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4 | ||||
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3.3 Restricted Share Unit Agreement
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5 | ||||
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ARTICLE IV VESTING
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5 | ||||
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4.1 Vesting
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5 | ||||
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ARTICLE V DISTRIBUTION OF
BENEFITS
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6 | ||||
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5.1 Distribution Timing
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6 | ||||
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5.2 Distribution upon Termination other than
for Disability or Death
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6 | ||||
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5.3 Distribution upon Death
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6 | ||||
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5.4 Distribution in the Event of Disability
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7 | ||||
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5.5 Withdrawals for Unforeseeable Emergency
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7 | ||||
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ARTICLE VI PLAN
ADMINISTRATION
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7 | ||||
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6.1 Administration
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7 | ||||
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6.2 Administrative Committee
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7 | ||||
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6.3 Statement of Participant’s Account
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8 | ||||
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6.4 Filing Claims
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8 | ||||
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ARTICLE VII AMENDMENT AND
TERMINATION
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8 | ||||
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7.1 Amendment
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8 | ||||
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7.2 Termination
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8 | ||||
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ARTICLE VIII MISCELLANEOUS
PROVISIONS
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9 | ||||
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8.1 Facility of Payments
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9 | ||||
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8.2 Funding
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9 | ||||
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8.3 Anti-Assignment
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9 | ||||
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8.4 Unclaimed Interests
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9 | ||||
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8.5 References to Code, Statutes and
Regulations
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10 | ||||
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8.6 Liability
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10 | ||||
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8.7 Governing Law; Severability
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10 | ||||
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8.8 Taxes
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10 | ||||
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8.9 Effective Date
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10 | ||||
i
STATE AUTO FINANCIAL CORPORATION
OUTSIDE DIRECTORS RESTRICTED SHARE UNIT PLAN
Background Information
The directors and shareholders of State Auto Financial Corporation, an Ohio corporation (the “Company”), desire to adopt the Company’s Outside Directors Restricted Share Unit Plan (the “Plan”) in order to align and strengthen the interests of Outside Directors with the interests of the Company’s shareholders.
The Company intends for the Plan to be an unfunded, nonqualified deferred compensation arrangement as provided under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to satisfy the requirements of a “top hat” plan thereunder and under Labor Reg. Sec. 2520.104-23.
The Plan is intended to comply with the requirements of The American Jobs Creation Act of 2004 and Section 409A of the Internal Revenue Code of 1986, as amended (“Code”), and to constitute a good faith effort at meeting such requirements pending the issuance of additional guidance by the Internal Revenue Service (“IRS”). To the extent inconsistent with Code Section 409A or regulations issued thereunder, this Plan shall be amended to conform to such requirements within applicable time limitations established by the IRS.
| ARTICLE I. | DEFINITIONS AND GENERAL PROVISIONS |
1.1 Definitions. For purposes of the Plan, the following terms shall be defined as set forth below. Other capitalized terms used in the Plan shall be defined as set forth in the Plan.
| (a) Account. The bookkeeping account described in Section 3.2 under which benefits and earnings are credited on behalf of a Participant. | |
| (b) Administrative Committee. The Compensation Committee of the Board or such other committee of at least three (3) persons appointed by the Compensation Committee to oversee the administration of the Plan. | |
| (c) Award. An award of Restricted Share Units under the Plan. | |
| (d) Beneficiary. The person(s) (including a trust) entitled to receive any distribution hereunder upon the death of a Participant. The Beneficiary for benefits payable under this Plan shall be the beneficiary designated by the Participant in accordance with procedures established by the Administrative Committee as of the Participant’s date of death, or, in the absence of any such designation, the Participant’s estate. | |
| (e) Board. The Board of Directors of the Company. | |
| (f) Change of Control. For purposes of the Plan, a Change of Control means: |
| (i) a change in ownership of the corporation occurring on the date that any one person, or more than one person acting as a group (as defined below), acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of such corporation. However, if any one person or more than one person acting as a |
| group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation (within the meaning of (ii) below)). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of a Change in Control. This change in ownership of the corporation applies only when there is a transfer of stock of the corporation (or issuance of stock of the corporation) and stock in such corporation remains outstanding after the transaction; or | |
| (ii) a change in the effective control of the corporation occurring on the date that either: (A) any one person, or more than one person acting as a group (as defined below), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing 35 percent or more of the total voting power of the stock of such corporation; or (B) a majority of members of the corporation’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board of directors prior to the date of the appointment or election, provided that for purposes of this subsection (B), the term “corporation” refers solely to the “relevant corporation”, as defined below, for which no other corporation is a majority shareholder for purposes of that definition; or | |
| (iii) a change in the ownership of a substantial portion of the corporation’s assets occurring on the date that any one person, or more than one person acting as a group (as defined below) acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to more than 40 percent of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. | |
| Persons acting as a group. For purposes of this definition, persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation. | |
| Identification of the “relevant corporation”. To constitute a Change in Control as to the Plan Participant, the Change in Control must relate to (i) the corporation for whom the Participant is performing services at the time of the Change in Control, (ii) the corporation |
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| that is liable for the payment of the deferred compensation (or all corporations liable for the payment if more than one corporation is liable), or (iii) a corporation that is a majority shareholder of a corporation identified in (i) or (ii), or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in (i) or (ii). For purposes of this paragraph, a majority shareholder is a shareholder owning more than 50% of the total fair market value and total voting power of such corporation. |
| (g) Common Shares. The common shares, without par value, of the Company. | |
| (h) Disability. Permanent and total disability as defined in Code Section 22(e)(3). | |
| (i) Distribution Options. An immediate single lump sum payment or annual installment payments over a period of five (5) or ten (10) years. In the absence of an election by the Participant, the default shall be an immediate single lump sum. | |
| (j) Outside Director. Any non-employee member of the Board of Directors of the Company. | |
| (k) Parent. Any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. | |
| (l) Participant. Any Outside Director who meets the eligibility requirements for participation in the Plan as set forth in Article II and who receives an Award under the Plan. | |
| (m) Plan Year. The fiscal year of the Plan, which is the twelve (12) consecutive month period beginning January 1 and ending December 31; provided, however, the first Plan Year shall begin on the Effective Date and end on December 31, 2005. | |
| (n) Retirement. The retirement from the Board of any Outside Director after attaining age 65. | |
| (o) Subsidiary. Any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. |
1.2 General Provisions. The masculine wherever used herein shall include the feminine; singular and plural forms are interchangeable. Certain terms of more limited application have been defined in the provisions to which they are principally applicable. The division of the Plan into Articles and Sections with captions is for convenience only and is not to be taken as limiting or extending the meaning of any of its provisions.
| ARTICLE II. | ELIGIBILITY AND PARTICIPATION |
2.1 General Eligibility Conditions. All Outside Directors are eligible to receive Awards under the Plan. However, in order to receive a benefit under the Plan, a Participant must meet the requirements of Sections 2.2 and 2.3.
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2.2 Specific Conditions for Active Participation. To participate actively in the Plan, a Participant must execute or acknowledge a Restricted Share Unit Agreement as described in Section 3.3 and comply with such other procedures as may be established by the Administrative Committee from time to time. A Participant’s Agreement shall be maintained by or on behalf of the Administrative Committee and must be executed, acknowledged, and filed as of the date of grant or at such other time as may be required by regulations issued under Code Section 409A.
2.3 Termination of Participation. Once an Outside Director becomes a Participant, such individual shall continue to be a Participant until such individual (a) ceases to qualify as an Outside Director, and (b) ceases to have any vested interest in the Plan (as a result of distributions made to such Participant or his Beneficiary, if applicable, or otherwise).
| ARTICLE III. | RESTRICTED SHARE UNITS |
3.1 Annual Awards of Restricted Share Units. Promptly following each annual meeting of the shareholders of the Company on and after the Effective Date, each Outside Director shall be automatically granted an Award of 1,400 restricted share units (“Restricted Share Units”), or such greater number as determined by the Administrative Committee in accordance with Section 6.2. Except for the elections which may be made by each Participant as provided in the Plan, the terms of each annual Award of Restricted Share Units shall be the same with respect to each Participant. The Company will credit the number of Restricted Share Units awarded for each Plan Year to the Participant’s Account. For each Award, each Participant shall select the Distribution Option applicable to the Award and the form of payment distribution of the credited Restricted Share Units, which shall be either in cash or Common Shares. The form of the payment distribution selected by the Participant shall be set forth in the Agreement.
3.2 Record of Account. Solely for the purpose of measuring the amount of the Company’s obligations to each Participant or his beneficiaries under the Plan, the Company will maintain a separate bookkeeping record, an “Account,” for each Participant in the Plan that shall reflect the fair market value of the Account.
Subject to the provisions of this Article III, on the date when the Restricted Share Units to be credited to the Participant are allocated to his Account, the Company will credit to a separate sub-account a number of hypothetical Common Shares (and fractions thereof) having a Value equal to the Restricted Share Units. For purposes of this Plan, the “Value” of a Common Share on a particular day shall mean: (a) the last reported sale price of a Common Share on the Nasdaq National Market System on the most recent previous trading day (or if there was no trading in the Common Shares on that day, then on the next preceding trading day in which there was trading in the Common Shares), or (b) the mean between the high and low bid and ask price of a Common Share as reported by the National Association of Securities Dealers on the most recent previous trading day, or (c) the last reported sale price of a Common Share on any stock exchange on which the Common Shares are listed on the most recent previous trading day (or if there was no trading in the Common Shares on that day, then on the next preceding trading day on which there was trading in the Common Shares).
If any Organic Change shall occur, then the Participant’s Account shall be adjusted so as to contain a Value equivalent to such shares of stock, securities or assets (including cash) as would have been issued or payable with respect to or in exchange for the number of Common Shares credited thereto immediately before such Organic Change, if such Common Shares had been outstanding. An
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The Account of a Participant (as of the Dividend Payment Date), shall be credited with such earnings (or losses) consisting solely of dividend equivalent credits pursuant to this paragraph. Whenever a dividend or other distribution is made with respect to the Common Shares, then the Account of a Participant (as of the Dividend Payment Date) shall be credited, on the payment date for such dividend or other distribution (the “Dividend Payment Date”), with a number of additional Common Shares having a Value, as of the Dividend Payment Date, based upon the number of Common Shares deemed to be held in the Participant’s Account as of the record date for such dividend or other distribution (the “Dividend Record Date”), if such Common Shares were outstanding. If such dividend or other distribution is in the form of cash, the number of Common Shares so credited shall be a number of Common Shares (and fractions thereof) having a Value, as of the Dividend Payment Date, equal to the amount of cash that would have been distributed with respect to the Common Shares deemed to be held in the Participant’s Account as of the Dividend Record Date, if such Common Shares were outstanding. If such dividend or other distribution is in the form of Common Shares, the number of Common Shares so credited shall equal the number of such Common Shares (and fractions thereof) that would have been distributed with respect to the Common Shares deemed to be held in the Participant’s Account as of the Dividend Record Date, if such Common Shares were outstanding. If such dividend or other distribution is in the form of property other than cash or Common Shares, the number of Common Shares so credited shall be a number of Common Shares (and fractions thereof) having a Value, as of the Dividend Payment Date, equal to the value of the property that would have been distributed with respect to the Common Shares deemed to be held in the Participant’s Account as of the Dividend Record Date, if such Common Shares were outstanding. The value of such property shall be its fair market value as of the Dividend Payment Date, determined by the Board based upon market trading if available and otherwise based upon such factors as the Board deems appropriate.
3.3 Restricted Share Unit Agreement. Each Restricted Share Unit Award granted under the Plan shall be evidenced by a Restricted Share Unit Agreement (“Agreement”). The Agreement shall be dated as of the date of the Award, shall be signed by an officer of the Company authorized by the Board, and shall be signed by the Participant. The Agreement shall describe the Restricted Share Unit Award and state that such Restricted Share Units are subject to all the terms and provisions of the Plan. At the time the Restricted Share Units are awarded, the Board may determine that such Restricted Share Units shall be restricted as to transferability as specified in the Agreement. The prospective Participant of an Award shall not have any rights with respect to such Award, unless and until such Participant has executed an agreement evidencing the Award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award.
| ARTICLE IV. | VESTING |
4.1 Vesting. A Participant always will be one hundred percent (100%) vested in amounts credited to such Participant’s Account.
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| ARTICLE V. | DISTRIBUTION OF BENEFITS |
5.1 Distribution Timing. A Participant shall receive payment of the amounts credited to his Account upon his termination from Board membership due to Retirement, death, Disability or any other reason. The Participant will begin to receive the amount credited to his Account in the form designated by the Participant in his Agreement as of the first regular payment processing date to occur at least six (6) months after the date of the Participant’s termination of Board membership, Retirement, death or Disability. The Administrative Committee may establish regular payment processing dates and change the same from time to time in its discretion, provided there are at least two such dates each Plan Year. If payment is to be made in an immediate lump sum, it shall occur on the first regular payment processing date as described above. If payment is to be made in annual installments, it shall commence on such first regular payment processing date with subsequent annual installments to occur on the same date each year thereafter until the Participant’s Account is distributed in full.
5.2 Distribution upon Termination other than for Disability or Death. A Participant may elect the Distribution Option to be applicable to each Award payable upon a termination of Board membership, including by Retirement. The Participant may change his election of a Distribution Option with respect to a particular Award; provided, however, that such change is made at least twelve (12) months prior to the date that payment would have otherwise begun under such Award and provided that a Participant may not change a Distribution Option to one that would complete the distribution of the Participant’s Account more quickly than the election in effect at the date of the new election. If a Distribution Option election is made or changed and distribution is triggered before twelve (12) months have elapsed, the distribution will be made in accordance with the Distribution Option election in effect prior to the change or, if none, in accordance with the default Distribution Option.
If an annual installment payment method is the selected Distribution Option, the amount of the annual benefit shall equal the amount necessary to fully distribute the Participant’s Account as an annual benefit over the installment period, consistent with the following methodology: the amount payable as the annual installment shall equal the value of the Participant’s Account as of the most recent Account valuation date, multiplied by a fraction, the numerator of which is one (1) and the denominator of which is the number of annual installments remaining in the installment period elected by the Participant. For example, assuming a ten (10) year installment payment period applies, the amount distributed at each of the distribution dates would represent the value of the Participant’s Account as of the most recent valuation date preceding the actual distribution date times the following factors: Year 1 — 10% ( 1/10), Year 2 — 11.11% ( 1/9), Year 3 — 12.5% ( 1/8), Year 4 — 14.29% ( 1/7), Year 5 — 16.66% ( 1/6), Year 6 — 20% ( 1/5), Year 7 — 25% ( 1/4), Year 8 — 33.33% ( 1/3), Year 9 — 50% ( 1/2), Year 10 — 100% ( 1/1).
The Participant must provide the Company advance notice of his intention to retire and receive benefits hereunder in accordance with uniform procedures established by the Administrative Committee.
5.3 Distribution upon Death. In the event of the death of the Participant while receiving benefit payments under the Plan, the Beneficiary or Beneficiaries designated by the Participant shall be paid the remaining payments due under the Plan in accordance with the method of distribution in effect at the date of death. In the event of the death of the Participant prior to the commencement of
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5.4 Distribution in the Event of Disability. Upon the Participant’s Disability, the Participant shall be eligible to receive payment of the amounts credited to his Account in the default Distribution Option commencing as soon as practicable after the Administrative Committee is satisfied of the determination of the existence of a Disability with respect to such Participant. The Participant’s Account may also be payable in one of the other Distribution Options provided such other Distribution Option was timely elected by the Participant at least twelve (12) months prior to his Disability.
5.5 Withdrawals for Unforeseeable Emergency. Upon the occurrence of an unforeseeable emergency, the Participant shall be eligible to receive payment of the amount necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent such liquidation would not itself cause severe financial hardship). The amount determined to be properly distributable under this section and applicable regulations under Code Section 409A shall be payable in a single lump sum only. For the purposes of this section, the term “unforeseeable emergency” means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent of the Participant (as defined in Code Section 152(a)); loss of the Participant’s property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. It shall be the responsibility of the Participant seeking to make a withdrawal under this section to demonstrate to the Administrative Committee that an unforeseeable emergency has occurred and to document the amount properly distributable hereunder.
| ARTICLE VI. | PLAN ADMINISTRATION |
6.1 Administration. The Plan shall be administered by the Administrative Committee as an unfunded deferred compensation plan that is not intended to meet the qualification requirements of Code Section 401.
6.2 Administrative Committee. The Administrative Committee will operate and administer the Plan and shall have all powers necessary to accomplish that purpose, including, but not limited to, the discretionary authority to interpret the Plan, the discretionary authority to determine all questions relating to the rights and status of Participants, and the discretionary authority to make such rules and regulations for the administration of the Plan as are not inconsistent with the terms and provisions hereof or applicable law, as well as such other authority and powers relating to the administration of the Plan, except such as are reserved by the Plan to the Board. All decisions made by the Administrative Committee shall be final.
Without limiting the powers set forth herein, the Administrative Committee shall have the power (a) to change or waive any requirements of the Plan to conform with the law or to meet special circumstances not anticipated or covered in the Plan; (b) to determine the times and places for holding meetings of the Administrative Committee and the notice to be given of such meetings; (c) to
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The members of the Administrative Committee and the Company and its officers and directors, shall be entitled to rely upon all valuations, certificates and reports furnished by any funding agent or service provider, upon all certificates and reports made by an accountant, and upon all opinions given by any legal counsel selected or approved by the Administrative Committee, and the members of the Administrative Committee and the Company and its officers and directors shall, except as otherwise provided by law, be fully protected in respect of any action taken or suffered by them in good faith in reliance upon any such valuations, certificates, reports, opinions or other advice of a funding agent, service provider, accountant or counsel.
6.3 Statement of Participant’s Account. The Administrative Committee shall, as soon as practicable after the end of each Plan Year, provide to each Participant a statement setting forth the Account of such Participant under Section 3.2 as of the end of such Plan Year. Such statement shall be deemed to have been accepted as correct unless written notice to the contrary is received by the Administrative Committee within thirty (30) days after providing such statement to the Participant. Account statements may be provided more often than annually in the discretion of the Administrative Committee.
6.4 Filing Claims. Any Participant, Beneficiary or other individual (hereinafter a “Claimant”) entitled to benefits under the Plan, or otherwise eligible to participate herein, shall be required to make a claim with the Administrative Committee (or its designee) requesting payment or distribution of such Plan benefits (or written confirmation of Plan eligibility, as the case may be), on such form or in such manner as the Administrative Committee shall prescribe. Unless and until a Claimant makes proper application for benefits in accordance with the rules and procedures established by the Administrative Committee, such Claimant shall have no right to receive any distribution from or under the Plan.
ARTICLE VII. AMENDMENT AND TERMINATION
7.1 Amendment. The Board reserves the right, in its sole discretion, to amend, modify or alter any or all of the provisions of the Plan at any time and from time to time without the consent of any Participants; provided, however, that no amendment shall operate retroactively so as to affect adversely any rights to which a Participant may be entitled under the provisions of the Plan as in effect prior to such action. Furthermore, no such amendments, modifications or alterations shall be made without the approval of the Company’s shareholders to the extent such approval is required by applicable law, regulation or Nasdaq or stock exchange rule.
7.2 Termination. The Company reserves, in its sole discretion, the right to suspend, discontinue or terminate the Plan at any time in whole or in part; provided, however, that a suspension,
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ARTICLE VIII. MISCELLANEOUS PROVISIONS
8.1 Facility of Payments. Whenever, in the opinion of the Administrative Committee, a person entitled to receive any payment, or installment thereof, is under a legal disability or is unable to manage his financial affairs, the Administrative Committee shall have the discretionary authority to direct payments to such person’s legal representative or to a relative or friend of such person for his benefit; alternatively, the Administrative Committee may in its discretion apply the payment for the benefit of such person in such manner as the Administrative Committee deems advisable. Any such payment or application of benefits made in good faith in accordance with the provisions of this Section shall be a complete discharge of any liability of the Administrative Committee with respect to such payment or application of benefits.
8.2 Funding. All benefits under the Plan are unfunded and the Company shall not be required to establish any special or separate fund or to make any other segregation of assets in order to assure the payment of any amounts under the Plan; provided, however, that in order to provide a source of payment for its obligations under the Plan, the Company may establish a trust fund. The right of a Participant or his Beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Company, and neither the Participant nor his Beneficiary shall have any rights in or against any amounts credited under the Plan or any other specific assets of the Company. All amounts credited under the Plan to the benefit of a Participant shall constitute general assets of the Company and may be disposed of by the Company at such time and for such purposes as it may deem appropriate.
8.3 Anti-Assignment. No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge; and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void. No right or benefit shall be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefits. If a Participant, a Participant’s spouse, or any Beneficiary should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber or charge any right to benefits under the Plan, then those rights, in the discretion of the Administrative Committee, shall cease. In this case, the Administrative Committee may hold or apply the benefits at issue or any part thereof for the benefit of the Participant, the Participant’s spouse, or Beneficiary in such manner as the Administrative Committee may deem proper.
8.4 Unclaimed Interests. If the Administrative Committee shall at any time be unable to make distribution or payment of benefits hereunder to a Participant or any Beneficiary of a Participant by reason of the fact that his whereabouts is unknown, the Administrative Committee shall so certify, and thereafter the Administrative Committee shall make a reasonable attempt to locate such missing person. If such person continues missing for a period of three (3) years following such certification, the interest of such Participant in the Plan shall, in the discretion of the Administrative Committee, be distributed to the Beneficiary of such missing person.
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8.5 References to Code, Statutes and Regulations. Any and all references in the Plan to any provision of the Code, ERISA, or any other statute, law, regulation, ruling or order shall be deemed to refer also to any successor statute, law, regulation, ruling or order.
8.6 Liability. The Company, and its directors, officers and employees, shall be free from liability, joint or several, for personal acts, omissions, and conduct, and for the acts, omissions and conduct of duly constituted agents, in the administration of the Plan.
8.7 Governing Law; Severability. The Plan shall be construed according to the laws of the State of Ohio, including choice of law provisions, and all provisions hereof shall be administered according to the laws of that State, except to the extent preempted by federal law. A final judgment in any action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. In the event that any one or more of the provisions of the Plan shall for any reason be held to be invalid, illegal, or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of the Plan, but the Plan shall be construed as if such invalid, illegal, or unenforceable provisions had never been contained herein, and there shall be deemed substituted such other provision as will most nearly accomplish the intent of the parties to the extent permitted by applicable law.
8.8 Taxes. The Company shall be entitled to withhold any taxes from any distribution hereunder or from other compensation then payable, as it believes necessary, appropriate, or required under relevant law.
8.9 Effective Date. This Plan shall be effective upon approval by the shareholders of the Company (the “Effective Date”). This Plan shall be submitted to the shareholders of the Company for approval at the Company’s 2005 annual meeting of shareholders, anticipated to be held May 11, 2005.
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| 1. | Vesting Dates & Term. The Option shall be exercisable as follows: |
| (i) |
[
] [(___)] Option
Shares may be purchased on or after [ ]. |
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| (ii) |
[
] [(___)] Option
Shares may be purchased on or after [ ]. |
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| (iii) |
[
] [(___)] Option
Shares may be purchased on or after [ ]. |
| (a) | state that the Option is thereby being exercised, the number of Option Shares with respect to which the Option is being exercised, each person in whose name any certificates for the Option Shares should be registered and his or her address and social security number; | ||
| (b) | be signed by the person or persons entitled to exercise the Option and, if the Option is being exercised by anyone other than the Grantee, be accompanied by proof satisfactory to counsel for the Company of the right of such person or persons to exercise the Option under the Plan and all applicable laws and regulations; | ||
| (c) | be accompanied by such representations, warranties or agreements with respect to the investment intent of such person or persons exercising the Option as the Company may reasonably request in form and substance satisfactory to counsel for the Company; and |
| (d) | be accompanied by tender to the Company of payment in full for the Option Shares being purchased as set forth in paragraph 3 hereof. |
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STATE AUTO FINANCIAL CORPORATION | |
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Date of Grant:
, 20___
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Date , 20___ |
| 1. | Vesting Dates & Term. The Option shall be exercisable as follows: |
| (i) |
[
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Shares may be purchased on or after [ ]. |
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| (ii) |
[
] [(___)] Option
Shares may be purchased on or after [ ]. |
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| (iii) |
[
] [(___)] Option
Shares may be purchased on or after [ ]. |
| (a) | state that the Option is thereby being exercised, the number of Option Shares with respect to which the Option is being exercised, each person in whose name any certificates for the Option Shares should be registered and his or her address and social security number; | ||
| (b) | be signed by the person or persons entitled to exercise the Option and, if the Option is being exercised by anyone other than the Grantee, be accompanied by proof satisfactory to counsel for the Company of the right of such person or persons to exercise the Option under the Plan and all applicable laws and regulations; | ||
| (c) | be accompanied by such representations, warranties or agreements with respect to the investment intent of such person or persons exercising the Option as the Company may reasonably request in form and substance satisfactory to counsel for the Company; and | ||
| (d) | be accompanied by tender to the Company of payment in full for the Option Shares being purchased as set forth in paragraph 3 hereof. |
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STATE AUTO FINANCIAL CORPORATION | |
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Date of Grant: [
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Date , [20___] |
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| A. | Award. |
| B. | Payment Elections. | |
| Timing of Payment: | ||
| Subject to the rules and procedures of the Administrative Committee (the “Committee”), I hereby make this election to receive payment of the value of the Restricted Share Units awarded pursuant to this Agreement in accordance with the applicable terms of the Plan. I understand that payment will not be made until the first regular payment processing date that occurs at least six months after my termination of Board membership, Retirement, death or Disability. | ||
| No Acceleration — I understand that after completion of this election under the Plan, the law provides that I cannot request an acceleration of the timing of my payment for this Award under the Plan. For example, if I elect a series of installment payments over 10 years, I cannot later change my election to receive payment in installment payments over 5 years or a lump sum. If I elect to change my distribution timing for this Award at a future date (to delay distributions), I understand that the law requires that my future election cannot be effective until 12 months after its date and that my distribution must be delayed for at least five years beyond the initial distribution date. | ||
| REMINDER: If I make no election under this section, the Plan will automatically distribute my benefits in the form of a single lump sum. | ||
| I elect to receive my benefit (initial only one): |
| ___ in an immediate single lump sum. | ||
| ___ in a series of approximately equal annual payments made over a period of five (5) years. | ||
| ___ in a series of approximately equal annual payments made over a period of ten (10) years. | ||
| (REMINDER: if electing installments, distributions can never be accelerated to a faster form of distribution.) |
| Form of Payment: | ||
| I elect to receive my benefit (initial only one): | ||
| ___ in cash. | ||
| ___ in Common Shares. | ||
| C. | Beneficiary Designation. | |
| Subject to the rules and procedures of the Committee, I understand that I may designate a Beneficiary to receive any distribution from the Plan upon my death. In the absence of a valid Beneficiary designation, I understand that my estate shall be my designated Beneficiary. |
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Agreed to by:[DIRECTOR’S NAME]
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Date of this Designation
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Signature of Participant |
| 1. | I have reviewed this Form 10-Q of State Auto Financial Corporation; | ||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: August 5, 2005 | /s/Robert H. Moone | |||
| Robert H. Moone, Chief Executive Officer | ||||
| (Principal executive officer) | ||||
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| 1. | I have reviewed this Form 10-Q of State Auto Financial Corporation; | ||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: August 5, 2005 | /s/Steven J. Johnston | |||
| Steven J. Johnston, Chief Financial Officer | ||||
| (Principal financial officer) | ||||
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| /s/ Robert H. Moone | ||||
| Robert H. Moone | ||||
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Chief Executive Officer
August 5, 2005 |
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| /s/ Steven J. Johnston | ||||
| Steven J. Johnston | ||||
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Chief Financial Officer
August 5, 2005 |
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