Gregory Shepard--a shareholder of State Auto Financial Corp. (NYSE:STFC), the insurer's publicly traded holding company subsidiary--has proposed merge yet-to-be-formed Mid-West Mutual Insurance Co. with State Automobile Mutual. This prompted a special shareholders meeting of State Auto Financial, the insurer said.
As a result of the meeting, State Automobile Mutual sent a letter to Shepard stating the board has formed a special committee to review the merger proposal and provide an opinion, the company said.
"Its a fairly significant undertaking in terms of organizing the committee, hiring counsel, hiring advisers, then completing the analysis and the review that the advisers will assist them in doing," said John Lowther, senior vice president for State Auto. "It's not going to happen in a fortnight. What the law requires will take some time, and the board must be guided by common-law fiduciary obligations and statutory obligations for officers and directors exercising their fiduciary duty."
Shepard's proposal suggests State Automobile would first merge with Mid-West, with State Auto as the surviving entity. State Auto and a wholly owned Ohio acquisition corporation, yet to be formed, would then immediately commence a tender offer for State Auto Financial Corp.'s 10.9 million public shares, the proposal states. Mid-West Mutual Insurance Co. is an Ohio mutual property and casualty insurance company in formation, which Shepard said he would control.
After completion of the transaction, State Auto would have about $1 billion of surplus to support its $1.2 billion of premiums, Shepard said in his proposal, filed with the Securities and Exchange Commission. With the elimination of the public ownership, the pooling agreement could be amended to provide for pro rata participation levels based upon surplus percentages, Shepard said.
While the company is required to fully review the proposal, State Auto Mutual said its preliminary review of the proposal pointed to several possible conflicts and problems.
The merger proposed would be with a yet-to-be-formed shell mutual insurance company that wouldn't write insurance policies and would exist solely to create an entity for this transaction, State Auto said. Also, Shepard's proposal would be financed entirely with resources of State Auto Mutual, by requiring that State Auto Mutual borrow $400 million to complete the transaction, the company said. No additional resources or financial strength would be brought to State Auto, and this debt-laden transaction could be expected to reduce State Auto Mutual's financial surplus, the insurer said.
In addition, the proposed transaction doesn't expand State Auto Mutual's insurance markets or business opportunities, the company said.
"Despite your proposal's apparent lack of business benefit, the board of directors of State Auto Mutual met today (June 4) and, to assure fulfillment of any fiduciary duties imposed on it by law, named a special committee of independent directors to evaluate your proposal," Robert H. Moone, president and chief executive officer, in the letter to Shepard.
Shepard filed a suit in December 2000 to halt State Automobile Mutual's merger with Meridian Insurance Group Inc., but a federal judge in Indiana dismissed that action (BestWire, April 12, 2001). Shepard had made his own $25-a-share offer to buy Meridian, but he withdrew it, saying he couldn't match the State Automobile proposal.
State Automobile Mutual Insurance Co. is rated A+ (Excellent) by A.M. Best Co.
On the afternoon of June 5, State Auto Financial's stock was trading at $21.90 a share, up 3.8% from the previous close.