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
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<Table>
[ ] 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 Section 240.14a-11c or Section 240.14a-12
</Table>
STATE AUTO FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
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:
----------------------------------------------------------------------
[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
Thursday, May 23, 2002, at 10:00 A.M., EDST, for the following purposes:
1. To elect two Class II 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 1, 2002 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 19, 2002
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 23,
2002 (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. A 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 19, 2002.
PROXIES AND VOTING
The close of business on April 1, 2002 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 38,980,255 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 II 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 II 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.
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 II directors expires concurrently with
the holding of the Annual Meeting. Messrs. David J. D'Antoni and William J.
Lhota, two of the three incumbent directors in Class II, have been nominated for
re-election. Ramon L. Humke, the third Class II director, will not stand for
re-election as director of the Company because he is expected to become a
director of State Automobile Mutual Insurance Company ("State Auto Mutual"), the
Company's parent, effective in June 2002.
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 two nominees named in the
following table as Class II directors, each to hold office until the 2005 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 II director is unable to
serve (which is not anticipated), the persons named in the proxy may vote it for
another nominee of their choice.
A replacement for Mr. Humke has not been nominated, thereby creating a
vacancy in the Class II directors, because the Company believes that it is
desirable to have a vacancy available which could be filled by the Board of
Directors without the time and expense involved in holding a special meeting of
shareholders should a person who could make a valuable contribution as a
director of the Company become available. No decision has been made to fill the
vacancy, nor has any candidate been considered or approved by the Board of
Directors.
Proxies cannot be voted at the Annual Meeting for a greater number of
persons than the two nominees named in this Proxy Statement.
2
Set forth below is information about each of the Class II director
nominees:
CLASS II DIRECTOR NOMINEES
(TERMS EXPIRING IN 2005)
<Table>
<Caption>
A COMMON
NAME OF DIRECTOR SHARES OWNED
DIRECTOR NOMINEE OF THE BENEFICIALLY AS %
AND POSITION(S) PRINCIPAL OCCUPATION(S) COMPANY OF APRIL 1, OF
WITH COMPANY AGE(1) DURING THE PAST FIVE YEARS SINCE 2002(2)(3) CLASS
---------------- ------ -------------------------- -------- --------------- -----
William J. Lhota....... 62 Retired President, Energy Delivery, 1994 34,500 *
Director American Electric Power delivery
business unit; Retired Executive
Vice President, American Electric
Power Service Corp., management,
technical, and professional
subsidiary of American Electric
Power. Mr. Lhota retired from these
positions in December, 2001. For
more than five years prior to his
retirement, Mr. Lhota was an
executive with American Electric
Power and American Electric Power
Service Corp. Mr. Lhota is also a
director of Huntington Bancshares,
Inc., a bank holding company.
David J. D'Antoni(4)... 57 Senior Vice President, Ashland, 1995 47,500 *
Director Inc., and Group Operating Officer,
APAC and Valvoline, 11/01 to
present; Senior Vice President,
Ashland Distribution and Specialty
Chemical Companies, 3/99 to 11/01;
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.
</Table>
3
Set forth below is information about the directors whose terms of office
continue after the Annual Meeting.
CLASS III DIRECTORS
(TERMS EXPIRING IN 2003)
<Table>
<Caption>
A COMMON
NAME OF DIRECTOR SHARES OWNED
DIRECTOR OF THE BENEFICIALLY AS %
AND POSITION(S) PRINCIPAL OCCUPATION(S) COMPANY OF APRIL 1, OF
WITH COMPANY AGE(1) DURING THE PAST FIVE YEARS SINCE 2002(2)(3) CLASS
--------------- ------ -------------------------- -------- --------------- -----
Urlin G. Harris, Jr.... 65 Retired 4/97 as an officer of the 1991 127,322 *
Director Company, State Auto Property and
Casualty Insurance Company ("State
Auto P&C"), Milbank Insurance
Company ("Milbank"), State Auto
National Insurance Company
("National"), each a wholly-owned
subsidiary of the Company, and of
State Auto Mutual; Executive Vice
President of the Company, State Auto
P&C, Milbank, National and State
Auto Mutual, 11/93 to 3/31/97.
George R. Manser(5).... 71 A private investor and Chairman of 1991 77,639 *
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; 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(6).... 56 Retired 6/97 as Partner of KPMG, 1999 11,500 *
Director LLP. Partner of KPMG LLP for more
than five years prior to 6/97.
</Table>
4
CLASS I DIRECTORS
(TERMS EXPIRING IN 2004)
<Table>
<Caption>
A COMMON
NAME OF DIRECTOR SHARES OWNED
DIRECTOR NOMINEE OF THE BENEFICIALLY AS %
AND POSITION(S) PRINCIPAL OCCUPATION(S) COMPANY OF APRIL 1, OF
WITH COMPANY AGE(1) DURING THE PAST FIVE YEARS SINCE 2002(2)(3) CLASS
---------------- ------ -------------------------- -------- --------------- -----
John R. Lowther(7)..... 51 Senior Vice President of the 1991 108,162 *
Senior Vice President, Company, State Auto P&C, Milbank,
Secretary and General National, and Farmers Casualty
Counsel Insurance Company ("Farmers
Casualty"), a wholly-owned
subsidiary of the Company, and of
State Auto Mutual, 3/01 to present;
Secretary and General Counsel of the
Company, State Auto P&C, Milbank,
National, and State Auto Mutual for
more than five years; Vice President
of the Company, State Auto P&C,
Milbank, National and State Auto
Mutual for more than five years
prior to 3/01.
Paul W. Huesman(8)..... 66 President, Huesman-Schmid Insurance 1991 65,355 *
Director Agency, Inc., an insurance agency,
for more than five years.
Robert H. Moone(9)..... 58 Chairman of the Board of the 1998 253,896 *
Chairman, President and Company, State Auto P&C, Milbank,
CEO National, Farmers Casualty and State
Auto Mutual, 1/01 to present;
President and CEO of the Company,
State Auto P&C, Milbank, National,
Farmers Casualty and State Auto
Mutual, 5/99 to present; President
and COO of the Company, State Auto
P&C, Milbank, National and State
Auto Mutual, 5/96 to 5/99; Executive
Vice President of the Company, State
Auto P&C, Milbank, National and
State Auto Mutual, 11/93 to 5/96.
</Table>
- ---------------
* 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 1,
2002.
(3) The amount reported includes Common Shares attributable to options granted
under the 1991 Stock Option Plan and the 2000 Stock Option Plan for Messrs.
Moone (159,463) and Lowther (72,183) and Common Shares attributable to
options granted under both the 1991 Directors' Stock Option Plan and 2000
Directors' Stock Option Plan for Messrs. Lhota (13,500), D'Antoni (13,500),
Manser (19,500), Huesman (19,500) and Smith (3,500). Mr. Harris' shares
owned include 70,400 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 7,500 Common Shares
5
granted under the 1991 Directors' Stock Option Plan and the 2000 Directors'
Stock Option Plan since he retired from the Company.
(4) Includes 12,000 Common Shares owned by Mrs. D'Antoni, as to which Mr.
D'Antoni disclaims beneficial ownership.
(5) Includes 9,259 Common Shares owned by Mrs. Manser, as to which Mr. Manser
disclaims beneficial ownership.
(6) Includes 5,000 Common Shares owned by Mrs. Smith, as to which Mr. Smith
disclaims beneficial ownership.
(7) Includes 20,000 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 Option Plan, which he
assigned pursuant to the 1991 Stock Option Plan to trusts maintained for the
benefit of his children and 9,011 Common Shares owned by Mrs. Lowther. Mr.
Lowther disclaims beneficial ownership of these Common Shares.
(8) Includes 2,820 Common Shares owned by Mrs. Huesman, as to which Mr. Huesman
disclaims beneficial ownership, 12,344 Common Shares owned by the
Huesman-Schmid Insurance Agency, Inc. Profit Sharing Plan and 16,778 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.
(9) Includes 54,090 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 and 11,400 Common Shares owned by Mrs. Moone. Mr.
Moone disclaims beneficial ownership of these Common Shares.
In addition to the Common Shares owned beneficially by Messrs. Lowther and
Moone, as set forth above, Mark A. Blackburn, Steven J. Johnston and Cathy B.
Miley, the other named executive officers in the Summary Compensation Table set
forth below, owned beneficially 19,252, 85,256 and 187,660 Common Shares,
respectively, of the Company as of April 1, 2002, 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 1, 2002, granted under the 1991 Stock Option Plan and
the 2000 Stock Option Plan in the amounts of 16,232, 63,766, and 103,932 for
Messrs. Blackburn and Johnston and Ms. Miley, respectively. For Ms. Miley,
53,366 of her options were granted to her spouse Richard L. Miley, who is also
an executive officer of the Company. 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 1, 2002, all directors and executive officers of the
Company as a group (20 persons) owned beneficially 1,373,642 (3.5%) Common
Shares of the Company, which included options for 790,778 Common Shares.
MEETINGS OF THE BOARD OF DIRECTORS AND BOARD COMMITTEES
During the fiscal year ended December 31, 2001, the Company's Board of
Directors held four regular meetings and six special 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.
6
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 nine
meetings during the Company's fiscal year ended December 31, 2001. 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 six meetings during the Company's fiscal year ended
December 31, 2001.
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 relates 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. 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.
COMPENSATION OF EXECUTIVE OFFICERS
Pursuant to a Management and Operations Agreement effective January 1,
2000, as amended by Amendment No. 1, Amendment No. 2 and Amendment No. 3 (the
"2000 Management Agreement"), among State Auto Mutual, the Company, State Auto
P&C, Milbank, National, 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
rather
7
than State Auto Mutual, while State Auto Mutual acts as the common paymaster and
common agent. The costs and expenses associated with these employees of State
Auto P&C are reimbursed to State Auto 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, State Auto Mutual for the Company's fiscal years ended
December 31, 2001, 2000, and 1999, to the Company's chief executive officer and
its four most highly compensated executive officers, other than the chief
executive officer:
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
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 H. Moone............. 2001 $400,000 $ 16,298 24,100 $14,830
Chairman, President and 2000 $336,000 $255,577 33,600 $12,590
Chief Executive Officer 1999 $319,616 $150,000 22,000 $12,017
Mark A. Blackburn........... 2001 $197,892 $ 7,971 9,100 $ 906
Senior Vice President 2000 $170,000 $ 58,707 7,200 $ 999
1999 $ 80,000 $ 25,600 6,000 $ 500
Steven J. Johnston.......... 2001 $189,860 $ 7,805 9,200 $ 6,063
Senior Vice President, 2000 $171,617 $ 83,021 13,200 $ 6,006
Treasurer and 1999 $169,059 $ 42,539 10,000 $ 5,838
Chief Financial Officer
John R. Lowther............. 2001 $174,036 $ 7,068 7,900 $ 6,639
Senior Vice President, 2000 $145,030 $ 86,766 10,800 $ 5,858
Secretary and General 1999 $143,436 $ 51,892 6,000 $ 5,802
Counsel
Cathy B. Miley(5)........... 2001 $151,162 $ 6,488 8,800 $ 6,093
Vice President 2000 $143,964 $ 38,409 14,400 $ 5,647
1999 $145,146 $ 35,738 12,000 $ 5,882
</Table>
- ---------------
(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
8
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, including the
Common Shares. 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 (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.
(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
2001, quarterly bonuses were paid to employees who had 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, other than
the MIGI Insurers (defined below) acquired by State Auto Mutual in its
acquisition of Meridian Insurance Group, Inc. ("MIGI"). The MIGI Insurers
consist of Meridian Security Insurance Company, Meridian Citizens Security
Insurance Company, Insurance Company of Ohio, and Meridian Citizens Mutual
Insurance Company, which is an affiliate of MIGI. QPB for 2001 also excluded
the results of the business formerly written by Meridian Mutual Insurance
Company, which merged with and into State Auto Mutual effective June 1,
2001.
Also included in this column are special incentive bonuses earned in 2000
and 1999 under special incentive bonus plans put into place for Mr.
Johnston, Mr. Blackburn, Mr. Lowther and Ms. Miley by the President. While
similar plans were in place for 2001, 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
Mr. Moone in 2001, 2000 and 1999. The bonus shown for Mr. Moone for 2000 and
1999 includes the special bonus earned in each such year. The 2001 incentive
bonus for Mr. 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 or 2000
Stock Option Plan.
(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 State Auto 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
9
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 2001 for the officer indicated: Mr. Moone -- $5,950; Mr.
Johnston -- $5,825, Mr. Lowther -- $5,857, and Ms. Miley -- $5,291. Each
employee who is eligible to participate in the Deferred Compensation Plan is
credited annually with his or her 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 2001: Mr. Moone -- $8,050. 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 2001: Mr. Moone -- $830; Mr. Johnston -- $238; Mr.
Blackburn -- $906; Mr. Lowther -- $795; and Ms. Miley $802.
(5) 4,400 the options of Ms. Miley reflected in this table were granted to her
spouse, Richard L. Miley, who is also an executive officer of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows the number of options granted in 2001 to the
individuals named in the Summary Compensation Table and estimates the potential
realizable value of these option grants.
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL POTENTIAL
------------------------------------------------ REALIZABLE VALUE REALIZABLE VALUE
% OF TOTAL AT ASSUMED AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE STOCK PRICE
UNDERLYING EMPLOYEES OR BASE APPRECIATION FOR APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM OPTION TERM
NAME GRANTED(1) YEAR ($/SH)(2) DATE 5%($)(3) 10%($)(3)
---- ---------- ---------- --------- ---------- ---------------- ----------------
Robert H. Moone...... 24,100 9.6% $16.47 5/23/2011 $249,625 $632,599
Mark A. Blackburn.... 9,100 3.6% $16.47 5/23/2011 $ 94,257 $238,865
Steven J. Johnston... 9,200 3.7% $16.47 5/23/2011 $ 95,293 $241,490
John R. Lowther...... 7,900 3.1% $16.47 5/23/2011 $ 81,827 $207,367
Cathy B. Miley(4).... 8,800 3.5% $16.47 5/23/2011 $ 91,150 $230,990
</Table>
- ---------------
(1) Options were granted on May 24, 2001. The options are fully exercisable in
1/3 increments over a three year vesting period, so long as employment with
the Company or its subsidiaries or its parent continues. There are no stock
appreciation rights, performance units, or other instruments granted in
tandem with these options, nor are there any reload provisions, tax
reimbursement features or performance-based conditions to exercisability.
(2) The option exercise price is the closing price of the Company's shares on
the NASDAQ National Market System on the day of the grant.
10
(3) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates dictated by the Securities and Exchange Commission when the
"Potential Realizable Value" alternative is used and are not intended to be
a forecast of the Company's stock price.
(4) 4,400 the options of Ms. Miley reflected in this table were granted to her
spouse, Richard L. Miley, who is also an executive officer of the Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth stock option exercises during 2001 by the
executive officers named in the Summary Compensation Table and shows the number
of Common Shares represented by both exercisable and non-exercisable stock
options and the value of in-the-money stock options (exercisable and
non-exercisable) held by each of the named executive officers as of December 31,
2001.
<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT FY-END(#) OPTIONS AT FY-
SHARES ACQUIRED VALUE EXERCISABLE/ END($) EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE(2)
---- --------------- -------------- -------------------- --------------------
Robert H. Moone(3)... 11,400 $158,061 151,430/24,100 $1,127,506/0
Mark A. Blackburn.... -0- -0- 13,200/9,100 $ 67,293/0
Steven J. Johnston... 1,200 $ 14,256 60,700/9,200 $ 452,786/0
John R. Lowther(4)... -0- -0- 76,300/7,900 $ 669,720/0
Cathy B. Miley(5).... -0- -0- 101,000/8,800 $ 795,544/0
</Table>
- ---------------
(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, 2001 ($16.24), 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
2001.
(3) 54,090 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.
(4) 20,000 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.
(5) 51,900 of the options indicated in this table as exercisable were granted to
Richard L. Miley, an executive officer of the Company and the spouse of
Cathy B. Miley. 4,400 of the options shown in this table as unexercisable
were granted to Mr. Miley. The value of the in-the-money-options that were
granted to Ms. Miley is $381,224. The balance of the value shown in the last
column is attributable to options granted to Mr. Miley.
11
EMPLOYEES' RETIREMENT PLAN
During 2001, 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 2001 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 State Auto Mutual.
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
<Table>
<Caption>
ANNUAL ANNUAL RETIREMENT BENEFIT BASED ON YEARS OF SERVICE
AVERAGE ----------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ------------ -------- -------- -------- -------- --------
$125,000 $45,821 $59,207 $ 72,593 $ 85,979 $ 99,305
$150,000 $51,596 $67,882 $ 84,167 $100,452 $116,673
$175,000 $55,704 $74,889 $ 94,074 $113,258 $132,377
$200,000 $59,811 $81,896 $103,980 $126,064 $148,081
$225,000 $63,919 $88,903 $113,887 $138,870 $163,785
$250,000 $67,044 $94,233 $121,422 $148,611 $175,730
$300,000 $67,044 $94,233 $121,422 $148,611 $175,730
$400,000 $66,564 $93,753 $142,217 $155,692 $175,730
$450,000 $66,564 $93,753 $157,172 $172,331 $193,440
$500,000 $66,564 $93,753 $172,127 $188,971 $212,535
</Table>
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, 2001, the years of credited service to the nearest whole
12
year and annual average compensation for each of the named executive officers in
the Summary Compensation Table actively participating in the Retirement Plan on
such date were as follows:
<Table>
<Caption>
NAME OF YEARS OF CURRENT ANNUAL AVERAGE COMPENSATION
INDIVIDUAL CREDITED SERVICE FOR PURPOSES OF RETIREMENT PLAN
---------- ---------------- -----------------------------------
Robert H. Moone............... 31 $170,000
Mark A. Blackburn............. 2 $170,000
Steven J. Johnston............ 16 $123,144
John R. Lowther............... 15 $112,499
Cathy B. Miley................ 24 $ 98,821
</Table>
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 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 "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 the
following: payment of his base salary, and receipt of benefits under his
Employment Agreement, both 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 years' 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.
13
EXECUTIVE AGREEMENTS (CHANGE-IN-CONTROL ARRANGEMENTS)
The Company has entered into Executive Agreements with Mr. Moone and three
of the persons named in the Summary Compensation Table, which provide for the
payment of certain benefits in the event of a change in control of the Company
or State Auto 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 senior executive officers notwithstanding any actual or
threatened change in control of the Company or of its parent, State Auto 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 of the Company 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
- 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 State Auto Mutual, a change in control includes:
- A person who has not been a director or an officer of State Auto Mutual
for at least the previous 12 months becomes empowered to vote the proxy
of the members of State Auto Mutual;
- State Auto Mutual affiliates with or merges with a third party where a
majority of the current board of State Auto Mutual does not continue in
office;
- State Auto Mutual is subject to an order of rehabilitation or liquidation
issued by the Ohio Department of Insurance; or
- State Auto Mutual converts to a stock corporation and a majority of the
board of directors of State Auto Mutual does not continue to serve on the
board of directors of the converted company.
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;
14
- 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 officer'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 the executive officer'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
- 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, in the event the
executive officer's contractual severance payments and benefits were subject to
any excise tax, but otherwise 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 officer with coverage under a standard directors' and officers'
liability insurance policy at its expense, and will indemnify, hold harmless,
and defend the executive officer to the fullest extent permitted under Ohio law
against all expenses and liabilities reasonably incurred by the executive
officer 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
15
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 officer. 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 State Auto Mutual. Also,
no executive officer of the Company served during 2001 as a member of a
compensation 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 2001 as reflected in the compensation tables above.
Pursuant to the 2000 Management Agreement, the Chief Executive Officer and
the other named executive officers were employees of State Auto P&C during all
of 2001. The Company's Executive Compensation Committee determines the salary
and incentive bonus of Robert Moone, the Chairman, President and Chief Executive
Officer, while Mr. Moone administers the base salary component of the cash
compensation paid to the other named executive officers, all of whom reported to
him in all of 2001. 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 2001 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. Since 1998, the Options
Committee has granted options on an annual basis as an
16
additional, long-term inducement to the named executive officers and other key
employees to improve the Company's performance and enhance the value of the
Company's Common Shares.
For 2001, compensation for the named executive officers had three
components as to which discretion was 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, and Ms. Miley, the named executive
officers whose 2001 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. Another factor
that affects the named executive officers' salaries is the level of parity with
the reported salaries of similar positions in peer companies.
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. Moone, the other
named executive officers, and all other option recipients under the 2000 Stock
Option Plan and the 2000 Directors' Stock Option Plan. 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 on the person's position
within the Company, and current optionees under the 2000 Directors' Stock Option
Plan 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. The Guidelines require any option recipient
under the 2000 Stock Option Plan who is not currently in compliance to
participate in the Company's benefit plans where the Common Shares are available
as an investment alternative at the rate of 6% of base salary in order to be
eligible for an option grant. Directors of the Company are still required to
make proportional progress in the five-year qualifying period. Every named
executive officer (and each director of the Company as well) met the stock
ownership requirements imposed by the Guidelines for 2001.
Options were awarded in May 2001. These options were based on the same
formula as was used for the grants made in May 2000, which has been used for a
number of years. 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 ($16.61) to
determine the number of options granted to each option recipient.
The Committee determined that the top five tiers of option grants (Tiers I,
II, III, IIIa and IV) should reflect the following percentages of base salary:
Tier I-Chairman and CEO, 100% of the base salary; Tier II-President and COO, 90%
of base salary (unoccupied); Tier III-Executive Vice President, 80% of base
salary (unoccupied); Tier IIIa, 75% of base salary, Senior Vice President(s);
Tier IV, 60% of base salary - Vice President. The Committee determined that for
all tiers below IV, progressively lower percentages of average salary of those
within each tier would be used in
17
determining the number of options granted. 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. For Tiers I through IIIa, actual salaries were
used in applying the formula while in all tiers below IIIa, the Committee used
the average salary of all option recipients in each tier in applying the
formula.
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 2001, 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. The QPB in 2001 excluded the
results of the MIGI Insurers and the business formerly written by Meridian
Mutual Insurance Company.
In addition, Mr. Moone developed individualized incentive cash compensation
plans for Mr. Johnston, Mr. Blackburn, Mr. Lowther, and Ms. Miley while Mr.
Moone had his incentive cash compensation plan for 2001 determined by the
Executive Compensation Committee. The incentive cash compensation plan for each
executive officer is hereafter referred to as his or her "Executive Bonus Plan".
Each of the Executive Bonus Plans applicable to Messrs. Johnston, Blackburn, and
Lowther and Ms. Miley 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 such
incentive bonus available depended upon such executive officer's 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 the same objective measures set forth in Mr. Moone's 2001
Executive Bonus Plan described below. One of 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 2001 Executive Bonus Plan.
At the time the 2001 Annual Meeting Proxy Statement was published last
year, the Executive Compensation Committee had not yet determined the total
amount of the bonus payable to Mr. Moone under the Executive Bonus Plan in place
for 2000. In June 2001, the Executive Compensation Committee met to consider the
discretionary element of the bonus for Mr. Moone. He had earned 60% of the bonus
target (50% of 2000 base salary) since the Company's performance relative to the
peer group had earned Mr. Moone 21 points under the peer comparison aspect of
the Executive Bonus Plans. Mr. Moone's non-discretionary bonus for 2000 was
$100,800.
As to Mr. Moone, the discretionary element of his 2000 Executive Bonus Plan
equaled 50% of his bonus target or 25% of his annual salary for 2000. The
Committee granted Mr. Moone a discretionary bonus of $119,200, which was $35,200
more than the proposed target. The Committee believed that the additional award
beyond the formula contemplated was merited due to the significance of the
Meridian transaction that was pending at year end. Other factors the Committee
considered in granting the additional discretionary bonus was the stellar
performance of the Company in 2000, the seamlessness of the transition of
management from the former Chairman and CEO, and the sales growth impact
resulting from changes implemented by Mr. Moone. Mr. Moone's total incentive
bonus under the Executive Bonus Plan for 2000 was $220,000.
The Committee eliminated MIGI from the list of peer companies used in the
Executive Bonus Plans because the price of MIGI stock had been materially
affected by the proposed transaction with
18
State Auto Mutual, which had been announced in October 2000. For the year 2001,
MIGI was replaced with the EMC Insurance Group, Inc.
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 2001 Mr.
Moone received a cash raise equal to $64,000 or 19%. His salary for 2001 was set
in December 2000. Comparison salary data from the National Association of
Independent Insurers ("NAII"), referred to below, that was made available to the
Committee in September 2000, was dated as of April of 2000.
In December 2000, 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 2001, represents 80% of
the average base salary and 78% of the median salary of chief executive officers
of companies of similar size included in an annual salary survey conducted by
the NAII, which is State Auto 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.
In setting Mr. Moone's salary for 2001, besides the salary comparison data,
the Committee considered several factors, including the increased
responsibilities arising out of the anticipated substantial increase in the size
of the State Auto Group as a result of the then pending merger of Meridian
Mutual Insurance Company with and into State Auto Mutual; the efforts that had
been made to address the declining sales in personal lines; and the assumption
of his new duties as Chairman of the Board. The Committee 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 2000, 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 2001 for
Mr. Moone. His Executive Bonus Plan utilized three parameters for peer
comparison: average shareholder return, statutory combined ratio, and direct
written premium growth. Thus, the total number of points available continued to
be 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,
19
Harleysville Group, EMC Insurance Group, Inc., Ohio Casualty Group, Safeco, and
Selective Insurance Group. The points system is as follows:
<Table>
<Caption>
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%
</Table>
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 2001 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 2001, 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 Chairman, President and Chief Executive Officer under the
discretionary component of the Executive Bonus Plan for Mr. Moone. Hence, Mr.
Moone's bonus earned in the 2001 calendar year remains undetermined.
EXECUTIVE COMPENSATION COMMITTEE/STOCK OPTIONS COMMITTEE
David J. D'Antoni
William J. Lhota
George R. Manser
20
REPORT OF THE AUDIT COMMITTEE
The Audit Committee monitors and reviews 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 responsibilities, the Audit Committee reviewed the
audited financial statements in the Annual Report on Form 10-K for the Company's
2001 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 also reviewed with the independent auditor, who
is responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, its
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 auditing standards generally accepted in the
United States, including those matters required to be discussed by SAS 61
(Codification of Statements on Auditing Standards, AU Section 380). In addition,
the Audit Committee discussed with the independent auditor the auditor's
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 auditor's 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 nine meetings during the 2001
fiscal year, and each member of the Audit Committee attended at least 75% of the
meetings. The Committee will increase the number of regularly scheduled meetings
from two to four per year, in addition to the telephonic meetings held just
prior to the release of earnings. In addition, the Audit Committee intends to
amend its charter to require management to receive the Audit Committee's
pre-approval for any consulting services to be performed by the independent
auditor, other than tax consulting services.
The full responsibilities of the Audit Committee are set forth in its
charter, which is reviewed and amended periodically by the Board of Directors. A
copy of the Audit Committee Charter was attached to the Proxy Statement for the
2001 annual meeting of shareholders.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Annual Report on Form
10-K for the 2001 fiscal year for filing with the Securities and Exchange
Commission.
As discussed above, the Audit Committee is responsible to monitor and
review the Company's financial reporting process on behalf of the Board of
Directors. However, it is not the duty or responsibility of the Audit Committee
to conduct auditing or accounting reviews or procedures. Members of the Audit
Committee are not employees of the Company, and some members may not be
accountants or auditors by profession or experts in the fields of accounting or
auditing. Therefore, the Audit Committee has relied, without independent
verification, on management's representation that the financial statements have
been prepared with integrity and objectivity and in conformity with
21
accounting principles generally accepted in the United States and on the
representations of the independent auditor included in its report on the
Company's financial statements. The Audit Committee's review does not provide
the Committee with an independent basis to determine that management has
maintained appropriate accounting and financial reporting principles or
policies, or appropriate internal controls and procedures designed to assure
compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee's considerations and discussions with
management and the independent auditors do not assure that the Company's
financial statements are presented in accordance with generally accepted
accounting principles, that the audit of the Company's financial statements has
been carried out in accordance with generally accepted auditing standards, or
that the Company's independent accountants are in fact "independent."
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
22
PERFORMANCE GRAPH
The line graph below compares the total return on $100 invested on December
31, 1996, 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
[GRAPH]
<Table>
<Caption>
STFC NASDAQ INDEX NASDAQ INS. INDEX
---- ------------ -----------------
12/31/96 100.000 100.000 100.000
12/31/97 180.514 122.477 146.733
12/31/98 139.419 172.681 130.73
12/31/99 103.822 320.894 101.409
12/31/00 205.252 193.012 127.347
12/31/01 188.021 153.153 136.234
</Table>
<Table>
<Caption>
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
-------- -------- -------- -------- -------- --------
STFC.................. 100.000 180.514 139.419 103.822 205.252 188.021
NASDAQ Index.......... 100.000 122.477 172.681 320.894 193.012 153.153
NASDAQ Ins. Index..... 100.000 146.733 130.730 101.409 127.347 136.234
</Table>
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth certain information as of April 1, 2002,
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:
<Table>
<Caption>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
------------------- ----------------- --------
State Automobile Mutual Insurance Company........ 26,285,419 67.51%
518 East Broad Street
Columbus, OH 43215
</Table>
- ---------------
(1) State Auto Mutual exercises sole voting and investment power with respect to
such Common Shares.
23
CERTAIN TRANSACTIONS
In 2001, 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 State Auto 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, clerical function for all of the above named
companies to the 2000 Management Agreement is performed by an employee of State
Auto P&C. 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, State Auto Mutual and Midwest
Security Insurance Company ("Midwest Security"), a wholly-owned subsidiary of
State Auto Mutual, and a Management and Operations Agreement dated January 1,
2000 (the "2000 Farmers Casualty Management Agreement"), among State Auto P&C,
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 State Auto Mutual
under the 2000 Management Agreement. Under the 2000 Management Agreement, State
Auto Mutual, National and State Auto IC each were obligated to pay a fee equal
to 4% of three-year average surplus of such managed insurer, provided the
performance of each managed insurer exceeded 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.
Effective October 1, 2001, the 2000 Management Agreement was amended by
Amendment No. 2, which deleted the service fee provision from the Agreement.
This was the culmination of a disagreement with the Ohio Department of Insurance
over the service fee provision. In conjunction with the elimination of the
service fee, the Company and State Auto Mutual agreed to amend the 2000 Pooling
Agreement (as defined below) to increase the Company's share of the State Auto
Pool (defined below) to 80%. The Company also entered into a Stop Loss
Reinsurance Agreement (the "Stop Loss") with State Auto Mutual. Under the Stop
Loss, if the State Auto Pool's statutory loss and loss adjustment expense ratio
(the "Loss Ratio") is between 70.75% and 80%, State Auto Mutual will reinsure
State Auto P&C and certain of its affiliates 27% of the State Auto Pool's losses
in excess of a Loss Ratio of 70.75% to 80%. State Auto P&C and certain of its
affiliates would be responsible for their share of the State Auto Pool's losses
over the 80% threshold. State Auto Mutual will have the right to participate in
the profits of the State Auto Pool. State Auto Mutual will assume 27% of the
State Auto Pool's underwriting profits attributable to a Loss Ratio less than
69.25% but more than 50.99%. The Stop Loss has a 27-month term. Under the Stop
Loss, State Auto Mutual paid State Auto P&C and certain of its affiliates $6.2
million for fourth quarter 2001 losses assumed.
Prior to the 2000 Management Agreement being amended effective October 1,
2001, as described above, State Auto P&C was paid a service fee under the 2000
Management Agreement 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 could be
withheld if that company did 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 a party to that agreement. During 2001, the
following companies incurred the
24
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: State Auto Mutual -- $12.5 million; Milbank -- $2.1 million;
National -- $0.4 million; Midwest Security -- $0.1 million; Farmers
Casualty -- $0.2 million; Mid-Plains -- $34,000; State Auto IC -- $0.3 million;
Stateco -- $0.2 million; S.I.S. -- $59,000; and 518 PML -- $0.3 million.
The 2000 Management Agreement as amended by Amendment No. 3, also addresses
procedures for 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
Independent Committees of State Auto Mutual's and the Company's boards of
directors. These committees review and evaluate the business opportunity using
such factors as each considers relevant. Based upon such review and evaluation,
these committees then make 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 State Auto Mutual or its insurer
subsidiaries 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.
Each of 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 could 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 could 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 State Auto Mutual have participated
in an intercompany pooling arrangement (the "State Auto Pool" or the "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 State Auto
Mutual. All of State Auto Mutual's property and casualty insurance business is
also included in the pooled business, except for voluntary assumed reinsurance
business. State Auto 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, 2001, the Reinsurance Pooling Agreement, amended and restated as of
January 1, 2000, as subsequently amended (the "2000 Pooling Agreement"), was in
force. Parties to the pooling arrangement and their allocated pooling
percentages as of December 31, 2001 are as follows: State Auto Mutual -- 19%;
State Auto P&C -- 59%; Milbank -- 17%; Farmers Casualty -- 3%; Midwest
Security -- 1% and State Auto IC -- 1%.
Stateco provides insurance premium finance services to certain
policyholders of State Auto 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
25
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 State Auto Mutual,
State Auto P&C, Milbank, National, Midwest Security, Farmers Casualty,
Mid-Plains, State Auto IC and each of the MIGI Insurers the responsibility of
managing those companies' investable assets. In consideration of this service,
Stateco charges such 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 2001, the following companies incurred the following
fees to Stateco: State Auto Mutual -- $2.5 million; State Auto P&C -- $2.5
million; Milbank -- $0.7 million; National -- $0.1 million; Midwest
Security -- $67,000; Farmers Casualty -- $0.1 million; Mid-Plains -- $37,000;
State Auto IC -- $58,000; Meridian Security -- $0.3 million; Meridian Citizens
Security -- $48,000 and Meridian Citizens Mutual -- $31,000. The Company
believes the fee charged by Stateco is comparable to those charged by
independent investment managers under similar circumstances.
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 2001, these affiliates paid $1.7 million to S.I.S for its services
and products. S.I.S. believes its fees for software development and software
licensing charged to affiliates reflect what a third party would pay S.I.S. for
similar services.
State Auto 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, State
Auto 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 State Auto 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, State Auto Mutual,
National and State Auto IC. During 2001, State Auto P&C, National, State Auto
Mutual and State Auto IC paid such insurance agency and its affiliated agencies
commissions in the amount of $357,000. Such commissions were determined in the
same manner as commissions are determined for other agencies of State Auto P&C,
State Auto Mutual, National, and State Auto IC.
State Auto P&C, State Auto Mutual, Milbank, National, Midwest Security,
Farmers Casualty, Mid-Plains, State Auto IC and the MIGI Insurers (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 $100.0 million to be used to cover
catastrophe losses in excess of $120.0 million. Under this arrangement, in the
event of such a loss, the
26
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 State Auto Mutual,
Milbank, National, Midwest Security, Farmers Casualty, Mid-Plains, State Auto IC
and the MIGI Insurers pursuant to a Catastrophe Assumption Agreement in the
amount of $100.0 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 the lenders) by redeeming the preferred shares over a
five-year period. This layer of $100.0 million in excess of $120.0 million has
been excluded from the 2000 Pooling Agreement. In addition, the Company's
obligation to repay Bank One has been secured by a Put Agreement among the
Company, State Auto 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, State Auto Mutual would be obligated to either buy the preferred
shares from the SPC or repay the SPC for the loan(s) outstanding.
The Company's wholly owned subsidiary, 518 PML, leases an office building
it owns near Nashville, Tennessee, to State Auto Mutual. 518 PML received
$496,000 from State Auto Mutual in rent for the Nashville Regional office in
2001. In addition, 518 PML leases office buildings it owns in Greer, South
Carolina, and West Des Moines, Iowa to State Auto Mutual for its Southern
Regional Office and Des Moines Branch Office, respectively. 518 PML received
$525,000 in rent from State Auto Mutual for the South Carolina location and
$194,000 in rent for the Iowa location in 2001. The Company believes 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, 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. As of the date of this Proxy
Statement, the Company has not selected an independent public accounting firm
for the Company's 2002 fiscal year. The Audit Committee of the Company's Board
of Directors intends to seek proposals from independent public accounting firms,
including Ernst & Young LLP, for the 2002 fiscal year.
Aggregate fees billed to or incurred by the Company for services performed
for the year ending December 31, 2001, by Ernst & Young LLP were as follows:
<Table>
Audit Fees.................................................. $270,423
Financial Information Systems Design and Implementation
Fees...................................................... $ 0
All Other Fees.............................................. $339,620(1)(2)
</Table>
- ---------------
(1) Includes fees for tax preparation and consulting totaling $101,860; other
required statutory audit services not directly related to the audit of the
Company totaling $223,805 and other miscellaneous non-audit services
totaling $13,865.
(2) The Audit Committee has considered whether the provision of these services
is compatible with maintaining the principal accountant's independence.
27
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Annual Meeting of
Shareholders to be held in May 2003 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 2003
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 2003 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.
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 Company's 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 2001, except as
follows: Because it had no evidence of receipt by the Securities and Exchange
Commission of a prior Form 4 filing, the Company made a filing in July 2001
relating to the grant of 1,500 options under the 2000 Directors' Stock Option
Plan made in May of 2000 to Paul W. Huesman, a director of the Company. All
other directors' options granted that year were timely reported, as verified by
a stamped copy from the SEC of each director's Form 4.
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 electronic mail, 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
28
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 Thursday, May 23,
2002, at 10:00 A.M., EDST, and at any and all adjournments thereof, as specified
on the reverse of this Proxy.
<Table>
Proposal 1 -- ELECTION OF THE FOLLOWING WITHHELD [ ]
NOMINEES AS CLASS II DIRECTORS: for all Nominees
FOR all Nominees [ ]
(except as marked to the contrary)
</Table>
William J. Lhota and David J. D'Antoni.
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S) PRINT THE NAMES
IN THE SPACE BELOW
-----------------------------------------------------------------------------
Proposal 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)
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 PROPOSAL 1.
[ ] I PLAN TO ATTEND MEETING
Date........................, 2002
..................................
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.