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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY
(AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12.
STATE AUTO FINANCIAL CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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[State Auto Financial Corporation Logo]
STATE AUTO FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of
STATE AUTO FINANCIAL CORPORATION:
Notice is hereby given that the Annual Meeting of Shareholders of State
Auto Financial Corporation (the "Company") will be held at the Company's
principal executive offices located at 518 East Broad Street, Columbus, Ohio, on
Friday, May 25, 2001, at 10:00 A.M., EDST, for the following purposes:
1. To elect three Class I directors, each to hold office for a
three-year term and until a successor is elected and qualified; and
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The close of business on April 3, 2001 has been fixed as the record date
for the determination of shareholders entitled to notice of and to vote at the
meeting and any adjournment thereof.
In order that your shares may be represented at this meeting and to assure
a quorum, please sign and return the enclosed proxy promptly. A return addressed
envelope, which requires no postage, is enclosed. In the event you are able to
attend and wish to vote in person, at your request we will cancel your proxy.
By Order of the Board of Directors
JOHN R. LOWTHER
Secretary
Dated: April 20, 2001
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STATE AUTO FINANCIAL CORPORATION
PROXY STATEMENT
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of State Auto Financial Corporation (the
"Company") to be used at its Annual Meeting of Shareholders to be held May 25,
2001 (the "Annual Meeting"). Shares represented by properly executed proxies
will be voted at the Annual Meeting in accordance with the choices indicated on
the proxy. Any proxy may be revoked at any time, insofar as it has not been
exercised, by delivery to the Company of a subsequently dated proxy or by giving
notice of revocation to the Company in writing or in open meeting. A
shareholder's presence at the Annual Meeting does not by itself revoke the
proxy.
The mailing address of the principal executive offices of the Company is
518 East Broad Street, Columbus, Ohio 43215. The approximate date on which this
Proxy Statement and the form of proxy are first being sent or given to
shareholders is April 20, 2001.
PROXIES AND VOTING
The close of business on April 3, 2001, has been fixed as the record date
for the determination of shareholders entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof. On the record date there were
outstanding and entitled to vote 38,695,961 of the Company's Common Shares,
without par value. Each Common Share is entitled to one vote.
Shareholders do not have the right to cumulate their votes in the election
of directors, and the nominees receiving the highest number of votes will be
elected as the Class I directors.
All Common Shares represented by properly executed proxies will be voted at
the Annual Meeting in accordance with the choices indicated on the proxy. If no
choices are indicated on a proxy, the Common Shares represented by that proxy
will be voted in favor of the nominees listed in this Proxy Statement for
election as Class I directors. Any proxy may be revoked at any time prior to its
exercise by delivering to the Company a subsequently dated proxy or by giving
notice of revocation to the Company in writing or in open meeting. A
shareholder's presence at the Annual Meeting does not by itself revoke the
proxy.
Abstentions will be considered as Common Shares present and entitled to
vote at the Annual Meeting and will be counted for purposes of determining
whether a quorum is present. Abstentions will not be counted in determining the
votes cast for the election of directors and will not have a positive or
negative effect on the outcome of the election.
If your Common Shares are held in street name, you will need to instruct
your broker regarding how to vote your Common Shares. If you do not provide your
broker with voting instructions regarding the election of directors, your broker
will nevertheless have the discretion to vote your Common Shares for the
election of directors. There are certain other matters, however, over which your
broker does not have discretion to vote your Common shares without your
instructions -- these situations are referred to as "broker non-votes." If such
a matter comes before the Annual Meeting (which is not anticipated), your Common
Shares will not be voted on that matter.
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PROPOSAL ONE: ELECTION OF DIRECTORS
The number of directors currently is fixed at nine. The Board of Directors
is divided into three classes, Class I, Class II and Class III, with three
directors in each Class. The term of office of directors in one Class expires
annually at each annual meeting of shareholders at such time as their successors
are elected and qualified. Directors in each Class are elected for three-year
terms. The term of office of the Class I directors expires concurrently with the
holding of the Annual Meeting. The three incumbent directors in Class I have
been nominated for re-election.
There is currently a vacancy in the Class II directors due to the
resignation of Robert L. Bailey effective January 1, 2001. The Company expects
to fill that vacancy with the election of Ramon L. Humpke following the closing
of the acquisition of Meridian Insurance Group, Inc. ("MIGI") by State
Automobile Mutual Insurance Company ("Mutual"), owner of approximately 68% of
the Common Shares. Mr. Humpke is currently the Chairman of the Board of MIGI.
The acquisition of MIGI is anticipated to close during the second quarter of
2001. For additional information regarding this transaction, please see the
Company's Annual Report on Form 10-K for its year ending December 31, 2000,
which document is on file with the Securities and Exchange Commission.
At the Annual Meeting, it is the intention of the persons named in the
accompanying form of proxy, unless a contrary position is indicated on such
proxy, to vote the proxy for the election of the three nominees named in the
following table as Class I directors, each to hold office until the 2004 annual
meeting of shareholders and until a successor is elected and qualified. In the
event that any nominee named in the table as a Class I director is unable to
serve (which is not anticipated), the persons named in the proxy may vote it for
another nominee of their choice.
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Set forth below is information about each of the Class I director nominees:
CLASS I DIRECTOR NOMINEES
(TERMS EXPIRING IN 2004)
A COMMON
NAME OF DIRECTOR SHARES OWNED
DIRECTOR NOMINEE OF THE BENEFICIALLY AS %
AND POSITION(S) PRINCIPAL OCCUPATION(S) COMPANY OF APRIL 3, OF
WITH COMPANY AGE(1) DURING THE PAST FIVE YEARS SINCE 2001(2)(3) CLASS
---------------- ------ -------------------------- -------- --------------- -----
John R. Lowther(4)..... 50 Senior Vice President of the 1991 108,279 *
Senior Vice President, Company, State Auto Property and
Secretary and General Casualty Insurance Company ("State
Counsel Auto P&C"), Milbank Insurance
Company ("Milbank"), State Auto
National Insurance Company
("National"), Farmers Casualty
Insurance Company ("Farmers
Casualty"), each a wholly-owned
subsidiary of the Company, and
Mutual, 3/01 to present; Secretary
and General Counsel of the
Company, State Auto P&C, Milbank,
National, and Mutual for more than
five years; Vice President of the
Company, State Auto P&C, Milbank,
National and Mutual for more than
five years prior to 3/01.
Paul W. Huesman(5)..... 64 President, Huesman-Schmid 1991 64,940 *
Director Insurance Agency, Inc., an
insurance agency, for more than
five years.
Robert H. Moone(6)..... 56 Chairman of the Board of the 1998 244,044 *
Chairman, President and Company, State Auto P&C, Milbank,
CEO National, Farmers Casualty and
Mutual, 1/01 to present; President
and CEO of the Company, State Auto
P&C, Milbank, National, Farmers
Casualty and Mutual, 5/99 to
present; President and COO of the
Company, State Auto P&C, Milbank,
National and Mutual, 5/96 to 5/99;
Executive Vice President of the
Company, State Auto P&C, Milbank,
National and Mutual, 11/93 to
5/96.
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6
Set forth below is information about the directors whose terms of office
continue after the Annual Meeting.
CLASS II DIRECTORS
(TERMS EXPIRING IN 2002)
A COMMON
NAME OF DIRECTOR SHARES OWNED
DIRECTOR OF THE BENEFICIALLY AS %
AND POSITION(S) PRINCIPAL OCCUPATION(S) COMPANY OF APRIL 3, OF
WITH COMPANY AGE(1) DURING THE PAST FIVE YEARS SINCE 2001(2)(3) CLASS
--------------- ------ -------------------------- -------- --------------- -----
William J. Lhota....... 60 President-Energy Delivery, American 1994 30,000 *
Director Electric Power, management,
technical and professional
subsidiary of AEP, a major
investor-owned electric utility,
6/00 to present; President and Chief
Operating Officer, Appalachian Power
Company, Central Power and Light
Company, Columbus Southern Power
Company, Indiana Michigan Power
Company, Kentucky Power Company,
Kingsport Power Company, Ohio Power
Company, Wheeling Power Company,
Public Service Company of Oklahoma,
Southwestern Electric Power Company,
and West Texas Utilities Company,
all of which are subsidiaries of
AEP, 1/96 to present; Executive Vice
President, American Electric Power,
1/96 to 6/00; Executive Vice
President, American Electric Power
Service Corporation, 7/93 to 1/96.
Mr. Lhota is also a director of
Huntington Bancshares, Inc., a bank
holding company, and AEP Generating
Company, Appalachian Power Company,
Central Power and Light Company,
Columbus Southern Power Company,
Indiana Michigan Power Company,
Kentucky Power Company, Ohio Power
Company, Public Service Company of
Oklahoma, Southwestern Electric
Power Company and West Texas
Utilities Company.
David J. D'Antoni(7)... 55 Senior Vice President, Ashland, 1995 46,000 *
Director Inc., and Group Operating Officer,
Ashland Distribution and Specialty
Chemical Companies, 3/99 to present;
Senior Vice President of Ashland,
Inc. and President, Ashland
Chemical, a division of Ashland,
Inc., 7/88 to 3/99. Ashland, Inc. is
involved in oil refining and
marketing, highway construction,
automotive after market products,
specialty chemicals and chemical and
plastics distribution.
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7
CLASS III DIRECTORS
(TERMS EXPIRING IN 2003)
A COMMON
NAME OF DIRECTOR SHARES OWNED
DIRECTOR OF THE BENEFICIALLY AS %
AND POSITION(S) PRINCIPAL OCCUPATION(S) COMPANY OF APRIL 3, OF
WITH COMPANY AGE(1) DURING THE PAST FIVE YEARS SINCE 2001(2)(3) CLASS
--------------- ------ -------------------------- -------- --------------- -----
Urlin G. Harris, Jr.... 63 Retired 4/97 as an officer of the 1991 120,567 *
Director Company, State Auto P&C, Milbank,
National and of Mutual; Executive
Vice President of the Company,
State Auto P&C, Milbank, National
and Mutual, 11/93 to 3/31/97.
George R. Manser(8).... 69 A private investor and Chairman of 1991 76,139 *
Director Concorde Holding Co., a family
holding company; retired 10/99 as
Director of Corporate Finance,
Uniglobe Travel USA; Director of
Corporate Finance, Uniglobe Travel
USA, a travel agency franchisor,
3/97 to 10/99; Chairman of the
Board, Uniglobe Travel (Capital
Cities) Inc., a travel agency
franchisor, for more than five
years prior to 3/97; retired
advisory director to J.C. Bradford
& Co., effective 6/00; Mr. Manser
is also a director of Hallmark
Financial Services, Inc., a
nonstandard, Texas only, auto
insurer.
Richard K. Smith(9).... 55 Retired 6/97 as Partner of KPMG, -- 8,000 *
Director LLP. Partner of KPMG LLP for more
than five years prior to 6/97.
- ---------------
* Less than one (1%) percent.
(1) Ages shown are as of the date of the Annual Meeting.
(2) Except as indicated in the notes to this table, the persons named in the
table have sole voting and investment power with respect to all Common
Shares shown as beneficially owned by the named person. With respect to
stock options, this table includes only stock options for Common Shares
which are currently exercisable or exercisable within 60 days of April 3,
2001.
(3) The amount reported includes Common Shares attributable to options granted
under the 1991 Stock Option Plan for Messrs. Moone (162,830) and Lowther
(76,300) and Common Shares attributable to options granted under the 1991
Directors' Stock Option Plan for Messrs. Lhota (12,000), D'Antoni (12,000),
Manser (24,000), Huesman (24,000), and Smith (2,000). Mr. Harris' shares
include 65,400 Common Shares attributable to options granted under the 1991
Stock Option Plan to Mr. Harris while he was employed by the Company and
options for 6,000 Common Shares granted under the 1991 Directors' Stock
Option Plan since he retired from active service to the Company.
(4) Includes 26,750 Common Shares attributable to options granted to Mr. Lowther
under the 1991 Stock Option Plan, which he assigned to his spouse pursuant
to the terms of the 1991 Stock Option Plan, and 2,000 Common Shares
attributable to options granted under the 1991 Stock
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Option Plan, which he assigned pursuant to the 1991 Stock Option Plan to
trusts maintained for the benefit of his children. Mr. Lowther disclaims
beneficial ownership of these Common Shares.
(5) Includes 2,820 Common Shares owned by Mrs. Huesman, as to which Mr. Huesman
disclaims beneficial ownership, 12,238 Common Shares owned by the
Huesman-Schmid Insurance Agency, Inc. Profit Sharing Plan and 16,670 Common
Shares owned by the Huesman-Schmid Insurance Agency, Inc. Defined Benefit
Pension Plan. Mr. Huesman shares voting and investment power with the other
trustee of these plans with respect to these Common Shares.
(6) Includes 65,490 Common Shares attributable to options granted to Mr. Moone
under the 1991 Stock Option Plan which he assigned to the Anna Moone Living
Trust (Anna Moone and Robert H. Moone, co-trustees) pursuant to the terms of
the 1991 Stock Option Plan. Mr. Moone disclaims beneficial ownership of
these Common Shares.
(7) Includes 12,000 Common Shares owned by Mrs. D'Antoni, as to which Mr.
D'Antoni disclaims beneficial ownership.
(8) Includes 9,259 Common Shares owned by Mrs. Manser, as to which Mr. Manser
disclaims beneficial ownership.
(9) Includes 4,000 Common Shares owned by Mrs. Smith, as to which Mr. Smith
disclaims beneficial ownership.
In addition to the Common Shares owned beneficially by Messrs. Bailey and
Moone, as set forth above, Mark A. Blackburn and Steven J. Johnston, the other
named executive officers in the Summary Compensation Table set forth below,
owned beneficially 15,210 and 80,860 Common Shares, respectively, of the Company
as of April 3, 2001, each of which represents less than 1% of the Company's
outstanding Common Shares. These amounts include Common Shares attributable to
options which are currently exercisable or exercisable within 60 days of April
3, 2001, granted under the 1991 Stock Option Plan in the amounts of 13,200, and
61,900 for Messrs. Blackburn and Johnston, respectively. These persons and/or
their spouses have sole voting and investment power with respect to all Common
Shares beneficially owned by them. As of April 3, 2001, all directors and
executive officers of the Company as a group (22 persons) owned beneficially
1,574,124 (4.1%) Common Shares of the Company, which included options for
968,400 Common Shares.
MEETINGS OF THE BOARD OF DIRECTORS AND BOARD COMMITTEES
During the fiscal year ended December 31, 2000, the Company's Board of
Directors held four meetings. No incumbent director attended fewer than 75% of
the aggregate of the meetings of the Board and the meetings of all committees on
which he served.
The Board has an Audit Committee charged with several responsibilities,
including: 1) reviewing the Company's accounting functions, operations, and
management; 2) considering the adequacy and effectiveness of the internal
controls and internal auditing methods and procedures of the Company; 3) meeting
and consulting with the Company's independent auditors and with the Company's
financial and accounting personnel concerning the foregoing matters; 4)
reviewing with the Company's independent auditors the scope of their audit of
the Company and the results of their examination of its financial statements;
and 5) considering the selection and recommending to the Board of Directors a
firm of certified public accountants to be appointed as the independent auditors
of the Company for its then current fiscal year. Present members are Richard K.
Smith, David J. D'Antoni and George R. Manser. The Audit Committee held four
meetings during the Company's
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fiscal year ended December 31, 2000. See "Report of the Audit Committee"
contained elsewhere in this Proxy Statement.
The Board also has a Stock Options Committee (the "Options Committee")
charged with the responsibility of administering the Company's 2000 Stock Option
Plan and 1991 Stock Option Plan. Present members of such committee, who also
serve as the Executive Compensation Committee, are David J. D'Antoni, William J.
Lhota and George R. Manser. See "Executive Compensation Committee and Options
Committee Report" for a discussion of the responsibilities of the Company's
Executive Compensation Committee. The Executive Compensation Committee and
Options Committee held three meetings during the Company's fiscal year ended
December 31, 2000.
The Board has no standing nominating committee or committee performing
similar functions.
COMPENSATION OF DIRECTORS
Directors of the Company who are not also officers of the Company receive
from the Company an annual fee of $20,000, plus travel expenses incurred in
attending directors meetings, and a fee of $500, plus travel expenses, for each
committee meeting attended, other than certain Audit Committee meetings. Audit
Committee members are paid $250 for each telephone conference meeting, which
generally relate to reviewing the quarterly financial statements just prior to
the Company's releasing earnings. Directors may defer all or a portion of these
fees under the Company's deferred compensation plan for directors. In addition,
directors of the Company who are not full-time employees of the Company or its
parent or subsidiary corporations will receive stock options pursuant to the
2000 Directors' Stock Option Plan. Under this plan, promptly following each
annual meeting of shareholders of the Company, each eligible director is granted
a non-qualified option to purchase 1,500 Common Shares of the Company at the
fair market value of such shares on the last trading day prior to the annual
meeting immediately preceding the date of grant. Options are immediately
exercisable in whole or in part and must be exercised within ten years of the
date of grant. A director's compliance with the Stock Ownership Guidelines is a
condition to his or her eligibility for receipt of options under this plan. The
2000 Directors Stock Option Plan was amended in 2001 to increase the annual
option grant to 1,500 Common Shares from 1,000 Common Shares in accordance with
the recommendation of a consultant retained by the Board of Directors of the
Company.
COMPENSATION OF EXECUTIVE OFFICERS
Pursuant to a Management and Operations Agreement effective January 1, 2000
(the "2000 Management Agreement"), among Mutual, the Company and State Auto P&C,
Milbank and National, all wholly owned subsidiaries of the Company, and other
affiliated companies, the executive officers of the Company, State Auto P&C,
Milbank, and National, as well as every other person providing services to these
companies, are employees of State Auto P&C and the Company rather than Mutual,
while Mutual acts as the common paymaster. The costs and expenses associated
with these employees of State Auto P&C and the Company are reimbursed to Mutual,
as paymaster, in accordance with the terms of the 2000 Management Agreement. See
"Certain Transactions" below.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
Set forth below is information concerning the compensation paid or accrued
by, or reimbursed to, Mutual for the Company's fiscal years ended December 31,
2000, 1999, and 1998, to the
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Company's chief executive officer and its four most highly compensated executive
officers, other than the chief executive officer:
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) GRANTED(3) COMPENSATION(4)
- --------------------------- ---- --------- -------- ------------ ---------------
Robert L. Bailey(5)...... 2000 $483,000 $ 51,142 48,300 $17,923
Chairman 1999 $477,693 $279,000 38,000 $17,737
1998 $425,000 $260,579 28,000 $15,893
Robert H. Moone(5)....... 2000 $336,000 $ 35,577 33,600 $12,590
Chairman, President and 1999 $319,616 $150,000 22,000 $12,017
Chief Executive Officer 1998 $270,000 $ 94,507 16,000 $10,280
Steven J. Johnston....... 2000 $171,617 $ 18,033 13,200 $ 6,006
Senior Vice President, 1999 $169,059 $ 42,539 10,000 $ 5,838
Treasurer and 1998 $153,148 $ 47,234 6,000 $ 5,597
Chief Financial Officer
Mark A. Blackburn(6)..... 2000 $170,000 $ 17,907 7,200 $ 999
Senior Vice President 1999 $ 80,000 $ 25,600 6,000 $ 500
John R. Lowther.......... 2000 $145,030 $ 15,356 10,800 $ 5,858
Senior Vice President, 1999 $143,436 $ 51,892 6,000 $ 5,802
Secretary and General 1998 $132,176 $ 48,096 6,000 $ 5,408
Counsel
- ---------------
(1) Includes amounts deferred pursuant to the State Auto Insurance Companies
Capital Accumulation Plan (the "CAP") and the Non-Qualified Incentive
Deferred Compensation Plan (the "Deferred Compensation Plan"). The CAP is a
defined contribution plan (within the meaning of the Employee Retirement
Income Security Act of 1974) ("ERISA") and is intended to be a qualified
plan under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"). Under the CAP, each participant is eligible to
enter into a written salary reduction agreement with his employer whereby
the participant's salary will be reduced by a whole percentage from 1% to
16%, as elected by the participant, in accordance with the rules governing
cash or deferred arrangements under Section 401(k) of the Code. The amount
deferred by a participant is contributed by his employer to the trust fund
for the CAP and invested in accordance with the election of the participant
from among investment funds established under the trust agreement. The
Deferred Compensation Plan is a non-qualified, unfunded deferred
compensation plan for eligible key employees who are legally precluded from
contributing a full 6% of compensation to the CAP or who choose to defer a
portion of their salary beyond the amount matched by the CAP. Under the
Deferred Compensation Plan, such employees are eligible to enter into a
salary reduction agreement to defer payment of an additional portion of the
employee's salary as the employee prescribes on an election form executed
annually in advance of the year in which such compensation would be earned.
Deferred amounts, along with the Company matching amounts on that portion
deferred that is eligible for the match (see footnote
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(4), below), are invested by State Auto P&C in a variety of investment options
made available to participants in the Deferred Compensation Plan pursuant to the
terms of such plan, including, effective March 2001, the Common Shares. The
amounts included as salary for 1999 were affected by the fact that there
were 27 pay periods in 1999, rather than 26 pay periods.
(2) The amounts appearing in this column represent bonuses paid pursuant to the
State Auto Quality Performance Bonus Plan (the "QPB"). Under the QPB for
2000, quarterly bonuses are paid to employees who have completed two full
calendar quarters of service if the direct statutory combined ratio for such
quarter was 100% or less for all combined affiliated insurers.
Also included in this column are special incentive bonuses earned in 1999
and 1998 under special incentive bonus plans put into place for Mr.
Johnston, Mr. Blackburn and Mr. Lowther by the President. While similar
plans were in place for 2000, the amounts of these bonuses were not
determined as of the date this Proxy Statement was printed. The Executive
Compensation Committee also had in place special incentive bonus plans for
Messrs. Bailey and Moone in 2000 and the two prior years. The bonus shown
for Mr. Moone and Mr. Bailey for 1999 and 1998 includes the special bonus
earned in each such year. The 2000 incentive bonus for Messrs. Bailey and
Moone has not been determined as of the date this Proxy Statement was
printed (see "Executive Compensation Committee and Options Committee
Report").
(3) In each year noted, the persons listed in the Summary Compensation Table
were granted options to purchase the number of Common Shares of the Company
set forth in this column pursuant to the 1991 Stock Option Plan, all of
which were non-qualified stock options except that one-half of the options
granted to Mr. Johnston, and Mr. Blackburn and to Mr. Lowther in 1998 were
incentive stock options. Mr. Moone's grants included 9,638, 8,420 and 5,800
incentive stock options in 2000, 1999 and 1998, respectively.
(4) The amounts appearing in this column represent the Company's contributions
and credits on behalf of each named person under the CAP or the Deferred
Compensation Plan. Each participant in the CAP is credited annually with his
allocable share of employer matching contributions made to the CAP from the
consolidated net accumulated or current earnings of Mutual and its
subsidiaries. A participant's share of the matching contribution equals 75%
of his salary reduction contributions up to 2% of compensation, plus 50% of
his salary reduction contributions from 3% to 6% of compensation. While a
participant is always vested in his own salary reduction contributions, the
rights of a participant to amounts credited to his account as matching
contributions vest as follows: (a) one-third of matching contributions
allocated for the plan year preceding the plan year in which termination of
employment occurs, two-thirds of matching contributions allocated for the
second plan year before the plan year in which termination of employment
occurs, and 100% of the matching contributions allocated for the third and
earlier plan years before the plan year in which termination of employment
occurs; and (b) notwithstanding the foregoing, after the participant has
five or more years of service with State Auto P&C and its affiliates, all
matching contributions become vested. The following are the amounts of the
Company matching contributions under the CAP for 2000 for the officer
indicated: Mr. Bailey -- $5,950; Mr. Moone -- $5,950; Mr.
Johnston -- $5,769; and Mr. Lowther -- $5,076. Each employee who is eligible
to participate in the Deferred Compensation Plan is credited annually with
his allocable share of Company matching contributions on the same basis that
contributions are matched under the CAP, provided that no more than 6% of
any employee's salary is subject to being matched under either the CAP or
the Deferred Compensation Plan. The following amounts reflect the Company's
contribution to the Deferred Compensation Plan for
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2000: Mr. Bailey -- $10,955 and Mr. Moone -- $5,810. The amounts appearing in
this column also represent the premiums for policies of whole life insurance
purchased on behalf of the officers of the Company, including the executive
officers named above. The following amounts represent the premiums paid for
whole life insurance for 2000: Mr. Bailey -- $1,018; Mr. Moone -- $830; Mr.
Johnston -- $237; Mr. Blackburn -- $999; and Mr. Lowther -- $782.
(5) Mr. Bailey retired from the Company and its Board of Directors effective
January 1, 2001, at which time Mr. Moone was elected as Chairman of the
Board.
(6) Mr. Blackburn joined the Company in July 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows the number of options granted in 2000 to the
individuals named in the Summary Compensation Table and estimates the potential
realizable value of these option grants.
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL POTENTIAL
% OF TOTAL REALIZABLE VALUE REALIZABLE VALUE
OPTIONS AT ASSUMED AT ASSUMED
NUMBER OF GRANTED ANNUAL RATES OF ANNUAL RATES OF
SECURITIES TO EXERCISE STOCK PRICE STOCK PRICE
UNDERLYING EMPLOYEES OR BASE APPRECIATION FOR APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM OPTION TERM
NAME GRANTED(1) YEAR ($/SH)(2) DATE 5%($)(3) 10%($)(3)
---- ---------- ---------- ---------- ---------- ---------------- ----------------
Robert L. 48,300 13.6% $10.375 05/25/2010 $315,474 $798,644
Bailey(4)..........
Robert H. Moone...... 33,600 9.4% $10.375 05/25/2010 $219,233 $555,579
Steven J. Johnston... 13,200 3.7% $10.375 05/25/2010 $ 86,127 $218,263
Mark A. Blackburn.... 7,200 2.0% $10.375 05/25/2010 $ 46,978 $119,053
John R. Lowther...... 10,800 3.0% $10.375 05/25/2010 $ 70,468 $178,579
- ---------------
(1) Options were granted on May 26, 2000. Each option is fully exercisable after
a one-year vesting period expires, so long as employment with the Company or
its subsidiaries or its parent continues. There are no stock appreciation
rights, performance units, or other instruments granted in tandem with these
options, nor are there any reload provisions, tax reimbursement features or
performance-based conditions to exercisability.
(2) The option exercise price is the closing price of the Company's shares on
the NASDAQ National Market System on the day of the grant.
(3) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates dictated by the Securities and Exchange Commission when the
"Potential Realizable Value" alternative is used and are not intended to be
a forecast of the Company's stock price.
(4) Mr. Bailey retired from the Company effective January 1, 2001. The 1991
Stock Option Plan and his Option Agreement provide that unvested options
vest on retirement.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth stock option exercises during 2000 by the
executive officers named in the Summary Compensation Table and shows the number
of Common Shares represented
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by both exercisable and non-exercisable stock options and the value of
in-the-money stock options (exercisable and non-exercisable) held by each of the
named executive officers as of December 31, 2000.
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES ACQUIRED FY-END(#) FY-END($)
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($)(1) UNEXERCISABLE() UNEXERCISABLE(2)
---- --------------- -------------- -------------------- --------------------
Robert L. Bailey(3)... 12,000 $ 70,500 398,000/48,300 $4,632,513/$362,250
Robert H. Moone(4).... 7,950 $ 50,324 129,230/33,600 $1,290,484/$252,000
Steven J. Johnston.... -0- -0- 48,700/13,200 $ 464,616/$99,000
Mark A. Blackburn..... -0- -0- 6,000/7,200 $ 34,875/$54,000
John R. Lowther(5).... -0- -0- 65,500/10,800 $ 708,910/$81,000
- ---------------
(1) Aggregate market value of the Common Shares covered by the option less the
aggregate price paid by the executive officer.
(2) The value of in-the-money options was determined by subtracting the exercise
price from the market value of the Company's Common Shares as of December
31, 2000 ($17.875), based on the closing price of the Company's Common
shares on the NASDAQ National Market System on that date, the last trading
day of 2000.
(3) Mr. Bailey retired from the Company effective January 1, 2001. The 1991
Stock Option Plan and his Option Agreement provide that unvested options
vest on retirement.
(4) 65,490 of the options indicated as exercisable at fiscal year end have been
assigned to the living trust of Mr. Moone's spouse of which he is the
co-trustee.
(5) 26,750 of the options indicated as exercisable at fiscal year end have been
assigned to Mr. Lowther's spouse and 2,000 of such options have been
assigned to trusts maintained for the benefit of Mr. Lowther's children.
EMPLOYEES' RETIREMENT PLAN
During 2000, the executive officers named in the Summary Compensation
Table, as well as substantially all employees of State Auto P&C were eligible to
participate in the State Auto Insurance Companies' Employee Retirement Plan (the
"Retirement Plan"). The Retirement Plan is a defined benefit plan (within the
meaning of ERISA) which is intended to be a qualified plan under Section 401(a)
of the Code, and is subject to the minimum funding standards of Section 412 of
the Code. Benefits payable under the Retirement Plan are funded through employer
contributions to a trust fund.
In addition, the executive officers named in the Summary Compensation table
benefited in 2000 from a non-qualified Amended and Restated Supplemental
Executive Retirement Plan (the "Supplemental Plan"). The Supplemental Plan is
intended to offset the impact of the Code's and ERISA's limitations on
retirement benefits available under the Retirement Plan by providing for a lump
sum or deferred cash payments in an actuarially determined amount upon
retirement of officers whose participation in the Supplemental Plan is approved
by the Board of Directors of Mutual.
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The table below shows estimated annual benefits payable under the
Retirement Plan and the Supplemental Plan to a participant upon retirement at
age 65 with indicated average annual compensation and period of service:
ESTIMATED ANNUAL RETIREMENT BENEFIT
ANNUAL ANNUAL RETIREMENT BENEFIT BASED ON YEARS OF SERVICE
AVERAGE ----------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ------------ -------- -------- -------- -------- --------
$125,000.... $44,825 $58,250 $ 71,675 $ 85,100 $ 98,466
$150,000.... $51,180 $67,505 $ 83,829 $100,153 $116,413
$175,000.... $55,628 $74,852 $ 94,075 $113,299 $132,457
$200,000.... $60,315 $82,439 $104,562 $126,685 $148,741
$225,000.... $65,243 $90,266 $115,288 $140,311 $165,264
$250,000.... $68,808 $96,037 $123,265 $150,493 $177,650
$300,000.... $68,808 $96,037 $123,265 $150,493 $177,650
$400,000.... $68,808 $96,037 $144,944 $158,419 $180,974
$450,000.... $68,808 $96,037 $160,236 $175,395 $200,894
$500,000.... $68,808 $98,886 $175,528 $192,371 $220,815
Note: The annual average compensation applies to post-1988 salaries. Post-1988
salaries have been capped according to the Internal Revenue Code.
Benefits shown above are computed as a straight single life annuity
beginning at age 65. Such amounts are not subject to offset for Social Security
benefits or other amounts payable to participants in the Retirement Plan. As of
December 31, 2000, the years of credited service to the nearest whole year and
annual average compensation for each of the named in the Summary Compensation
Table actively participating in the Retirement Plan on such date were as
follows:
NAME OF YEARS OF CURRENT ANNUAL AVERAGE COMPENSATION
INDIVIDUAL CREDITED SERVICE FOR PURPOSES OF RETIREMENT PLAN
---------- ---------------- -----------------------------------
Robert L. Bailey............. 29 $160,000
Robert H. Moone.............. 30 $160,000
Steven J. Johnston........... 15 $160,000
Mark A. Blackburn............ 1 $160,000
John R. Lowther.............. 14 $145,030
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
EMPLOYMENT AGREEMENT WITH MR. MOONE
Robert H. Moone, the Company's Chairman, President, and Chief Executive
Officer, has entered into an Employment Agreement with the Company for a term
beginning on January 1, 2001, and continuing through December 31, 2002, or until
his earlier death or disability, or upon earlier termination by either Mr. Moone
or the Company as permitted by the agreement. The Employment
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Agreement automatically renews at the end of the first two-year term for
additional two-year terms unless either party gives 60 days notice of his or its
intent not to renew such agreement. Mr. Moone's Employment Agreement provides
that his annual rate of compensation will not be less than his base salary at
the time the agreement was entered into by the parties, plus such increases in
base compensation as may be authorized by the Executive Compensation Committee
of the Company's Board of Directors. The Employment Agreement also provides for
Mr. Moone's continued participation in the Company's QPB and his incentive bonus
arrangement (collectively, the "Incentive Compensation Plans").
In the event Mr. Moone is terminated for cause, he will be entitled to
receive salary payments for twelve bi-weekly pay periods following the date of
termination plus any compensation to which he is entitled under the Incentive
Compensation Plans. In the event Mr. Moone is terminated without cause (other
than for death, disability, or retirement), he will be entitled to payment of
his full annual base salary, receipt of benefits under his Employment Agreement
for a 24-month period, payment of the average of the prior two years aggregate
QPB payments, and payment of the average of the two prior year's incentive bonus
arrangement. Mr. Moone and his spouse shall also be entitled to participate in
the Company's health insurance plan until he becomes eligible for Medicare. In
the event Mr. Moone becomes disabled, which disability continues for more than
six consecutive months during a twelve-month period, the Company may terminate
Mr. Moone's Employment Agreement, and he will be entitled to receive his base
salary and payments under the Incentive Compensation Plans to the date of
termination. Thereafter, Mr. Moone will be entitled to receive 20% of his base
salary, in addition to disability benefits received from any of the Company's
long-term disability benefits, throughout the period of his disability or until
he attains age 65, whichever first occurs. In the event of Mr. Moone's death,
his beneficiaries will receive payment of his base annual salary for twelve
months plus a prorata share of Incentive Compensation Plan payments "earned" as
of the date of death.
EXECUTIVE AGREEMENTS (CHANGE-IN-CONTROL ARRANGEMENTS)
The Company has entered into Executive Agreements with each of the persons
named in the Summary Compensation Table, other than Mr. Bailey, which provide
for the payment of certain benefits in the event of a change in control of the
Company or Mutual. These Executive Agreements were entered into as part of the
Company's corporate strategy to provide protection for, and thus retain, its
well-qualified executive officers notwithstanding any actual or threatened
change in control of the Company or of its parent, Mutual. A "Change in Control"
of the Company generally includes:
- The acquisition by any person of beneficial ownership of 25% or more of
the Company's outstanding voting securities;
- A change in the composition of the Board of Directors if a majority of
the new directors were not appointed or nominated by the directors
currently sitting on the Board of Directors or their subsequent nominees;
- A merger involving the Company where the Company's shareholders
immediately prior to the merger own less than 51% of the combined voting
power of the surviving entity immediately after the merger;
- The dissolution of the Company; or
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- A disposition of assets, reorganization, or other corporate event
involving the Company which would have the same effect as any of the
above-described events.
As respects Mutual, a change in control includes:
- A person who has not been a director or an officer of Mutual for at least
the previous 12 months becomes empowered to vote the proxy of the members
of Mutual;
- Mutual affiliates with or merges with a third party where a majority of
the current board of Mutual does not continue in office;
- Mutual is subject to an order of rehabilitation or liquidation issued by
the Ohio Department of Insurance; or
- Mutual converts to a stock corporation and a majority of the Board of
Mutual does not continue.
Under each Executive Agreement, the Company or its successor must provide
severance benefits to the executive officer if his employment is terminated
(other than on account of the officer's death or disability or termination for
cause):
- By the Company, at any time within 36 months after a Change in Control;
- By the Company, at any time prior to a Change in Control but after
commencement of any discussions with a third party relating to a possible
Change in Control involving such third party ("Change in Control
Discussion") if the officer's termination is in contemplation of such
possible Change in Control and such Change in Control is actually
consummated within 12 months after the date of such officer's
termination;
- By the executive officer voluntarily with Good Reason at any time within
36 months after a Change in Control of the Company; and
- By the executive officer voluntarily with Good Reason at any time after
commencement of Change in Control Discussions if such Change in Control
is actually consummated within 12 months after the date of such officer's
termination.
"Good Reason" generally means the assignment to the executive officer of
duties which are materially and adversely different from or inconsistent with
the duties, responsibility or status of the Executive's position during the
twelve months prior to the Change in Control, a reduction in such officer's
salary, benefits or incentive bonus or a demand to relocate to more than 35
miles from Executive's current location, made by the Company or its successor.
An executive officer's determination of Good Reason will be conclusive and
binding upon the parties if made in good faith, except that, if the executive
officer is serving as Chief Executive Officer of the Company immediately prior
to a Change in Control, the occurrence of a Change in Control will be
conclusively deemed to constitute Good Reason.
In addition to accrued compensation, bonuses, and vested benefits and stock
options, the executive officer's severance benefits payable under the Executive
Agreements include:
- A lump-sum cash payment equal to three times the officer's then current
base annual salary;
- A lump-sum cash payment equal to three times the highest annual incentive
compensation to which the officer would be entitled;
- Thirty-six months of continued insurance benefits;
- Thirty-six months of additional service credited for purposes of
retirement benefits; and
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- Out-placement benefits in an amount equal to 15% of Annual Base Salary.
Each Executive Agreement also provides that the Company will pay the
executive officer such amounts as would be necessary to compensate such officer
for any excise tax paid or incurred due to any severance payment or other
benefit provided under the Executive Agreement. However, the executive's
severance payments and benefits would be subject to any excise tax, but would
not be subject to such tax if the total of such payments and benefits were
reduced by 10% or less, then such payments and benefits will be reduced by the
minimum amount necessary (not to exceed 10% of such payments and benefits) so
that the Company will not have to pay an excess severance payment and the
executive officer will not be subject to an excise tax.
The Executive Agreements provide that, for a period of five years after any
termination of the executive's employment, the Company will provide the
executive with coverage under a standard directors' and officers' liability
insurance policy at its expense, and will indemnify, hold harmless, and defend
the executive to the fullest extent permitted under Ohio law against all
expenses and liabilities reasonably incurred by the executive in connection with
or arising out of any action, suit, or proceeding in which he may be involved by
reason of having been a director or officer of the Company or any subsidiary.
The Company must pay the cost of counsel (legal and accounting) for an
executive officer in the event such officer is required to enforce any of the
rights granted under his Executive Agreement. In addition, the executive officer
is entitled to prejudgment interest on any amounts found to be due to him in
connection with any action taken to enforce such officer's rights under the
Executive Agreement at a rate equal to the prime commercial rate of the
Company's principal bank or its successor in effect from time to time plus 4%.
The Executive Agreements (except Mr. Moone's which has a two year renewable
term to coincide with his Employment Agreement) are in effect through December
31, 2003, subject to automatic renewals and to an extension for thirty-six
months after any month in which a Change of Control occurs. An Executive
Agreement will terminate if the employment of the executive officer terminates
other than under circumstances which trigger the severance benefits. The
Executive Agreement also imposes a post-termination confidentiality covenant and
a non-competition covenant on the executive. The confidentiality covenant has a
one-year term, while the non-compete has a six-month term and includes a company
size factor and a geographic factor as respects the scope of the non-compete.
No other named executive officer of the Company has an employment agreement
with the Company.
COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee currently consists of the following
three members of the Company's Board of Directors: David J. D'Antoni, William J.
Lhota, and George R. Manser who also make up the Options Committee. None of the
members of the Executive Compensation Committee is, or was, an officer or
employee of the Company, any of its subsidiaries, or of Mutual. Also, no
executive officer of the Company served during 2000 as a member of a
compensation
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committee or as a director of any entity of which any of the Company's Executive
Compensation Committee members served as an executive officer.
EXECUTIVE COMPENSATION COMMITTEE AND OPTIONS COMMITTEE REPORT
The following is the report of the Executive Compensation Committee and the
Options Committee, whose members are identified below, with respect to
compensation reported for 2000 as reflected in the compensation tables above.
Pursuant to the 2000 Management Agreement, the Chief Executive Officer and
the other named executive officers are employees of State Auto P&C. The
Company's Executive Compensation Committee determines the salary and incentive
bonus of the Chairman and the President and Chief Executive Officer, while Mr.
Robert Moone, as President and Chief Executive Officer, is responsible for
administering the base salary component of the cash compensation paid to the
other named executive officers, all of whom reported to him in 2000. Mr. Moone
also makes recommendations to the Executive Compensation Committee with respect
to incentive bonuses for the named executive officers.
The compensation policies applied by the President in setting base salaries
earned by the named executive officers in 2000 mirror those applied in the
Company at large. This compensation system is intended to reward individuals
based on their performance, to encourage a focus on underwriting profit, to
provide for competitive levels of compensation necessary to attract and retain
executive officers, and to create an understanding of the importance of
achieving company-wide goals over the long term. The Options Committee grants
options on a periodic basis as an additional, long-term inducement to the
executive officers to improve the Company's performance and enhance the value of
the Company's Common Shares.
For 2000, compensation for the named executive officers had three
components as to which discretion is exercised: annual base salary, stock
options and incentive bonus arrangements. Mr. Moone reviews the base salary of
persons reporting directly to him approximately every 12 months. This included
Messrs. Johnston, Blackburn and Lowther, three of the named executive officers
whose 2000 salaries are reflected in the Summary Compensation Table. Merit
raises granted each year reflect his assessment of the individual officer's
performance in achieving division-wide goals set at the beginning of the year.
The overall performance of the Company's operating units is also considered. In
individual cases, raises may also reflect a named executive officer's assumption
of additional duties and responsibilities. Annual salary reviews also reflect
the fact that certain of the named executive officers had an opportunity to earn
an additional incentive bonus for superior performance.
The Executive Compensation Committee and Options Committee believe that
stock options and individual stock purchases by executive officers create a
mutuality of interest between the shareholders and management. This is believed
to be desirable and in the best interests of the shareholders as it focuses
management's attention on the importance of long-term appreciation in the price
of the Company's Common Shares. In that regard, stock ownership guidelines (the
"Guidelines") created by the Options Committee apply to Mr. Bailey, Mr. Moone,
the other named executive officers, and all other option recipients under the
1991 and 2000 Stock Option Plans and the 1991 and 2000 Directors Stock Option
Plans. These Guidelines require optionees under the 1991 and 2000 Stock Option
Plans to own Common Shares of the Company equal to percentages of base salary
depending
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on the person's position within the Company, and optionees under the 1991 and
2000 Director's Stock Option Plans to own Common Shares with a value equal to at
least three times their annual director's fee. These Guidelines are intended to
be a condition precedent to receipt of future option grants. All optionees have
five years to reach their required level of ownership. In May of 2000 the
Options Committee amended the Guidelines to facilitate their administration.
Previously, Company employees who were not in compliance with the Guidelines had
to make proportional progress to achieving compliance within the five-year
period provided for in the Guidelines. As amended, the Guidelines require any
option recipient under the 1991 and 2000 Stock Option Plans who is not currently
in compliance to participate in the employee stock purchase plan at the rate of
6% of base salary in order to be eligible for an option grant. Directors are
still required to make proportional progress in the five-year qualifying period.
Every named executive officer (and each director as well) met the stock
ownership requirements imposed by the Guidelines for 2000.
Options were awarded in May 2000. These options were based on the same
formula as was used for the grants made in May 1999. The number of options
granted depended on the relationship of the estimated value of underlying shares
to be granted as options to a percentage of the salary level applicable to each
tier of option grants. In applying this formula, the Committee used a recent
share price ($10.375) to determine the number of options granted to each option
recipient.
The Committee determined that the top three tiers of option grants should
reflect the following percentages of base salary: 100% of the base salary for
the Chairman, Mr. Bailey, 90% of base salary for the second tier occupied by Mr.
Moone, President and CEO, and 75% of the base salary for the third tier,
occupied by the Chief Financial Officer and the Secretary and General Counsel.
The Committee also determined that the fourth tier of option grants, which
affected the other named executive officer, should be set at 60% of average
salary ($110,000). The Options Committee also determined that within each tier
after the third tier, each recipient in such tier would receive an equal number
of options notwithstanding salary differences. In addition, the Options
Committee rounded up in performing the calculations to maintain what it deemed
an appropriate spread between the different tiers in terms of the number of
options granted to those in each tier.
With respect to cash bonus arrangements, the Company's QPB is intended to
provide a more short-term incentive to virtually all employees to generate
underwriting profits on a quarterly basis. Under the QPB in 2000, quarterly
bonuses were paid to all employees who completed two full calendar quarters of
service if the insurance affiliates of the Company had a direct statutory
combined ratio for such quarter of 100% or less.
In addition, Mr. Moone, President and Chief Executive Officer, developed
individualized incentive cash compensation plans for Mr. Johnston, Mr. Blackburn
and Mr. Lowther, while Mr. Moone and Mr. Bailey had their incentive cash
compensation plans for 2000 determined by the Executive Compensation Committee.
The incentive cash compensation plan for each executive officer is hereafter
referred to as his "Executive Bonus Plan." Each of the Executive Bonus Plans
applicable to Messrs. Johnston, Blackburn, and Lowther provided for a set of
objective measures of performance, which measures were designed by Mr. Moone, to
focus the attention and effort of these individuals on the operational and
financial success and the profitability of the Company. As to certain of these
executive officers, one half of their incentive bonus available depended upon
such executive officer meeting particularized objectives and targets applicable
to such person's area of responsibility within the Company. For these executive
officers the other half was driven by two of the same objective measures set
forth in Mr. Moone's Executive Bonus Plan described below. One of
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these executive officer's incentive bonus depended solely on two company-wide,
objective peer comparison measures of performance factors applicable also to Mr.
Moone's Executive Bonus Plan.
At the time the 2000 Annual Meeting Proxy Statement was published, the
Executive Compensation Committee had not yet determined the total amount of the
bonuses payable to Messrs. Bailey and Moone under their Executive Bonus Plans in
place for 1999. In May of 2000, the Executive Compensation Committee met to
consider the discretionary element of the bonus for each of Messrs. Bailey and
Moone. Each person had earned 80% of the bonus target based on the Company
earning 15 points under the peer comparison aspect of their Executive Bonus
Plans. For Mr. Bailey, his bonus under the non-discretionary aspect was
$191,076, and for Mr. Moone, his bonus was $115,061.
Mr. Bailey was entitled to a maximum of 50% of the amount payable under the
formula, or 25% or his salary for that year, as the discretionary element of his
Executive Bonus Plan. The Committee agreed to pay Mr. Bailey an additional bonus
of $59,148, or 49.5% of the target amount available under the discretionary
portion of the bonus. The Committee believed it was appropriate for Mr. Bailey's
total bonus payments, including Quality Performance Bonus, for 1999 to be less
than in 1997 when shareholder return was 70% but more than in 1998 when
underwriting results were inferior to those in 1999. Notwithstanding that
shareholder return in 1999 was not what it might have been, based on most
measures of performance of underwriting and operations over which the Chairman
had control, 1999 was a superior year in the view of the Committee.
As to Mr. Moone, the Committee retroactively amended his 1999 Executive
Bonus Plan to add a discretionary element equal to 50% of his bonus target, or
22.5% of his annual salary. The Committee granted Mr. Moone a $19,205
discretionary bonus for 1999, which was 26.7% of the maximum amount he might
have received under this part of his Executive Bonus Plan. The rationale for
this award was the Company's generally outstanding underwriting and operating
performance in 1999. Mr. Moone's total incentive bonus under his Executive Bonus
Plan for 1999 was $134,266.
In May 1999, Mr. Moone was elected Chief Executive Officer, replacing Mr.
Bailey, who continued to serve as Chairman of the Board through December 31,
2000. Hence, this report will reflect more detailed information regarding Mr.
Moone, the Chief Executive Officer during 2000. There are four components to the
Company's compensation arrangements with the Chief Executive Officer -- base
salary, incentive compensation arrangements, QPB, and stock options.
In regards to the compensation of the Chief Executive Officer, for 2000 Mr.
Moone received a cash raise equal to $16,000 or 5%. His salary for 2000 was set
in December 1999. Comparison salary data from the National Association of
Independent Insurers ("NAII"), referred to below, that was made available to the
Committee in September 1999, was dated as of April of 1999. In addition to the
salary data from NAII, the Committee reviewed the work product of a consultant's
report dated February 1999 that compared the base salary and total cash
compensation of the Company's CEO (and other positions) to the cash and total
compensation reported by several sources on peer company insurers.
In December 1999, the Committee evaluated Mr. Moone's performance and his
compensation level based on both objective and subjective measures. Mr. Moone's
salary, reflected in the Summary Compensation table for 2000, represents 62% of
the average base salary and 61% of the median salary of chief executive officers
of companies of similar size included in an annual salary survey conducted by
NAII, which is Mutual's and State Auto P&C's national trade association.
Twenty-one companies responded to this survey. These survey participants are not
necessarily reflected in the group of companies included in the NASDAQ insurance
stocks index reflected on the performance graph below.
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In setting Mr. Moone's salary for 2000, besides the salary comparison data,
the Committee considered the fact that seven months previous, Mr. Moone had
received a substantial raise when he was named chief executive officer. It also
believed that the Company's continuing exceptional underwriting performance
compared to other property casualty insurers with which the Company competes
warranted the raise it granted to Mr. Moone. At that point in time, based on the
results through the third quarter of 1999, the Company's combined ratio was
likely to be 100 or less for the fifth straight year, which the committee
regarded as a significant accomplishment.
In addition, the cash Executive Bonus Plan continued in place for 2000 for
Mr. Moone with a modification from prior years. In addition to the parameters of
average shareholder return and statutory combined ratio, the Committee added the
factor of direct written premium growth in this comparison of nine peer
companies. Thus, the total number of points available changed from 20 to 30, as
reflected in the table below.
The nine peer property casualty insurance groups to which the performance
of the Company is compared are as follows: Alfa Insurance Group, Allstate,
Chubb, Cincinnati Insurance Companies, Harleysville Group, Meridian Insurance
Group, Ohio Casualty Group, Safeco, and Selective Insurance Group. The points
system is adjusted as follows:
TOTAL POINTS EARNED PERCENT OF TARGET
- ------------------- -----------------
30-27 100%
26-23 80%
22-19 60%
18-15 40%
14-11 20%
10 or less 0%
The performance of State Auto as respects combined ratio, three-year
average shareholders' return, and direct written premium growth are ranked from
10 to 1 with 10 being the best in each criteria. The rank equates to a point
total. The highest point total attainable is 30, the lowest is 3. These peer
companies are not necessarily the same group of insurers in the NASDAQ Insurance
Index or in the NAII Salary Survey referred to above.
Mr. Moone's targeted bonus available equals 50% of his annual salary. In
addition, the plan contemplates that the Executive Compensation Committee may
award an additional bonus of up to 25% of base salary based on a subjective
evaluation of his performance by the Committee. As respects the bonus to be
earned for 2000, the Committee will determine the number of points the Company
earned when the statutory combined ratio and premium revenue growth numbers for
each of the peer company groups become available. In addition, the Committee
must determine the amount, if any, of bonus payable due to its evaluation of Mr.
Moone's performance as Chief Executive Officer under the discretionary component
of the Executive Bonus Plan for Mr. Moone. Hence, Mr. Moone's bonus earned in
the 2000 calendar year remains undetermined.
EXECUTIVE COMPENSATION COMMITTEE/STOCK OPTIONS COMMITTEE
David J. D'Antoni
William J. Lhota
George R. Manser
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REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process, including the systems of
internal controls. In fulfilling its oversight responsibilities, the Audit
Committee reviewed the audited financial statements in the Annual Report on Form
10-K for the Company's 2000 fiscal year with management, including a discussion
of the quality, not just the acceptability, of the accounting principles, the
reasonableness of significant judgments, and the clarity of disclosures in the
financial statements.
The Audit Committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of the Company's
accounting principles and such other matters as are required to be discussed
with the Audit Committee under generally accepted auditing standards. In
addition, the Audit Committee discussed with the independent auditors the
auditors' independence from management and the Company, including the matters in
the written disclosures required by the Independence Standards Board and
considered the compatibility of nonaudit services with the auditors'
independence.
The Audit Committee discussed with the Company's internal and independent
auditors the overall scope and plans for their respective audits. The Audit
Committee meets with the internal and independent auditors, with and without
management present, to discuss the results of their examinations, their
evaluations of the Company's internal controls, and the overall quality of the
Company's financial reporting. The Committee held four meetings during the 2000
fiscal year, and each member of the Audit Committee attended at least 75% of the
meetings.
In reliance on the reviews and discussions referred to above, the Audit
Committee approved that the audited financial statements be included in the
Annual Report on Form 10-K for the 2000 fiscal year for filing with the
Securities and Exchange Commission.
The Company's Board of Directors has adopted a written charter for the
Audit Committee. A copy of the Audit Committee Charter is attached to this Proxy
Statement as Appendix A.
All of the members of the Audit Committee are independent directors as
defined by the rules and regulations of Nasdaq.
AUDIT COMMITTEE
David J. D'Antoni
George R. Manser
Richard K. Smith
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PERFORMANCE GRAPH
The line graph below compares the total return on $100 invested on December
31, 1995, in the Company's shares, the CRSP Total Return Index for the NASDAQ
Stock Market ("NASDAQ Index"), and the CRSP Total Return Index for NASDAQ
insurance stocks ("NASDAQ Ins. Index"), with dividends reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN
STFC NASDAQ INDEX NASDAQ INS. INDEX
---- ------------ -----------------
12/31/95 100 100 100
12/31/96 104.849 123.036 113.991
12/31/97 189.267 150.693 167.212
12/31/98 146.18 212.509 148.981
12/31/99 108.856 394.921 115.566
12/31/00 215.205 237.618 145.124
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- -------- --------
STFC........................... 100.000 104.849 189.267 146.180 108.856 215.205
NASDAQ Index................... 100.000 123.036 150.693 212.509 394.921 237.618
NASDAQ Ins. Index.............. 100.000 113.991 167.212 148.981 115.566 145.124
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth certain information as of April 3, 2001,
with respect to the only shareholder known by the Company to be the beneficial
owner of more than 5% of any class of the Company's outstanding Common Shares:
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
------------------- ----------------- --------
State Automobile Mutual Insurance Company....... 26,302,319 68%
518 East Broad Street
Columbus, OH 43215
- ---------------
(1) Mutual exercises sole voting and investment power with respect to such
Common Shares.
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CERTAIN TRANSACTIONS
In 2000, the Company and its subsidiaries, State Auto P&C, Milbank,
National, State Auto Insurance Company ("State Auto IC"), Strategic Insurance
Software, Inc. ("S.I.S."), Stateco Financial Services, Inc. ("Stateco"), and 518
Property Management and Leasing LLC ("518 PML"), operated and managed their
businesses in conjunction with Mutual under a Management and Operations
Agreement dated January 1, 2000 (the "2000 Management Agreement"). Under the
2000 Management Agreement, every executive, managerial, technical, professional,
supervisory, and clerical function for all of the above named companies to the
2000 Management Agreement is performed by an employee of State Auto P&C. Prior
to that time, State Auto P&C performed only executive management services for
the insurance companies named above (other than State Auto IC which was not in
business prior to January 1, 2000). In addition to the 2000 Management
Agreement, there is also a Management and Operations Agreement dated January 1,
2000 (the "2000 Midwest Management Agreement"), among State Auto P&C, Mutual,
and Midwest Security Insurance Company ("Midwest Security"), a wholly owned
subsidiary of Mutual, and a Management and Operations Agreement dated January 1,
2000 (the "2000 Farmer Casualty Management Agreement"), among State Auto P&C,
Farmers Casualty Insurance Company ("Farmers Casualty"), and Mid-Plains
Insurance Company ("Mid-Plains"), a wholly owned subsidiary of Farmers Casualty.
The services provided to each of these companies mirror those provided by State
Auto P&C to Mutual. Under the 2000 Management Agreement, Mutual, National and
State Auto IC each are obligated to pay a fee equal to 4% of average surplus of
such managed insurer, provided the performance of each managed insurer exceeds
the performance standard set forth in the 2000 Management Agreement. Under the
2000 Midwest Management Agreement and the 2000 Farmers Casualty Management
Agreement, each respective managed insurer is obligated to pay .75% of direct
written premium as a management fee.
In return for the management and operations services provided under the
2000 Management Agreement, State Auto P&C receives an annual fee equal to 4% of
the three-year average annual statutory surplus of each insurance company
managed (less statement valuations for managed subsidiaries). However, the
management fee from a managed insurer can be withheld if that company does not
meet the standards of performance described or incorporated in the 2000
Management Agreement, as approved by the boards of directors of the insurers
that are parties to that agreement. During 2000, the following companies
incurred the following management fees to State Auto P&C under the 2000
Management Agreement, the 2000 Midwest Management Agreement, and the 2000
Farmers Casualty Management Agreement: Mutual -- $14.5 million; Milbank -- $2.6
million; National -- $0.5 million; Midwest Security -- $0.1 million; Farmers
Casualty -- $0.2 million; Mid-Plains -- $52,489; State Auto IC -- $0.2 million;
Stateco -- $0.3 million; S.I.S. -- $78,466; and 518 PML -- $0.3 million. Based
on a review by the Company of other similar arrangements, the Company believes
the amount of the management fee charged to each managed company is comparable
to what would be charged by an independent third party performing the same
services.
The Ohio Department of Insurance (the "Department") has requested that,
beginning in 2001, Mutual file an analysis on a quarterly basis with the
Department that justifies the apportionment of the service fee paid by Mutual to
State Auto P&C under the 2000 Management Agreement in accordance with the
accounting guidance outlined in Statement of Statutory Accounting Principles No.
70 -- Allocation of Expenses. The Company believes its accounting for such
service fee is consistent with all statutory accounting principles. However,
there can be no assurance that all or any
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part of the service fee paid by Mutual will be justified to the Department's
satisfaction, which may affect the amount of such fee recognized as revenue by
Company.
The 2000 Management Agreement also addresses procedures for resolving
potential conflicts of interest. Generally, business opportunities presented to
the common officers of the companies, other than business opportunities that
meet certain criteria, must be presented to a four-member coordinating committee
consisting of two directors of Mutual, who represent the interests of Mutual and
its subsidiary, and two directors of the Company, who represents the interests
of the Company and its subsidiaries. This committee reviews and evaluates the
business opportunity using such factors as it considers relevant. Based upon
such review and evaluation, this committee then makes recommendations to each
respective board of directors as to whether or not such business opportunities
should be pursued and, if so, by which company. The boards of directors of
Mutual or its insurer subsidiary and of the Company or any of its subsidiaries
must then act on the recommendation of the committee after considering all other
factors deemed relevant to them.
The 2000 Management Agreement, the 2000 Midwest Management Agreement, and
the 2000 Farmers Casualty Management Agreement each has a ten-year term and
automatically renews for an additional ten-year term, provided that any party to
the agreement can terminate its own participation at the end of the term then in
effect by giving at least two years' advance written notice of non-renewal to
the other parties, with the exception that Milbank may terminate its
participation on 120 days notice. Any party can also terminate its participation
upon events constituting a change of control or potential change of control (as
defined in the 2000 Management Agreement, the 2000 Midwest Management Agreement,
and the 2000 Farmers Casualty Management Agreement) of the Company, or upon
agreement of the parties. The agreement automatically terminates with respect to
a party (and only that party) if such party is subject to insolvency
proceedings.
Since January 1987, State Auto P&C and Mutual have participated in an
intercompany pooling arrangement which has been amended from time to time,
including amendments adding participants to the pooling arrangement and
adjusting pooling percentages. Under the terms of the pooling arrangement, State
Auto P&C and the other pool participants cede all of their insurance business to
Mutual. All of Mutual's property and casualty insurance business is also
included in the pooled business, except for voluntary assumed reinsurance
business. Mutual then cedes a percentage of the pooled business to State Auto
P&C and the other pool participants and retains the balance. As of December 31,
2000, the parties to the pooling arrangement and their allocated pooling
percentages were as follows: Mutual -- 46%; State Auto P&C -- 39%;
Milbank -- 10%; Farmers Casualty -- 3%; Midwest Security -- 1%; and State Auto
IC -- 1%.
Stateco provides insurance premium finance services to certain
policyholders of Mutual, State Auto P&C, and Milbank. Premiums for property and
casualty insurance are typically payable at the time a policy is placed in force
or renewed. On certain large commercial policies, the premium cost may be
difficult for a policyholder to pay in one sum. Stateco makes loans to
policyholders for the term of an insurance policy to enable them to pay the
insurance premium in installments over the term of the policy, and retains a
contractual right to cancel the insurance policy if the loan installment is not
paid on a timely basis.
In 1993, Stateco expanded its business activities to include a broader
range of financial services. It now undertakes, on behalf of Mutual, State Auto
P&C, Milbank, National, Midwest Security, Farmers Casualty, Mid-Plains, and
State Auto IC, the responsibility of managing those companies'
23
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investable assets. In consideration of this service, Stateco charges each of
these companies an annual fee, paid quarterly, based on a percentage of the
average investable assets of each company. The percentage currently set is 0.4%
for bonds and 0.5% for equities, with a 0.1% bonus available if the stock
portfolio return exceeds that of the S&P 500 Index for the same period. During
2000, the following companies incurred the following fees to Stateco:
Mutual -- $2.9 million; State Auto P&C -- $1.9 million; Milbank -- $0.6 million;
National -- $0.1 million; Midwest Security -- $58,700; Farmers Casualty -- $0.1
million; Mid-Plains -- $33,206; and State Auto IC -- $49,858. The Company
believes the fees charged by Stateco to each company is comparable to those
charged by independent investment managers.
The Company's wholly owned subsidiary, S.I.S., develops and sells software
for use by insurance companies and insurance agencies. S.I.S. sells its software
and software support services to its affiliated insurers and to nonaffiliated
entities. In 2000, these affiliates paid $1.9 million to S.I.S. for its services
and products.
Mutual has guaranteed the adequacy of State Auto P&C's loss and loss
expense reserves as of December 31, 1990. Pursuant to the guarantee, Mutual has
agreed to reimburse State Auto P&C for any losses and loss expenses in excess of
State Auto P&C's December 31, 1990 reserves ($65,463,732) that may develop from
claims that have occurred on or prior to that date. This guarantee ensures that
any deficiency in the reserves of State Auto P&C as of December 31, 1990, under
the pooling arrangement percentages effective on December 31, 1990, will be
reimbursed by Mutual.
Paul W. Huesman, a director of the Company, is the president and a majority
owner of the Huesman-Schmid Insurance Agency, an independent insurance agency
licensed to sell insurance products for State Auto P&C, Mutual, National, and
State Auto IC. During 2000, State Auto P&C, National, Mutual, and State Auto IC
paid such insurance agency and its affiliated agencies commissions in the amount
of $523,455. Such commissions were determined in the same manner as commissions
were determined for other agencies of State Auto P&C, Mutual, National, and
State Auto IC.
State Auto P&C, Mutual, Milbank, National, Midwest Security, Farmers
Casualty, Mid-Plains and State Auto IC (collectively the "State Auto Group")
together participate in a catastrophe reinsurance program. Under this program,
State Auto P&C is the catastrophe reinsurer for the State Auto Group. The amount
retained by the State Auto Group is $40.0 million for each occurrence. For up to
$80.0 million in losses, excess of $40.0 million, traditional reinsurance
coverage is provided. In the event the State Auto Group incurs catastrophe
losses in excess of $120.0 million, the Company has entered into a structured
contingent financing transaction with Bank One, NA ("Bank One") to provide up to
an additional $115.0 million to be used to cover catastrophe losses in excess of
$120 million. Under this arrangement, in the event of such a loss, the Company
would sell redeemable preferred shares to SAF Funding Corporation, a special
purpose company ("SPC"), which will borrow the money necessary for such purchase
from Bank One and a syndicate of other lenders. The Company will contribute to
State Auto P&C the proceeds from the sale of its preferred shares. State Auto
P&C has assumed catastrophe reinsurance from Mutual, Milbank, National, Midwest
Security, Farmers Casualty, Mid-Plains, and State Auto IC pursuant to a
Catastrophe Assumption Agreement in the amount of $115.0 million excess of
$120.0 million. State Auto P&C will use the contributed capital to pay its
direct catastrophe losses and losses assumed under the Catastrophe Assumption
Agreement. The Company is obligated to repay the SPC (which will repay
24
27
the lenders) by redeeming the preferred shares over a six-year period. This
layer of $115.0 million in excess of $120.0 million has been excluded from the
pooling agreement, In addition, the Company's obligation to repay Bank One has
been secured by a Put Agreement among the Company, Mutual and the Lenders, under
which, in the event of a default by the Company as described in the Credit
Agreement or in the Put Agreement, Mutual would be obligated to put either the
preferred shares or the loan(s) outstanding.
The Company's wholly owned subsidiary, 518 PML, leases an office building
it owns near Nashville, Tennessee, to Mutual. 518 PML received $484,385 from
Mutual in rent for the Tennessee office in 2000. In addition, 518 PML leases an
office building it owns in Greer, South Carolina, to Mutual for its Southern
Regional Office. 518 PML received $524,880 from Mutual in rent for this office
in 2000. The Company believe these rents reflect market rates.
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP served as the independent public accountants for the
Company for its fiscal year ended December 31, 2000. Ernst & Young LLP has been
retained by the Company as its independent public accountants for the fiscal
year ending December 31, 2001. It is expected that a representative of Ernst &
Young LLP will be present at the Annual Meeting and will be given an opportunity
to make a statement, if such representative desires, and to respond to
appropriate questions.
Aggregate fees billed to the Company for the year ending December 31, 2000,
by Ernst & Young LLP were as follows:
Audit Fees.................................................. $129,278
Financial Information Systems Design and Implementation
Fees...................................................... $ 0
All Other Fees.............................................. $132,902(1)(2)
- ---------------
(1) Includes fees for tax consulting and other non-audit services.
(2) The Audit Committee has considered whether the provision of these services
is compatible with maintaining the principal accountant's independence.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Annual Meeting of
Shareholders to be held in May 2002 must be received by the Company at its
principal executive offices for inclusion in the Proxy Statement and form of
Proxy on or prior to 120 days in advance of the first anniversary date of this
Proxy Statement. If a shareholder intends to present a proposal at the 2002
Annual Meeting, but does not seek to include such proposal in the Company's
Proxy Statement and form of proxy, such proposal must be received by the Company
on or prior to 45 days in advance of the first anniversary of the date of this
Proxy Statement or the persons named in the form of proxy for the 2002 Annual
Meeting will be entitled to use their discretionary voting authority should such
proposal then be raised at such meeting, without any discussion of the matter in
the Company's Proxy Statement or form of proxy.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who own more than 10% of the
Common Shares to file statements of beneficial ownership of the Common Shares.
Based solely on a review of copies of the forms filed under Section 16(a) and
furnished to the Company, the Company believes that all applicable Section 16(a)
filing requirements were complied with during 2000, except as follows: Paul J.
Otte, a director of Mutual, reported in January 2001 an acquisition of 500
Common Shares acquired in June 2000; and Richard K. Smith, a director of the
Company and Mutual, reported in February 2001 an acquisition of 2,000 Common
Shares acquired in August 2000.
OTHER MATTERS
Management does not know of any other matters, which may come before the
Annual Meeting. However, if any other matters properly come before the Annual
Meeting, it is the intention of the persons named in the accompanying form of
proxy to vote the proxy in accordance with their judgment on such matters.
The Company will bear the cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by officers, directors, and
regular employees, personally or by telephone or telegraph, and the Company will
reimburse banks, brokers, and nominees for their out-of-pocket expenses incurred
in sending proxy material to the beneficial owners of shares held by them. If
there are follow-up requests for proxies, the Company may employ other persons
for such purpose.
JOHN R. LOWTHER
Secretary
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APPENDIX A
Audit Committee Charter
Organization
The Audit Committee of The Board of Directors shall be comprised of at
least three directors who are independent of management and the Company and
its subsidiaries or affiliates. Members of the Audit Committee shall be
considered independent if they have no relationship that may interfere with
the exercise of their independence from management and the Company, as
described in NASD Rule 4200. All Audit Committee members must be able to
read and understand fundamental financial statements, including the
Company's balance sheet, income statement, and cash flow statement, and at
least one member will have past employment experience in finance or
accounting, requisite professional certification in accounting, or
comparable experience or background in accounting or related financial
management expertise.
Statement of Policy
The Audit Committee shall provide assistance to the directors in fulfilling
their responsibility to the shareholders/policyholders, potential
shareholders/policyholders, and investment community relating to corporate
accounting, reporting practices of the company, and the quality and
integrity of financial reports of the Company. In so doing, it is the
responsibility of the Audit Committee to maintain free and open
communication between the directors, the independent auditors, the internal
auditors, and the senior management of the Company.
Responsibilities
In carrying out its responsibilities, the Audit Committee believes its
policies and procedures should remain flexible in order to best react to
changing conditions and to ensure that the corporate accounting and
reporting practices of the Company are in accordance with all requirements
and are of the highest quality.
The Audit Committee's duties shall include (where appropriate):
- Authority and responsibility to select, evaluate and, where appropriate
recommend replacement of the independent auditors to the Board of
Directors, as the independent auditors are ultimately accountable to the
Board and Audit Committee.
- Meet with the independent auditors and senior management of the Company
to review the scope of the proposed audit for the current year and the
procedures to be utilized, and at the conclusion thereof meet again to
review such audit, including any comments or recommendations of the
independent auditors.
- Review the quarterly financial statements with senior management and the
independent auditors prior to the press release of results to determine
that the independent auditors do not take exception to the content of the
financial statements, and discuss any other matters required to be
communicated to the Committee by the independent auditors. The Committee
Chairman, or his designee, may represent the entire Committee for
purposes of this review.
- Review the independent auditors' compensation.
A-1
30
- Review with management and the independent auditors the adequacy of
reserves.
- Review reports received from independent auditors, the chief internal
auditor, financial and accounting personnel, regulators, and other legal
and regulatory agencies concerning matters that may have a material
effect on the financial statements or related company compliance
policies.
- Review with the independent auditors, the chief internal auditor, and
financial and accounting personnel, the adequacy and effectiveness of the
accounting and financial controls of the Company. Elicit recommendations
for the improvement of such internal controls in areas where new or more
detailed controls or procedures are desirable. Particular emphasis should
be given to the adequacy of internal controls: (1) to expose any
payments, transactions, or procedures that might be deemed illegal or
otherwise improper, and (2) in areas which would entail significant risk
or exposure to the Company.
- Review the Company's internal audit function including the independence
and authority of its reporting obligations, a summary of findings from
completed internal audits, and a progress report on the proposed internal
audit plan, with explanations for any deviations from the original plan.
- Sole responsibility for appointment, termination, or replacement of the
chief internal auditor.
- Provide sufficient opportunity for the chief internal auditor and
independent auditors to meet with the members of the audit committee
without members of management present.
- On an annual basis, obtain from the independent auditors a written
communication delineating all their relationships and professional
services as required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees. In addition, review with
the independent auditors the nature and scope of any disclosed
relationships or professional services that may impact the objectivity
and independence of the auditors, and take, or recommend that the board
of directors take, appropriate action to oversee the continuing
independence of the auditors.
- Pre-approve the Company's use of the independent auditors to perform
significant non-audit services.
- Review and reassess the adequacy of this Charter on an annual basis.
A-2
31
DETACH CARD
- --------------------------------------------------------------------------------
STATE AUTO FINANCIAL CORPORATION ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned hereby appoints Robert H. Moone, and in the event he is unable
to so act, Steven J. Johnston and John R. Lowther, and any one or more of them,
Proxies, with full power of substitution, to represent and vote all common
shares, without par value, of State Auto Financial Corporation (the "Company")
which the undersigned would be entitled to vote if personally present at the
Annual Meeting of Shareholders to be held at the Company's principal executive
offices located at 518 East Broad Street, Columbus, Ohio on Friday, May 25,
2001, at 10:00 A.M., EDST, and at any and all adjournments thereof, as specified
on the reverse of this Proxy.
1. ELECTION OF THE FOLLOWING WITHHELD [ ]
NOMINEES AS CLASS I DIRECTORS: for all Nominees
FOR all Nominees [ ]
(except as marked to the contrary)
John R. Lowther, Paul W. Huesman, and Robert H. Moone.
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S) PRINT THE
NAMES(S) OF SUCH PERSON(S) IN THE SPACE BELOW
-----------------------------------------------------------------------------
2. In the discretion of the named Proxies, to vote on all other matters that
may properly come before the meeting or any adjournment thereof.
[ ] For [ ] Against [ ] Abstain
(CONTINUED, AND TO BE SIGNED ON OTHER SIDE)
32
DETACH CARD
- --------------------------------------------------------------------------------
State Auto Financial Corporation
(Continued from the other side)
The shares represented by this Proxy will be voted as directed by the
shareholder. IF NO DIRECTION IS GIVEN WHEN THE DULY EXECUTED PROXY IS RETURNED,
SUCH SHARES WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1.
[ ] I PLAN TO ATTEND MEETING
Date........................, 2001
..................................
Signature
..................................
Signature
Please mark, date and sign as your
name appears below and return in
the enclosed envelope. If acting
as executor, administrator,
trustee, guardian, etc., you
should so indicate when signing.
If the signer is a corporation,
please sign the full corporate
name by a duly authorized officer.
If shares are held jointly, each
stockholder named should sign.