-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QPb8hphB4KsEL7fy5mcszZXYQ5h5akjEW54utBApwCgwpnkC6/Dw2O+Gl7ueGz+g iFvYwW/ZTWrqVfzX3bsTuA== 0000950152-02-009277.txt : 20021213 0000950152-02-009277.hdr.sgml : 20021213 20021213100429 ACCESSION NUMBER: 0000950152-02-009277 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20021213 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: STATE AUTO FINANCIAL CORP CENTRAL INDEX KEY: 0000874977 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 311324304 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-58913 FILM NUMBER: 02856335 BUSINESS ADDRESS: STREET 1: 518 E BROAD ST CITY: COLUMBUS STATE: OH ZIP: 43215-3976 BUSINESS PHONE: 6144645000 MAIL ADDRESS: STREET 1: 518 EAST BROAD STREET CITY: COLUMBUS STATE: OH ZIP: 43215 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SHEPARD GREGORY M CENTRAL INDEX KEY: 0001065833 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 303 E WASHINGTON STREET CITY: BLOOMINGTON STATE: IL ZIP: 61701 BUSINESS PHONE: 3095571210 MAIL ADDRESS: STREET 1: 303 E WASHINGTON STREET CITY: BLOOMINGTON STATE: IL ZIP: 61701 SC 13D 1 l97787asc13d.txt STATE AUTO FINANCIAL/SHEPARD SC 13D SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20459 SCHEDULE 13D Under the Securities Exchange Act of 1934 STATE AUTO FINANCIAL CORPORATION (Name of Issuer) COMMON SHARES (Title of Class of Securities) 85570710500 (CUSIP Number of Class of Securities) F. Ronald O'Keefe, Esq. Hahn Loeser & Parks LLP 3300 BP Tower 200 Public Square Cleveland, Ohio 44114-2301 (216) 621-0150 (Name, address and telephone number of persons authorized to receive notices and communications on behalf of person(s) filing statement) DECEMBER 9, 2002 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-l(b)(3) or (4), check the following box [ ]. Page 1 of 6 Pages Page 2 of 7 Pages CUSIP No. 85570710500 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NOS. OF REPORTING PERSON GREGORY M. SHEPARD 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [_] (b) [_] 3 SEC USE ONLY 4 SOURCE OF FUNDS PF & OO 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [X] 6 CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES OF AMERICA 7 SOLE VOTING POWER NUMBER OF 2,000,000 SHARES 8 SHARED VOTING POWER BENEFICIALLY -0- OWNED BY EACH 9 SOLE DISPOSITIVE POWER REPORTING 2,000,000 PERSON 10 SHARED DISPOSITIVE POWER WITH -0- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 2,000,000 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 5.13% 14 TYPE OF REPORTING PERSON* IN SCHEDULE 13D This Schedule 13D is filed on behalf of Gregory M. Shepard, an individual, for the purpose of reporting transactions in the common stock, no par value ("Shares") of State Auto Financial Corporation. ITEM 1. SECURITY AND ISSUER. This Schedule 13D relates to the common shares, without par value (the "Shares"), of State Auto Financial Corporation, an Ohio corporation (the "Issuer"). The address of the principal executive offices of the Issuer is 518 East Broad Street, Columbus, Ohio 43215-3976. ITEM 2. IDENTITY AND BACKGROUND. a) The person filing this statement is Gregory M. Shepard (the "Filing Person"). b) The principal business address and the principal office of the Filing Person is 15 Country Club Place, Bloomington, Illinois 61701. c) Gregory M. Shepard's present principal occupation or employment is acting as Chairman and President of American Union Insurance Company ("AUIC"), an Illinois stock property and casualty insurance company. AUIC's principal business office is located at 2205 East Empire Street, Suite A, Bloomington, Illinois 61704. d) Negative. e) Negative, except as described below: The Filing Person executed a SEC consent decree on May 11, 2000 and the SEC issued the decree on September 20, 2000. The consent decree states that during April 1999 the Filing Person, through AUIC, purchased shares of Meridian Insurance Group, Inc. ("MIGI") on the open market during the pendency of a tender offer by AUIC for shares of MIGI in violation of Rule 10b-13. The Filing Person, without admitting or denying the findings, consented to the entry of the consent decree stating that the Filing Person should cease and desist from committing any violation, or future violation, of Rule 14e-5 (formerly Rule 10b-13) of the Act. f) Mr. Shepard is a citizen of the United States. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. The aggregate purchase price of the 2,000,000 Shares purchased by Filing Person was $31,517,621 (including commissions). The source of funding for the purchase of these Shares was personal funds and moneys borrowed pursuant to a Loan Agreement and Promissory Note between the Filing Person and Commerce Bank, N.A. ("Commerce"). Interest on the Commerce debt is computed at the prime rate, as announced from time to time by Commerce, less one percent. The Commerce debt matures on September 6, 2003 and is subject to certain other customary commercial loan terms. Commerce has a lien on the shares reported herein as having been acquired pursuant to a Securities Account Pledge Agreement (the "Commerce Pledge Agreement"). A copy of the Commerce Promissory Note and the Commerce Pledge Agreement are attached hereto as Exhibits 7.1 and 7.2. ITEM 4. PURPOSE OF TRANSACTIONS. Page 3 of 7 Pages The Filing Person has acquired the Shares because he believes their true value exceeds their current market price. The Filing Person has orally informed the Issuer that he has acquired the Shares and that he may, from time to time, communicate with the Issuer concerning its affairs, including, possibly, exploring methods to enhance stockholder value. On December 11, 2002, the Filing Person submitted the following proposal to be presented and voted upon at the Issuer's 2003 Annual Meeting of Shareholders: Resolved, that the shareholders of State Auto Financial Corporation ("STFC") hereby request that the Board of Directors (1) appoint a committee of independent, non-management directors of STFC that would be authorized and directed to explore strategic alternatives to maximize shareholder value for the STFC shareholders, including, but not limited to, a merger of STFC's 68% owner State Automobile Mutual Insurance Company ("State Auto Mutual") with another mutual insurance company followed by the sale or merger of STFC, (2) instruct such committee to retain a leading investment banking firm to advise the committee with respect to such strategic alternatives and (3) authorize the committee and investment banking firm to solicit and evaluate offers for the merger of State Auto Mutual followed by the sale or merger of STFC. A copy of the proposal and supporting statement are attached hereto as Exhibit 7.3. The Filing Person may acquire additional Shares at any time and from time to time in the open market or otherwise at prices which the Filing Person may determine. The Filing Person may dispose of the Shares at any time and from time to time in the open market or otherwise at prices which the Filing Person may determine. Except as set forth in this Item 4, the Reporting Person has no plans or proposals that would result in any of the transactions described in items (a) through (j) of Item 4 to Schedule 13D. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. a) As of the close of business on December 9, 2002, the Filing Person may be deemed to beneficially own, in the aggregate, 2,000,000 Shares, representing approximately 5.13% of the Issuer's outstanding Shares (based upon the 38,971,714 Shares stated to be outstanding as of November 8, 2002 by the Issuer in the Issuer's Form 10-Q filing, filed with the Securities and Exchange Commission on November 14, 2002). b) The Filing Person has sole voting power and sole dispositive power with respect to 2,000,000 Shares. c) The following table sets forth all purchases with respect to Shares effected during the past sixty (60) days by the Filing Person. All such transactions were effected in the open market, the table excludes commissions paid.
Date No. of Shares Purchased Price Per Share ---- ----------------------- --------------- 10/16/02 7,700 $15.9027 10/18/02 11,000 $16.1353 10/22/02 1,600 $15.9449 10/23/02 3,600 $16.2806 12/03/02 1,400 $14.3678 12/04/02 400 $14.0345 12/05/02 200 $14.0000 12/09/02 52,000 $13.9229
Page 4 of 7 Pages On October 23, 2002, the Filing Person sold 800 Shares at a price of $16.2806 (excluding commissions) in the open market. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. Except as described herein, the Filing Person does not have any contracts, arrangements, understandings or relationships (legal or otherwise) with any person with respect to any securities of the Issuer, including but not limited to the transfer or voting of any of the securities, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or losses, or the giving or withholding of proxies. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. 7.1 Commerce Promissory Note 7.2 Commerce Pledge Agreement 7.3 Proposal and Supporting Statement Page 5 of 7 Pages SCHEDULE 13D SIGNATURE PAGE After reasonable inquiry and to the best of his knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct. DATED: December 12, 2002 /s/ Gregory M. Shepard - ---------------------- Page 6 of 7 Pages Exhibit Index 7.1 Commerce Promissory Note 7.2 Commerce Pledge Agreement 7.3 Proposal and Supporting Statement EX-7.1 3 l97787aexv7w1.txt EXHIBIT 7.1 Exhibit 7.1 PROMISSORY NOTE Borrower: Lender: GREGORY M. SHEPARD COMMERCE BANK, N.A. 15 COUNTRY CLUB PLACE 120 N CENTER STREET BLOOMINGTON, IL 61701-3486 BLOOMINGTON, IL 61701 =============================================================================== Principal Amount: $28,000,000.00 Date of Note: September 6, 2002 Initial Rate 3.750% PROMISE TO PAY. Gregory M. Shepard ("Borrower") promises to pay to COMMERCE BANK, N.A. ("Lender"), or order, in lawful money of the United States of America, the principal amount not to exceed Twenty-eight Million & 00/100 Dollars ($28,000,000.00) (the "Maximum Amount") or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. ADVANCES. Subject to the terms and conditions hereof and in that certain Loan Agreement entered into by and between Lender and the Borrower, dated as of even date herewith (as the same may be amended, modified, extended or restated from time to time, the "Loan Agreement"), Lender agrees to make advances to Borrower from time to time during the period commencing on the date of this Note and ending on September 6, 2003 (the "Maturity Date") in an aggregate principal amount at any time outstanding not to exceed the lesser of the Maximum Amount and the Borrowing Base. Borrower agrees that it will only use the proceeds of any such advances for a Specified Purpose or otherwise in compliance with the terms and provisions set forth in the Loan Agreement. Borrower will not use any part of such proceeds for any other purpose. Each request for an advance hereunder shall be made pursuant to the terms of and in compliance with the Loan Agreement. Any capitalized terms used herein, but not otherwise defined herein, shall have the meanings ascribed to such terms in the Loan Agreement. ONE NOTE FOR MULTIPLE ADVANCES. It is contemplated that more than one advance may be made in connection with this Note from time to time pursuant to the terms of the Loan Agreement; provided, however, that the outstanding principal amount evidenced by this Note shall not exceed the Maximum Amount. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on September 6, 2003. In addition, Borrower will pay regular quarterly payments of all accrued unpaid interest due as of each payment date, beginning September 30, 2002, with all subsequent interest payments to be due on the last day of each quarter after that. Unless otherwise agreed or required by applicable law, payments will be as described in the Loan Agreement. The annual interest rate for this Note is computed on the basis of a 360 day year. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Each payment (including prepayments) by Borrower on account of the principal of or interest on the Loans or of any fee or other amounts payable to the Lender under the Agreement or this Note shall be made not later than 2:00 p.m. on the date specified for payment under this Note (or if such day is not a Business Day, the next succeeding business Day) to the Lender at Lender's address set forth herein, in U.S. dollars, in immediately available funds and shall be made without any setoff, counterclaim or deduction whatsoever. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. No amounts pre-paid may be reborrowed. Voluntary Prepayment. Borrower may make voluntary prepayments under this Note as described in the Loan Agreement. Mandatory Prepayment. Borrower shall make a mandatory prepayment under this Note upon the conditions described in the Loan Agreement. PAYMENT DISPUTES. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: COMMERCE BANK, N.A.; BLOOMINGTON BANKING CENTER; 120 N. CENTER; BLOOMINGTON, IL 61701. PAYMENTS DUE ON SATURDAYS, SUNDAYS OR LEGAL HOLIDAYS. If any payment of principal or interest due on this Note is payable on a day which is a Saturday, Sunday or legal holiday in the State of Illinois, then such payment shall be due on the next business day, the amount of such payment, in such case, to include all interest accrued to the date of actual payment. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the per annum rate from time to time announced by Lender at its Bloomington, Illinois office as the prime rate, or as the case may be, the base, reference or other rate then in use for commercial loan reference purposes, not necessarily the lowest or even favored rate, which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each day. Rates of interest tied to the Index shall change with and be effective on the date of each change in the Index. The initial rate and the current Index described above are based on the information available as of the date of preparation of this Note and is subject to change if there is any change in the Index between the note preparation date and the date of the initial Advance. Borrower understands that Lender may make loans based on other rates as well. THE INDEX CURRENTLY IS 4.750% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.000 PERCENTAGE POINT UNDER THE INDEX, RESULTING IN AN INITIAL RATE OF 3.750% PER ANNUM. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged 5.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT OF $50.00, WHICHEVER IS LESS. INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, this Note shall bear interest at a variable interest rate equal to 3.000 percentage points above the Index (the "Default Rate"). The interest rate will not exceed the maximum rate permitted by applicable law. DEFAULT. The occurrence of an Event of Default shall be an event of default under this Note. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. In addition, Lender may exercise any and all other rights and remedies set forth in the Loan Agreement or any Related Document. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. JURY WAIVER. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF ILLINOIS. THIS NOTE HAS BEEN ACCEPTED BY LENDER IN THE STATE OF ILLINOIS. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender or any affiliate of Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owning on the indebtedness against any and all such accounts. MULTI-ADVANCE NOTE. This Note evidences a multi-advance term loan note. In no event shall the aggregate amount of Loans exceed the lesser of the Maximum Amount and the Borrowing Base. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or as provided in this paragraph. Lender may, but need not, require that all oral requests be confirmed in writing. The following person currently is authorized to request advances and authorize payments under this Note until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of his or her authority: GREGORY M. SHEPARD. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note is there has been or is continuing an Event of Default. ASSIGNMENT; SUCCESSOR INTERESTS. Lender may assign to one or more banks or other entities all or a portion of its rights under this Note. In the event of an assignment of all of its rights, Lender may transfer this Note to the assignee. Lender may, in connection with any assignment or proposed assignment, disclose to the assignee or proposed assignee any information relating to Borrower furnished to Lender by or on behalf of Borrower. This Note may not be assigned by Borrower without Lender's prior express written consent. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and permitted assigns, and shall inure to the benefit of Lender and its successors and assigns. AMENDMENTS, ETC. No amendment, modification or waiver of any provision of this Note, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and separately acknowledged in writing by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Each and every right granted to Lender under this Note or allowed to it at law or in equity is deemed cumulative and such remedies may be exercised from time to time concurrently or consecutively at Lender's option. No failure on the part of the Lender to exercise, and no delay in exercising, any right under this Note shall P:loans/illinois/Shepard.PromNote Account No. 4004370 PROMISSORY NOTE Loan No. 9012 (Continued) Page 3 - -------------------------------------------------------------------------------- operate as a waiver thereof, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THIS NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. THIS NOTE CONTAINS A BINDING JURY WAIVER PROVISION. BORROWER: X /s/ Gregory M. Shepard ------------------------------------ Gregory M. Shepard, Individually EX-7.2 4 l97787aexv7w2.txt EXHIBIT 7.2 Exhibit 7.2 SECURITIES ACCOUNT PLEDGE AGREEMENT This SECURITIES ACCOUNT PLEDGE AGREEMENT ("Agreement") is dated as of September 6, 2002, by and between GREGORY M. SHEPARD, an individual residing at 15 Country Club Place -- Bloomington, IL 61701 (the "Pledgor"), and COMMERCE BANK, N.A., a national banking association (the "Pledgee"). Terms initially capitalized and used herein which are not otherwise defined herein shall have the meanings given them in the Loan Agreement referred to below. W I T N E S S E T H T H A T : WHEREAS, pursuant to the Loan Agreement between Pledgor and Pledgee, dated as of even date herewith (as such agreement may be amended, modified, supplemented or restated from time to time, the "Loan Agreement"), the Pledgee has required collateral to secure Pledgor's duties and obligations under the Loan Agreement (the "Obligations"); WHEREAS, Pledgor is the owner of certain marketable securities of State Auto Financial Corporation ("State Auto") in a securities account within the meaning of Section 8-501 of the UCC (as hereinafter defined) (Account No. 62B068100) in the name of Pledgor, in the custody of COMMERCE TRUST COMPANY (the "Account"), as a securities intermediary as defined in Section 8-102 of the UCC (the "Custodian"). "UCC" as used herein means the Uniform Commercial Code as in effect in the State of Illinois as of the date hereof, as the same may from time to time be amended or modified; WHEREAS, the Pledgee is willing to accept the pledge of the Account as security for the Obligations. NOW, THEREFORE, for and in consideration of the foregoing and of any financial accommodations or extensions of credit heretofore, now or hereafter made to or for the benefit of the Pledgor by the Pledgee and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Pledge. The Pledgor hereby pledges and assigns to the Pledgee and grants the Pledgee a security interest in, a lien upon and a right of set-off as to all of Pledgor's now owned and/or hereafter acquired or arising right, title and interest in, to and under: (a) the Account and each custody account, sub-custody account, investment account, safekeeping account or other account (whether immediate or remote) representing or evidencing a renewal or replacement of, or substitution for, the Account (each such custody, sub-custody, investment, safekeeping or other account being a "Replacement Account"), (b) any and all securities, securities entitlements, stocks, bonds, options, warrants, commodity contracts, futures contracts, notes, instruments, documents, general intangibles, commercial paper, money market funds and/or accounts, treasury instruments, documents, general intangibles, commercial paper, money market funds and/or accounts, treasury bills, notes and bonds, certificates of deposit, mutual fund shares, cash, money, investment property and financial assets (as defined in Section 8-102(a)(9) of the UCC) of any kind or type, whether certificated or uncertificated, now or hereafter contained in the 1 Account, including, but not limited to, the stock of State Auto, together with all rights, income, revenues, proceeds and profits therefrom including, without limitation, all dividends, distributions (cash or stock, extraordinary as well as ordinary), interest and other payments, all additions thereto, substitutions or replacements thereof and exchanges for or changes in any of the foregoing, (c) any free credit balance or other money now or hereafter credited or owing to Pledgor on or in respect of the Account, (d) all cash and non-cash proceeds of any of the foregoing and (e) all rights incidental to the ownership of any of the foregoing, such as participation interests, voting, conversion and registration rights and rights of recovery for violations of applicable securities laws (all of the types or items of property described in the foregoing clauses (a), (b), (c), (d) and (e) being hereinafter collectively referred to as the "Pledged Collateral"). 2. Perfection of Security Interest. The Assignor authorizes the Pledgee to file financing statements covering the Pledged Collateral and containing such legends as Pledgee shall deem necessary or desirable to protect Pledgee's interest in the Pledged Collateral under the terms of the UCC, and to take such other steps as the Pledgee may request to perfect the Pledgee's security interest in the Pledged Collateral under applicable law, including, with respect to any portion of the Pledged Collateral which may constitute "investment property": (as defined in Section 9-102(a)(49) of the UCC), causing the Pledgee's security interest in such Pledged Collateral to be perfected by "control" (as defined in the UCC). 3. Representations. The Pledgor warrants and represents as follows: (a) Pledgor is the sole legal and beneficial owner of the Pledged Collateral, free and clear of any lien, charge, security interest or encumbrance, except for the security interest created by this Agreement; (b) The Pledgor has full power and authority to enter into this Agreement; (c) There are no restrictions upon the transfer of any of the Pledged Collateral; (d) Pledgor has the right, subject to the provisions of this Agreement, to pledge and grant a security interest in all or any part of the Pledged Collateral free of any lien or other charge, encumbrance or restriction; (e) Pledgor has the right to otherwise transfer all or any part of the Pledged Collateral free of any lien, security interest or other charge, encumbrance or restriction; (f) Other than that certain Control Agreement, executed as of even date herewith, among Pledgor, Pledgee and the Custodian (the "Control Agreement"), there are no other agreements entered into between the Pledgor and Custodian or any third party with respect to the Pledged Collateral; and 2 (g) Pledgor acknowledges that this Agreement is the "Agreement" referenced in the Control Agreement. 4. Covenants. Until the Obligations are satisfied and extinguished in full, the Pledgor: (a) shall maintain and cause to be maintained in the Account, or the Replacement Account, as the case may be, on a daily basis marketable securities of State Auto traded on an active exchange with a fair market value (being the quoted trading price of the securities at the conclusion of each trading day), when taken together with the AUIC Account Balance, in the aggregate amount of not less than 300% of the aggregate outstanding principal balance of the Loans (the "Minimum Balance Requirement"). Pledgor agrees that the Pledgee may, and is hereby authorized to access the information about the securities in the Account, or the Replacement Account, as the case may be, from time to time to verify compliance with the Minimum Balance Requirement; (b) shall not, without the prior written consent of the Pledgee, (i) create or permit the existence of any lien, security interest, pledge or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of the Pledged Collateral, other than pursuant to this Agreement, (ii) cause, or seek to cause, or permit, any of the Pledged Collateral which is currently held in book-entry (uncertificated) form to be evidenced or otherwise embodied by physical certificates, (iii) withdraw, or seek to withdraw, funds from the Account or any Replacement Account (except as provided in and subject to such limitations as set forth in the Control Agreement), (iv) demand possession of, receive or otherwise take delivery of, any or all of the Pledged Collateral, (v) close, cancel or terminate, or seek to close, cancel or terminate, the Account or any Replacement Account; (vi) transfer any of the Pledged Collateral, into the name of any person other than the Pledgee; (vii) attempt to modify or attempt to terminate the Control Agreement or its customer agreement(s) with the Custodian under which the Account was established; (c) shall (i) promptly deliver any certificate or instrument constituting or representing any of the Pledged Collateral which it may obtain possession of from time to time to the Custodian for credit to the Account, duly endorsed in blank without restriction, (ii) promptly deliver to the Custodian any endorsements or instruments which may be necessary or convenient to transfer any financial assets held by the Custodian, which are registered in the name of, payable to the order of or specially endorsed to Pledgor, to the Custodian or its securities intermediary or to one of their respective nominees; (d) shall cause the Custodian to send to the Pledgee a true, correct and complete copy of every statement, confirmation, notice or other communication concerning the Account that the Custodian sends to Pledgor; and (e) shall advise the Pledgee promptly, completely, accurately and in writing and in reasonable detail, (i) of any lien or encumbrance upon; security interest in or claim asserted against any of the Pledged Collateral and (ii) of the occurrence of any event, other than changes in general market conditions adequately reported in the general news media, 3 that would have a material adverse effect upon the aggregate value of the Pledged Collateral or upon the security interest of the Pledgor. 5. Waivers. The Pledgor waives notice of acceptance hereof, creation of any of the Obligations, or nonpayment or default by Pledgor under any of the Obligations or any agreement now or hereafter existing between Pledgor and Pledgee. The Pledgor hereby waives any requirement of diligence, presentment, demand of payment, protest or notice with respect to the Obligations, the benefit of any statutes of limitation, and all demands whatsoever (and shall not require that the same be made on the Pledgor as a condition precedent to the Pledgor's liabilities hereunder), and covenants that the Pledgor will not be discharged of liabilities under this Agreement, except as provided in paragraph 11. The Pledgor consents to and waives notice of all changes of terms of the Obligations (including, without limitation, a change in the interest rate applicable to the Obligations), the withdrawal or extension of credit or time to pay, the release of the whole or any part of the Obligations, renewal, indulgence, settlement, compromise or failure to exercise due diligence in collection, the acceptance or release of security, extension of the time to pay for any period or periods whether or not longer than the original period, or any surrender, substitution or release of any other person directly or indirectly liable for any of the Obligations or any collateral security given by AUIC. 6. Default. The following events constitute a default under the terms of this Agreement (each an "Event of Default," and collectively "Events of Default"): (a) any default under the Loan Agreement, including, but not limited to, an Event of Default (as defined in the Loan Agreement); (b) any default under this Pledge Agreement; (c) this Pledge Agreement shall at any time for any reason cease to be in full force and effect or shall be declared to be null and void by a court of competent jurisdiction, or if the validity or enforceability of this Pledge Agreement shall be contested or denied by Pledgor or if Pledgor shall deny that it has any further liability or obligation under this Pledge Agreement; (d) any default under the Control Agreement; or (e) the Control Agreement shall at any time for any reason cease to be in full force and effect or shall be declared to be null and void by a court of competent jurisdiction, or if the validity or enforceability of the Control Agreement shall be contested or denied by Pledgor or the Custodian, or if Pledgor or the Custodian shall deny that it has any further liability or obligation under the Control Agreement or if Pledgor of the Custodian shall fail to comply with or to observe any of the terms, provisions or conditions contained in the Control Agreement. 7. Remedies of Pledgee Following an Event of Default. The Pledgee may, at any time that an Event of Default exists, or at any time after the Obligations have become due and payable in accordance with the Loan Agreement, at its option, (i) transfer or register the Pledged 4 Collateral or any part thereof into its or its nominee's name with or without any indication that such Pledged Collateral is subject to the security interest hereunder. Pledgor hereby appoints the Pledgee as its attorney-in-fact to arrange at the Pledgee's option for such transfer; (ii) without notice to or demand upon Pledgor, liquidate the Pledged Collateral and apply the proceeds thereof in payment of the Obligations; and (iii) without notice to or demand upon the Pledgor, charge, set-off or otherwise apply all or any part of the Pledged Collateral in payment of the Obligations. The Pledgee shall have, in addition to the foregoing and any other rights given under this Agreement, the Loan Agreement or by law, all of the rights and remedies with respect to the Pledged Collateral of a secured party under the UCC. In addition, at any time that an Event of Default exists, the Pledgee shall have such powers of sale and other powers as may be conferred by applicable law. The Pledgor will pay to the Pledgee all expenses (including, without limitation, court costs and reasonable attorneys' fees and expenses), of, or incident to, (i) the custody or preservation of, or the sale or collection of or other realization upon, any of the Pledged Collateral, (ii) the exercise or enforcement of any of the rights of the Pledgee hereunder, or (iii) the failure by the Pledgor to perform or observe any provision hereof. 8. Voting Rights. During the term of this Pledge Agreement, and except as provided below in this Section 8, the Pledgor shall be permitted to exercise any voting or consensual rights that it may have as to any of the Pledged Collateral for any purpose which is not inconsistent with this Pledge Agreement or any applicable laws. If any Event of Default has occurred and is continuing, (a) the Pledgee or the Pledgee's nominee may, at the Pledgee's or such nominee's option and following written notice from the Pledgee to the Pledgor, exercise all voting or consensual rights pertaining to the Pledged Collateral, and (b) Pledgor shall deliver to the Pledgee all notices, proxy statements, proxies and other information and instruments relating to the exercise of such rights received by Pledgor from the issuers of any of the Pledged Collateral promptly upon receipt thereof and shall at the request of the Pledgee execute and deliver to the Pledgee any proxies or other instruments which are, in the good faith judgment of the Pledgee, necessary for the Pledgee to validly exercise such voting and consensual rights. 9. Dividends and Other Distributions. (a) So long as no Event of Default shall have occurred and be continuing: (i) The Pledgor shall be entitled to receive and retain any and all dividends, interest, distributions, subscription warrants or any other rights or options in respect of the Pledged Collateral, provided, however, that any and all (A) dividends, interests or distributions paid or payable other than in cash with respect to, and instruments and other property received, receivable or otherwise distributed with respect to, or in exchange for, any of the Pledged Collateral; (B) dividends and other distributions paid or payable in cash with respect to any of the Pledged Collateral that constitute a partial or total liquidation, distribution or dissolution or a reduction of capital, capital surplus or paid-in surplus; and 5 (C) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any of the Pledged Collateral; shall be Pledged Collateral, and shall be forthwith delivered to the Custodian to hold, for the benefit of the Pledgee, in the Account or Replacement Account, as applicable, and shall, if received by the Pledgor, be received in trust for the Pledgee, for the benefit of the Pledgee, be segregated from the other property or funds of the Pledgor, and be delivered promptly to the Custodian as Pledged Collateral in the same form as so received (with any necessary endorsement of the Pledgor); and (ii) The Pledgee shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to receive the dividends, interest payments or distributions which it is authorized to receive and retain pursuant to clause (i) above. (b) If any Event of Default has occurred and is continuing: (i) All rights of the Pledgor to receive the dividends and interest payments, if any, which it would otherwise be authorized to receive and retain pursuant to Section 9(a)(i) hereof shall cease, and all such rights shall thereupon become vested in the Pledgee, for the benefit of the Pledgee, which shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; (ii) All dividends and interest payments which are received by the Pledgor contrary to the provisions of clause (i) of this Section 9(b) shall be received in trust for the Pledgee, for the benefit of the Pledgee, shall be segregated from other funds of the Pledgor and shall be paid over promptly to the Pledgee as Pledged Collateral in the same form as so received (with any necessary endorsements of the Pledgor); and (iii) The Pledgor shall, upon the request of the Pledgee, at the Pledgor's expense, do or cause to be done all such acts and things as may be necessary to make a sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law. The Pledgor will reimburse the Pledgee for all reasonable expenses incurred by the Pledgee, including without limitation, reasonable attorneys' fees and accountants' fees and expenses in connection with the foregoing. 10. Security Interest Absolute. All rights of the Pledgee, the pledge and security interests hereunder, and all obligations of the Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) Any lack of validity or enforceability of either of the Loan Agreement or any other agreement or instrument relating thereto; 6 (b) Any change in the time, manner or place of payment of, or in any other term of, all or any part of the Obligations, or any other amendment or waiver of or any consent to any departure from the Loan Agreement; (c) Any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any part of the Obligations; or (d) Any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Pledgor in respect of the Obligations or of this Agreement. 11. Term. This Agreement shall remain in full force and effect until the Loan Agreement shall have been terminated and all of the Obligations shall have been indefeasibly paid and satisfied in full. Upon the termination of this Agreement as provided above (other than as a result of the sale of the Pledged Collateral), the Pledgee will release the security interest created hereunder and, if it then has possession of any evidence of ownership of the Pledged Collateral; Pledgee will deliver the evidence of ownership to the Pledgor and terminate the Control Agreement. 12. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Pledgor and the Pledgee and their respective successors and assigns. The Pledgor's successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession of or for the Pledgor. 13. Applicable Law; Severability. (a) This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois applicable to contracts made and to be performed within such state, without giving effect to its conflicts of laws principles or rules. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Regardless of any provision in any other agreement, for purposes of the UCC, Illinois shall be deemed to be the Custodian's jurisdiction (within the meaning of Section 8-110 of the UCC) and the Account or the Replacement Account, as the case may be (as well as the securities entitlements related thereto) shall be governed by the laws of the State of Illinois. (b) Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is determined to be legally invalid, the affected provision will be stricken from this Agreement, and the remaining terms of this Agreement and its enforceability will remain unaffected thereby. The parties further agree to replace any such provision with a valid and enforceable provision which will achieve, to the fullest extent possible, the pledge economic, 7 business and/or other purposes of the stricken provision. 14. Definitions. The singular shall include the plural and vice versa and any gender shall include any other gender as the context may require. 15. Further Assurances. The Pledgor agrees to cooperate with the Pledgee and to execute and deliver, or cause to be executed and delivered, all such other instruments and documents and to take all such other actions as the Pledgee may reasonably request from time to time in order to carry out the provisions and purposes hereof. 16. Litigation. EACH OF THE PLEDGEE AND THE PLEDGOR HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE PLEDGOR OR THE PLEDGEE ARISING OUT OF THIS AGREEMENT, THE PLEDGED COLLATERAL OR ANY ASSIGNMENT THEREOF OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE PLEDGOR AND THE PLEDGEE OF ANY KIND OR NATURE. THE PLEDGOR AND THE PLEDGEE HEREBY AGREE THAT THE FEDERAL COURT OF THE CENTRAL DISTRICT OF ILLINOIS, PEORIA DIVISION OR, AT THE OPTION OF THE PLEDGEE, ANY COURT IN WHICH THE PLEDGEE SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY AND WHICH SITS IN A JURISDICTION IN WHICH THE PLEDGOR TRANSACTS BUSINESS SHALL HAVE NON-EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE PLEDGOR AND THE PLEDGEE, PERTAINING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT OR THE CONTROL AGREEMENT OR TO ANY MATTER ARISING THEREFROM. THE PLEDGOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS ISSUED THEREIN AND AGREEING THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE PLEDGOR AT THE ADDRESS SET FORTH BELOW PLEDGOR'S SIGNATURE TO THIS AGREEMENT, WHICH SERVICE SHALL BE DEEMED MADE UPON RECEIPT THEREOF. THE NON-EXCLUSIVE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGEMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE THE SAME IN ANY APPROPRIATE JURISDICTION. 17. Pledgee Appointed Attorney-in-Fact. The Pledgor hereby appoints the Pledgee as the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Pledgee's discretion to take any action and to execute any instrument which the Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Pledgor representing any distribution, interest payment or other dividend distribution in respect of the Pledged Collateral or any part thereof and to give 8 full discharge for the same. This power of attorney created under this paragraph 17, being coupled with an interest, shall be irrevocable for the term of this Agreement. 18. Pledgee's Duty. The Pledgee shall not be liable for any acts, omissions, errors of judgment or mistakes of fact or law including, without limitation, acts, omissions, errors or mistakes with respect to the Pledged Collateral, except for those arising out of or in connection with the Pledgee's (i) willful misconduct, or (ii) failure to use reasonable care with respect to the safe custody of any certificate evidencing any of the Pledged Collateral which is in the physical possession of the Pledgee. Without limiting the generality of the foregoing, the Pledgee shall be under no obligation to take any steps necessary to preserve rights in the Pledged Collateral against any other parties but may do so at its option, and all expenses incurred in connection therewith shall be for the sole account of the Pledgor, and shall be added to the Obligations secured hereby. 19. Notices. Any notice required or desired to be served, given or delivered hereunder shall be as described in the Loan Agreement. 20. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. 21. Section Headings; Recitals. The section headings herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. The recitals set forth hereinabove are hereby incorporated into and form a part of this Agreement, the truth and accuracy of which is evidenced by each party's execution hereof. 22. Amendments, Waivers and Consents. No amendment or waiver of any provision of this Agreement nor consent to any departure by the Pledgor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Pledgee and the Pledgor, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 9 IN WITNESS WHEREOF, the Pledgor and the Pledgee have executed this Agreement as of the day and year first above written. PLEDGEE: PLEDGOR: COMMERCE BANK, N.A. By: /s/ Lawrence Horvath By: /s/ Gregory M. Shepard --------------------------- ----------------------------- Name: Lawrence Horvath Name: Gregory M. Shepard Its: SENIOR VICE PRESIDENT --------------------------- EX-7.3 5 l97787aexv7w3.txt EXHIBIT 7.3 Exhibit 7.3 [American Union Insurance Company Letterhead] December 12, 2002 CERTIFIED MAIL RETURN RECEIPT REQUESTED Mr. Robert H. Moone Chairman and CEO State Auto Financial Corporation 518 East Broad Street Columbus, OH 43215-3976 Mr. John R. Lowther Senior Vice President, Secretary and General Counsel State Auto Financial Corporation 518 East Broad Street Columbus, OH 43215-3976 RE: SHAREHOLDER PROPOSAL AND SUPPORTING STATEMENT Dear Messrs. Moone and Lowther: Enclosed is a shareholder proposal and supporting statement for inclusion in the proxy statement for the annual shareholders' meeting of State Auto Financial Corporation (the "Company") to be held in May 2003. I intend to present the attached shareholder proposal at the Company's annual shareholders' meeting. Enclosed herewith, please find the written statement of Commerce Bank, NA of Kansas City Missouri attesting that I am the beneficial owner of 2,000,000 shares of the Company's common stock and that I have continuously held shares of common stock of the Company with an aggregate market value of at least $2,000 for a period of at least one year. As required by Rule 14a-8 promulgated under the Securities Act of 1934, I intend to hold these shares through the date of the Company's annual shareholders' meeting. Sincerely, /s/ Gregory M. Shepard Gregory M. Shepard cc: F. Ronald O'Keefe, Esq. SHAREHOLDER PROPOSAL AND SUPPORTING STATEMENT SHAREHOLDER PROPOSAL: Gregory M. Shepard, 15 Country Club Place, Bloomington, Illinois 61701, who individually is the beneficial owner of 2,000,000 shares of common stock of the Company, submitted the following proposal to be presented and voted upon at the meeting: Resolved, that the shareholders of State Auto Financial Corporation ("STFC") hereby request that the Board of Directors (1) appoint a committee of independent, non-management directors of STFC that would be authorized and directed to explore strategic alternatives to maximize shareholder value for the STFC shareholders, including, but not limited to, a merger of STFC's 68% owner State Automobile Mutual Insurance Company ("State Auto Mutual") with another mutual insurance company followed by the sale or merger of STFC, (2) instruct such committee to retain a leading investment banking firm to advise the committee with respect to such strategic alternatives, and (3) authorize the committee and investment banking firm to solicit and evaluate offers for the merger of State Auto Mutual followed by the sale or merger of STFC. SUPPORTING STATEMENT: The purpose of this proposal is to provide shareholders with the opportunity to advise the Board of Directors of their concerns regarding STFC's strategic direction and to express their desire to realize the full value of their investment in STFC. As the owner of approximately 16% of the shares of STFC's publicly traded stock not held by State Auto Mutual, I believe that, through a sale or merger with or to a mutual insurance company, shareholders could receive a substantial premium of up to 300% of STFC's recent market price. I believe that management's failure to consider seriously such a transaction has been and will continue to be detrimental to shareholders. In June 2001, State Auto Mutual merged with Meridian Mutual Insurance Company followed by State Auto Mutual's purchase of Meridian Insurance Group, Inc.'s ("MIGI") publicly traded shares. MIGI's public shareholders realized a 135% premium over the market price in the transactions. This premium was extracted as a direct result of my prior offers to purchase MIGI. Public company status would appear to afford several purported advantages to STFC over mutual insurance company status: the ability to raise capital in the public market; additional flexibility to restructure; creation of a currency; and the ability to provide incentives to management, employees and agents. However, as a public company, STFC is failing to deliver a return for its shareholders. STFC's stock price on December 11, 2002 is approximately 19% less than on December 31, 1997. Management's current operating strategy serves management by facilitating stock option grants and discounted insider share purchases. It is time for management to explore a strategy that serves STFC's public shareholders. This resolution does not require that the Board accept an offer to sell or merge with another party. However, if the Board acts on our proposal, these business alternatives must be fairly evaluated by non-management directors on the basis of shareholder value. We strongly urge you to vote FOR this resolution. -----END PRIVACY-ENHANCED MESSAGE-----