<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-0783294
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
136 NORTH THIRD STREET, HAMILTON, OHIO 45025
(Address of principal executive offices) (Zip Code)
(513) 867-3000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares, Par Value $.125 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value as of March 1, 1999 of the voting stock held by
non-affiliates of the registrant was $1,067,342,306.
On March 1, 1999 there were 31,221,531 shares outstanding.
Page 1 of 111
INDEX TO EXHIBITS ON PAGE 74
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<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement of the Board of Directors for the fiscal year ended December
31, 1998 for the Annual Shareholders meeting to be held April 21, 1999 is
incorporated herein by reference for the following items:
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Ohio Casualty Corporation (the Corporation) was incorporated under the laws of
Ohio in August, 1969. The Corporation operates primarily as a holding company
and is principally engaged, through its direct and indirect subsidiaries, in the
business of property and casualty insurance and insurance premium finance.
The Corporation has two industry segments: property and casualty insurance and
insurance premium finance. The Corporation conducts its property and casualty
insurance business through The Ohio Casualty Insurance Company ("Ohio
Casualty"), an Ohio corporation organized in 1919, the Ohio Casualty's five
operating property and casualty insurance subsidiaries: West American Insurance
Company ("West American"), an Indiana corporation (originally incorporated under
the laws of the State of California) acquired in 1945; Ohio Security Insurance
Company ("Ohio Security"), an Ohio corporation acquired in 1962; American Fire
and Casualty Company ("American Fire"), an Ohio corporation (originally
incorporated under the laws of the State of Florida) acquired in 1969; Avomark
Insurance Company ("Avomark"), an Indiana corporation created in 1997 and Ohio
Casualty of New Jersey, Inc. ("OCNJ"), an Ohio corporation created in 1998. This
group of companies presently underwrites most forms of property and casualty
insurance. The Corporation conducts its premium finance business through Ocasco
Budget, Inc. ("Ocasco"), an Ohio corporation (originally incorporated under the
laws of the State of California) organized in 1960. Ocasco is a direct
subsidiary of Ohio Casualty. On May 31, 1995 the states of domicile of West
American and Ocasco changed to Indiana and Ohio, respectively, in connection
with the withdrawal from property and casualty insurance operations in
California as previously announced and as discussed elsewhere herein.
On December 1, 1998, the Corporation acquired substantially all of the
Commercial Lines Division of Great American Insurance Company ("GAI"), an
insurance subsidiary of the American Financial Group, Inc. As part of the
transaction, the Corporation assumed responsibility for 650 employees of GAI's
Commercial Lines Division, as well as relationships with 1,700 agents. The major
lines of business included in the sale were workers' compensation, commercial
multi-peril, umbrella and commercial auto. Four commercial operations as well as
all California business and all pre-1987 environmental claims were excluded from
the transaction.
Under the asset purchase agreement, the Corporation assumed $645.8 million of
commercial lines insurance liabilities, $62.6 million in other liabilities and
acquired $287.9 million of investments, $1.5 million in cash and $119.1 million
in other assets. This resulted in an assumption by the Corporation of a net
statutory-basis liability of $300.0 million plus warrants to purchase 3 million
shares of Ohio Casualty Corporation common stock at a price of $45.01. In
addition, if the annualized production from the transferred agents at the end of
eighteen months equals or exceeds the production in the twelve months prior to
closing, GAI will receive an additional $40.0 million. This bonus payment grades
down ratably where if eighteen-month annualized production equals 71% or less of
previous production, no bonus payment is required. The bonus payment will be
accrued as additional goodwill when minimum contingency is achieved. Additional
information related to the accounting treatment of the acquisition as well as
proforma results are set forth in Note 14, Acquisition of Commercial Lines
Business, in the Notes to the Consolidated Financial Statements in Item 14 on
pages 57 and 58 of this Form 10-K.
3
<PAGE> 4
ITEM 1. CONTINUED
During 1995, the Corporation's life insurance operations were discontinued. We
found it increasingly difficult to achieve our targeted 16% rate of return in
this segment of our business. After extensive analysis, it was determined that a
16% return could not be achieved without substantial capital contributions and a
dramatic overhaul of the life operations. It was decided that this would not be
a prudent use of our capital. Therefore, on October 2, 1995, the Corporation
signed the final documents to reinsure the existing blocks of business and enter
a marketing agreement with Great Southern Life Insurance Company. The existing
blocks of business were reinsured through a 100% coinsurance arrangement with
Employer's Reassurance Corporation. During the fourth quarter of 1997, Great
Southern Life Insurance Company legally replaced Ohio Life as the primary
insurer for approximately 76% of the life insurance policies subject to the 1995
agreement. As a result of this assumption, fourth quarter net income was
positively impacted by a partial recognition of unamortized ceding commission.
The after-tax impact was an increase to net income of $5.3 million. At December
31, 1998, Great Southern had assumed 95% of the life insurance policies subject
to the 1995 agreement. As a result, the Corporation recognized an additional
amount of unamortized ceding commission of $1.1 million before tax during the
fourth quarter 1998. There remains approximately $1.1 million in unamortized
ceding commission. This will continue to be amortized over the remaining life of
the underlying policies. Net income from discontinued operations amounted to
$1.9 million or $.06 per share in 1998 compared with $8.7 million or $.25 per
share in 1997 and $5.3 million or $.15 per share in 1996. Additional information
related to the discontinued life insurance operations is included in Item 14,
Note 20 Discontinued Operations on page 60 of this Form 10-K.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The revenues, operating profit and combined ratios of each industry segment for
the three years ended December 31, 1998 are set forth in Item 14, Note 13,
Segment Information, in the Notes to the Consolidated Financial Statements on
pages 56 and 57 of this Form 10-K.
4
<PAGE> 5
ITEM 1. CONTINUED
PREMIUMS
The following table shows the total net premiums written (gross premiums less
premiums ceded pursuant to reinsurance treaties) by line of business by Ohio
Casualty, West American, American Fire, Avomark, Ohio Security, OCNJ and Ohio
Life as a group (collectively, the "Ohio Casualty Group") for the periods
indicated.
<TABLE>
<CAPTION>
Ohio Casualty Group
Net Premiums Written
By Line of Business
(in thousands)
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Auto liability $ 403,179 $ 384,358 $ 386,121 $ 403,781 $ 420,031
Auto physical damage 257,170 219,870 208,541 207,534 212,005
Homeowners
multiple peril 180,697 168,168 166,457 160,444 160,089
Workers' compensation 100,150 97,176 115,398 140,558 145,641
Commercial
multiple peril 157,103 141,931 132,808 131,553 135,595
Other liability 95,144 96,610 101,688 108,483 112,906
All other lines 105,668 98,708 97,059 96,842 98,714
Property and casualty
----------- ----------- ----------- ----------- -----------
premiums $ 1,299,111 $ 1,206,821 $ 1,208,072 $ 1,249,195 $ 1,284,981
============ =========== =========== =========== ============
Premium finance
revenues $ 1,170 $ 1,511 $ 1,981 $ 2,314 $ 2,528
============ =========== =========== =========== ============
Discontinued operations
Statutory premiums:
Individual life $ 0 $ 0 $ 0 $ (126,979) $ 22,238
Annuity 0 0 0 (195,870) 18,104
Other 0 6 215 (22,012) 8,606
----------- ----------- ----------- ----------- -----------
Total 0 6 215 (344,861) 48,948
FAS 97 adjustments 0 0 0 (1,533) (26,173)
----------- ----------- ----------- ----------- -----------
Discontinued operations
revenues $ 0 $ 6 $ 215 $ (346,394) $ 22,775
============ =========== =========== =========== ============
</TABLE>
Property and casualty net premiums written increased 7.6% in 1998. This increase
includes $31.6 million in net premium written from the acquisition of the
Commercial Lines business of GAI. Excluding GAI effects, net premiums written
increased 5.5%. This increase is primarily due to the Corporation's successful
year in personal auto, homeowners and CMP.
Excluding the effects of the GAI acquisition, New Jersey net premiums written
decreased 1.4%, primarily due to a decline in the workers' compensation, general
liability and commercial auto lines of business. Ohio and Kentucky net premiums
written increased 12.8% and 18.8%, respectively. These results are largely due
to the successful growth in our auto and homeowners lines of business.
5
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ITEM 1. CONTINUED
(C) NARRATIVE DESCRIPTION OF BUSINESS
The Ohio Casualty Group is represented on a commission basis by approximately
5,433 independent insurance agents. In most cases, these agents also represent
other unaffiliated companies which may compete with the Ohio Casualty Group. The
34 claim and 12 underwriting and service offices operated by the Ohio Casualty
Group assist these independent agents in producing and servicing the Group's
business.
The following table shows consolidated direct premiums written for the Ohio
Casualty Group's ten largest states:
<TABLE>
<CAPTION>
Ohio Casualty Group
Ten Largest States
Direct Premiums Written
From Continuing Operations
(in thousands)
Percent Percent Percent
1998 of Total 1997 of Total 1996 of Total
---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New Jersey $219,518 17.0 New Jersey $220,588 18.0 New Jersey $218,553 18.0
Ohio 147,285 11.4 Ohio 132,325 10.8 Ohio 125,675 10.3
Kentucky 120,309 9.3 Pennsylvania 101,341 8.3 Pennsylvania 114,998 9.5
Pennsylvania 96,932 7.5 Kentucky 101,074 8.2 Kentucky 87,002 7.2
Illinois 73,794 5.7 Illinois 63,347 5.2 Illinois 60,311 5.0
Indiana 65,681 5.1 Maryland 54,415 4.4 Maryland 52,204 4.3
Maryland 41,526 3.2 Indiana 46,660 3.8 Indiana 50,560 4.2
Texas 40,537 3.1 Texas 42,005 3.4 Texas 37,678 3.1
North Carolina 37,856 2.9 Florida 37,383 3.0 Florida 36,995 3.0
Florida 32,649 2.5 North Carolina 34,570 2.8 North Carolina 34,108 2.8
--------- ----- --------- ----- --------- ------
$876,087 67.7 $833,708 67.9 $818,084 67.4
======== ==== ======== ==== ======== ====
</TABLE>
INVESTMENT OPERATIONS
Each of the companies in the Ohio Casualty Group must comply with the insurance
laws of its domiciliary state and of the other states in which it is licensed
for business. Among other things, these laws prescribe the kind, quality and
concentration of investments which may be made by insurance companies. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages and real estate.
The distribution of invested assets of the Ohio Casualty Group is determined by
a number of factors, including insurance law requirements, the Corporation's
liquidity needs, tax position, and general market conditions. In addition, our
business mix and liability payout patterns are considered. Adjustments are made
to the asset allocation from time to time. The Corporation has no real estate
investments. Assets relating to property and casualty operations are invested to
maximize after-tax returns with appropriate diversification of risk.
6
<PAGE> 7
ITEM 1. CONTINUED
The following table sets forth the carrying values and other data of the
consolidated invested assets of the Ohio Casualty Group as of the end of the
years indicated:
<TABLE>
<CAPTION>
Ohio Casualty Group
Distribution of Invested Assets
(in millions)
1998
Average % of % of % of
Rating 1998 Total 1997 Total 1996 Total
--------- -------------- ----------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government AAA $ 79.8 2.2 $ 69.8 2.2 $ 82.5 2.7
Tax exempt bonds
and notes AA+ 839.6 23.3 875.7 27.8 794.5 25.8
Debt securities
issued by foreign
governments A+ 3.6 0.1 3.5 0.1 3.3 0.1
Corporate securities BBB+ 1,117.5 31.0 929.9 29.5 983.7 32.0
Mortgage backed
securities
U.S. government AAA 6.3 0.2 17.6 0.6 176.9 5.8
Other AA+ 369.1 10.2 329.5 10.4 270.0 8.8
-------- ------- --------- ------- -------- ------
Total bonds A+ 2,415.9 67.0 2,226.0 70.6 2,310.9 75.2
Common stocks 919.8 25.5 853.9 27.1 713.4 23.2
Preferred stocks 5.1 0.2 5.6 0.2 7.8 0.2
-------- ------- --------- ------- -------- ------
Total stocks 924.9 25.7 859.5 27.3 721.2 23.4
Short-term 262.9 7.3 65.9 2.1 41.5 1.4
-------- ------- --------- ------- -------- ------
Total investments $3,603.7 100.0 $3,151.4 100.0 $3,073.6 100.0
======== ======= ========= ======= ======== ======
Total market value
of investments $3,603.7 $3,151.4 $3,073.6
======== ========= ========
Total amortized cost
of investments $2,815.8 $2,453.8 $2,564.8
======== ========= ========
</TABLE>
The consolidated fixed income portfolio (identified as "Total Bonds" in the
foregoing table) of the Ohio Casualty Group had a weighted average rating of
"A+" and an average stated maturity of 10.3 years as of December 31, 1998.
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) and unrated securities are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Below investment grade securities:
Carrying value $207.3 $141.4 $184.6
Amortized cost 208.8 135.6 180.0
Unrated securities:
Carrying value $281.8 $242.8 $315.4
Amortized cost 264.8 228.6 308.3
</TABLE>
7
<PAGE> 8
ITEM 1. CONTINUED
Utilizing ratings provided by other agencies, such as the NAIC, categorizes
additional unrated securities into below investment grade ratings. The following
summarizes the additional unrated securities that are rated in the below
investment grade category by other rating agencies:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Below investment grade securities at
carrying value $207.3 $141.4 $184.6
Other rating agencies categorizing
unrated securities as below
investment grade 7.7 8.1 27.3
--------- --------- --------
Below investment grade securities at
carrying value $215.0 $149.5 $211.9
</TABLE>
All of the Corporation's below investment grade investments (based on carrying
value) are performing in accordance with contractual terms and are making
principal and interest payments as required. The securities in the Corporation's
below investment grade portfolio have been issued by 63 corporate borrowers in
approximately 42 industries. At December 31, 1998, the market value of the
Corporation's five largest investments in below investment grade securities
totaled $35.5 million, and had an approximate amortized cost of $36.1 million.
None of these holdings individually exceeded $10.3 million.
At December 31, 1998, the fixed income portfolio relating to property and
casualty operations totaled $2.4 billion which consisted of 91.1% investment
grade securities and 8.9% below investment grade and/or unrated securities. At
December 31, 1998, the fixed income portfolio relating to discontinued
operations totaled $9.4 million, all of which are classified as investment grade
securities.
Investments in below investment grade securities have greater risks than
investments in investment grade securities. The risk of default by borrowers
which issue securities rated below investment grade is significantly greater
because these securities are generally unsecured and often subordinated to other
debt and these borrowers are often highly leveraged and are more sensitive to
adverse economic conditions such as a recession or a sharp increase in interest
rates. Investment grade securities are also subject to significant adverse risks
including the risks of re-leveraging and changes in control of the issuer. In
most instances, investors are unprotected with respect to such risks, the
effects of which can be substantial.
Yield (based on cost of investments) for the taxable fixed income portfolio was
8.9% and 8.6% at December 31, 1998 and 1997, respectively. Below investment
grade securities were yielding 8.8% and 9.3% at December 31, 1998 and 1997,
respectively, while investment grade securities were yielding 8.9% in 1998 and
8.5% in 1997. Yield for tax exempt securities was 6.0% and 6.2% at December 31,
1998 and 1997, respectively, however, this yield is not directly comparable to
taxable yield due to the complexity of federal taxation of insurance companies.
The Corporation remains committed to a diversified common stock portfolio. As of
December 31, 1998, the portfolio consisted of 58 separate issues, diversified
across 42 different industries; and the largest single position was 13.2% of the
portfolio. The portfolio strategy with respect to common stocks has been to
invest in companies whose stocks have below average valuations, yet above
average growth prospects.
8
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ITEM 1. CONTINUED
Investment income is affected by the amount of new investable funds and
investable funds arising from maturities, prepayments, calls and exchanges as
well as the timing of receipt of such funds. In addition, other factors such as
interest rates at time of investment and the maturity, income tax status, credit
status and other risks associated with new investments are reflected in
investment income. Future changes in the distribution of investments and the
factors described above could affect overall investment income in the future;
however, the amount of any increase or decrease cannot be predicted. Further
details regarding investment distribution and investment income are described in
Item 14, Note 2, Investments, in the Notes to Consolidated Financial Statements
on pages 49 and 50 of this Form 10-K.
Purchases of taxable fixed income securities in 1998 were as follows: $172.5
million of investment grade securities, $119.1 million of high yield securities
and $54.4 million of unrated securities. Purchases of tax-exempt and equity
securities in 1998 totaled $121.3 million and $32.5 million, respectively.
Disposals (including maturities, calls, exchanges and scheduled prepayments) of
taxable fixed income securities in 1998 were as follows: $274.9 million of
investment grade securities, $58.7 million of high yield securities and $94.0
million of unrated securities. Dispositions of tax-exempt and equity securities
in 1998 totaled $133.8 million and $73.1 million, respectively.
The Corporation continues to have no exposure to futures, forwards, caps,
floors, or similar derivative instruments as defined by Statement of Financial
Accounting Standards No. 119. However, as noted in Item 14, Note 17 on pages 58
and 59 of this Form 10-K, we have an interest rate swap with Chase Manhattan
Bank covering $15.0 million of the outstanding balance of the revolving line of
credit. This swap is not classified as an investment but rather as a hedge
against a portion of the variable rate loan.
Consolidated net realized investment gains (before taxes) in 1998 totaled $14.4
million, $.44 per share. Included in this amount are approximately $8.1 million
in writedowns of the carrying values of certain securities the Corporation
determined had an other than temporary decline in value.
SHARE REPURCHASES
During 1990 the Board of Directors of Ohio Casualty Corporation authorized the
additional purchase of as many as 3,000,000 (as adjusted for 1994 stock split)
shares of its common stock through open market or privately negotiated
transactions. In November 1997, the Board of Directors authorized an additional
1,500,000 shares to be repurchased and again in 1998 an additional authorization
of 1,400,000 shares. During 1998, 2,362,900 shares were repurchased for $100
million. This compares with 1,544,688 shares repurchased in 1997 for $64.9
million and 264,600 shares repurchased in 1996 for $9.2 million. This brings the
remaining repurchase authorization to 1,063,912 shares as of December 31, 1998.
LIABILITIES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Liabilities for loss and loss adjustment expenses are established for the
estimated ultimate costs of settling claims for insured events, both reported
claims and incurred but not reported claims, based on information known as of
the evaluation date. As more information becomes available and claims are
settled, the estimated liabilities are adjusted upward or downward with the
effect of
9
<PAGE> 10
ITEM 1. CONTINUED
increasing or decreasing net income at the time of adjustments. Such estimated
liabilities include direct costs of the loss under terms of insurance policies
as well as legal fees and general expenses of administering the claims
adjustment process. The liabilities for claims incurred in accident years 1997,
1996 and 1995 were reduced in the subsequent year as shown below:
<TABLE>
<CAPTION>
Accident Year Loss and Loss Adjustment Expense Liabilities
Subsequent Year Adjustment
(in millions)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Property $12 $ 2 $27
Auto 24 12 14
Workers' compensation
and other liability 5 6 37
----- ----- -----
Total reduction $41 $20 $78
===== ===== =====
</TABLE>
The effect of catastrophes on the Corporation's results cannot be accurately
predicted. As such, severe weather patterns could have a material adverse impact
on the Corporation's results. In 1998, 1997 and 1996 there were 37, 25 and 41
catastrophes, respectively. The largest catastrophe in each year was $7.3
million, $4.6 million and $13.7 million in incurred losses. Additional
catastrophes with over $1.0 million in incurred losses number 14, 3 and 10 in
1998, 1997 and 1996, respectively. For additional discussion of catastrophe
losses, refer to Item 14, Note 9, Losses and Loss Reserves in the Notes to the
Consolidated Financial Statements on pages 54 and 55 of this Form 10-K.
In the normal course of business, the Ohio Casualty Group is involved in
disputes and litigation regarding terms of insurance contracts and the amount of
liability under such contracts arising from insured events. The liabilities for
loss and loss adjustment expenses include estimates of the amounts for which the
Ohio Casualty Group may be liable upon settlement or other conclusion of such
litigation.
Because of the inherent future uncertainties in estimating ultimate costs of
settling claims, actual loss and loss adjustment expenses may deviate
substantially from the amounts recorded in the Corporation's consolidated
financial statements. Furthermore, the timing, frequency and extent of
adjustments to the estimated liabilities cannot be accurately predicted since
conditions and events which established historical loss and loss adjustment
expense development and which serve as the basis for estimating ultimate claims
cost may not occur in the future in exactly the same manner, if at all.
The anticipated effect of inflation is implicitly considered when estimating the
liability for losses and loss adjustment expenses based on historical loss
development trends adjusted for anticipated changes in underwriting standards,
policy provisions and general economic trends.
The following tables present an analysis of losses and loss adjustment expenses
and related liabilities for the periods indicated. The accounting policies used
to estimate liabilities for losses and loss adjustment expenses are described in
Item 14, Notes 1H, Accounting Policies and 9, Losses and Loss Reserves, in the
Notes to Consolidated Financial Statements on pages 48 and 54 and 55 of this
Form 10-K.
10
<PAGE> 11
<TABLE>
<CAPTION>
ITEM 1. CONTINUED
Reconciliation of Liabilities for Losses and Loss Adjustment Expense
(in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net liabilities, beginning of year $1,421,804 $1,486,622 $1,557,065
Addition related to acquisition 483,938 0 0
Provision for current accident year
claims 989,114 922,065 1,009,086
Increase (decrease)in provisions for
prior accident year claims (66,119) (53,615) (76,920)
----------- ----------- -----------
922,995 868,450 932,166
Payments for claims occurring during:
Current accident year 513,292 448,402 515,025
Prior accident years 449,802 484,866 487,584
----------- ----------- -----------
963,094 933,268 1,002,609
Net liabilities, end of year 1,865,643 1,421,804 1,486,622
Reinsurance recoverable 91,296 62,003 70,048
----------- ----------- -----------
Gross liabilities, end of year $1,956,939 $1,483,807 $1,556,670
=========== =========== ===========
</TABLE>
11
<PAGE> 12
ITEM 1. CONTINUED
<TABLE>
<CAPTION>
Analysis of Development of Loss and Loss Adjustment Expense Liabilities
(In thousands)
Year Ended December 31 1988 1989 1990 1991 1992 1993 1994
- ---------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net liability as originally
estimated: $ 1,252,404 $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,868 $ 1,693,551 $ 1,606,487
Life Operations Liability 663 656 961
P&C Operations Liability $ 1,252,404 $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,205 $ 1,692,895 $ 1,605,526
Net cumulative payments as of:
One year later 440,173 489,562 506,246 526,973 561,133 533,634 510,219
Two years later 695,364 745,766 783,948 822,634 869,620 833,399 803,273
Three years later 845,472 902,081 955,666 1,007,189 1,060,433 1,017,893 997,027
Four years later 937,034 1,000,299 1,063,507 1,123,591 1,176,831 1,147,266 1,106,361
Five years later 996,353 1,061,173 1,131,012 1,201,317 1,264,900 1,218,916
Six years later 1,033,508 1,100,683 1,182,110 1,266,605 1,316,756
Seven years later 1,055,972 1,134,145 1,235,315 1,302,313
Eight years later 1,078,561 1,177,259 1,262,187
Nine years later 1,112,120 1,195,615
Ten years later 1,124,964
Gross cumulative payments as of:
One year later 586,869 547,377 522,811
Two years later 904,911 859,142 827,232
Three years later 1,107,980 1,051,915 1,030,701
Four years later 1,231,386 1,190,466 1,158,798
Five years later 1,328,478 1,278,602
Six years later 1,394,890
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1995 1996 1997 1998
- ---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net liability as originally
estimated: $ 1,557,065 $ 1,486,622 $ 1,421,804 $ 1,865,643
Life Operations Liability 3,934 3,722 100 98
P&C Operations Liability $ 1,553,131 $ 1,482,900 $ 1,421,704 $ 1,865,545
Net cumulative payments as of:
One year later 486,168 483,574 449,802
Two years later 772,670 747,374
Three years later 944,294
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Gross cumulative payments as of:
One year later 500,150 498,274 469,933
Two years later 798,078 781,853
Three years later 988,674
Four years later
Five years later
Six years later
</TABLE>
12
<PAGE> 13
ITEM 1. CONTINUED
<TABLE>
<CAPTION>
Analysis of Development of Loss and Loss Adjustment Expense Liabilities (continued)
(In thousands)
Year Ended December 31 1988 1989 1990 1991 1992 1993 1994
- ---------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net liability re-estimated as of:
One year later 1,179,052 1,285,233 1,403,172 1,515,129 1,601,406 1,539,178 1,500,528
Two years later 1,175,861 1,299,428 1,407,197 1,500,890 1,555,452 1,510,943 1,501,530
Three years later 1,193,127 1,296,215 1,388,381 1,467,256 1,524,054 1,515,114 1,486,455
Four years later 1,195,712 1,281,246 1,368,530 1,449,789 1,559,492 1,525,493 1,507,331
Five years later 1,186,680 1,268,193 1,366,676 1,498,881 1,561,763 1,551,024
Six years later 1,178,126 1,270,734 1,423,277 1,499,009 1,588,063
Seven years later 1,184,233 1,327,228 1,420,105 1,526,136
Eight years later 1,233,809 1,325,938 1,444,589
Nine years later 1,230,778 1,342,741
Ten years later 1,242,601
Decrease (increase) in
original estimates: $ 9,803 $ 27,313 $ 39,396 $ 40,003 $ 85,142 $ 141,871 $ 98,196
Net liability as originally
estimated: $1,673,205 $1,692,895 $1,605,526
Reinsurance recoverable on
unpaid losses and LAE 80,114 75,738 65,336
Gross liability as originally
estimated: $1,753,982 $1,769,289 $1,671,823
Life Operations Liability 663 656 961
P&C Operations Liability 1,753,319 1,768,633 1,670,862
One year later 1,692,044 1,609,429 1,572,435
Two years later 1,644,586 1,590,205 1,578,905
Three years later 1,622,842 1,600,667 1,565,580
Four years later 1,663,734 1,612,300 1,630,314
Five years later 1,666,556 1,680,806
Six years later 1,722,897
Decrease (increase) in
original estimates: 30,422 87,827 40,548
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1995 1996 1997 1998
- ---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net liability re-estimated as of:
One year later 1,474,795 1,427,992 1,355,586
Two years later 1,441,081 1,403,059
Three years later 1,445,738
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Decrease (increase) in
original estimates: $ 107,393 $ 79,841 $ 66,119
Net liability as originally
estimated: $ 1,553,131 $ 1,482,900 $ 1,421,704 $ 1,865,643
Reinsurance recoverable on
unpaid losses and LAE 71,066 64,695 59,952 80,215
Gross liability as originally
estimated: $ 1,631,184 $ 1,556,670 $ 1,483,807 $ 1,956,939
Life Operations Liability 6,987 9,075 2,150 11,081
P&C Operations Liability 1,624,197 1,547,595 1,481,657 1,945,858
One year later 1,544,461 1,496,100 1,447,044
Two years later 1,515,032 1,507,365
Three years later 1,561,675
Four years later
Five years later
Six years later
Decrease (increase) in
original estimates: 62,522 40,230 34,613
</TABLE>
13
<PAGE> 14
ITEM 1. CONTINUED
REINSURANCE
In order to preserve capital and shareholder value, Ohio Casualty Corporation
purchases reinsurance to protect the Corporation against large or catastrophic
losses. As a result of the Corporation's acquisition of the majority of the
commercial lines division of Great American Insurance Company, the Corporation's
reinsurance program was expanded to address the additional concentrations of
underwriting exposures. The Property Per Risk contract covers Ohio Casualty in
the event that an insured sustains a property loss in excess of $1.0 million in
a single insured event. Property reinsurance covers $29.0 million in excess of
the retention. The Casualty Per Occurrence contract covers the Corporation in
the event an insured sustains a liability loss in excess of $1.0 million in a
single insured event. Workers' compensation, umbrella and other casualty
reinsurance covers $100.0 million, $50.0 million and $24.0 million,
respectively, in excess of the retention. The Corporation also carries various
facultative reinsurance contracts protecting against certain individual risks.
The Catastrophe reinsurance contract protects the Corporation against an
accumulation of losses arising from one defined catastrophic occurrence or
series of events. The 1999 catastrophe program, similar to 1998, provides $150.0
million coverage in excess of the Corporation's $25.0 million retention. In
1998, a portion of the catastrophe program was again renewed with a multi-year
placement. The multi-year placements maintain rates, continuity and each
reinsurers' overall share of the program. Over the last twenty years, there were
two events that triggered coverage under our catastrophe reinsurance contract.
Losses and loss adjustment expenses from the Oakland Fires in 1991 and Hurricane
Andrew in 1992 totaled $35.6 million and $29.8 million, respectively. Both of
these losses exceeded our prior retention amount of $13.0 million. The
Corporation recovered $33.9 million from reinsurers as a result of these events.
Our reinsurance limits are designed to cover exposure to a catastrophic event
expected to occur once every 300 years.
Reinsurance contracts do not relieve the Corporation of its obligation to the
policyholders. The collectibility of reinsurance is subject to the solvency of
the reinsurers. Since the Corporation's reinsurance protection is an important
component in our financial plan, we closely monitor the financial health and
claims settlement performance of each of our reinsurers. Annually, financial
statements are reviewed and various ratios calculated to identify reinsurers who
have ceased to meet our high standards of financial strength. If any reinsurers
fail these tests, they are removed from the program at renewal. Currently, all
domestic reinsurers have an AM Best rating of A or better, and the financial
condition of all international reinsurers meet the Corporation's high standards.
Additionally, the Corporation utilizes a large base of reinsurers to mitigate
its concentration risk. In 1998 and 1997, no reinsurer accounted for more than
10% of total ceded premiums. In 1996, only three reinsurers exceeded 10% of
total ceded premiums: Everest Reinsurance Company, MidOcean Reinsurance Company
and Kemper Reinsurance Company accounted for 16.79%, 10.65% and 10.52% of total
ceded premiums, respectively. As a result of the Corporation's controls over
reinsurance, uncollectible amounts have not been significant.
COMPETITION
More than 2,400 property and casualty insurance companies compete in the United
States and no one company or company group has a market share greater than
approximately 12.6%. The Ohio Casualty Group ranked as the forty-fourth largest
property and casualty insurance groups in the United States based on net
insurance premiums written in 1997, the latest year for which statistics are
available. The Ohio Casualty Group competes with other companies on the basis of
service, price and coverage.
14
<PAGE> 15
ITEM 1. CONTINUED
STATE INSURANCE REGULATION
GENERAL. The Corporation and the Ohio Casualty Group are subject to regulation
under the insurance statutes, including the holding company statutes, of various
states. Ohio Casualty, American Fire, Ohio Security and OCNJ are all domiciled
in Ohio. West American and Avomark are domiciled in Indiana. Collectively, the
Ohio Casualty Group is authorized to transact the business of insurance in the
District of Columbia and all states. The Ohio Casualty Group is subject to
examination of their affairs by the insurance departments of the jurisdictions
in which they are licensed.
State laws also require prior notice or regulatory agency approval of changes in
control of an insurer or its holding company and of certain material
intercorporate transfers of assets within the holding company structure. Under
applicable provisions of the Indiana insurance statutes ("Indiana Insurance
Law") and the Ohio insurance statutes (the "Ohio Insurance Law"), a person would
not be permitted to acquire direct or indirect control of the Corporation or any
of the Ohio Casualty Group companies domiciled in such state, unless such person
had obtained prior approval of the Indiana Insurance Commissioner and the Ohio
Superintendent of Insurance, respectively, for such acquisition. For the
purposes of the Indiana Insurance Law and the Ohio Insurance Law, any person
acquiring more than 10% of the voting securities of a company is presumed to
have acquired " control " of such company.
Proposition 103 was passed in the State of California in 1988 in an attempt to
legislate premium rates for that state. As construed by the California Supreme
Court, the proposition requires premium rate rollbacks for 1989 California
policyholders while allowing for a "fair" return for insurance companies. Even
after considering investment income, total returns in California have been less
than what would be considered "fair" by any reasonable standard. During the
fourth quarter of 1994, the State of California assessed the Corporation $59.9
million for Proposition 103. In February 1995, California revised this billing
to $47.3 million due to California Senate Bill 905 which permits reduction of
the rollback due to actual commissions and premium taxes paid. The assessment
was revised again in August 1995 to $42.1 million plus interest. In December
1997, during Administrative Law hearings, the California Department of Insurance
filed two revised rollback calculations. These calculations indicated rollback
liabilities of either $35.9 million or $39.9 million plus interest.
In 1998, the Administrative Law Judge finally issued a proposed ruling with a
rollback liability of $24.4 million plus interest. Her ruling was sent to the
California Commissioner of Insurance to be accepted, rejected or modified. The
Corporation expected the commissioner to rule sometime after the election in
November, but he has so far failed to do so. In light of this failure to rule,
the Corporation consulted extensively with outside counsel to determine the
range of liability asserted by the Department. The asserted rollbacks to date
have ranged from $24.4 million to $61.2 million. The Administrative Law Judge
indicates clearly in her ruling that by her calculation the Corporation would
have lost approximately $1.0 million on 1989 operations if a rollback of $24.4
million were imposed. Given that conclusion, it is clear that any assessment
greater than $24.4 million would strengthen the Corporation's Constitutional
argument that this rollback is confiscatory. Since the Corporation does not
believe it is possible to pinpoint a specific rollback within the California
Department of Insurance's asserted range that is the most probable, the
Corporation has established a contingent liability for Proposition 103 rollback
at $24.4 million plus simple interest at 10% from May 8, 1989. This brings the
total reserve to $48.0 million at December 31, 1998.
15
<PAGE> 16
ITEM 1. CONTINUED
The Corporation will continue to challenge the validity of any rollback. To
date, the Corporation has paid $4.8 million in legal costs related to the
withdrawal, Proposition 103, and Fair Plan assessments.
In December 1992, the Corporation stopped writing business in California due to
a lack of profitability and a difficult regulatory environment. In April 1995,
the California Department of Insurance gave final approval for withdrawal.
Currently, subsidiary American Fire and Casualty remains in the state to wind
down the affairs of the group.
The State of New Jersey has historically been a profitable state for the
Corporation. In recent years, however, the legislative environment in that state
has become more difficult. Due to legislative rules and regulations designed to
make insurance less expensive and more easily obtainable for New Jersey
residents, our results have been adversely impacted. New Jersey passed the Fair
Automobile Insurance Reform Act which was an eight year assessment that began in
1990 and ended in 1997. In order to meet our state imposed assessment
obligations under the Fair Automobile Insurance Reform Act the Corporation has
incurred expenses of $3.3 million in 1997 and $3.6 million in 1996. The
Corporation's future obligations related to this act are minimal as only true-up
payments of less than $.1 million were made in 1998 and remaining future
true-ups are anticipated to be immaterial to the Corporation's results of
operations, financial position and liquidity in future years.
The Unsatisfied Claim and Judgment Fund is another assessment made by the State
of New Jersey. This assessment is based upon estimated future direct premium
written in that state. The Corporation has paid $3.4 million in 1999 for fiscal
year 2000 assessment and has paid $3.2 million, $4.2 million and $4.4 million in
1998, 1997 and 1996, respectively. The Corporation anticipates the future
assessments to be between $3.0 and $4.0 million dollars annually. The
Corporation anticipates future assessments will not materially affect the
Corporation's results of operations, financial position or liquidity.
Recently, the New Jersey State Senate passed an auto insurance reform bill that
mandates a 15% rate reduction for personal auto policies for drivers who agree
not to sue for "pain and suffering" unless they suffer permanent injury in an
accident. The bill was passed by the Assembly and signed by the governor. The
reform bill becomes effective on March 22, 1999. The anticipated impact on the
Corporation is a tradeoff of lower premium rates on personal auto policies for
presumably lower losses on these policies but the degree of offset, if any, is
uncertain at present. As of December 31, 1998, the Corporation had personal auto
net premium written of $114.5 million or 53.1% of total premium that the
Corporation writes in New Jersey. The maximum impact of this reform bill on the
Corporation would have been a decrease in premium of $17.2 million for the year
ended December 31, 1998 if all policyholders made this election on their
policies.
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS. The National Association of
Insurance Commissioners (the "NAIC") annually calculates a number of financial
ratios to assist state insurance regulators in monitoring the financial
condition of insurance companies. A "usual range" of results for each ratio is
used as a benchmark. Departure from the usual range on four or more of the
ratios could lead to inquiries from individual state insurance commissioners as
to certain aspects of a company's business. None of the property and casualty
companies of the Ohio Casualty Group had more than three NAIC financial ratios
that were outside the usual range in the last five calendar years.
16
<PAGE> 17
ITEM 1. CONTINUED
Beginning in 1994, the NAIC required inclusion of a risk-based capital
calculation in the Annual Statements. The risk-based capital model is used to
establish standards which relate insurance company statutory surplus to risks of
operations and assist regulators in determining solvency requirements. The model
is based on four risk factors in two categories: asset risk, consisting of
investment risk and credit risk; and underwriting risk, composed of loss
reserves and premiums written risks. Based on current calculations, all of the
Ohio Casualty Group companies are in excess of levels that would require
regulatory action.
The States of Ohio and Indiana have adopted the NAIC model law limiting dividend
payments by insurance companies. This law allows dividends to equal the greater
of 10% of policyholders' surplus or net income determined as of the preceding
year end without prior approval of the Insurance Department. For 1998, $112.1
million of policyholders' surplus is not subject to restrictions or prior
dividend approval.
EMPLOYEES
At December 31, 1998, the Ohio Casualty Group had approximately 4,050 employees
of which approximately 1,370 were located in Hamilton, Ohio.
YEAR 2000
The Corporation is proceeding on schedule in its phased approach to convert its
computer systems to be Year 2000 compliant. The four phases included in this
approach are: awareness, planning, execution/testing and compliance. Two of the
phases, awareness and planning, are complete and the execution/testing and
compliance phases are substantially complete with only one system left to be
tested.
The Corporation began the awareness phase early in the 1990s, recognizing that
its systems and applications would need significant changes. From that time
forward all system development and major enhancements to existing systems took
Year 2000 processing requirements into consideration. This approach resulted in
some of our systems being converted and compliant long before there was any
business requirement or exposure to processing problems.
During 1995, the Information Systems Department (I/S) began the planning phase.
At that time Year 2000 compliance became a priority project with Project
Managers assigned specifically for converting our systems to be compliant. A
comprehensive inventory of our systems was completed, identifying the critical
date that each system must be compliant and an action plan was put together to
outline that the conversion was completed on time. The Corporation is currently
on schedule with this action plan.
As a result of the planning phase, dedicated staff and resources were assigned
to work on the Year 2000 project. This began our execution/testing phase of the
project which includes addressing the remediation of Year 2000 problems
identified in the planning phase and logical partition (LPAR) compliance
testing. LPAR compliance testing requires an isolated partition within the
computer that runs independently. Essentially it can be considered an entirely
separate computer. The Corporation's LPAR has a dedicated processor, disk and
tape storage. In this environment, data can be migrated forward and tested as
the internal date in the computer is changed to critical dates in 1999 and 2000.
This provides an excellent environment to test applications, system software and
hardware. This involves individual and integrated compliance testing. The first
step verifies that the systems are compliant when they run independently. The
17
<PAGE> 18
ITEM 1. CONTINUED
second step verifies compliance when they are integrated with all other systems
with which they interface. Testing was performed throughout 1998 focusing
initially on systems critical to the daily business operation and followed by
all others. The Corporation has six major system areas: commercial lines,
claims, auto, personal property, management/financial reporting and human
resources. All of these areas are required to undergo LPAR compliance testing.
At this time, the auto, commercial lines, claims, personal property and human
resource systems have completed the LPAR compliance testing. The Corporation's
management/financial reporting system area has substantially completed LPAR
compliance testing with only one internal management reporting system left to be
tested. This is targeted for completion by the end of the first quarter 1999.
Following the completion of LPAR compliance testing, all systems will undergo
integrated testing of the production environment. Contingency plans include
compliance reverification of this integrated test early in the third quarter of
1999 and again early in the fourth quarter of 1999.
As of December 31, 1998, the total amount spent to date for I/S related costs on
the Year 2000 project is $2.3 million and the Corporation anticipates minimal
additional I/S related expenses to complete our efforts. These amounts do not
include any costs associated with efforts made to contact third parties or
related to contingency planning. As a result of the Corporation's efforts early
in the 1990s to begin making changes to systems and existing hardware and
software, the Corporation to date has not had to make an expensive effort to
identify and remedy its Year 2000 issues and does not anticipate that it will be
required to make substantial expenditures to address Year 2000 compliance in the
future.
During 1997, the Corporation began the compliance phase. The Year 2000 team is
currently in the process of identifying all significant vendors, suppliers and
agents of the Corporation and is completing the initial contact to obtain
written statements of their readiness and commitment to a date for their Year
2000 compliance. The Corporation will continue to monitor the Year 2000 status
of these entities and develop contingency plans to reduce the possible
disruption in business operations that may result from the failure of third
parties with which the Corporation has business relationships to address their
Year 2000 issues. Identification and initial contact for all significant
third-parties is expected to be complete by the first quarter of 1999 with
follow-up reviews scheduled throughout 1999. Should a third-party with whom the
Corporation transacts business have a system failure due to not being Year 2000
compliant, the Corporation believes this could result in a delay in processing
or reporting transactions of the Corporation, or a potential disruption in
service to its customers, notwithstanding the Corporation's intention to develop
contingency plans to respond to these potential system failures by such third
parties.
The Corporation is also addressing non information technology (non-IT) to ensure
Year 2000 compliance. At December 31, 1998, the Year 2000 team had completed a
preliminary assessment of the non-IT assets. The team identified the material
items that have a risk involving the safety of individuals, or that may cause
damage to property or the environment, or affect revenues. The team reported on
the identified non-IT assets in December 1998 to the Corporation's Executive
Management Team. Remediation and contingency planning is scheduled throughout
1999 with regular updates required to be given to the Executive Management Team.
The Corporation is currently assessing the status of Year 2000 readiness of the
business and assets that it acquired in the acquisition of substantially all the
Commercial Lines Division of Great American Insurance Company on December 1,
1998. For a period of at least 24 months
18
<PAGE> 19
ITEM 1. CONTINUED
from the date of the acquisition, GAI will provide computer processing and
communication services to the Corporation in connection with the acquired
business pursuant to an Information Systems Agreement. Thus, the Corporation
will be dependent on GAI to address and remediate Year 2000 issues with respect
to the information technology systems utilized for the business being acquired
by the Corporation. The failure of GAI to satisfactorily correct a material Year
2000 problem in the computer processing systems being used to provide services
to the Corporation in connection with the acquired business could result in a
material adverse effect on the ability of the Corporation to integrate the
acquired business and to operate it on a profitable basis.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, the normal business operations of the
Corporation including the disruption or delay in premium or claim processing and
the disruption in service to its customers. Also the inability to be Year 2000
compliant of significant third-party providers of the Corporation could result
in an interruption in the normal business operations. Due to the general
uncertainty inherent in the Year 2000 problem, such failures could materially
and adversely affect the Corporation's financial position, results of operations
or liquidity.
The Year 2000 issue is also a concern from an underwriting standpoint regarding
the extent of liability for coverage under various general liability, property
and directors and officers liability products and policies. The Corporation is
managing this concern by directly providing educational information on Year 2000
to insureds and agents; adding clarification and exclusionary language to
certain policies; and by adjusting underwriting practices. The Corporation
believes that minimal coverage may be interpreted to exist under some current
liability and product policies. The Corporation has historically avoided
manufacturing risks which produce computer or computer-dependent products.
The Insurance Services Office (ISO) recently developed policy language that
clarifies that there is no coverage for certain Year 2000 occurrences. The
liability exclusion has been accepted in over 40 states and a companion filing
for property has been accepted in at least 20 states at this time. Several
states have not adopted or approved the property exclusion form citing
specifically that there is no coverage under the current property contracts and
therefore, there is no reason to accept a clarifying endorsement. The
Corporation is currently addressing the year 2000 issue by attaching the ISO
exclusionary language, where approved by regulators, to general liability
policies with a rating classification the Corporation believes could potentially
have Year 2000 losses. The ISO exclusionary language endorsement is included on
all property policies where approved by regulators. These actions should
minimize the Corporation's exposure to Year 2000 losses.
Directors and officers could be held liable if a company in their control fails
to take necessary actions to address any Year 2000 problems and that failure
results in a material financial loss to the Company. The Corporation has written
directors' and officers' liability policies since 1995, with approximately $.5
million in premiums written in 1998. The Corporation is managing its D&O Year
2000 exposure through a combination of underwriting guidelines which address
Year 2000 issues in the application process and reinsurance policies which
provide coverage for any loss in excess of $.3 million.
Management of the Corporation believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be "worst-case scenarios" in
19
<PAGE> 20
ITEM 1. CONTINUED
which the Corporation could experience interruptions in normal business
operations. These "worst-case scenarios" include: disruption or delay in premium
and claim processing; disruption in service to customers; litigation for Year
2000 related claims, adverse affects on the Corporation's ability to integrate
the acquired business from Great American and loss of electrical, water and
other utility services which could result in a disruption in the Corporation's
services. The amount of potential liability and lost revenue cannot be
reasonably estimated.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-3 "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments". This statement provides guidance on accounting
for insurance related assessments and required disclosure information. This
statement is effective for fiscal years beginning after December 15, 1998. The
Corporation does not believe that this statement will materially affect the
Corporation's financial statements or disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement standardizes the accounting for derivative
instruments by requiring those items to be recognized as assets or liabilities
with changes in fair value reported in earnings or other comprehensive income in
the current period. The Corporation expects the adoption of FAS 133 to have an
immaterial impact on the financial results due to its limited use of derivative
instruments. This statement is effective for fiscal quarters of fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Corporation).
ITEM 2. PROPERTIES
The Ohio Casualty Group owns and leases office space in various parts of the
country. The principal office buildings consist of facilities owned in Hamilton,
Ohio and Fairfield, Ohio.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Corporation or its
subsidiaries other than litigation arising in connection with settlement of
insurance claims as described on page 10 and Proposition 103 hearings described
on page 15 and 16.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of Shareholders through the solicitation of
proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is related to executive officers who are not
separately reported in the Corporation's Proxy Statement:
20
<PAGE> 21
ITEM 4. CONTINUED
<TABLE>
<CAPTION>
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
<S> <C> <C>
Barry S. Porter 62 Chief Financial Officer and Treasurer of The Ohio Casualty
Corporation, The Ohio Casualty Insurance Company, American Fire and
Casualty Company, Ocasco Budget, Inc., The Ohio Life Insurance
Company, The Ohio Security Insurance Company and West American
Insurance Company since 1993. Chief Financial Officer and Treasurer
of Avomark since 1997 and Chief Financial Officer and Treasurer of
Ohio Casualty of New Jersey, Inc. since 1998.
Thomas A. Hayes 56 Executive Vice President and Chief Operating Officer of The Ohio
Casualty Insurance Company, The Ohio Security Insurance Company,
American Fire and Casualty Company, and West American Insurance
Company since 1998, prior thereto, Director and Senior Vice President
, Divisional President of Commercial Lines Division of Great American
Insurance Company
Michael L. Evans 55 Senior Vice President of The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, The Ohio Life Insurance Company, American
Fire and Casualty Company, West American Insurance Company and Ocasco
Budget, Inc., Executive Vice President of Avomark Insurance Company
and Ohio Casualty of New Jersey, Inc.; prior thereto, Vice President
of The Ohio Casualty Corporation and Executive Vice President of The
Ohio Casualty Insurance Company, American Fire and Casualty Company,
Ocasco Budget, Inc., The Ohio Life Insurance Company and Ohio Security
Insurance Company since April 1995; prior thereto, Vice President of
The Ohio Casualty Insurance Company, American Fire and Casualty
Company, Ocasco Budget, Inc., The Ohio Life Insurance Company and West
American Insurance Company.
John S. Busby 53 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ohio Security Insurance Company and West
American Insurance Company since May 1991. Vice President of Avomark
Insurance Company since 1997.
Donald J. Dehne 48 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996 and Avomark
since September 1997; prior thereto, Assistant Secretary of The Ohio
Casualty Insurance Company, American Fire and Casualty Company, Ocasco
Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company.
</TABLE>
21
<PAGE> 22
ITEM 4. CONTINUED
<TABLE>
<CAPTION>
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
<S> <C> <C>
Steven J. Adams 44 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996; Vice
President of Avomark Insurance Company since 1997; prior thereto,
Assistant Secretary of The Ohio Casualty Insurance Company, American
Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security
Insurance Company and West American Insurance Company; prior thereto,
Commercial Lines Customer Strategist; prior thereto, Imaging
Technology Expert.
Thomas P. Prentice 46 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996; Senior
Vice President of Avomark; prior thereto, Assistant Secretary of The
Ohio Casualty Insurance Company, American Fire and Casualty Company,
Ocasco Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company; prior thereto, Personal Lines Customer Specialist;
prior thereto, Claims Manager.
Coy Leonard, Jr. 54 Senior Vice President of The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company, Ocasco Budget, Inc., and Vice President of
Avomark Insurance Company; prior thereto, Vice President of The Ohio
Casualty Insurance Company, American Fire and Casualty Company, Ocasco
Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company; prior thereto, Assistant Vice President of The Ohio
Casualty Insurance Company, American Fire and Casualty Company, Ocasco
Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company; prior thereto, Manager of Strategic Planning and
Technology.
</TABLE>
22
<PAGE> 23
ITEM 4. CONTINUED
<TABLE>
<CAPTION>
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
<S> <C> <C>
Elizabeth M. Riczko 32 Senior Vice President of The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company and Vice President of Avomark Insurance
Company; prior thereto, Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio
Security Insurance Company and West American Insurance Company since
May 1996; prior thereto, Assistant Secretary of The Ohio Casualty
Insurance Company, American Fire and Casualty Company, Ocasco Budget,
Inc., Ohio Security Insurance Company and West American Insurance
Company; prior thereto, Corporate Actuarial Manager.
William E. Minor 43 Senior Vice President of The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company, and Vice President of Avomark Insurance
Company; prior thereto, Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company, Ohio Security Insurance
Company and West American Insurance Company since September 1996;
prior thereto, Account Director for Sire/Young and Rubicam.
Susan D. Dillon 43 Assistant Vice President of The Ohio Casualty Insurance Company,
American Fire and Casualty Company, Ohio Security Insurance Company
and West American Insurance Company since May 1995; prior thereto,
Branch Manager; prior thereto, Field Representative.
Jerome S. Runnels 59 Senior Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company and
West American Insurance Company, prior thereto, Vice President of
Claims for Great American Insurance Company
John J. McGovern 66 Senior Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company and
West American Insurance Company, prior thereto, Senior Vice President
of Great American Insurance Company
</TABLE>
23
<PAGE> 24
ITEM 4. CONTINUED
<TABLE>
<CAPTION>
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
<S> <C> <C>
Ralph G. Goode 53 Senior Vice President of Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, and
West American Insurance Company, Vice President of Avomark Insurance
Company, prior thereto, Vice President of The Ohio Casualty Insurance
Company, Ohio Security Insurance Company, American Fire and Casualty
Company and West American Insurance Company, prior thereto, Assistant
Vice President of The Ohio Casualty Insurance Company, Ohio Security
Insurance Company, American Fire and Casualty Company and West
American Insurance Company
Barbara F. Aras 43 Vice President of Ohio Casualty Insurance Company, The Ohio Security
Insurance Company, The Ohio Life Insurance Company, American Fire and
Casualty Company, West American Insurance Company and Ocasco Budget,
Inc., prior thereto, President and CEO of Argus Advisors, LTD, prior
thereto, Director of Lexis-Nexis
Richard B. Kelly 44 Vice President of Ohio Casualty Insurance Company, The Ohio Security
Insurance Company, The Ohio Life Insurance Company, American Fire and
Casualty Company, West American Insurance Company, Ocasco Budget, Inc.
and Avomark Insurance Company, prior thereto, Assistant Vice President
of The Ohio Casualty Insurance Company, Ohio Security Insurance
Company, American Fire and Casualty Company, West American Insurance
Company, Avomark Insurance Company and Ohio Life Insurance Company
Michael E. Sullivan 36 Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company and
West American Insurance Company, prior thereto, Divisional Senior Vice
President, Divisional Vice President, Divisional Assistant Vice
President and Product Manager of Great American Insurance Company
Larry Les Chander 51 Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company and
West American Insurance Company, prior thereto, Division Senior Vice
President of Great American Insurance Company
</TABLE>
24
<PAGE> 25
ITEM 4 CONTINUED
<TABLE>
<CAPTION>
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
<S> <C> <C>
Lloyd E. Geary 44 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company and West American Insurance Company, Assistant
Vice President of Avomark Insurance Company, prior thereto, Assistant
Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company and West American Insurance Company, prior
thereto, Assistant Secretary of The Ohio Casualty Insurance Company,
West American Insurance Company and Avomark Insurance Company
William G. Erickson 62 Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company and Avomark Insurance Company
Ronald R. Hutchison 66 Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company and Avomark Insurance Company, prior
thereto, Branch Manager of Orlando, FL.
John E. Bade, Jr. 44 Vice President of the Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company, and Avomark Insurance Company, prior
thereto, Assistant Vice President of Ohio Casualty Insurance Company,
American Fire and Casualty Company, Ohio Security Insurance Company,
West American Insurance Company and Avomark Insurance Company, prior
thereto, Branch Manager of Greensboro, NC
Harry E. Hunter 50 Vice President of the Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company, Avomark Insurance Company and Ohio
Casualty of New Jersey, Inc. prior thereto, Assistant Vice President
of The Ohio Casualty Insurance Company, American Fire and Casualty
Company, and West American Insurance Company, prior thereto, Branch
Manager of Grand Rapids, MI
Jeffery L. Haniewich 52 Vice President of the Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, and
West American Insurance company, prior thereto, Divisional Senior Vice
President of Great American Insurance Company
</TABLE>
25
<PAGE> 26
ITEM 4. CONTINUED
<TABLE>
<CAPTION>
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
<S> <C> <C>
Lisa A. Hays 31 Assistant Vice President of Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, and
West American Insurance Company; prior thereto, Divisional Assistant
Vice President of Great American Insurance Company
Joseph L. Dzigiel 36 Assistant Vice President of Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, and
West American Insurance Company, prior thereto, Assistant Vice
President of Great American Insurance Company, prior thereto,
Automation Manager of Great American Insurance Company, prior thereto,
Marketing Manager of Great American Insurance Company, prior thereto,
Agency of Operations of Great American Insurance Company
</TABLE>
- ---------------------------------------
(1) Ages listed are as of the annual meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
See Item 14, on pages 29, 30 and 33 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
See Item 14, on pages 31 and 32 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See Item 14, on pages 33-43 of this Form 10-K.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
The Corporation publishes forward-looking statements relating to such matters as
anticipated financial performance, business prospects and plans, regulatory
developments and similar matters. The statements contained in this report that
are not historical information, are forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor under The
Securities Act of 1933 and The Securities Exchange Act of 1934 for
forward-looking statements. The risks and uncertainties that may affect
operations, performance, development and results of the Corporation's business
and the results of the acquisition described herein,
26
<PAGE> 27
ITEM 7. CONTINUED
include the following: changes in property and casualty reserves; catastrophe
losses; premium and investment growth; product pricing environment; availability
of credit; changes in government regulation; performance of financial markets;
fluctuations in interest rates; availability of pricing reinsurance; litigation
and administrative proceedings; Year 2000 issues, including the Corporation's
ability to successfully identify and remediate Year 2000 system issues with its
own IT and non-IT assets, the ability of third parties with which the
Corporation has business relationships to address and resolve their Year 2000
issues and the ability of the Corporation to identify these third party issues;
Year 2000 issues relating to the commercial lines business acquired from the
Great American Insurance Company and the ability of the Corporation to implement
appropriate contingency plans to address Year 2000 problems which are not
successfully remediated; ability of Ohio Casualty to integrate the acquired
business and to retain the acquired insurance business; and general economic and
market conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 14, on page 40 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedules.
(See Index to Financial Statements attached hereto.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See pages 5 through 7 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1998 and Executive Officers of the Registrant
separately captioned under Part I of this annual report.
ITEM 11. EXECUTIVE COMPENSATION
See pages 8 through 15 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See pages 1 through 5 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1998.
27
<PAGE> 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See page 7 of the Proxy Statement of the Board of Directors for the fiscal year
ended December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES REQUIRED TO
BE FILED BY ITEM 8 OF THIS FORM AND REGULATION S-X
28
<PAGE> 29
ITEM 14. CONTINUED
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:30 a.m. on
Wednesday, April 21 1999, in the Ohio Casualty University Auditorium of the Ohio
Casualty Group Fairfield facility, 9450 Seward Road, Fairfield, OH 45014. Please
note this change in location from years past.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
The Corporation offers an automatic dividend reinvestment plan for all
registered holders of common stock. Under the plan, shareholders may reinvest
their dividends to buy additional shares of common stock, and may also make
voluntary cash payments of up to $60,000 yearly toward the purchase of Ohio
Casualty shares. Participation is entirely voluntary. More information on the
plan can be obtained by contacting the Transfer Agent listed below.
FORM 10-K ANNUAL REPORT
The Form 10-K Annual Report for 1998, as filed with the Securities and
Exchange Commission, is available without charge upon written request to:
Ohio Casualty Corporation
Office of the Chief Financial Officer
136 N. Third St.
Hamilton, OH 45025
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York, a division of EquiServe
P. O. Box 2500
Jersey City, NJ 07303-2500
1-800-317-4445
VISIT THE OHIO CASUALTY GROUP INTERNET WEB SITE
www.ocas.com
The site includes current financial data about Ohio Casualty Group as well as
other Corporate and product information.
<TABLE>
<CAPTION>
1999 ANTICIPATED DIVIDEND SCHEDULE DIVIDENDS PER SHARE
(in thousands)
Declaration Date Record Date Payable Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $1.76
February 18, 1999 March 1, 1999 March 10, 1999 1997 $1.68
May 20, 1999 June 1, 1999 June 10, 1999 1996 $1.60
August 19, 1999 September 1, 1999 September 10, 1999 1995 $1.52
November 18, 1999 December 1, 1999 December 10, 1999 1994 $1.46
</TABLE>
29
<PAGE> 30
ITEM 14. CONTINUED
<TABLE>
<CAPTION>
Ohio Casualty Corporation & Subsidiaries
FINANCIAL HIGHLIGHTS
(IN THOUSANDS) 1998 1997 1996
======================================================================================================
<S> <C> <C> <C>
Premiums and finance
charges earned $ 1,268,824 $ 1,208,974 $ 1,226,651
Investment income,
less expenses 169,024 177,700 183,308
Income before investment
gains 73,644 97,406 64,941
Realized investment gains,
after taxes 9,367 32,986 32,287
Income from discontinued
operations 1,916 8,655 5,229
Net income 84,927 139,047 102,457
Property and casualty
combined ratio 107.2% 105.3% 109.5%
BASIC AND DILUTED EARNINGS
PER COMMON SHARE
Income before investment
gains $ 2.24 $ 2.85 $ 1.85
Realized investment gains,
after taxes 0.28 0.96 0.91
Income from discontinued
operations 0.06 0.25 0.15
Net income 2.58 4.06 2.91
Book value 42.25 39.11 33.44
Dividends 1.76 1.68 1.60
FINANCIAL CONDITION
Assets $ 4,802,264 $ 3,778,782 $ 3,889,981
Shareholders' equity 1,320,981 1,314,829 1,175,100
Average shares
outstanding - basic 32,904 34,228 35,247
Average shares
outstanding - diluted 32,935 34,257 35,254
Shares outstanding
on December 31 31,269 33,622 35,141
Number of shareholders 6,100 6,200 6,500
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
TEN-YEAR SUMMARY OF OPERATIONS
(IN MILLIONS) 1998 1997 1996 1995
====================================================================================================================================
CONSOLIDATED OPERATIONS
<S> <C> <C> <C> <C>
Income after taxes
Operating income $ 73.6 $ 97.4 $ 64.9 $ 91.4
Realized investment gains (losses) 9.4 33.0 32.3 4.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 83.0 130.4 97.2 95.4
Discontinued operations 1.9 8.7 5.3 4.3
Cumulative effect of accounting changes 0.0 0.0 0.0 0.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 84.9 139.1 102.5 99.7
====================================================================================================================================
Income after taxes per average share outstanding - BASIC
Operating income 2.24 2.85 1.85 2.56
Realized investment gains (losses) 0.28 0.96 0.91 0.11
Discontinued operations 0.06 0.25 0.15 0.12
Cumulative effect of accounting changes 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 2.58 4.06 2.91 2.79
====================================================================================================================================
Average shares outstanding - BASIC 32.9 34.2 35.2 35.8
Income after taxes per average share outstanding - DILUTED
Operating income 2.24 2.85 1.85 2.56
Realized investment gains (losses) 0.28 0.96 0.91 0.11
Discontinued operations 0.06 0.25 0.15 0.12
Cumulative effect of accounting changes 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 2.58 4.06 2.91 2.79
====================================================================================================================================
Average shares outstanding -DILUTED 32.9 34.3 35.3 35.8
Total assets 4,802.3 3,778.8 3,890.0 3,980.1
Shareholders' equity 1,321.0 1,314.8 1,175.1 1,111.0
Book value per share 42.25 39.11 33.44 31.39
Dividends paid per share 1.76 1.68 1.60 1.52
Percent increase over previous year 4.8% 5.0% 5.3% 4.1%
PROPERTY AND CASUALTY OPERATIONS
Net premiums written 1,299.6 1,207.6 1,209.0 1,250.6
Net premiums earned 1,267.8 1,204.3 1,223.4 1,264.6
GAAP underwriting gain (loss) before taxes (74.1) (49.6) (112.2) (68.8)
Loss ratio 63.7% 62.7% 66.5% 61.2%
Loss expense ratio 9.1% 9.4% 9.7% 10.2%
Underwriting expense ratio 34.4% 33.2% 33.3% 32.6%
Combined ratio 107.2% 105.3% 109.5% 104.0%
Investment income before taxes 164.8 172.4 179.4 184.6
Per average share outstanding 5.01 5.04 5.09 5.16
Property and casualty reserves
Unearned premiums 668.6 494.9 491.4 505.8
Losses 1,580.6 1,174.5 1,215.8 1,268.1
Loss adjustment expense 376.3 307.2 331.8 356.1
Statutory policyholders' surplus 1,027.1 1,109.5 984.9 876.9
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
10-Year Compound
1994 1993 1992 1991 1990 1989 Annual Growth
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
$ 77.1 $ 51.5 $ 57.8 $ 99.1 $ 94.6 $ 109.3 (5.9)%
14.2 28.7 35.1 9.8 (8.7) (10.5) 0.0 %
- -----------------------------------------------------------------------------------------------------------------------------
91.3 80.2 92.9 108.9 85.9 98.8 (3.7)%
5.9 6.8 4.1 (1.0) (1.8) 2.7 (12.2)%
(0.3) 0.0 1.5 0.0 0.0 0.0 0.0 %
- -----------------------------------------------------------------------------------------------------------------------------
96.9 87.0 98.5 107.9 84.1 101.5 (4.0)%
=============================================================================================================================
2.14 1.43 1.60 2.77 2.47 2.56 (3.2)%
0.40 0.80 0.98 0.27 (0.23) (0.25) 0.0 %
0.16 0.19 0.12 (0.03) (0.05) 0.06 (9.3)%
(0.01) 0.00 0.04 0.00 0.00 0.00 0.0 %
- -----------------------------------------------------------------------------------------------------------------------------
2.69 2.42 2.74 3.01 2.19 2.37 (1.3)%
=============================================================================================================================
36.0 36.0 36.0 35.8 38.4 42.8 (2.8)%
2.14 1.43 1.60 2.76 2.47 2.55 (3.2)%
0.40 0.79 0.98 0.27 (0.23) (0.25) 0.0 %
0.16 0.19 0.12 (0.03) (0.05) 0.06 (9.3)%
(0.01) 0.00 0.04 0.00 0.00 0.00 0.0 %
- -----------------------------------------------------------------------------------------------------------------------------
2.69 2.41 2.74 3.00 2.19 2.36 (1.3)%
=============================================================================================================================
36.0 36.0 36.0 35.9 38.5 42.9 (2.8)%
3,739.0 3,816.8 3,760.7 3,531.3 3,252.9 3,145.7 5.1 %
850.8 862.3 825.2 774.5 651.2 775.0 6.3 %
23.64 23.93 23.43 21.58 18.19 18.46 9.8 %
1.46 1.42 1.34 1.24 1.16 1.04 6.5 %
2.8% 6.0% 8.1% 6.9% 11.5% 10.6% (8.7)%
1,286.4 1,306.0 1,508.5 1,492.3 1,468.4 1,377.6 (0.4)%
1,297.7 1,379.4 1,517.6 1,469.1 1,438.0 1,364.2 (0.5)%
(92.9) (147.3) (130.8) (74.5) (79.4) (62.6) 16.3 %
61.6% 64.9% 63.7% 60.4% 61.4% 58.4%
10.0% 11.8% 10.8% 10.6% 10.9% 12.1%
32.2% 33.6% 33.5% 33.9% 33.0% 33.2%
103.8% 110.3% 108.0% 104.9% 105.3% 103.7%
183.8 190.4 194.6 191.6 176.7 187.7 (0.3)%
5.10 5.29 5.41 5.34 4.59 4.38 2.6 %
517.8 529.6 596.1 605.2 582.0 551.6 2.2 %
1,303.6 1,378.0 1,309.2 1,216.1 1,148.9 1,061.5 4.9 %
367.3 390.6 364.0 350.0 335.1 308.5 3.3 %
660.0 713.6 674.2 643.4 465.8 531.6 8.6 %
</TABLE>
32
<PAGE> 33
ITEM 14. CONTINUED
MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
Net income decreased 38.9% for 1998 to $84.9 million or $2.58 per share
while the combined ratio increased by 1.9 points to 107.2%. Losses were
negatively impacted by catastrophes with $44.6 million of catastrophe losses in
1998 versus $21.4 million in 1997 and $62.2 million in 1996. Underwriting
expenses, as a percentage of earned premium, increased by 2.0% in 1998 compared
with increases of under 1% for both 1997 and 1996. General operating expenses, a
component of underwriting expenses, have increased over the period of 1996 to
1998. The increase in operating expense is primarily due to expenditures for
advertising as a part of the Corporation's efforts to increase name recognition
of its property and casualty companies.
Statutory net premiums written increased $229.7 million for 1998 to
$1.4 billion. $169.2 million of this increase is attributable to the acquisition
of substantially all of Great American Insurance Company's Commercial Lines
Division. The acquisition added $31.6 million in net written premium for the
month of December as well as $137.6 million in net written premium related to
the transfer of the unearned premium reserve. In addition, the Corporation's
premium growth continued to be led by our key agents with an 8% increase in
written premium for the year. The Corporation has established a very successful
key producer program for agencies who are willing to set and achieve goals in
production and other key areas. Excluding Great American, the largest increase
in premium occurred in the personal auto line of business with a 12.3% increase
and the largest premium increase by individual state came in Kentucky with an
$18.7 million increase or 18.8% over 1997.
Net cash produced from operations was $24.6 million compared with cash
produced of $26.4 million in 1997 and cash used of $14.0 million in 1996.
Investing activities produced net cash of $93.5 million in 1998, compared with
$164.0 million in 1997 and $112.7 million in 1996. Total cash produced from
financing activities was $66.9 million in 1998 compared with total cash used of
$131.9 million in 1997 and $75.4 million in 1996. The increase in 1998 compared
to 1997 primarily resulted from borrowing $225 million from the Corporation's
line of credit offset by dividends paid to shareholders and repurchases of
treasury stock. Dividend payments were $57.9 million in 1998 compared with $57.5
million in 1997 and $56.4 million in 1996. Overall, total cash generated in 1998
was $184.9 million, compared with $58.4 million in 1997 and $23.3 million in
1996.
In order to evaluate corporate performance relative to shareholders'
expectations, the Corporation calculates a five-year average return on equity.
Net income and unrealized gains and losses on investments are included in the
calculation to derive a total return. A five-year average is used to correspond
to our planning horizon and emphasize consistent long-term returns, not
intermediate fluctuations. At December 31, 1998, our five-year average return on
equity was 14.3% compared with 15.5% calculated at December 31, 1997 and 13.4%
at December 31, 1996.
HIGH/LOW MARKET PRICE PER SHARE
(IN DOLLARS)
High Low
1998 51 1/8 34 1/8
1997 50 3/4 34 3/8
1996 39 1/4 30 3/8
1995 39 28 1/4
1994 33 3/4 26 1/2
1993 35 7/8 28 13/16
1992 33 5/16 24 1/2
1991 25 1/8 20
1990 25 3/8 13 3/8
1989 26 1/4 17 3/4
PROPERTY AND CASUALTY
As described in more detail in Note 14, the Corporation purchased
substantially all of the Commercial Lines Division of Great American Insurance
Company on December 1, 1998. The acquisition has been treated as a purchase for
accounting purposes. The revenue and profit reported include the division from
the December 1, 1998 acquisition date forward.
33
<PAGE> 34
ITEM 14. CONTINUED
The Corporation's strategy in purchasing substantially all of the
Commercial Lines Division of Great American includes broadening its product mix
and adding approximately 1,400 agents to the Corporation's existing agency
plant. From a geographic point of view, the Corporation will increase its
presence in areas where it already does business and add a presence in the
Northeast, a region in which the Corporation had hoped to expand. Finally, the
Corporation anticipates that it will achieve financial benefits through
cross-selling of products, economies of scale and reductions in expenses through
improved processes.
Property and casualty operating income was $74.9 million, $2.27 per
share, in 1998 compared with $97.4 million, $2.84 per share, in 1997 and $66.1
million, $1.88 per share in 1996. Catastrophe losses in 1998 totaled $44.6
million compared with $21.4 million in 1997 and $62.2 million in 1996. There
were 37 separate catastrophes in 1998 compared with 25 catastrophes in 1997 and
39 in 1996. Catastrophe losses added 3.6 points to the combined ratio in 1998
compared with 1.8 points in 1997 and 5.1 points in 1996. 1998 losses were
heavily impacted by wind and hail related losses in Kentucky, Minnesota and
Iowa. 1996 losses were largely due to winter and spring storms in the Midwest.
PERSONAL AUTO
The performance of our personal auto segment was one of the
Corporation's major successes of 1998. Written premiums increased 12.3% to
$521.8 million in 1998 compared to $464.7 million in 1997 and $456.4 million in
1996. The increase is attributable to aggressive advertising efforts aimed at
increasing brand recognition. In addition, the Corporation's key producer
program continues to generate impressive results. Key producers generated a
12.8% increase in written premiums in 1998 compared to 1997. Lastly, the
Corporation offers a number of unique service advantages including "quick
quotes" from our Website, monthly payment option, youthful drivers program,
direct claims reporting and a number of enhanced policy endorsements.
The combined ratio improved to 103.8% in 1998 from 105.4% in 1997 and
110.3% in 1996. This success comes in spite of a slightly higher impact from
catastrophe losses of 1.2% in 1998 compared to .5% in 1997 and .9% in 1996.
COMMERCIAL MULTI PERIL, FIRE & INLAND MARINE
Written premiums increased 9.5% to $225.7 million in 1998 compared to
$206.1 million in 1997 and $195.3 million in 1996. In 1998, $9 million or 4.3%
is attributable to the acquired business from Great American's Commercial
Division. The remaining increase is largely attributable to production from our
key agents, which increased approximately $7.3 million from 1997.
Competition in the commercial segment remains formidable. Consequently,
rates have remained flat while the combined ratio increased in 1998 to 113.5%
from 107.7% in 1997. The combined ratio in 1996 was 115.0%. The combined ratio
was impacted by catastrophe losses which were 4.9% in 1998, 2.5% in 1997 and
8.3% in 1996. Additionally, losses from our auto services products were higher
than anticipated in 1998. The Corporation continues to be selective in the
writing of new business and to reinforce the sound relationships with customers
who appreciate the stability, expertise and added value the Corporation
provides.
GENERAL LIABILITY
Excluding the impact of $2.0 million in written premiums from the Great
American acquisition, written premiums have decreased for the third consecutive
year to $93.1 million in 1998 from $96.7 million in 1997 and $101.8 million in
1996.
While premiums have declined, the combined ratio improved in 1998 to
101.6% compared to 103.0% in 1997. Market conditions remain intensely
competitive, making profitable premium growth difficult to achieve. During this
period of soft pricing the Corporation has maintained its rates, focusing on a
quality book of business. Consequently, the number of policies in force are down
4.2% in 1998 from 1997 while underwriting results have improved.
34
<PAGE> 35
ITEM 14. CONTINUED
COMMERCIAL AUTO
In a market that continues to be exceptionally competitive, the
Corporation's written premium decreased in 1998 by $4.4 million when excluding
$3.2 million in premiums from the Great American acquisition. Although premiums
declined, excluding Great American, the number of insured vehicles increased
during the year and our business shifted from higher premium states to lower
premium states. The majority of the premium decline came in the states of
Pennsylvania and New Jersey.
While the Corporation's combined ratio improved 7.5 points, it was
higher than anticipated at 105.4%. Liability coverage accounted for 66% of the
Corporation's written premium and liability results were satisfactory. Uninsured
motorists and comprehensive claims, however, were $3.8 million above average of
the proceeding two years, accounting for almost 3 points of the combined ratio.
WORKERS' COMPENSATION
Excluding the impact of $8.3 million in written premiums from the Great
American acquisition, written premiums decreased in 1998 by 5.4% to $91.8
million compared to $97.2 million in 1997 and $115.4 million in 1996. The 1998
decrease primarily resulted from bureau-driven rate decreases, extremely
competitive market conditions.
The combined ratio increased 16.6 points in 1998 to 109.6% compared to
93.0% in 1997 and 94.3% in 1996. The increase primarily resulted from adverse
development in case reserves on older large claims.
HOMEOWNERS
Written premiums grew 7.5% to $180.7 million in 1998 compared to $168.2
million in 1997 and $166.5 million in 1996. This increase is led by our key
agents and corresponds with our increase in personal auto insurance. The
Corporation offers a "Fam-Pak" discount for customers combining automobile and
homeowners coverages.
The combined ratio increased to 118.4% from 111.2% in 1997. The
increase is primarily attributable to increased catastrophe losses of 15.2% in
1998 compared to 8.1% in 1997. In general, our homeowners products are offered
as ancillary to our personal auto products.
FIDELITY & SURETY
Written premiums increased 7.6% in 1998 to $37.0 million compared to
$34.4 million in 1997 and 34.5 million in 1996. The increase in 1998 is
primarily driven by contract surety products for construction contractors and is
fueled by a strong economy.
The combined ratio increased to 81.4% in 1998 from 76.5% in 1997 and
73.4% in 1996. Two large losses in 1998 contributed to the increase; however,
the Corporation's combined ratio remains below the industry average of
approximately 87.4%.
STATUTORY SURPLUS
Statutory surplus, a traditional insurance industry measure of strength
and underwriting capacity, was $1,027.1 million at December 31, 1998 compared
with $1,109.5 million at December 31, 1997 and $984.9 million at December 31,
1996. The decrease in 1998 was due to the statutory treatment of goodwill.
Increases in 1997 and 1996 were due primarily to the unrealized gains in our
investment portfolio and net income less dividends paid.
The ratio of premiums written to statutory surplus has not exceeded 1.7
to 1 for any property and casualty company in The Ohio Casualty Group in any of
the last three years. This ratio is one of the measures used by insurance
regulators to gauge the financial strength of an insurance company and indicates
the ability of the Corporation to grow by writing additional business.
Currently, the Corporation's ratio is 1.4 to 1. Ratios below 3 to 1 generally
indicate additional capacity and financial strength.
The National Association of Insurance Commissioners has developed a
"Risk Based Capital" formula for property and casualty insurers and life
insurers. The formulas are intended to measure the adequacy of an insurer's
capital given the asset structure and product mix of the company. Under the
current formulas, all insurance companies in The Ohio Casualty Group comfortably
exceed the necessary capital.
35
<PAGE> 36
ITEM 14. CONTINUED
PREMIUM DISTRIBUTIONS BY TOP STATES
1998 1997 1996
- ------------------------------------------------
New Jersey 16.6% 17.9% 18.3%
Ohio 11.3% 10.7% 10.2%
Kentucky 9.1% 8.2% 7.2%
Pennsylvania 7.4% 8.3% 9.4%
Illinois 6.0% 5.2% 5.0%
- ------------------------------------------------
Premiums written increased in both Ohio and Kentucky for the third
consecutive year. This growth has primarily come from the auto and CMP lines of
business. Net written premiums in Ohio totaled $147.1 million in 1998, $129.8
million in 1997 and $123.8 million in 1996. Net written premiums in Kentucky
totaled $118.4 million in 1998, $99.1 million in 1997 and $86.5 million in 1996.
New Jersey has experienced a small decline in premiums written in each
of the last three years. Net premiums written were $215.8 million compared with
$216.0 million in 1997 and $221.2 million in 1996. The reduction in premium
growth is primarily due to a decline in the workers compensation, general
liability and commercial auto lines of business.
Premiums written in Pennsylvania declined during 1998 to $96.5 million
compared with $99.8 million in 1997 and $113.5 million in 1996. This decline
has primarily been driven by competitive pricing conditions in commercial lines.
<TABLE>
<CAPTION>
COMBINED RATIOS
1998 1997 1996 1995 1994
===================================================================================================
<S> <C> <C> <C> <C> <C>
Private Passenger Auto 103.8% 105.4% 110.0% 100.3% 100.2%
Commercial Multiple Peril, Fire
and Inland Marine 113.5% 107.7% 115.0% 105.7% 108.6%
General Liability 101.6% 103.0% 89.1% 105.3% 90.3%
Workers' Compensation 109.6% 93.0% 94.3% 93.7% 87.8%
Homeowners 118.4% 111.2% 135.9% 113.7% 135.7%
Fidelity and Surety 81.4% 76.5% 73.4% 84.5% 72.8%
- ---------------------------------- -------------- ------------ ------------ ----------- -----------
Total 107.2% 105.3% 109.5% 104.0% 103.8%
===================================================================================================
</TABLE>
RESTRUCTURING
In December 1998, the Corporation finalized a restructuring and
reorganization plan. Under the plan, the Corporation will consolidate many of
its branch locations for underwriting and claims over the course of 1999.
Personal lines business centers will be reduced from five to three locations.
Commercial underwriting branches will be reduced from 17 to eight locations and
claims branches will be reduced from 38 to six locations. Workforce reductions
are anticipated to amount to approximately 250 positions. The plan is expected
to generate approximately $14 million in annual pretax savings upon full
implementation in late 1999.
Restructuring charges recorded in 1998 were comprised of expenses
associated with abandoned lease space totaling $10 million or $.30 per share
before-tax and $6.5 million or $.20 per share after-tax.
DISCONTINUED OPERATIONS
During 1995, the Corporation's life operations were discontinued. The
Corporation found it increasingly difficult to achieve our targeted 16% rate of
return in this segment of our business. After extensive analysis, it was
determined that a 16% return could not be achieved without substantial capital
contributions and a dramatic overhaul of the life operations. Since this was a
small segment of our overall business, it was decided that this would not be a
prudent use of our capital. Therefore, on October 2, 1995, the Corporation
signed the final documents to reinsure the existing blocks of business with
Great Southern Life Insurance Company. The existing blocks of business were
reinsured through a 100% coinsurance arrangement.
Great Southern Life Insurance Company legally replaced Ohio Life as the
primary insurer, subject to the 1995 reinsurance agreement with Ohio Life, on
approximately
36
<PAGE> 37
ITEM 14. CONTINUED
95% of the life insurance business as of the fourth quarter of 1998 and
approximately 76% as of the fourth quarter of 1997. As a result of the increased
assumption, the Corporation recognized additional amounts of unamortized ceding
commission of $1.1 million before tax in 1998 and $10.7 million in 1997. There
remains approximately $1.1 million in unamortized ceding commission. This will
continue to be amortized over the remaining life of the policies which have yet
to be assumed by Great Southern Life Insurance Company.
Net income from discontinued operations amounted to $1.9 million or
$.06 per share in 1998 compared with $8.7 million or $.25 per share in 1997 and
$5.2 million or $.15 per share in 1996.
REINSURANCE
In order to preserve capital and shareholder value, Ohio Casualty
Corporation purchases reinsurance to protect the Corporation against large or
catastrophic losses. As a result of the Corporation's acquisition of the
majority of the Commercial Lines Division of Great American Insurance Company,
the Corporation's reinsurance program was expanded to address the additional
concentrations of underwriting exposures. The Property Per Risk contract covers
Ohio Casualty in the event that an insured sustains a property loss in excess of
$1.0 million in a single insured event. Property reinsurance covers $29.0
million in excess of the retention. The Casualty Per Occurrence contract covers
the Corporation in the event an insured sustains a liability loss in excess of
$1.0 million in a single insured event. Workers' compensation, umbrella and
other casualty reinsurance covers $100.0 million, $50.0 million and $24.0
million respectively in excess of the retention. The Corporation also carries
various facultative reinsurance contracts protecting certain individual risks.
The catastrophe reinsurance contract protects the Corporation against
an accumulation of losses arising from one defined catastrophic occurrence or
series of events. The 1999 catastrophe program, similar to 1998, provides $150.0
million coverage in excess of the Corporation's $25.0 million retention. In
1998, a portion of the catastrophe program was again renewed with a multi-year
placement. The multi-year placements maintain rates, continuity, and each
reinsurers' overall share on the program. Over the last 20 years, there were two
events that triggered coverage under our catastrophe reinsurance contract.
Losses and loss adjustment expenses from the Oakland Fires in 1991 and Hurricane
Andrew in 1992 totaled $35.6 million and $29.8 million, respectively. Both of
these losses exceeded our prior retention amount of $13.0 million. The
Corporation recovered $33.9 million from reinsurers as a result of these events.
Our reinsurance limits are designed to cover exposure to a catastrophic event
expected to occur once every 300 years.
Reinsurance contracts do not relieve the Corporation of its obligation
to the policyholders. The collectibility of reinsurance is subject to the
solvency of the reinsurers. Since the Corporation's reinsurance protection is an
important component in our financial plan, we closely monitor the financial
health and claims settlement performance of each of our reinsurers. Annually,
financial statements are reviewed and various ratios calculated to identify
reinsurers who have ceased to meet our high standards of financial strength. If
any reinsurers fail these tests, they are removed from the program at renewal.
Currently, all domestic reinsurers have an AM Best rating of A or better and the
financial condition of all international reinsurers meet the Corporation's high
standards. Additionally, the Corporation utilizes a large base of reinsurers to
mitigate its concentration risk. In 1998 and 1997 no reinsurer accounted for
more than 10% of total ceded premiums. In 1996, only three reinsurers exceeded
10% of total ceded premiums. Everest Reinsurance Company, MidOcean Reinsurance
Company and Kemper Reinsurance Company accounted for 16.79%, 10.65% and 10.52%
of total ceded premiums respectively. As a result of the Corporation's controls
over reinsurance, uncollectible amounts have not been significant.
CATASTROPHE LOSSES
(IN MILLIONS)
1998 $45
1997 $21
1996 $62
1995 $27
1994 $37
37
<PAGE> 38
ITEM 14. CONTINUED
LOSS AND LOSS ADJUSTMENT EXPENSES
The Corporation's largest liabilities are the reserves for losses and
loss adjustment expenses. Loss and loss adjustment expense reserves are
established for all incurred claims and are carried on an undiscounted basis
before any credits for reinsurance recoverable. These reserves amounted to $2.0
billion at December 31, 1998, $1.5 billion at December 31, 1997 and $1.6 billion
at December 31, 1996.
In recent years, environmental liability claims have expanded greatly
in the insurance industry. Fortunately, Ohio Casualty has a substantially
different mix of business than the industry. We have historically written small
commercial accounts, and have not attracted significant manufacturing liability
coverage. As a result, our environmental liability claims are substantially
below the industry average. Our liability business reflected our current mix of
approximately 66% contractors, 16% building/premises, 12% mercantile and only 6%
manufacturers. Within the manufacturing category, we have concentrated on the
light manufacturers which further limits our exposure to environmental claims.
Estimated asbestos and environmental reserves are composed of case
reserves, incurred but not reported reserves and reserves for loss adjustment
expense. For 1998, 1997 and 1996, respectively, those reserves were $41.9
million, $40.1 million and $41.0 million. Asbestos reserves were $10.3 million,
$7.0 million and $5.2 million and environmental reserves were $31.5 million,
$33.2 million and $35.7 million for those respective years. These loss estimates
are based on currently available information. However, given the expansion of
coverage and liability by the courts and legislatures, there is some uncertainty
as to the ultimate liability. The Corporation's insurance subsidiaries changed
their pollution exclusion policy language between 1985 and 1987 to effectively
eliminate these coverages.
CALIFORNIA WITHDRAWAL
On June 15, 1992, the Corporation announced its intention to withdraw
its business operations from California due to the lack of profitability and the
difficult regulatory environment. In December 1992, the Corporation stopped
writing business in California and filed a withdrawal plan with the California
Department of Insurance.
Under the terms of the plan, The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, and West American Insurance Company would withdraw
from California, leaving American Fire and Casualty Company licensed to wind
down the affairs of the Group. Also, the plan required the withdrawing companies
to transfer their California liabilities to American Fire and Casualty Company
along with assets to secure those liabilities. In April 1995, the California
Department of Insurance gave final approval for withdrawal and the Corporation
implemented the withdrawal plan.
Proposition 103 was passed in the State of California in 1988 in an
attempt to legislate premium rates for that state. As construed by the
California Supreme Court, the proposition requires premium rate rollbacks for
1989 California policyholders while allowing for a "fair" return for insurance
companies. Even after considering investment income, total returns in California
have been less than would be considered "fair" by any reasonable standard.
During the fourth quarter of 1994, the State of California assessed the
Corporation $59.9 million for Proposition 103. In February 1995, California
revised this billing to $47.3 million due to California Senate Bill 905 which
permits reduction of the rollback due to actual commissions and premium taxes
paid. The assessment was revised again in August 1995 to $42.1 million plus
interest. In December 1997, during Administrative Law hearings, the California
Department of Insurance filed two revised rollback calculations. These
calculations indicated roll back liabilities of either $35.9 million or $39.9
million plus interest.
In 1998, the Administrative Law Judge issued a proposed ruling with a
rollback liability of $24.4 million plus interest. Her ruling was sent to the
California Commissioner of Insurance to be accepted, rejected or modified. The
Corporation expected the commissioner to rule sometime after the general
election in November, but he has so far failed to do so. In light of this
failure to rule, the Corporation consulted extensively with outside counsel to
determine the range of liability asserted by the Department. The asserted
rollbacks to date have ranged from $24.4 million to $61.1 million. The
Administrative Law Judge indicates clearly in
38
<PAGE> 39
ITEM 14. CONTINUED
her ruling that by her calculation the Corporation would have lost approximately
$1.0 million on 1989 operations if a rollback of $24.4 million were imposed.
Given that conclusion, it is clear that any assessment greater than $24.4
million would strengthen the Corporation's Constitutional argument that this
rollback is confiscatory. Since the Corporation does not believe it is possible
to pinpoint a specific rollback within the California Department of Insurance's
asserted range that is the most probable, the Corporation has established a
contingent liability for Proposition 103 rollback at $24.4 million plus simple
interest at 10% from May 8, 1989. This brings the total reserve to $48.0 million
at December 31, 1998.
The Corporation will continue to challenge the validity of any
rollback. To date, the Corporation has paid $4.8 million in legal costs related
to the withdrawal, Proposition 103 and fair plan assessments.
INVESTMENTS
Consolidated pre-tax investment income from continuing operations
decreased 4.9% to $169.0 million in 1998 compared with $177.7 million in 1997
and $183.3 million in 1996. After-tax investment income totaled $125.8 million
in 1998 compared with $133.6 million in 1997 and $138.6 million in 1996. Pre-tax
and after-tax investment income comparisons are impacted by investments in
municipal bonds, which provide tax free investment income.
Cash flow from investment income has been impacted by our continued
share repurchase program. During 1998, Ohio Casualty Corporation purchased
2,362,900 shares of its common stock at a cost of $100.0 million compared with
1,544,688 shares for $64.9 million in 1997 and 264,600 shares for $9.2 million
in 1996. The Corporation is currently authorized to repurchase 1.1 million
additional shares of its common stock to be held as treasury shares for stock
options or other general corporate purposes. Since the beginning of 1987, we
have repurchased 14.6 million shares at an average cost of $27.43 per share. We
believe that when the market value of our stock fails to reflect the prospects
of our operations, repurchasing shares is a prudent use of our capital. In the
future, we intend to continue repurchasing shares when doing so makes economic
sense for the Corporation and its shareholders.
At year end 1998, consolidated investments had a carrying value of $3.6
billion. The excess of market value over cost was $787.9 million, compared with
a $697.6 million excess at year end 1997 and $508.8 million at year end 1996.
The increase in unrealized gains in 1998 and in 1997 was attributable to the
strong performance of our equity and fixed income portfolios. After-tax realized
investment gains from continuing operations amounted to $9.4 million in 1998
compared with $33.0 million in 1997 and $32.3 million in 1996.
The Corporation continues to have no exposure to futures, forwards,
caps, floors, or similar derivative instruments as defined by Statement of
Financial Accounting Standards No. 119. However, as noted in footnote number 17,
the Corporation has an interest rate swap with Chase Manhattan Bank covering a
portion of the outstanding balance of our line of credit. At year-end 1998 the
amount covered by the swap was $15.0 million. This swap is not classified as an
investment but rather as a hedge against a portion of the variable rate loan. As
of December 31, 1998, Ohio Casualty maintained a $375.4 million mortgage-backed
securities portfolio compared with $347.1 million at December 31, 1997 and
$446.9 million at December 31, 1996. The majority of our mortgage-backed
securities holdings are less volatile planned amortization class, sequential
structures and agency pass-through securities. $9.6, $5.8, $27.0 million of this
portfolio was invested in more volatile bond classes (e.g. interest-only,
super-floaters, inverses) in 1998, 1997 and 1996, respectively.
Ohio Casualty's fixed income strategy has been to maintain a portfolio
with a laddered maturity structure and an intermediate duration. We believe that
our portfolio composition and duration continue to be appropriate for our
insurance business. Further, we do not try to time the financial markets.
Instead, we believe it is prudent to remain fully invested at all times, subject
only to our liquidity needs.
Tax exempt bonds were 34.8% of the fixed income portfolio at year-end
1998 versus 39.4% at December 31, 1997 and 34.4% at December 31, 1996. This high
average exposure to municipals reflects our internal tax planning strategy as
well as our belief that municipals are attractive relative to taxable bond
alternatives.
39
<PAGE> 40
ITEM 14. CONTINUED
Our commitment to a diversified, growth-oriented equity portfolio
remains unchanged. Equity investments have increased as a percentage of our
consolidated portfolio from 23.5% in 1996 to 25.7% at year end 1998. This
increase is largely attributable to market appreciation of existing investments
as opposed to commitment of new funds.
MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
Market risk is the risk of loss resulting from adverse changes in
interest rates and market prices. In addition to market risk, the Corporation is
exposed to other risks, including the credit risk related to its financial
instruments and the underlying insurance risk relating to its core business. The
sensitivity analysis below summarizes only the exposure to market risk.
The Corporation's investments are held for purposes other than trading
with an objective of earning relative competitive returns by investing in a
diverse portfolio of high-quality, liquid securities. As a result, the
Corporation minimizes its credit risk.
Interest Rate Risk - The Corporation has exposure to losses resulting
from interest rate risk arising from potential volatility in interest rates. The
Corporation attempts to mitigate its exposure to interest rate risk through
active portfolio management including periodic reviews of our asset and
liability positions. Estimates of cash flows, as well as the impact of interest
rate fluctuations relating to the Corporation's investment portfolio and
revolving line of credit are modeled and reviewed quarterly.
Equity Price Risk - The Corporation's portfolio of marketable equity
securities has exposure to losses resulting from equity price risk arising from
potential volatility in equity market values. The Corporation attempts to
mitigate its exposure to equity price risk by maintaining a portfolio of
investments which are diversified across industries, and concentrations in any
one company or industry are limited by parameters established by senior
management. Market risk is actively managed by analysis of various portfolio
characteristics on a routine basis.
The following table illustrates the hypothetical effect of an increase
in interest rates of 100 basis points (1%) and a 10% decrease in equity values
at December 31, 1998. Prior period disclosures are not required in the initial
year of disclosure. The changes in market rates selected reflect the
Corporation's view of changes which are reasonably possible over a one-year
period. These rates should not be considered a prediction by the Corporation of
future events. This analysis is not intended to provide a precise forecast of
the effect of changes in interest rates and equity prices on the Corporation's
income, cash flow and shareholders' equity. In addition, the analysis does not
take into account any actions the Corporation may take to reduce its exposure in
response to market fluctuations.
Estimated Adjusted Market Value
December 31, 1998 Fair Value as indicated above
- ----------------------------------------------------------------
Interest Rate Risk:
Fixed maturities $2,416 $2,312
Short-term
investments 263 183
Equity Price Risk:
Equity securities 925 832
- ----------------------------------------------------------------
Totals $3,604 $3,327
================================================================
In addition to the above scheduled investments, the Corporation has a
revolving line of credit. An increase in interest rates of one basis point would
result in additional annual interest expense of $2.5 million.
Certain assumptions are inherent in the above analysis. The Corporation
assumes an instantaneous shift in interest rates and equity prices at December
31, 1998 and that the composition of its investment portfolio remains relatively
constant. Also, the Corporation assumes a change in interest rates is reflected
uniformly across all financial instruments even though interest rates on certain
types of instruments may fluctuate or lag behind other instruments.
YEAR 2000
The Corporation is proceeding on schedule in its phased approach to
convert its computer systems to be Year 2000 compliant. The four phases included
in this approach are: awareness, planning, execution/testing and compliance. Two
of the phases, awareness and planning, are complete and the execution/testing
and compliance phases are substantially complete with only one system left to be
tested.
40
<PAGE> 41
ITEM 14. CONTINUED
The Corporation began the awareness phase early in the 1990s,
recognizing that its systems and applications would need significant changes.
From that time forward all system development and major enhancements to existing
systems took Year 2000 processing requirements into consideration. This approach
resulted in some of our systems being converted and compliant long before there
was any business requirement or exposure to processing problems.
During 1995, the Information Systems Department (I/S) began the
planning phase. At that time Year 2000 compliance became a priority project with
Project Managers assigned specifically for converting our systems to be
compliant. A comprehensive inventory of our systems was completed, identifying
the critical date that each system must be compliant and an action plan was put
together to outline that the conversion was completed on time. The Corporation
is currently on schedule with this action plan.
As a result of the planning phase, dedicated staff and resources were
assigned to work on the Year 2000 project. This began our execution/testing
phase of the project which includes addressing the remediation of Year 2000
problems identified in the planning phase and logical partition (LPAR)
compliance testing. LPAR compliance testing requires an isolated partition
within the computer that runs independently. Essentially it can be considered an
entirely separate computer. The Corporation's LPAR has a dedicated processor,
disk and tape storage. In this environment, data can be migrated forward and
tested as the internal date in the computer is changed to critical dates in 1999
and 2000. This provides an excellent environment to test applications, system
software and hardware. This involves individual and integrated compliance
testing. The first step verifies that the systems are compliant when they run
independently. The second step verifies compliance when they are integrated with
all other systems with which they interface. Testing was performed throughout
1998 focusing initially on systems critical to the daily business operation and
followed by all others. The Corporation has six major system areas: commercial
lines, claims, auto, personal property, management/financial reporting and human
resources. All of these areas are required to undergo LPAR compliance testing.
At this time, the auto, commercial lines, claims, personal property and human
resource systems have completed the LPAR compliance testing. The Corporation's
management/ financial reporting system area has substantially completed LPAR
compliance testing with only one internal management reporting system left to be
tested. This is targeted for completion by the end of the first quarter 1999.
Following the completion of LPAR compliance testing, all systems will
undergo integrated testing of the production environment. Contingency plans
include compliance reverification of this integrated test early in the third
quarter of 1999 and again early in the fourth quarter of 1999.
As of December 31, 1998, the total amount spent to date for I/S related
costs on the Year 2000 project is $2.3 million and the Corporation anticipates
minimal additional I/S related expenses to complete our efforts. These amounts
do not include any costs associated with efforts made to contact third parties
or related to contingency planning. As a result of the Corporation's efforts
early in the 1990s to begin making changes to systems and existing hardware and
software, the Corporation to date has not had to make an expensive effort to
identify and remedy its Year 2000 issues and does not anticipate that it will be
required to make substantial expenditures to address Year 2000 compliance in the
future.
During 1997, the Corporation began the compliance phase. The Year 2000
team is currently in the process of identifying all significant vendors,
suppliers and agents of the Corporation and is completing the initial contact to
obtain written statements of their readiness and commitment to a date for their
Year 2000 compliance. The Corporation will continue to monitor the Year 2000
status of these entities and develop contingency plans to reduce the possible
disruption in business operations that may result from the failure of third
parties with which the Corporation has business relationships to address their
Year 2000 issues. Identification and initial contact for all significant
third-parties is expected to be complete by the first quarter of 1999 with
follow-up reviews scheduled throughout 1999. Should a third-party with whom the
Corporation transacts business have a system failure due to not being Year 2000
compliant, the Corporation believes this could result in a delay in processing
or reporting
41
<PAGE> 42
ITEM 14. CONTINUED
transactions of the Corporation, or a potential disruption in service to its
customers, notwithstanding the Corporation's intention to develop contingency
plans to respond to these potential system failures by such third parties.
The Corporation is also addressing non information technology (non-IT)
to ensure Year 2000 compliance. At December 31, 1998, the Year 2000 team had
completed a preliminary assessment of the non-IT assets. The team identified the
material items that have a risk involving the safety of individuals, or that may
cause damage to property or the environment, or affect revenues. The team
reported on the identified non-IT assets in December 1998 to the Corporation's
Executive Management Team. Remediation and contingency planning is scheduled
throughout 1999 with regular updates required to be given to the Executive
Management Team.
The Corporation is currently assessing the status of Year 2000
readiness of the business and assets that it acquired in the acquisition of
substantially all the Commercial Lines Division of Great American Insurance
Company on December 1, 1998. For a period of at least 24 months from the date of
the acquisition, GAI will provide computer processing and communication services
to the Corporation in connection with the acquired business pursuant to an
Information Systems Agreement. Thus, the Corporation will be dependent on GAI to
address and remediate Year 2000 issues with respect to the information
technology systems utilized for the business being acquired by the Corporation.
The failure of GAI to satisfactorily correct a material Year 2000 problem in the
computer processing systems being used to provide services to the Corporation in
connection with the acquired business could result in a material adverse effect
on the ability of the Corporation to integrate the acquired business and to
operate it on a profitable basis.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, the normal business operations of the
Corporation including the disruption or delay in premium or claim processing and
the disruption in service to its customers. Also the inability to be Year 2000
compliant of significant third-party providers of the Corporation could result
in an interruption in the normal business operations. Due to the general
uncertainty inherent in the Year 2000 problem, such failures could materially
and adversely affect the Corporation's financial position, results of operations
or liquidity.
The Year 2000 issue is also a concern from an underwriting standpoint
regarding the extent of liability for coverage under various general liability,
property and directors and officers liability products and policies. The
Corporation is managing this concern by directly providing educational
information on Year 2000 to insureds and agents; adding clarification and
exclusionary language to certain policies; and by adjusting underwriting
practices. The Corporation believes that minimal coverage may be interpreted to
exist under some current liability and product policies. The Corporation has
historically avoided manufacturing risks which produce computer or
computer-dependent products.
The Insurance Services Office (ISO) recently developed policy language
that clarifies that there is no coverage for certain Year 2000 occurrences. The
liability exclusion has been accepted in over 40 states and a companion filing
for property has been accepted in at least 20 states at this time. Several
states have not adopted or approved the property exclusion form citing
specifically that there is no coverage under the current property contracts and
therefore, there is no reason to accept a clarifying endorsement. The
Corporation is currently addressing the year 2000 issue by attaching the ISO
exclusionary language, where approved by regulators, to general liability
policies with a rating classification the Corporation believes could potentially
have Year 2000 losses. The ISO exclusionary language endorsement is included on
all property policies where approved by regulators. These actions should
minimize the Corporation's exposure to Year 2000 losses.
Directors and officers could be held liable if a company in their
control fails to take necessary actions to address any Year 2000 problems and
that failure results in a material financial loss to the Company. The
Corporation has written directors' and officers' liability policies since 1995,
with approximately $.5 million in premiums written in 1998. The Corporation is
managing its D&O Year 2000 exposure through a combination of underwriting
guidelines which address Year 2000 issues in the application process and
reinsurance policies which provide coverage for any loss in excess of $.3
million.
42
<PAGE> 43
ITEM 14. CONTINUED
Management of the Corporation believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. However, since it is
not possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be "worst-case scenarios" in which the
Corporation could experience interruptions in normal business operations. These
"worst-case scenarios" include: disruption or delay in premium and claim
processing; disruption in service to customers; litigation for Year 2000 related
claims and adverse affects on the Corporations ability to integrate the acquired
business from Great American. The amount of potential liability and lost revenue
cannot be reasonably estimated.
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards in Note 21.
FORWARD-LOOKING STATEMENTS
The Corporation publishes forward-looking statements relating to such
matters as anticipated financial performance, business prospects and plans,
regulatory developments and similar matters. The statements contained in this
report that are not historical information, are forward-looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor under
The Securities Act of 1933 and The Securities Exchange Act of 1934 for
forward-looking statements. The risks and uncertainties that may affect
operations, performance, development and results of the Corporation's business
and the results of the acquisition described herein, include the following:
changes in property and casualty reserves; catastrophe losses; premium and
investment growth; product pricing environment; availability of credit; changes
in government regulation; performance of financial markets; fluctuations in
interest rates; availability of pricing reinsurance; litigation and
administrative proceedings; Year 2000 issues, including the Corporation's
ability to successfully identify and remediate Year 2000 system issues with its
own IT and non-IT assets, the ability of third parties with which the
Corporation has business relationships to address and resolve their Year 2000
issues and the ability of the Corporation to identify these third party issues;
Year 2000 issues relating to the commercial lines business acquired from the
Great American Insurance Company and the ability of the Corporation to implement
appropriate contingency plans to address Year 2000 problems which are not
successfully remediated; ability of Ohio Casualty to integrate the acquired
business and to retain the acquired insurance business; and general economic and
market conditions.
43
<PAGE> 44
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 (IN THOUSANDS) 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value $ 2,415,904 $ 2,226,030 $ 2,310,938
(Cost: $2,307,734; $2,112,291; $2,225,517)
Equity securities, at fair value 924,906 859,475 721,152
(Cost: $245,129; $275,637; $297,727)
Short-term investments, at fair value 262,863 65,849 41,546
(Cost: $262,939; $65,849; $41,546)
- -------------------------------------------------------------------------------------------------------------
Total investments 3,603,673 3,151,354 3,073,636
Cash 42,139 54,206 20,078
Premiums and other receivables, net of allowance for
bad debts of $8,739, $4,200 and $3,700, respectively 301,943 193,615 186,676
Deferred policy acquisition costs 176,606 126,063 116,684
Property and equipment, net of accumulated depreciation of
$97,991, $87,232 and $77,427, respectively 80,065 50,699 42,239
Reinsurance recoverable 186,861 108,962 362,683
Goodwill, net of accumulated amortization of $1,031,
$0 and $0, respectively 308,206 0 0
Other assets 102,771 93,883 87,985
- -------------------------------------------------------------------------------------------------------------
Total assets $ 4,802,264 $ 3,778,782 $ 3,889,981
=============================================================================================================
LIABILITIES
Insurance reserves:
Unearned premiums $ 668,550 $ 495,076 $ 491,613
Losses 1,580,599 1,176,614 1,224,873
Loss adjustment expenses 376,340 307,193 331,797
Future policy benefits 25,518 34,148 280,002
Note payable 265,000 40,000 50,000
California Proposition 103 reserve 48,043 66,908 74,376
Deferred income taxes 140,730 95,389 27,993
Other liabilities 376,503 248,625 234,227
- -------------------------------------------------------------------------------------------------------------
Total liabilities (See Notes 1 and 8) 3,481,283 2,463,953 2,714,881
- -------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $.125 par value 5,850 5,850 5,850
Authorized: 150,000,000 shares
Issued shares: 46,803,872
Additional paid-in capital 4,186 3,923 3,603
Common stock purchase warrants 21,138 0 0
Accumulated other comprehensive income:
Unrealized gain on investments, net of applicable
income taxes 511,816 454,241 332,042
Retained earnings 1,185,349 1,158,308 1,076,545
Treasury stock, at cost
(Shares: 15,535,089; 13,182,240; 11,662,559) (407,358) (307,493) (242,940)
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,320,981 1,314,829 1,175,100
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 4,802,264 $ 3,778,782 $ 3,889,981
=============================================================================================================
</TABLE>
See notes to consolidated financial statements
44
<PAGE> 45
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996
============================================================================================================
<S> <C> <C> <C>
Premiums and finance charges earned $ 1,268,824 $ 1,208,974 $ 1,226,651
Investment income less expenses 169,024 177,700 183,308
Investment gains realized, net 14,411 50,749 49,672
- ------------------------------------------------------------------------------------------------------------
Total revenues 1,452,259 1,437,423 1,459,631
Losses and benefits for policyholders 805,020 751,207 812,234
Loss adjustment expenses 115,253 113,435 118,354
General operating expenses 120,304 103,299 100,939
Amortization of goodwill 1,031 0 0
Amortization of deferred policy acquisition costs 316,516 303,494 308,856
Restructuring charge 10,000 0 0
California Proposition 103 reserve, including interest (18,865) (7,469) 4,210
- ------------------------------------------------------------------------------------------------------------
Total expenses 1,349,259 1,263,966 1,344,593
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 103,000 173,457 115,038
Income taxes
Current 6,258 44,263 10,173
Deferred 13,731 (1,198) 7,637
- ------------------------------------------------------------------------------------------------------------
Total income taxes 19,989 43,065 17,810
- ------------------------------------------------------------------------------------------------------------
Income before discontinued operations 83,011 130,392 97,228
Income from discontinued operations net of taxes of
$1,028, $4,661 and $2,633, respectively (See Note 20) 1,916 8,655 5,229
- ------------------------------------------------------------------------------------------------------------
Net income $ 84,927 $ 139,047 $ 102,457
============================================================================================================
Other comprehensive income, net of tax:
Net change in unrealized gains (losses), net of
income tax expense of $31,002, $65,882 and
$13,304, respectively 57,575 122,199 26,993
- ------------------------------------------------------------------------------------------------------------
Comprehensive income (See Note 12) $ 142,502 $ 261,246 $ 129,450
============================================================================================================
Average shares outstanding - basic 32,904 34,228 35,247
Average shares outstanding - diluted 32,935 34,257 35,254
============================================================================================================
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 2.52 $ 3.81 $ 2.76
Income from discontinued operations, per share 0.06 0.25 0.15
- ------------------------------------------------------------------------------------------------------------
Net income, per share $ 2.58 $ 4.06 $ 2.91
============================================================================================================
</TABLE>
See notes to consolidated financial statements
45
<PAGE> 46
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ACCUMULATED
ADDITIONAL STOCK OTHER TOTAL
COMMON PAID-IN PURCHASE COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS'
(IN THOUSANDS) STOCK CAPITAL WARRANTS INCOME EARNINGS STOCK EQUITY
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 $ 5,850 $ 3,422 $ 0 $ 305,049 $ 1,030,468 $ (233,775) $ 1,111,014
Unrealized gain 40,297 40,297
Deferred income tax on
net unrealized gain (13,304) (13,304)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (9,786 shares) 181 3 184
Repurchase of treasury
stock (264,600 shares) (9,168) (9,168)
Net income 102,457 102,457
Cash dividends paid
($1.60 per share) (56,380) (56,380)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 $ 5,850 $ 3,603 $ 0 $ 332,042 $ 1,076,545 $ (242,940) $ 1,175,100
Unrealized gain 188,081 188,081
Deferred income tax on
net unrealized gain (65,882) (65,882)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (25,007 shares) 320 172 305 797
Repurchase of treasury
stock (1,544,688 shares) (64,858) (64,858)
Net income 139,047 139,047
Cash dividends paid
($1.68 per share) (57,456) (57,456)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 $ 5,850 $ 3,923 $ 0 $ 454,241 $ 1,158,308 $ (307,493) $ 1,314,829
Unrealized gain 88,577 88,577
Deferred income tax on
net unrealized gain (31,002) (31,002)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (10,051 shares) 263 126 389
Repurchase of treasury
stock (2,362,900 shares) (99,991) (99,991)
Issuance of warrants 21,138 21,138
Net income 84,927 84,927
Cash dividends paid
($1.76 per share) (57,886) (57,886)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1998 $ 5,850 $ 4,186 $ 21,138 $ 511,816 $ 1,185,349 $ (407,358) $ 1,320,981
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements
46
<PAGE> 47
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996
============================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM:
Operations
Net income $ 84,927 $ 139,047 $ 102,457
Adjustments to reconcile net income to
cash from operations:
Changes, net of affect from acquisition:
Insurance reserves (8,051) (315,255) (169,006)
Income taxes (978) 10,691 8,238
Premiums and other receivables 9,983 (6,939) 9,500
Deferred policy acquisition costs (13,171) (9,379) 3,111
Reinsurance recoverable (77,899) 253,720 83,484
Other assets (6,418) (22,339) 775
Other liabilities 52,440 20,677 (18,442)
California Proposition 103 reserves (18,865) (7,469) 4,209
Amortization of goodwill 1,031 0 0
Depreciation and amortization 15,902 16,035 12,388
Investment (gains) losses (14,339) (52,382) (50,674)
- ------------------------------------------------------------------------------------------------------------
Net cash from operations 24,562 26,407 (13,960)
- ------------------------------------------------------------------------------------------------------------
INVESTING
Purchase of securities:
Fixed income securities - available for sale (467,295) (351,393) (539,690)
Equity securities (32,502) (66,433) (74,243)
Proceeds from sales:
Fixed income securities - available for sale 425,355 342,193 501,394
Equity securities 51,217 144,688 122,970
Proceeds from maturities and calls:
Fixed income securities - available for sale 136,066 103,165 101,970
Equity securities 21,848 10,013 6,702
Property and equipment:
Purchases (40,642) (18,968) (7,340)
Sales 517 702 952
Cash paid in acquisition of business, net of cash acquired (1,082) 0 0
- ------------------------------------------------------------------------------------------------------------
Net cash from investments 93,482 163,967 112,715
- ------------------------------------------------------------------------------------------------------------
FINANCING
Note payable:
Borrowing 230,000 0 0
Repayment (5,000) (10,000) (10,000)
Proceeds from exercise of stock options 1 371 135
Purchase of treasury stock (100,212) (64,858) (9,168)
Dividends paid to shareholders (57,886) (57,456) (56,380)
- ------------------------------------------------------------------------------------------------------------
Net cash from financing 66,903 (131,943) (75,413)
- ------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 184,947 58,431 23,342
Cash and cash equivalents, beginning of year 120,055 61,624 38,282
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 305,002 $ 120,055 $ 61,624
============================================================================================================
Additional disclosures:
Interest paid $ 3,547 $ 3,147 $ 3,769
Income taxes paid 21,805 37,035 16,336
</TABLE>
See notes to consolidated financial statements
47
<PAGE> 48
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
NOTE 1 -- ACCOUNTING POLICIES
A. NATURE OF BUSINESS
Ohio Casualty Corporation is a property and casualty insurer whose primary
products consist of insurance for personal auto, commercial property,
homeowners, workers' compensation and other miscellaneous lines. The Corporation
operates through the independent agency system in over 40 states. Of net premium
written, approximately 16.6% was generated in the State of New Jersey, 11.3% in
Ohio and 9.1% in Kentucky.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles and include the accounts of Ohio
Casualty Corporation and its subsidiaries. The results of operations of the
acquisition of certain assets and liabilities of the Great American Insurance
Company Commercial Lines Division ("GAI") have been included in the consolidated
financial statements of the Corporation since the date of acquisition, December
1, 1998 (See Note 14). All significant inter-company transactions have been
eliminated. All dollar amounts except share and per share data are in thousands
of dollars.
C. INVESTMENTS
Investment securities are classified upon acquisition into one of the following
categories:
(1) held to maturity securities
(2) trading securities
(3) available for sale securities
Available for sale securities are those securities that would be available
to be sold in the future in response to liquidity needs, changes in market
interest rates, and asset-liability management strategies, among others.
Available for sale securities are reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of deferred tax. Equity securities are carried at
quoted market values and include non-redeemable preferred stocks and common
stocks. Fair values of fixed maturities and equity securities are determined on
the basis of dealer or market quotations or comparable securities on which
quotations are available.
Short-term investments include commercial paper and notes with original
maturities of 90 days or less and are stated at fair value. Short-term
investments are deemed to be cash equivalents.
Realized gains or losses on disposition of investments are determined on
the basis of specific cost of investments.
D. PREMIUMS
Property and casualty insurance premiums are earned principally on a monthly pro
rata basis over the term of the policy; the premiums applicable to the unexpired
terms of the policies are included in unearned premium reserve.
E. ACQUISITION COSTS
Acquisition costs incurred at policy issuance net of applicable ceding
commissions are deferred and amortized over the term of the policy. Acquisition
costs deferred are commissions, brokerage fees, salaries and benefits, and other
underwriting expenses to include allocations for inspections, taxes, rent and
other expenses as deemed appropriate. Deferred policy acquisition costs are
reviewed periodically to determine that they do not exceed recoverable amounts,
including anticipated investment income.
F. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed principally on the straight-line method over the
estimated lives of the assets. As of January 1, 1998, the Corporation adopted
Statement of Position (SOP) 98-1 and began capitalizing costs incurred to
internally develop software products used in the Corporation's operations. The
Corporation amortizes these costs on a straight-line basis over the estimated
useful life of the product, generally not to exceed five years. Unamortized
software costs and accumulated amortization in the consolidated balance sheet at
December 31, 1998 were $8,013 and $184.
G. GOODWILL
The Corporation records goodwill for the excess of cost over the fair value of
net assets acquired. Goodwill is amortized on a straight-line basis over a
twenty-five year period. Goodwill will be evaluated periodically as events or
circumstances indicate a possible inability to recover their carrying amount.
Such evaluation will be based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing company businesses. The analyses will necessarily involve significant
management judgments to evaluate the capacity of an acquired business to perform
within projections. If future undiscounted cash flows are insufficient to
recover the carrying amount of the asset, an impairment loss will be recognized.
H. LOSS RESERVES
The reserves for unpaid losses and loss adjustment expenses are based on
estimates of ultimate claim costs, including claims incurred but not reported,
salvage and subrogation and inflation without discounting. The methods of making
such estimates are continually reviewed and updated, and any resulting
adjustments are reflected in earnings currently.
Liabilities for future policy benefits are computed based on contract terms
and issue dates using interest rates ranging from 3 1/2% to 8 3/4%, select and
ultimate mortality experience and industry withdrawal experience. Interest rates
on $14,884 of such liabilities in 1998, $24,611 in 1997 and $230,843 in 1996 are
periodically adjusted based on market conditions. Fair value is determined by
discounting cash flows at current market interest rates.
48
<PAGE> 49
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
I. DEFERRED INCOME TAXES
The Corporation records deferred tax assets and liabilities based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
J. STOCK OPTIONS
The Corporation accounts for stock options issued to employees in accordance
with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees". Under APB 25, the Corporation recognizes expense based on
the intrinsic value of options.
K. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The insurance industry is subject to heavy regulation that differs by
state. A dramatic change in regulation in a given state may have a material
adverse impact on the Corporation.
NOTE 2 -- INVESTMENTS Investment income is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Investment income from:
Fixed maturities $155,153 $166,554 $173,664
Equity securities 15,533 13,776 14,135
Short-term securities 5,332 3,477 2,129
- ---------------------------------------------------------------
Total investment income 176,018 183,807 189,928
Investment expenses 6,994 6,107 6,620
- ---------------------------------------------------------------
Net investment income $169,024 $177,700 $183,308
===============================================================
</TABLE>
The proceeds, gross realized gains and gross realized losses from sales of
available-for-sale securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Realized Realized Realized
December 31 Proceeds Gains Losses Gains
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $476,571 $22,531 $8,120 $14,411
1997 486,881 57,751 7,002 50,749
1996 624,364 56,214 6,542 49,672
</TABLE>
Unrealized gains (losses) on investment in securities are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses):
Securities $ 88,577 $188,081 $ 40,297
Deferred tax (31,002) (65,882) (13,304)
- ---------------------------------------------------------------
$ 57,575 $122,199 $ 26,993
===============================================================
</TABLE>
The amortized cost and estimated market values of investments in debt and
equity securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1998 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities
available for
sale:
U.S. Government $ 74,534 $ 5,340 $ (20) $ 79,854
States, municipalities
and political
subdivisions 800,945 38,668 (40) 839,573
Debt securities
issued by
foreign
governments 3,000 636 0 3,636
Corporate securities 1,062,165 62,275 (6,965) 1,117,475
Mortgage-backed
securities:
U.S. Government
Agency 6,130 145 0 6,275
Other 360,960 9,226 (1,095) 369,091
- -------------------------------------------------------------------------
Total fixed maturities 2,307,734 116,290 (8,120) 2,415,904
Equity securities 245,129 686,715 (6,938) 924,906
Short-term
investments 262,939 5 (81) 262,863
- -------------------------------------------------------------------------
Total securities,
available for sale $ 2,815,802 $ 803,010 $(15,139) $3,603,673
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities
available for
sale:
U.S. Government $ 66,244 $ 3,601 $ (1) $ 69,844
States, municipalities
and political
subdivisions 835,355 40,405 (19) 875,741
Debt securities
issued by
foreign
governments 3,000 458 0 3,458
Corporate securities 872,904 58,046 (1,026) 929,924
Mortgage-backed
securities:
U.S. Government
Agency 16,876 678 (1) 17,553
Other 317,912 12,838 (1,240) 329,510
- -------------------------------------------------------------------------
Total fixed maturities 2,112,291 116,026 (2,287) 2,226,030
Equity securities 275,637 597,803 (13,965) 859,475
Short-term
investments 65,849 0 0 65,849
- -------------------------------------------------------------------------
Total securities,
available for sale $ 2,453,777 $713,829 $(16,252) $3,151,354
=========================================================================
</TABLE>
49
<PAGE> 50
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities
available for
sale:
U.S. Government $ 80,822 $ 2,101 $ (382) $ 82,541
States, municipalities
and political
subdivisions 760,602 34,966 (1,029) 794,539
Debt securities
issued by
foreign
governments 3,000 296 0 3,296
Corporate securities 940,540 50,126 (7,008) 983,658
Mortgage-backed
securities:
U.S. Government
Agency 171,291 12,992 (7,377) 176,906
Other 269,262 14,274 (13,538) 269,998
- ---------------------------------------------------------------------------
Total fixed maturities 2,225,517 114,755 (29,334) 2,310,938
Equity securities 297,727 434,160 (10,735) 721,152
Short-term
investments 41,546 0 0 41,546
- ---------------------------------------------------------------------------
Total securities,
available for sale $ 2,564,790 $ 548,915 $ (40,069) $ 3,073,636
===========================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1998, by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
- -----------------------------------------------------------------
<S> <C> <C>
Due in one year or less $34,249 $ 34,324
Due after one year through five years 434,964 449,556
Due after five years through ten years 757,440 803,594
Due after ten years 713,991 753,064
Mortgage-backed securities:
U.S. Government Agency 6,130 6,275
Other 360,960 369,091
- -----------------------------------------------------------------
Total fixed maturities $2,307,734 $2,415,904
=================================================================
</TABLE>
Certain securities were determined to have other than temporary declines in
book value and were written down through realized investment losses. Total
write-downs were $12,709, $14,433 and $19,456 during 1998, 1997 and 1996,
respectively, representing a reduction in value of $4,469, $0 and $7,055 on
fixed maturities and $8,240, $14,433 and $12,401 on equity securities.
Proceeds from maturities and sales of investments in debt securities during
1998, 1997 and 1996 were $561,420, $445,358 and $603,364, respectively. Gross
gains of $23,108, $12,665 and $14,257 and gross losses of $6,778, $4,311 and
$10,388 were realized on those maturities and sales in 1998, 1997 and 1996,
respectively.
NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Corporation's financial instruments:
<TABLE>
<CAPTION>
CARRYING FAIR
1998 AMOUNT VALUE
- ----------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term
investments $ 305,078 $ 305,002
Securities - available
for sale 3,340,810 3,340,810
Liabilities
Future policy benefits $ 25,518 $ 25,518
Long-term debt 265,000 265,000
Carrying Fair
1997 Amount Value
- -----------------------------------------------------------
Assets
Cash and short-term
investments $ 120,055 $ 120,055
Securities - available
for sale 3,085,505 3,085,505
Liabilities
Future policy benefits $ 34,148 $ 34,148
Long-term debt 40,000 40,000
Carrying Fair
1996 Amount Value
- -----------------------------------------------------------
Assets
Cash and short-term
investments $ 61,624 $ 61,624
Securities - available
for sale 3,032,090 3,032,090
Liabilities
Future policy benefits $ 280,002 $ 280,002
Long-term debt 50,000 50,000
</TABLE>
The Corporation believes that the fair value of long-term debt is
approximately equal to its carrying value due to the market-based variable
interest rates associated with the debt.
NOTE 4 -- DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are summarized as follows:
50
<PAGE> 51
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Deferred, January 1 $126,063 $116,684 $119,795
- --------------------------------------------------------------
Additions:
Addition due to acquisition 37,371 0 0
Commissions and brokerage 207,747 190,029 190,461
Salaries and employee 50,194 46,241 47,092
benefits
Other 70,654 67,301 66,143
- --------------------------------------------------------------
Deferral of expense 365,966 303,571 303,696
- --------------------------------------------------------------
Amortization to expense
Discontinued operations (1,093) (9,302) (2,049)
Continuing operations 316,516 303,494 308,856
- --------------------------------------------------------------
Deferred, December 31 $176,606 $126,063 $116,684
==============================================================
</TABLE>
The above schedule includes deferred policy acquisition costs (net of
unamortized ceding commission) for discontinued life insurance operations of
$(1,093), $(2,185) and $(11,486) as of 1998, 1997 and 1996, respectively. See
Note 20 for additional information regarding discontinued operations.
NOTE 5 -- INCOME TAX
The effective income tax rate is less than the statutory corporate tax rate of
35% for 1998, 1997 and 1996 for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $ 36,050 $ 60,710 $ 40,263
Tax exempt interest (16,433) (16,522) (18,367)
Dividends received
deduction (DRD) (3,247) (3,239) (4,056)
Proration of DRD and tax
exempt interest 2,826 2,796 3,017
Reduction in provision for
audit issues 0 0 (3,000)
Miscellaneous 793 (679) (47)
- --------------------------------------------------------------
Actual tax $ 19,989 $ 43,065 $ 17,810
==============================================================
</TABLE>
Tax years 1993 through 1995 are being examined by The Internal Revenue
Service. Management believes there will not be a significant impact on the
financial position or results of operations of the Corporation as a result of
this audit.
The components of the net deferred tax asset (liability) were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Unearned premium proration $ 35,209 $ 34,065 $ 33,833
Accrued expenses 48,549 52,520 59,217
Postretirement benefits 29,768 28,522 27,355
Discounted loss and loss
expense reserves 70,663 78,217 81,350
- --------------------------------------------------------------
Total deferred tax assets 184,189 183,968 201,755
- --------------------------------------------------------------
Deferred policy
acquisition costs (49,765) (44,122) (51,129)
Unrealized gains on
investments (275,154) (244,591) (178,619)
- --------------------------------------------------------------
Total deferred tax
liabilities (324,919) (279,357) (229,748)
- --------------------------------------------------------------
Net deferred tax asset
(liability) $(140,730) $ (95,389) (27,993)
==============================================================
</TABLE>
NOTE 6 -- EMPLOYEE BENEFITS
The Corporation has a non-contributory defined benefit retirement plan, a
contributory health care, life and disability insurance plan and a savings plan
covering substantially all employees. Benefit expenses are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Employee benefit costs:
Pension plan $(1,610) $ (252) $ (136)
Health care 13,215 12,555 14,415
Life and disability
insurance 502 463 555
Savings plan 2,404 2,321 2,489
- ---------------------------------------------------------
$14,511 $15,087 $17,323
=========================================================
</TABLE>
<TABLE>
<CAPTION>
The pension benefit is determined as follows:
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Service cost/(benefit)
earned during the year $ 6,011 $ 6,354 $ 6,256
Interest cost on projected
benefit obligation 15,068 15,003 13,927
Expected return on plan
assets (19,871) (18,650) (17,360)
Amortization of
unrecognized net
obligation (asset) (3,017) (3,017) (3,017)
Amortization of
unrecognized prior
service cost 199 58 58
- -----------------------------------------------------------
Net pension benefit $ (1,610) $ (252) $ (136)
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Changes in the benefit obligation during the year:
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Benefit obligation at
beginning of year $213,720 $197,538 $191,008
- ---------------------------------------------------------
Service cost 6,011 6,354 6,256
Interest cost 15,068 15,003 13,927
Amendments 0 2,000 0
Actuarial loss (gain) 17,132 4,142 (2,990)
Benefits paid (12,638) (11,317) (10,663)
- ---------------------------------------------------------
Benefit obligation at end
of year $239,293 $213,720 $197,538
=========================================================
</TABLE>
<TABLE>
<CAPTION>
Changes in pension plan assets during the year:
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Fair value of plan assets
at beginning of year $276,477 $225,681 $217,274
- -----------------------------------------------------------
Actual return on plan
assets (12,038) 62,113 19,070
Benefits paid (12,215) (11,317) (10,663)
- -----------------------------------------------------------
Fair value of plan assets
at end of year $252,224 $276,477 $225,681
===========================================================
</TABLE>
Pension Plan funding at December 31:
51
<PAGE> 52
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Funded status $ 12,931 $62,757 $28,143
Unrecognized net gain (loss) (6,697) 42,443 1,617
Unrecognized net assets 12,068 15,085 18,102
Unrecognized prior
service cost (2,308) (2,508) (566)
- --------------------------------------------------------------------
Accrued pension liability $ 9,868 $ 7,737 $ 8,990
=====================================================================
Expected long-term return on
plan assets 7.75% 8.25% 8.75%
Discount rate on plan benefit
obligations 6.75% 7.25% 7.75%
Expected future rate of salary
increases 5.25% 5.25% 5.25%
</TABLE>
Pension benefits are based on service years and average compensation using
the five highest consecutive years of earnings in the last decade of employment.
The pension plan measurement date is October 1, 1998, 1997 and 1996. The maximum
pension expense deductible for income tax purposes has been funded. Plan assets
at December 31, 1998 include $34,637 of the Corporation's common stock at market
value compared to $37,585 and $29,899 at December 31, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
Postretirement benefit cost at December 31:
1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,061 $ 1,739 $ 1,967
Interest cost 5,753 5,588 5,412
- ------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 7,814 $ 7,327 $ 7,379
========================================================================
Changes in the postretirement benefit obligation during the year:
1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Benefit obligation at
beginning of year $81,694 $71,797 $71,519
- ------------------------------------------------------------
Service cost 2,061 1,739 1,967
Interest cost 5,753 5,588 5,412
Plan participants'
contributions (4,676) (3,912) (3,655)
Increase due to change in
discount rate or other
assumptions 5,731 8,467 (2,353)
Actuarial loss (gain) 1,368 (2,141) (1,177)
Prior service cost
unrecognized at year
end 6,416 0 0
- ------------------------------------------------------------
Benefit obligation at end
of year $98,347 $81,694 $71,797
============================================================
</TABLE>
Accrued postretirement benefit liability at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Accumulated
postretirement benefit
obligation $98,347 $81,694 $71,797
Unrecognized net gain
(loss) (6,642) (203) 6,203
Unrecognized prior service
cost (6,416) 0 0
=============================================================
Accrued postretirement
benefit liability $85,289 $81,491 $78,000
=============================================================
<CAPTION>
Postretirement benefit weighted average rate assumptions at October 1:
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Medical trend rate 7% 8% 9%
Dental trend rate 5% 6% 7%
Ultimate health care
trend rate 5% 5% 5%
Discount rate 6.75% 8.00% 7.75%
</TABLE>
The above medical trend rates assumed for 1998, 1997 and 1996 were assumed
to decrease to the ultimate rate of 5% in 2, 3 and 4 years respectively. The
postretirement plan measurement date is October 1 for 1998, 1997 and 1996.
Increasing the assumed health care cost trend by 1 percentage point in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1998 by approximately $ 19,669 and increase the postretirement
benefit cost for 1998 by $2,032. Likewise, decreasing the assumed health care
cost trend by 1 percentage point in each year would decrease the accumulated
postretirement benefit obligation as of December 31, 1998 by approximately
$12,785 and decrease the postretirement benefit cost for 1998 by $1,250.
The Corporation's health care plan is a predominately managed care plan.
Retired employees continue to be eligible to participate in the health care and
life insurance plans. Employee contributions to the health care plan have been
established as a flat dollar amount with periodic adjustments as determined by
the Corporation. The health care plan is unfunded. Benefit costs are accrued
based on actuarial projections of future payments. There are currently 3,261
active employees and 1,416 retired employees covered by these plans.
Employees may contribute a percentage of their compensation to a savings
plan. A portion of employee contributions is matched by the Corporation and
invested in Corporation stock purchased on the open market by trustees of the
plan.
52
<PAGE> 53
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
NOTE 7 - STOCK OPTIONS
The Corporation is authorized under provisions of the 1993 Stock Incentive
Programs to grant options to purchase 1,293,500 shares of the Corporation's
common stock to key executive employees, directors, and other full time salaried
employees at a price not less than the fair market value of the shares on dates
the options are granted. The options granted may be either "Incentive Stock
Options" or "Nonqualified Stock Options" as defined by the Internal Revenue
Code; the difference in the option plans affects treatment of the options for
income tax purposes by the individual employee and the Corporation. The options
are non-transferable and exercisable at any time after the vesting requirements
are met. Option expiration dates are five and ten years from the grant date.
Options vest either at 100% six months from the grant date or at 33% per year
for three consecutive years from the date of the grant. At December 31, 1998,
868,289 remaining options may be granted.
In addition, the 1993 Stock Incentive Program provides for the grant of
Stock Appreciation Rights in tandem with the stock options. Stock Appreciation
Rights provide the recipient with the right to receive payment in cash or stock
equal to appreciation in value of the optioned stock from the date of grant in
lieu of exercise of the stock options held. At December 31, 1998, there were no
outstanding stock appreciation rights.
Restricted stock awards are occasionally issued by the Corporation. The
common shares covered by a restricted stock award may be sold or otherwise
disposed of only after a minimum of six months from the grant date of the award.
The difference between issue price and the fair market value on the date of
issuance is recorded as compensation expense. The amount of compensation expense
recognized in 1998 related to restricted stock awards was $387 and $345 in 1997
before tax. There were no restricted stock awards in 1996. Currently there are
15,312 shares of restricted stock outstanding.
The Corporation also issues, at its discretion, dividend payment rights in
connection with the grant of stock options. These rights entitle the holder to
receive, for each dividend payment right, an amount in cash equal to the
aggregate amount of dividends that the Corporation has paid on each common share
from the date on which such right becomes effective through the payout date. One
third of these rights becomes vested on each anniversary after the grant.
Dividends accrue and payments are made when the rights are fully vested by the
rightholder. The Corporation recognizes compensation expense accordingly. The
amount of compensation expense related to dividend payment rights recognized in
1998 was $551 and $517 in 1997 before tax. As of December 31, 1998, 313,684
dividend payment rights were outstanding.
The Corporation continues to elect APB 25 for recognition of stock-based
compensation expense. Under APB 25, expense is recognized based on the intrinsic
value of the options. However, under the provision of FAS 123 the Corporation is
required to estimate on the date of grant the fair value of each option using an
option-pricing model. Accordingly, the Black-Scholes option pricing model is
used with the following weighted-average assumptions for 1998, 1997 and 1996,
respectively: dividend yield of 4.5% for 1998, 1997 and 1996, expected
volatility of 26.7% for 1998, 26.1% for 1997 and 25.3% for 1996, risk free
interest rate of 5.63%, 6.87% and 6.34%, and expected life of 8 years. The
following table summarizes information about the stock-based compensation plan
as of December 31, 1998, 1997 and 1996, and changes that occurred during the
year:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Avg Avg Avg
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
--------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning of year 262 $37.38 173 $33.84 74 $30.02
Granted 123 46.97 120 41.44 127 34.93
Exercised (6) 35.00 (27) 33.33 (28) 28.75
Canceled 0 (4) 32.38 0
----- ------ -----
Outstanding end of
year 380 $40.53 262 $37.38 173 $33.84
===== ====== ======
Options exercisable at
year-end 160 81 52
Weighted-Avg fair
value of options
granted during
the year $10.60 $10.18 $8.14
</TABLE>
At year end 1998, 379,684 options were outstanding with an average
remaining contractual life of 7.94 years and weighted exercise price of $40.53.
Of the amount outstanding, 159,681 were exercisable with a weighted average
exercise price of $36.90. At year end 1997, 262,494 options were outstanding
with an average remaining contractual life of 8.35 years and a weighted exercise
price of $37.38. Of the amount outstanding, 81,493 were exercisable with a
weighted average exercise price of $34.05. At year end 1996, 172,500 options
were outstanding with an average remaining contractual life of 8.49 years and a
weighted exercise price of $33.84. Of the amount outstanding, 51,500 were
exercisable with a weighted average exercise price of $31.23.
Had the Corporation adopted FAS 123, the amount of compensation expense
that would have been recognized in 1998, 1997 and 1996 respectively, would be
$1,164, $755 and $350. The Corporation's net income and earnings per share would
have been reduced to the pro forma amounts disclosed below:
53
<PAGE> 54
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net Income As Reported: $84,927 $139,047 $102,457
Pro Forma: $83,994 $138,411 $102,146
Basic/diluted earnings per
share $ 2.58 $ 4.06 $ 2.91
As Reported:
Pro Forma: $ 2.55 $ 4.04 $ 2.90
</TABLE>
NOTE 8 -- REINSURANCE AND OTHER CONTINGENCIES
In the normal course of business, the Corporation seeks to reduce the loss that
may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk with other insurers or reinsurers.
In the event that such reinsuring companies might be unable at some future date
to meet their obligations under the reinsurance agreements in force, the
Corporation would continue to have primary liability to policyholders for losses
incurred. The Corporation evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. The following amounts are
reflected in the financial statements as a result of reinsurance ceded:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Ceded premiums earned,
presented net $ 35,334 $ 32,169 $ 30,534
Ceded losses incurred,
presented net 41,477 13,387 11,846
Reserve for unearned
premiums 12,290 8,242 8,062
Reserve for losses 82,589 54,209 61,205
Reserve for future policy
benefits
Reserve for loss adjustment 25,518 34,148 280,002
expenses 8,707 7,794 8,833
</TABLE>
Annuities are purchased from other insurers to pay certain claim
settlements. These payments are made directly to the claimants; should such
insurers be unable to meet their obligations under the annuity contracts, the
Corporation would be liable to claimants for the remaining amount of annuities.
The claim reserves are presented net of the related annuities on the
Corporation's balance sheet. The total amount of unpaid annuities was $24,155,
$25,123 and $25,139 at December 31, 1998, 1997 and 1996, respectively.
On October 2, 1995, as part of the transaction involving the reinsurance of
the Ohio Life business to Employers' Reassurance Corporation, Ohio Casualty
Insurance Company agreed to manage a $163,615 fixed income portfolio for
Employers' Reassurance. The term of the agreement is seven years, terminating on
October 2, 2002. There is no separate fee to Ohio Casualty for this investment
management service. The assets of the fixed income portfolio are not carried on
the Corporation's balance sheet as these are assets of Employers' Reassurance
Corporation. The agreement requires that Ohio Casualty pay an annual rate of
7.25% interest to Employers' Reassurance and maintain the market value of the
account at $163,615. As the market value fluctuates from this amount, Ohio
Casualty is required to make up any deficiency and is entitled to receive any
excess. Accordingly, the Corporation accrues any deficiency or excess in market
value over the guaranteed amount of $163,615. This results in either investment
income or loss and is recorded in earnings of the current period. At December
31, 1998, the market value of the account exceeded the $163,615 required balance
by $1,356 compared with excesses of $2,080 in 1997 and $699 in 1996. The annual
interest obligation of 7.25% was also being adequately serviced by the portfolio
assets.
NOTE 9 -- LOSSES AND LOSS RESERVES
The following table presents a reconciliation of liabilities for losses and loss
adjustment expenses:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Balance as of January
1, net of reinsurance
recoverables of
$62,003, $70,048 and $1,421,804 $1,486,622 $1,557,065
$74,119
Addition related to
acquisition 483,938 0 0
Incurred related to:
Current year 989,114 922,065 1,009,086
Prior years (66,119) (53,615) (76,920)
- -------------------------------------------------------------
922,995 868,450 932,166
Paid related to:
Current year 513,292 448,402 515,025
Prior years 449,802 484,866 487,584
- -------------------------------------------------------------
Total paid 963,094 933,268 1,002,609
Balance as of December 31,
net of reinsurance
recoverables of
$91,296, $62,003 and
$70,048 $1,865,643 $1,421,804 $1,486,622
=============================================================
</TABLE>
As a result of favorable development in estimates for insured events of
prior years, the incurred related to prior years shows a favorable
development. The following table presents catastrophe losses incurred and
the respective impact on the loss ratio:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Incurred losses $44,595 $21,389 $62,189
Loss ratio effect 3.6% 1.8% 5.1%
</TABLE>
In 1998, 1997 and 1996 there were 37, 25 and 41 catastrophes respectively.
The largest catastrophe in each year was $7,300, $4,600 and $13,700 in incurred
losses. Additional catastrophes with over $1,000 in incurred losses numbered 14,
3 and 10 in 1998, 1997 and 1996.
The effect of catastrophes on the Corporation's results cannot be
accurately predicted. As such, severe weather patterns could have a material
adverse impact on the Corporation's results.
54
<PAGE> 55
Inflation has historically affected operating costs, premium revenues and
investment yields as business expenses have increased over time. The long term
effects of inflation are considered when estimating the ultimate liability for
losses and loss adjustment expenses. The liability is based on historical loss
development trends which are adjusted for anticipated changes in underwriting
standards, policy provisions and general economic trends. It is not adjusted to
reflect the effect of discounting.
Reserves for asbestos-related illnesses and toxic waste cleanup claims
cannot be estimated with traditional loss reserving techniques. In establishing
liabilities for claims for asbestos-related illnesses and for toxic waste
cleanup claims, management considers facts currently known and the current state
of the law and coverage litigation. However, given the expansion of coverage and
liability by the courts and the legislatures in the past and the possibilities
of similar interpretations in the future, there is uncertainty regarding the
extent of remediation. Accordingly, additional liability could develop.
Estimated asbestos and environmental reserves are composed of case reserves,
incurred but not reported reserves and reserves for loss adjustment expense. For
1998, 1997 and 1996, respectively, total case, incurred but not reported and
loss adjustment expense reserves were $41,898, $40,121 and $40,956. Asbestos
reserves were $10,364, $6,966 and $5,215 and environmental reserves were
$31,534, $33,155 and $35,741 for those respective years.
NOTE 10 -- EARNINGS PER SHARE
During 1997, the Corporation adopted Statement of Financial Accounting Standard
128 "Earnings Per Share". Basic earnings per share is computed using weighted
average number of common shares outstanding. Diluted earnings per share is
computed similar to basic earnings per share except that the weighted average
number of shares outstanding is increased to include the number of additional
common shares that would have been issued if all dilutive outstanding stock
options would have been exercised. All prior periods were recalculated under the
new definition of basic and diluted earnings per share. Basic and diluted
earnings per share are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing
operations $83,011 $130,392 $97,228
Average common shares
outstanding - basic 32,904 34,228 35,247
Basic income from continuing
operations per average
share $2.52 $3.81 $2.76
==============================================================
Average common shares
outstanding 32,904 34,228 35,247
Effect of dilutive securities 31 29 7
- --------------------------------------------------------------
Average common shares
outstanding - diluted 32,935 34,257 35,254
Diluted income from
continuing operations per
average share $2.52 $3.81 $2.76
==============================================================
</TABLE>
At December 31, 1998, 3,000 purchase warrants and 103 stock options were
not included in earnings per share calculations for 1998 as they were
antidilutive.
<TABLE>
<CAPTION>
NOTE 11 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1998 FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and
finance charges
earned $309,627 $311,663 $314,956 $332,406
Net investment
income 44,634 41,299 42,231 40,860
Investment gains
(losses)
realized 4,082 8,151 3,537 (1,359)
Income from
continuing
operations 30,914 9,989 22,903 19,205
Income from
discontinued
operations 280 345 278 1,013
Net income 31,194 10,334 23,181 20,218
Basic and diluted
net income per
share .93 .31 .71 .64
</TABLE>
<TABLE>
<CAPTION>
1997 First Second Third Fourth
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and
finance charges
earned $302,479 $307,788 $300,252 $298,455
Net investment
income 43,717 45,153 45,365 43,465
Investment gains
(losses)
realized 13,340 8,498 20,806 8,105
Income from
continuing
operations 31,257 32,962 25,324 40,849
Income from
discontinued
operations 1,458 1,143 (85) 6,139
Net income 32,715 34,105 25,239 46,988
Basic and diluted
net income per
share .94 1.00 .74 1.39
</TABLE>
The fourth quarter adjustments for 1998 included income of $12,262 after
tax for the reduction in Proposition 103 liability and an expense of $6,500
after tax for a restructuring charge.
55
<PAGE> 56
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
NOTE 12 -- COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income related to changes in
unrealized gains(losses) on securities were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains
(losses) arising
during the period, net
of tax $71,207 $143,794 $56,019
Less: Reclassification
adjustment for gains
included in net income,
net of taxes 13,632 21,595 29,026
- ------------------------------------------------------------
Net unrealized
gains(losses) on
securities, net of
taxes $57,575 $122,199 $26,993
============================================================
</TABLE>
NOTE 13 -- SEGMENT INFORMATION
In 1998, the Corporation adopted Statement of Financial Accounting Standard 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement supersedes Statement of Financial Accounting Standard 14, "Financial
Reporting for Segments of a Business Enterprise" and replaces the industry
segment approach with a management segment approach in identifying reportable
segments. The management segment approach focuses on financial information that
the Corporation's decision makers use to make decisions about the operating
segments. The accounting policies of the property and casualty segments are
based upon statutory accounting practices. Statutory accounting principles
differ from generally accepted accounting principles primarily by deferred
policy acquisition costs, required statutory reserves, assets not admitted for
statutory reporting, California Proposition 103 reserve and deferred federal
income taxes.
The Corporation has determined its reportable segments based upon its
method of internal reporting which is organized by product line. The property
and casualty segments are personal automobile, commercial automobile,
homeowners, workers' compensation, fidelity and surety, general liability and
commercial property. These segments generate revenues by selling a wide variety
of personal, commercial and surety insurance products. The Corporation also has
an all other segment which derives its revenues from premium financing,
investment income, royalty income and discontinued life insurance operations.
The Corporation writes business in over 40 states in conjunction with the
independent agency system.
Each segment of the Corporation is managed separately. The property and
casualty segments are managed by assessing the performance and profitability of
the segments through analysis of industry financial measurements including loss
and loss adjustment expense ratios, combined ratio, premiums written,
underwriting gain/loss and the effect of catastrophe losses on the segment. The
following tables present this information by segment as it is reported
internally to management. Asset information by reportable segment is not
reported, since the Corporation does not produce such information internally.
<TABLE>
<CAPTION>
Private Passenger Auto 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $521,794 $464,693 $456,371
% Increase(decrease) 12.3% 1.8% -2.3%
Net premiums earned 500,785 460,029 457,121
% Increase(decrease) 8.8% 0.6% -3.6%
Underwriting gain/(loss)
(before tax) (24,220) (25,926) (46,951)
Loss ratio 68.8% 72.0% 75.7%
Loss expense ratio 10.3% 9.6% 10.6%
Underwriting expense
ratio 24.7% 23.8% 24.0%
Combined ratio 103.8% 105.4% 110.3%
Impact of catastrophe
losses on combined
ratio 1.2% 0.5% 0.9%
<CAPTION>
CMP, Fire, Inland Marine 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $225,749 $206,133 $195,290
% Increase(decrease) 9.5% 5.6% 0.8%
Net premiums earned 217,236 200,330 195,437
% Increase(decrease) 8.4% 2.5% 0.2%
Underwriting gain/(loss)
(before tax) (33,008) (17,812) (29,311)
Loss ratio 64.5% 58.7% 63.5%
Loss expense ratio 6.2% 7.0% 8.9%
Underwriting expense
ratio 42.8% 42.0% 42.7%
Combined ratio 113.5% 107.7% 115.0%
Impact of catastrophe
losses on combined 4.9% 2.5% 8.3%
ratio
General Liability 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $ 95,144 $ 96,698 $101,793
% Increase(decrease) -1.6% -5.0% -6.0%
Net premiums earned 96,535 98,971 104,428
% Increase(decrease) -2.5% -5.2% -5.5%
Underwriting gain/(loss)
(before tax) (819) (1,892) 12,622
Loss ratio 35.8% 36.6% 26.2%
Loss expense ratio 13.8% 19.3% 15.7%
Underwriting expense
ratio 52.0% 47.1% 47.2%
Combined ratio 101.6% 103.0% 89.1%
Impact of catastrophe
losses on combined
ratio N/A N/A N/A
Workers' Compensation 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $100,150 $ 97,176 $115,398
% Increase(decrease) 3.1% -15.8% -17.9%
Net premiums earned 100,336 103,484 124,157
% Increase(decrease) -3.0% -16.7% -12.6%
Underwriting gain/(loss)
(before tax) (9,606) 9,130 9,613
Loss ratio 69.1% 57.2% 59.3%
Loss expense ratio 8.2% 6.4% 5.9%
Underwriting expense
ratio 32.3% 29.4% 29.1%
Combined ratio 109.6% 93.0% 94.3%
Impact of catastrophe
losses on combined
ratio N/A N/A N/A
</TABLE>
56
<PAGE> 57
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
<TABLE>
<CAPTION>
Commercial Auto 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $139,087 $140,295 $139,420
% Increase(decrease) -0.9% 0.6% -4.8%
Net premiums earned 139,114 139,933 142,446
% Increase(decrease) -0.5% -1.8% -4.5%
Underwriting gain/(loss)
(before tax) (7,453) (18,146) (6,507)
Loss ratio 61.2% 69.3% 64.5%
Loss expense ratio 8.6% 10.2% 7.0%
Underwriting expense
ratio 35.6% 33.3% 33.8%
Combined ratio 105.4% 112.9% 105.3%
Impact of catastrophe
losses on combined
ratio 0.7% 0.3% 0.8%
<CAPTION>
Homeowners 1998 1997 1996
- ----------------------------------------------------------
Net premiums written $180,697 $168,168 $166,457
% Increase(decrease) 7.5% 1.0% 3.7%
Net premiums earned 177,419 166,474 165,630
% Increase(decrease) 6.6% 0.5% 2.8%
Underwriting gain/(loss)
(before tax) (33,824) (19,254) (59,806)
Loss ratio 73.8% 66.5% 89.5%
Loss expense ratio 8.2% 8.7% 11.5%
Underwriting expense
ratio 36.4% 36.0% 34.9%
Combined ratio 118.4% 111.2% 135.9%
Impact of catastrophe
losses on combined
ratio 15.2% 8.1% 24.4%
Fidelity & Surety 1998 1997 1996
- ------------------------------------------------------------
Net premiums written $ 37,022 $ 34,418 $ 34,473
% Increase(decrease) 7.6% -0.2% 0.9%
Net premiums earned 36,403 35,045 34,135
% Increase(decrease) 3.9% 2.7% 4.3%
Underwriting gain/(loss)
(before tax) 6,351 8,663 8,866
Loss ratio 10.3% 7.9% 5.8%
Loss expense ratio 5.2% 2.8% -0.3%
Underwriting expense
ratio 65.9% 65.8% 67.8%
Combined ratio 81.4% 76.5% 73.4%
Impact of catastrophe
losses on combined
ratio N/A N/A N/A
Total Property & Casualty 1998 1997 1996
- ---------------------------------------------------------------
Net premiums written $1,299,643 $1,207,581 $1,209,202
% Increase(decrease) 7.6% -0.1% -3.3%
Net premiums earned 1,267,828 1,204,265 1,223,353
% Increase(decrease) 5.3% -1.56% -3.3%
Underwriting gain/(loss)
(before tax) (102,579) (65,237) (111,474)
Loss ratio 63.7% 62.7% 66.5%
Loss expense ratio 9.1% 9.4% 9.7%
Underwriting expense
ratio 34.4% 33.2% 33.4%
Combined ratio 107.2% 105.3% 109.5%
Impact of catastrophe
losses on combined
ratio 3.6% 1.8% 5.1%
All other 1998 1997 1996
- ---------------------------------------------------------------
Revenues $ 5,391 $ 6,833 $ 6,009
Expenses 6,663 6,880 7,223
- ---------------------------------------------------------------
Net income $ (1,272) $ (47) $ (1,214)
Reconciliation of Revenues 1998 1997 1996
- ---------------------------------------------------------------
Net premiums earned for
reportable segments $1,267,828 $1,204,265 $1,223,353
Investment income 164,812 172,372 181,904
Realized gains 26,516 58,912 49,401
Miscellaneous income 162 453 647
- ---------------------------------------------------------------
Total property and
casualty revenues
(Statutory basis) 1,459,318 1,436,002 1,455,305
Property and casualty
statutory to GAAP
adjustment (12,450) (5,412) (1,683)
- ---------------------------------------------------------------
Total revenues property
and casualty (GAAP
basis) 1,446,868 1,430,590 1,453,622
Other segment revenues 5,391 6,833 6,009
- ---------------------------------------------------------------
Total revenues $1,452,259 $1,437,423 $1,459,631
===============================================================
Reconciliation of Underwriting
gain/(loss) (before tax) 1998 1997 1996
- ---------------------------------------------------------------
Property and casualty
underwriting gain/(loss)
(before tax) (Statutory
basis) $ (102,579) $ (65,237) $ (111,474)
Statutory to GAAP
adjustment 28,528 15,597 (706)
- ---------------------------------------------------------------
Property and casualty
underwriting gain/(loss)
(before tax) (GAAP
basis) (74,051) (49,640) (112,180)
Net investment income 169,024 177,700 183,308
Realized gains 14,411 50,749 49,672
Other income (6,384) (5,352) (5,762)
- ---------------------------------------------------------------
Income from continuing
operations before income
taxes $ 103,000 $ 173,457 $ 115,038
===============================================================
</TABLE>
NOTE 14 -- ACQUISITION OF COMMERCIAL LINES BUSINESS
On December 1, 1998, the Corporation acquired substantially all of the
Commercial Lines Division of Great American Insurance Company ("GAI"), an
insurance subsidiary of the American Financial Group, Inc. As part of the
transaction, the Corporation assumed responsibility for 650 employees of GAI's
Commercial Lines Division, as well as relationships with 1,700 agents. The major
lines of business included in the sale are workers' compensation, commercial
multi-peril, umbrella and commercial auto. Four commercial operations as well as
all California business and all pre-1987 environmental claims were excluded from
the transaction.
Under the asset purchase agreement, the Corporation assumed $645,813 of
commercial lines insurance liabilities, $62,639 in other liabilities and
acquired $287,900 of investments, $1,500 in cash and $119,052 in other assets.
This resulted in an assumption by the Corporation of a net statutory-basis
liability of $300,000 plus warrants to purchase 3 million shares of Ohio
Casualty Corporation common stock at a price of $45.01. In addition, if the
annualized production from the transferred agents at the end of eighteen months
equals or exceeds the production in the twelve months prior to closing, GAI will
receive an additional $40,000. This bonus payment grades down ratably where if
eighteen-month annualized production equals 71% or less of previous production,
no bonus payment is
57
<PAGE> 58
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
required. The bonus payment will be accrued as additional goodwill when minimum
contingency is achieved.
The transaction was accounted for using the purchase method of accounting.
The Corporation has recorded goodwill of $309,237 relating to this transaction,
consisting of $285,517 of net liabilities assumed under generally accepted
accounting principles, $21,138 in warrants given and $2,582 in acquisition
expenses. Deferred policy acquisition costs of $37,371 were also recorded as a
result of the transaction. The Corporation follows the practice of allocating
purchase price to specifically identifiable intangible assets based on their
estimated values as determined by appropriate valuation methods. In the GAI
acquisition, no allocation of purchase price was made to specifically
identifiable intangible assets other than goodwill and deferred policy
acquisition costs as the Corporation believes it did not acquire any other
significant specifically identifiable intangible assets.
The warrants which were issued in connection with the transaction provide
for the purchase of the Corporation's common stock at $45.01 per share and
expire in December 2003. The warrants may be settled through physical or net
share settlement and thus have been recorded as equity in the financial
statements at their estimated fair value. Estimated fair value was determined
based on a third party appraisal of the warrants.
<TABLE>
<CAPTION>
The following table presents the unaudited proforma results of operations
had the acquisition occurred at the beginning of each year.
(Unaudited) 1998 1997
- ------------------------------------------------------
<S> <C> <C>
Revenues $1,750,528 $1,775,556
Net income 58,866 130,206
Diluted earnings per
share 1.79 3.80
</TABLE>
NOTE 15 -- RESTRUCTURE CHARGE
During December 1998, the Corporation adopted a plan to restructure its branch
operations. To continue in the Corporation's efforts to reduce expenses,
personal lines business centers will be reduced from five to three locations.
Underwriting branch locations will be reduced from seventeen to eight locations
and claims branches will be reduced from thirty-eight to six locations. The
Corporation recognized $10,000 in expense in its income statement to reflect
one-time charges related to its branch office consolidation plan. These charges
consisted solely of future contractual lease payments related to abandoned
facilities. The activities under the plan are expected to be completed in 1999.
NOTE 16 -- STATUTORY ACCOUNTING INFORMATION
The following information has been prepared on the basis of statutory accounting
principles which differ from generally accepted accounting principles. The
principal differences relate to deferred acquisition costs, required statutory
reserves, assets not admitted for statutory reporting, California Proposition
103 reserve, goodwill and deferred federal income taxes.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Property and
Casualty Insurance
Statutory net income $ 82,044 $ 142,457 $ 104,137
Statutory policyholders'
surplus 1,027,105 1,109,517 984,859
Life Insurance
Statutory net income 6,675 29,794 4,885
Statutory policyholders'
surplus 14,943 29,971 58,511
</TABLE>
The Ohio Casualty Insurance Company, domiciled in Ohio, prepares its
statutory financial statements in accordance with the accounting practices
prescribed or permitted by the Ohio Insurance Department. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
The Company received written approval from the Ohio Insurance Department to
have the California Proposition 103 liability reported as a direct charge to
surplus and not included as a charge in the 1995 statutory statement of
operations. Following this same treatment, during 1997 and 1998 the principal
reduction in the Proposition 103 liability was taken as an increase to statutory
surplus and not included in the 1997 or 1998 statutory statements of operations.
For statutory purposes, goodwill related to the GAI acquisition was taken
as a direct charge to surplus.
The Corporation is dependent on dividend payments from its insurance
subsidiaries in order to meet operating expenses and to pay dividends. Insurance
regulatory authorities impose various restrictions and prior approval
requirements on the payment of dividends by insurance companies and holding
companies. At December 31, 1998, approximately $112,129 of retained earnings are
not subject to restriction or prior dividend approval requirements.
NOTE 17 -- BANK NOTE PAYABLE
During 1997, the Corporation signed a credit facility that makes available a
$300,000 revolving line of credit. This line of credit was accessed in 1997 to
refinance the outstanding term loan balance the Corporation had at that time. In
1998, the line of credit was used for capital
58
<PAGE> 59
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
infusion of $200,000 into the property and casualty subsidiaries due to the
acquisition. The line of credit was again accessed during 1998 for the purchase
of a building and to purchase treasury shares. The credit agreement contains
financial covenants and provisions customary for such arrangements. The
agreement expires in October 2002, with any outstanding loan balance due at that
time. The revolving line of credit maintains an interest rate swap that existed
on the previous term loan. The effect of the swap agreement was to establish a
fixed rate of 6.34% on $20,000 of the outstanding balance converted to the
revolving line of credit. The remaining balance and any additional borrowings
under the line of credit bear interest at a periodically adjustable rate (5.82%
at December 31, 1998). The interest rate is determined on various bases
including prime rates, certificate of deposit rates and the London Interbank
Offered Rate. Interest incurred on borrowings amounted to $3,547, $3,147 and
$3,769 in 1998, 1997 and 1996, respectively. Under the loan agreement, the
maximum permissible consolidated funded debt cannot exceed 30% of consolidated
tangible net worth.
NOTE 18 -- CALIFORNIA WITHDRAWAL
Proposition 103 was passed in the State of California in 1988 in an attempt to
legislate premium rates for that state. As construed by the California Supreme
Court, the proposition requires premium rate rollbacks for 1989 California
policyholders while allowing for a "fair" return for insurance companies. Even
after considering investment income, total returns in California have been less
than what would be considered "fair" by any reasonable standard. During the
fourth quarter of 1994, the State of California assessed the Corporation $59,867
for Proposition 103. In February 1995, California revised this billing to
$47,278 due to California Senate Bill 905 which permits reduction of the
rollback due to actual commissions and premium taxes paid. The assessment was
revised again in August 1995 to $42,100 plus interest. In December 1997, during
Administrative Law hearings, the California Department of Insurance filed two
revised rollback calculations. These calculations indicated rollback liabilities
of either $35,900 or $39,900 plus interest.
In 1998, the Administrative Law Judge finally issued a proposed ruling with a
rollback liability of $24,428 plus interest. Her ruling was sent to the
California Commissioner of Insurance to be accepted, rejected or modified. The
Corporation expected the commissioner to rule sometime after the election in
November, but he has so far failed to do so. In light of this failure to rule,
the Corporation consulted extensively with outside counsel to determine the
range of liability asserted by the Department. The asserted rollbacks to date
have ranged from $24,428 to $61,197. The Administrative Law Judge indicates
clearly in her ruling that by her calculation the Corporation would have lost
approximately $1,000 on 1989 operations if a rollback of $24,428 were imposed.
Given that conclusion, it is clear that any assessment greater than $24,428
would strengthen the Corporation's Constitutional argument that this rollback is
confiscatory. Since the Corporation does not believe it is possible to pinpoint
a specific rollback within the California Department of Insurance's asserted
range that is the most probable, the Corporation has established a contingent
liability for Proposition 103 rollback at $24,428 plus simple interest at 10%
from May 8, 1989. This brings the total reserve to $48,043 at December 31, 1998.
The Corporation will continue to challenge the validity of any rollback. To
date, the Corporation has paid $4,755 in legal costs related to the withdrawal,
Proposition 103, and Fair Plan assessments.
In December 1992, the Corporation stopped writing business in California due to
a lack of profitability and a difficult regulatory environment. In April 1995,
the California Department of Insurance gave final approval for withdrawal.
Currently, subsidiary American Fire and Casualty remains in the state to wind
down the affairs of the group.
NOTE 19 -- SHAREHOLDER RIGHTS PLAN
In December 1989, the Board of Directors adopted a Shareholder Rights Plan (the
Plan) declaring a dividend of one-half of one Common Share Purchase Right,
expiring in 2009, for each outstanding share of common stock. The Plan is
designed to deter coercive or unfair takeover tactics and to prevent a person or
persons from gaining control of the Corporation without offering a fair price to
all shareholders.
Under the terms of the Plan, each whole right entitles the registered
holder (except the acquirer) to purchase from the Corporation one share of
common stock at a price of $250 per share, subject to adjustment. Each right
entitles its holder to purchase at the right's then current exercise price, a
number of the Corporation's common shares having a market value of twice such
price. The rights become exercisable for a 60 day period commencing 11 business
days after a public announcement that a person or group has acquired shares
representing 20 percent or more of the outstanding shares of common stock,
without the prior approval of the board of directors; or 11 business days
following commencement of a tender or exchange of 20 percent or more of such
outstanding shares of common stock.
If after the rights become exercisable, the Corporation is involved in a
merger, other business consolidation or 50 percent or more of the assets or
earning power of the Corporation is sold, the rights will then entitle the
rightholders, upon exercise of the rights, to receive shares of common stock of
the acquiring company with a market value equal to twice the exercise price of
each right.
59
<PAGE> 60
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
The Corporation can redeem the rights for $0.01 per right at any time prior
to becoming exercisable.
NOTE 20 -- DISCONTINUED OPERATIONS (LIFE INSURANCE)
Discontinued operations include the operations of Ohio Life, a subsidiary of the
Ohio Casualty Insurance Company.
During 1995, the Corporation committed to a plan to exit the life insurance
business. On October 2, 1995, the Corporation transferred its life insurance and
related businesses through a 100% coinsurance arrangement to Employers'
Reassurance Corporation and entered into an administrative and marketing
agreement with Great Southern Life Insurance Company ("Great Southern"). In
connection with the reinsurance agreement, $144,469 in cash and $161,401 of
securities were transferred to Employers' Reassurance to cover the liabilities
of $348,479. Ohio Life received an adjusted ceding commission of $37,641 as
payment. After deduction of deferred acquisition costs, the net ceding
commission from the transaction was $17,284. During the fourth quarter of 1997,
Great Southern legally replaced Ohio Life as the primary insurer for
approximately 76% of the life insurance policies subject to the 1995 agreement.
As a result of this assumption, fourth quarter of 1997 net income was positively
impacted by a partial recognition of unamortized ceding commission. The
after-tax impact was an increase to net income of $5,300. At December 31, 1998,
Great Southern had assumed 95% of the life insurance policies subject to the
1995 agreement. As a result, the Corporation recognized an additional amount of
unamortized ceding commission of $1,093 before tax during the fourth quarter
1998. There remains approximately $1,093 in unamortized ceding commission. This
will continue to be amortized over the remaining life of the underlying
policies.
Great Southern Life Insurance Company and Employers' Reassurance
Corporation have entered into a modified coinsurance arrangement whereby all
Ohio Life policies that were assumed by Employers' Reassurance are, in turn,
retroceded to Great Southern Life Insurance Company. This gives the Corporation
additional protection since the Corporation would first look for recovery from
Employers' Reassurance which is rated A++ by A.M. Best. As part of the
agreement, Americo Life Inc., the parent of Great Southern Life, acts as the
third party administrator for Ohio Life for all unassumed policies. This
arrangement lasts until the policies are assumed or lapse. Under the marketing
agreement, Great Southern was permitted to market life insurance products
through the Corporation's independent agency distribution system. This agreement
was terminated in 1996 by mutual consent of the parties.
Results of the discontinued life insurance operations for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Gross premiums written $ 0 $ 1,267 $ 1,428
Net premiums earned 3,708 23,865 4,582
Net investment income 2,288 3,954 4,812
Realized investment
gains (72) 1,633 1,002
- -----------------------------------------------------------
Total income 5,924 29,452 10,396
Income before income
taxes 2,944 13,316 7,892
- -----------------------------------------------------------
Provision for income
taxes 1,029 4,661 2,663
- -----------------------------------------------------------
Net income $ 1,916 $ 8,655 $ 5,229
===========================================================
</TABLE>
Assets and liabilities of the discontinued life insurance operations as of
the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Cash $ 24 $ 9,214 $ 1,150
Investments 13,917 21,320 71,313
Deferred policy
acquisition costs,
net of unamortized
ceding commission (1,093) (2,185) (11,486)
Reinsurance receivable 36,599 36,198 285,354
Other assets 3,191 4,219 7,376
- -------------------------------------------------------------
Total assets $52,638 $68,766 $353,707
=============================================================
Future policy benefits $25,518 $34,148 $280,002
Deferred income tax (1,215) (1,357) 1,728
Other liabilities 46,822 35,512 17,505
- -------------------------------------------------------------
Total liabilities $71,125 $68,303 $299,235
=============================================================
</TABLE>
NOTE 21 -- NEW ACCOUNTING STANDARDS
In December 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-3 "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments". This statement provides guidance on accounting
for insurance related assessments and required disclosure information. This
statement is effective for fiscal years beginning after December 15, 1998. The
Corporation does not believe that this statement will materially affect the
Corporation's financial statements or disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement standardizes the accounting for derivative
instruments by requiring those items to be recognized as assets or liabilities
with changes in fair value reported in earnings or other comprehensive income in
the current period. The Corporation expects the adoption of FAS 133 to have an
immaterial impact on the financial results due to its limited use of derivative
instruments. This statement is effective for fiscal quarters of fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Corporation).
60
<PAGE> 61
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
Report of Independent Accountants
To the Board of Directors and Shareholders of
Ohio Casualty Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Ohio
Casualty Corporation and its subsidiaries at December 31, 1998, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 4 , 1999
61
<PAGE> 62
ITEM 14. CONTINUED
(b) REPORTS ON FORM 8-K OR 8-K/A SINCE OCTOBER 1, 1998.
On December 15, 1998, the Corporation filed Form 8-K announcing the
acquisition of substantially all the Commercial Lines Division of
Great American Insurance Company.
On February 16, 1999, the Corporation filed Form 8-K filing the
Corporation's Consolidated Financial Statements for the year ended
December 31, 1998 together with the Notes to the Consolidated
Financial Statements.
On February 16, 1999, the Corporation filed Form 8-K/A to amend the
8-K dated December 15, 1998 to include the Financial Statements and
Pro Forma Information pursuant to Items 7(a)(4) and 7(b)(2).
On March 26, 1999, the Corporation filed Form 8-K/A to amend Form
8-K filed on February 16, 1999.
On March 26, 1999, the Corporation filed Form 8-K/A to amend Form
8-K originally filed on December 15, 1998.
(c) EXHIBITS. (SEE INDEX TO EXHIBITS ATTACHED HERETO.)
62
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OHIO CASUALTY CORPORATION
(Registrant)
March 30, 1999 By: /s/ Lauren N. Patch
-------------------
Lauren N. Patch, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 30, 1999 /s/ Joseph L. Marcum
---------------------------------------------------------
Joseph L. Marcum, Chairman of the Board
March 30, 1999 /s/ William L. Woodall
---------------------------------------------------------
William L. Woodall, Vice Chairman of the Board
March 30, 1999 /s/ Lauren N. Patch
---------------------------------------------------------
Lauren N. Patch, President and Chief Executive Officer
March 30, 1999 /s/ Arthur J. Bennert
---------------------------------------------------------
Arthur J. Bennert, Director
March 30, 1999 /s/ Jack E. Brown
---------------------------------------------------------
Jack E. Brown, Director
March 30, 1999 /s/ Catherine E. Dolan
---------------------------------------------------------
Catherine E. Dolan, Director
March 30, 1999 /s/ Wayne R. Embry
---------------------------------------------------------
Wayne R. Embry, Director
March 30, 1999 /s/ Vaden Fitton
---------------------------------------------------------
Vaden Fitton, Director
March 30, 1999 /s/ Jeffery D. Lowe
---------------------------------------------------------
Jeffery D. Lowe, Director
March 30, 1999 /s/ Stephen S. Marcum
---------------------------------------------------------
Stephen S. Marcum, Director
March 30, 1999 /s/ Stanley N. Pontius
---------------------------------------------------------
Stanley N. Pontius, Director
March 30, 1999 /s/ Howard L. Sloneker III
---------------------------------------------------------
Howard L. Sloneker III, Director
March 30, 1999 /s/ Barry S. Porter
---------------------------------------------------------
Barry S. Porter, Chief Financial Officer and Treasurer
March 30, 1999 /s/ Michael L. Evans
---------------------------------------------------------
Michael L. Evans, Vice President
63
<PAGE> 64
FORM 10-K, ITEM 14
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
OHIO CASUALTY CORPORATION
The following statements are included herein as Item 14:
<TABLE>
<CAPTION>
Page Number
in this Report
--------------
<S> <C>
Consolidated Balance Sheet at December 31, 1998, 1997, 1996 44
Statement of Consolidated Income for the years ended
December 31, 1998, 1997 and 1996 45
Statement of Consolidated Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 46
Statement of Consolidated Cash Flow for the years ended
December 31, 1998, 1997 and 1996 47
Notes to Consolidated Financial Statements 48-60
Report of Independent Accountants 61
</TABLE>
<TABLE>
<CAPTION>
Page Number
in this Report
--------------
The following financial statement schedules are included herein:
<S> <C>
Schedule I - Consolidated Summary of Investments Other Than
Investments in Related Parties at December 31, 1998 66
Schedule II - Condensed Financial Information of Registrant for
the years ended December 31, 1998, 1997 and 1996 67
Schedule III - Consolidated Supplementary Insurance Information
for the years ended December 31, 1998, 1997 and 1996 68-70
Schedule IV - Consolidated Reinsurance for the years ended
December 31, 1998, 1997 and 1996 71
Schedule V - Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1997 and 1996 72
Schedule VI - Consolidated Supplemental Information Concerning
Property and Casualty Insurance Operations for the
years ended December 31, 1998, 1997 and 1996 73
</TABLE>
64
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Ohio Casualty Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 4, 1999 appearing on page 61 of the 1998 Annual Report to
Shareholders of Ohio Casualty Corporation (which report and consolidated
financial statements are included herein) also included an audit of the
Financial Statement Schedules listed in Item 14(a)(2) of this Form 10-K. In our
opinion, these Financial Statement Schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
February 4, 1999
Cincinnati, Ohio
65
<PAGE> 66
Schedule I
Ohio Casualty Corporation and Subsidiaries
Consolidated Summary of Investments
Other than Investments in Related Parties
(In thousands)
<TABLE>
<CAPTION>
December 31, 1998
Amount shown
Type of investment Cost Value in balance sheet
- ------------------ ---- ----- ----------------
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States govt. and
govt. agencies with auth. $ 74,534 $ 79,854 $ 79,854
States, municipalities and
political subdivisions 800,945 839,573 839,573
Debt securities issued by
foreign governments 3,000 3,636 3,636
Corporate securities 1,062,165 1,117,475 1,117,475
Mortgage-backed securities:
U.S. government guaranteed 6,130 6,275 6,275
Other 360,960 369,091 369,091
---------- ---------- ----------
Total fixed maturities 2,307,734 2,415,904 2,415,904
Equity securities:
Common stocks:
Banks, trust and insurance
companies 60,320 284,796 284,796
Industrial, miscellaneous and
all other 180,204 634,959 634,959
Preferred stocks:
Non-redeemable 105 133 133
Convertible 4,500 5,018 5,018
---------- ---------- ----------
Total equity securities 245,129 924,906 924,906
Short-term investments 262,939 262,863 262,863
---------- ---------- ----------
Total investments $2,815,802 $3,603,673 $3,603,673
========== ========== ==========
</TABLE>
66
<PAGE> 67
Schedule II
Ohio Casualty Corporation
Condensed Financial Information of Registrant
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Condensed Balance Sheet:
Investment in wholly-owned
subsidiaries, at equity $ 1,482,064 $ 1,258,432 $ 1,167,237
Investment in bonds/stocks 76,687 85,742 57,233
Cash and other assets 31,066 13,000 5,706
----------- ----------- -----------
Total assets 1,589,817 1,357,174 1,230,176
Bank note payable 265,000 40,000 50,000
Other liabilities 3,836 2,345 5,076
----------- ----------- -----------
Total liabilities 268,836 42,345 55,076
Shareholders' equity $ 1,320,981 $ 1,314,829 $ 1,175,100
=========== =========== ===========
Condensed Statement of Income:
Dividends from subsidiaries $ 119,988 $ 169,988 $ 100,000
Equity in subsidiaries (33,929) (30,867) 3,957
Operating (expenses) (1,132) (74) (1,500)
----------- ----------- -----------
Net income $ 84,927 $ 139,047 $ 102,457
=========== =========== ===========
Condensed Statement of Cash Flows:
Cash flows from operations
Net distributed income $ 118,856 $ 169,914 $ 98,500
Other (2,562) (805) 4,879
----------- ----------- -----------
Net cash from operations 116,294 169,109 103,379
Investing
Purchase of bonds/stocks (200,740) (57,031) (34,458)
Sales of bonds/stocks 14,440 28,147 7,190
----------- ----------- -----------
Net cash from investing (186,300) (28,884) (27,268)
Financing
Note payable
Borrowing 230,000 (10,000) (10,000)
Repayment (5,000) 0 0
Exercise of stock options 1 371 135
Purchase of treasury stock (100,212) (64,858) (9,168)
Dividends paid to shareholders (57,886) (57,456) (56,380)
----------- ----------- -----------
Net cash from financing 66,903 (131,943) (75,413)
Net change in cash (3,103) 8,282 698
Cash, beginning of year 11,657 3,375 2,677
----------- ----------- -----------
Cash, end of year $ 8,554 $ 11,657 $ 3,375
=========== =========== ===========
</TABLE>
67
<PAGE> 68
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1998
<TABLE>
<CAPTION>
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 9,890 $ 189,817 $ 83,448 $ 139,114 $
Personal auto 35,562 418,570 143,543 500,227
Workers' compensation 7,627 591,527 95,839 100,336
Gen. liability, A&H 14,954 320,169 65,493 96,535
Homeowners 28,379 63,230 98,807 177,419
CMP, fire and allied lines,
inland marine 38,542 348,013 154,233 217,236
Fidelity, surety, burglary 11,342 14,532 27,019 36,403
Miscellaneous Income 334
Investment 164,812
Addition due to acquisition 31,402
Retro reinsurance assumed
from acquisition
------------ ------------- ----------- ------------ ------------
Total property and
casualty insurance 177,698 1,945,858 668,382 1,267,604 164,812
Life ins. (discontinued
operations) (1,092) 36,599 3,709 2,288
Premium finance 168 1,219 94
Corporation 4,118
------------ ------------- ----------- ------------ ------------
Total $ 176,606 $ 1,982,457 $ 668,550 $ 1,272,532 $ 171,312
============ ============= =========== ============ ============
<CAPTION>
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 97,077 $ 26,833 $ 18,309 $ 139,087
Personal auto 396,312 100,561 11,830 521,262
Workers' compensation 77,632 18,060 11,912 100,150
Gen. liability, A&H 47,908 33,875 14,653 95,144
Homeowners 145,500 46,448 17,497 180,697
CMP, fire and allied lines,
inland marine 153,575 67,125 24,541 225,749
Fidelity, surety, burglary 5,662 17,646 6,124 37,021
Miscellaneous Income
Investment
Addition due to acquisition 5,968
Retro reinsurance assumed
from acquisition 137,636
----------- ------------ ------------ --------------
Total property and
casualty insurance 923,666 316,516 104,866 1,436,746
Life ins. (discontinued
operations) (1) 2,524 456
Premium finance 1,529 1,170
Corporation 6,075
----------- ------------ ------------ --------------
Total $ 923,665 $ 319,040 $ 112,926 $ 1,437,916
=========== ============ ============ ==============
</TABLE>
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses with
the remainder allocated based on premium volume.
68
<PAGE> 69
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1997
<TABLE>
<CAPTION>
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
------------ -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Segment
Property and
casualty insurance:
Underwriting
Commercial auto $ 8,835 $ 167,558 $ 64,350 $ 139,932
Personal auto 29,247 421,276 122,536 459,180
Workers' compensation 5,290 367,802 40,705 103,484
Gen. liability, A&H 14,036 254,159 43,030 98,971
Homeowners 26,582 64,681 94,752 166,474
CMP, fire and allied lines,
inland marine 33,537 193,885 103,751 200,330
Fidelity, surety, burglary 10,721 12,296 25,759 35,045
Miscellaneous Income 3,925
Investment $ 172,372
------------ -------------- ------------ ------------- ------------
Total property and
casualty insurance 128,248 1,481,657 494,883 1,207,341 172,372
Life ins. (discontinued
operations) (2,185) 36,298 23,865 3,954
Premium finance 193 1,632 65
Corporation 5,264
------------ -------------- ------------ ------------- ------------
Total $ 126,063 $ 1,517,955 $ 495,076 $ 1,232,838 $ 181,655
============ ============== ============ ============= ============
<CAPTION>
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Segment
Property and
casualty insurance:
Underwriting
Commercial auto $ 107,740 $ 28,242 $ 15,886 $ 140,295
Personal auto 375,431 93,488 9,047 463,933
Workers' compensation 65,762 21,313 9,979 97,176
Gen. liability, A&H 55,331 33,731 11,597 96,698
Homeowners 125,136 44,666 15,897 168,168
CMP, fire and allied lines,
inland marine 131,499 64,520 21,220 206,133
Fidelity, surety, burglary 3,743 17,534 5,220 34,418
Miscellaneous Income
Investment
------------ ------------- ------------ -------------
Total property and
casualty insurance 864,642 303,494 88,846 1,206,821
Life ins. (discontinued
operations) 268 15,049 819 6
Premium finance 1,655 1,511
Corporation 5,329
------------ ------------- ------------ -------------
Total $ 864,910 $ 318,543 $ 96,649 $ 1,208,338
============ ============= ============ =============
</TABLE>
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses with
the remainder allocated based on policy counts.
69
<PAGE> 70
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1996
<TABLE>
<CAPTION>
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Segment
Property and
casualty insurance:
Underwriting
Commercial auto $ 8,536 $ 167,288 $ 63,800 $ 142,445
Personal auto 27,789 428,843 118,034 455,894
Workers' compensation 7,990 387,951 47,012 124,157
Gen. liability, A&H 13,833 265,399 45,337 104,428
Homeowners 26,553 70,969 92,950 165,630
CMP, fire and allied lines,
inland marine 32,634 213,270 97,943 195,437
Fidelity, surety, burglary 10,835 13,867 26,312 34,135
Miscellaneous Income 2,410
Investment $ 179,407
------------- -------------- ------------ ------------- ------------
Total property and
casualty insurance 128,170 1,547,587 491,388 1,224,536 179,407
Life ins. (discontinued
operations) (11,486) 289,086 4,582 4,812
Premium finance 225 2,115 293
Corporation 3,608
------------- -------------- ------------ ------------- ------------
Total $ 116,684 $ 1,836,673 $ 491,613 $ 1,231,233 $ 188,120
============= ============== ============ ============= ============
<CAPTION>
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Segment
Property and
casualty insurance:
Underwriting
Commercial auto $ 100,944 $ 28,285 $ 18,440 $ 139,421
Personal auto 394,334 92,589 15,828 455,240
Workers' compensation 80,975 26,221 10,124 115,398
Gen. liability, A&H 43,799 34,829 14,081 101,793
Homeowners 167,302 46,149 12,641 166,457
CMP, fire and allied lines,
inland marine 141,331 62,688 20,364 195,290
Fidelity, surety, burglary 1,904 18,095 5,794 34,473
Miscellaneous Income
Investment
------------ ------------- ------------ --------------
Total property and
casualty insurance 930,589 308,856 97,272 1,208,072
Life ins. (discontinued
operations) 693 2,004 (193) 215
Premium finance 1,969 1,981
Corporation 5,907
------------ ------------- ------------ --------------
Total $ 931,282 $ 310,860 $ 104,955 $ 1,210,268
============ ============= ============ ==============
</TABLE>
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses with
the remainder allocated based on policy counts.
70
<PAGE> 71
Schedule IV
Ohio Casualty Corporation and Subsidiaries
Consolidated Reinsurance
(In thousands)
December, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Percent of
amount
Ceded to Assumed assumed
Gross other from other Net to net
amount companies companies amount amount
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Life insurance in force $ 329 $ 329 $ 0 $ 0 0.0%
Premiums
Property and casualty insurance $ 1,289,837 $ 79,268 $ 226,177 $ 1,436,746 15.7%
Life insurance (Discontinued operations) 3,187 3,187 0 0 0.0%
Accident and health insurance 567 567 0 0 0.0%
----------- ----------- ----------- -----------
Total premiums 1,293,591 83,022 226,177 1,436,746 15.7%
Premium finance charges 1,170
Life insurance - FAS 97 adjustment 0
-----------
Total premiums and finance charges written 1,437,916
Change in unearned premiums and finance charges (31,790)
Retro reinsurance assumed from acquisition (137,636)
-----------
Total premiums and finance charges earned 1,268,490
Miscellaneous income 334
Discontinued operations - life insurance 0
-----------
Total premiums & finance charges earned -
continuing operations $ 1,268,824
===========
Year Ended December 31, 1997
Life insurance in force $ 547 $ 547 $ 0 $ 0 0.0%
=========== =========== =========== ===========
Premiums
Property and casualty insurance $ 1,225,813 $ 31,298 $ 12,306 $ 1,206,821 1.0%
Life insurance (Discontinued operations) 18,359 18,359 0 0 0.0%
Accident and health insurance 1,392 1,575 189 6 3150.0%
----------- ----------- ----------- -----------
Total premiums 1,245,564 51,232 12,495 1,206,827 1.0%
Premium finance charges 1,511
Life insurance - FAS 97 adjustment 0
-----------
Total premiums and finance charges written 1,208,338
Change in unearned premiums and finance charges (3,283)
-----------
Total premiums and finance charges earned 1,205,055
Miscellaneous income 3,925
Discontinued operations - life insurance (6)
-----------
Total premiums & finance charges earned -
continuing operations $ 1,208,974
===========
Year Ended December 31, 1996
Life insurance in force $ 4,623,435 $ 4,623,435 $ 0 $ 0 0.0%
=========== =========== =========== ===========
Premiums
Property and casualty insurance $ 1,211,695 $ 29,039 $ 25,416 $ 1,208,072 2.1%
Life insurance (Discontinued operations) 29,822 29,822 0 0 0.0%
Accident and health insurance 2,204 3,502 1,513 215 703.7%
----------- ----------- ----------- -----------
Total premiums 1,243,721 62,363 26,929 1,208,287 2.2%
Premium finance charges 1,981
-----------
Total premiums and finance charges written 1,210,268
Change in unearned premiums and finance charges 14,182
-----------
Total premiums and finance charges earned 1,224,450
Miscellaneous income 2,416
Discontinued operations - life insurance (215)
-----------
Total premiums & finance charges earned -
continuing operations $ 1,226,651
===========
</TABLE>
71
<PAGE> 72
Schedule V
Ohio Casualty Corporation and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Balance at Addition Balance at
beginning Charged to due to end of
of period expenses Acquisition Deductions period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Reserve for bad debt 4,200 100 4,439 0 8,739
Year ended December 31, 1997
Reserve for bad debt 3,700 500 0 0 4,200
Year ended December 31, 1996
Reserve for bad debt 3,500 200 0 0 3,700
</TABLE>
72
<PAGE> 73
Schedule VI
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplemental Information Concerning Property and Casualty
Insurance Operations
(IN THOUSANDS)
<TABLE>
<CAPTION>
Reserves for
Deferred unpaid claims
policy and claim Discount Net
Affiliation with acquisition adjustment of Unearned Earned investment
registrant costs expenses reserves premiums premiums income
---------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Property and casualty
subsidiaries
Year ended December 31,
1998 $ 177,698 $ 1,945,858 $ 0 $ 668,382 $1,267,604 $ 164,812
========== =========== ========== =========== =========== ==========
Year ended December 31,
1997 $ 128,248 $ 1,481,657 $ 0 $ 494,883 $1,207,341 $ 172,372
========== =========== ========== =========== =========== ==========
Year ended December 31,
1996 $ 128,170 $ 1,547,587 $ 0 $ 491,388 $1,224,536 $ 179,407
========== =========== ========== =========== =========== ==========
<CAPTION>
Claims and claim
adjustment expenses Amortization Paid
incurred related to of deferred claims
--------------------- policy and claim
Affiliation with Current Prior acquisition adjustment Premiums
registrant year years costs expenses written
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Property and casualty
subsidiaries
Year ended December 31,
1998 $ 989,115 $ (66,119) $ 316,516 $ 963,094 $ 1,436,746
=========== =========== ============ =========== ===========
Year ended December 31,
1997 $ 921,818 $ (53,615) $ 303,494 $ 929,399 $ 1,206,821
=========== =========== ============ =========== ===========
Year ended December 31,
1996 $1,008,395 $ (76,920) $ 308,856 $1,001,706 $ 1,208,072
=========== =========== ============ =========== ===========
</TABLE>
73
<PAGE> 74
FORM 10-K
OHIO CASUALTY CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
Exhibit 21 Subsidiaries of Registrant 75
Exhibit 22 Proxy Statement of the Board of Directors for the fiscal year
ended December 31, 1998 76-95
Exhibit 23 Consent of Independent Accountants to incorporation of their
opinion by reference in Registration Statement on Form S-3 and
Form S-8 96
Exhibit 27 Financial Data Schedule 97
Exhibit 28 Information from Reports Furnished to State Insurance
Regulation Authorities 98-111
Exhibits incorporated by reference to previous filings:
Exhibit 2 Asset Purchase Agreement between Ohio Casualty Corporation
and Great American Insurance Company filed with Form 10Q on
November 13, 1998
Exhibit 3 Articles of Incorporation and By Laws amended 1986 and filed
with Form 8-K on January 15, 1987
Exhibit 3a Amendment to Amended Articles of Incorporation increasing
authorized number of shares to 150,000,000 common shares and
authorized 2,000,000 preferred shares, dated April 17, 1996
Exhibit 4 Amended and Restated Rights Agreement dated as of February 19,
1998 between Ohio Casualty Corporation and First Chicago Trust
Company of New York, as Rights Agent.
Exhibit 10 Credit Agreement dated as of October 25, 1994 between Ohio
Casualty Corporation and Chase Manhattan Bank, N.A., as agent,
filed with Form 10-Q on November 1, 1994
Exhibit 10a Ohio Casualty Corporation 1993 Stock Incentive Program
filed with Form 10-Q as Exhibit 10d on May 31, 1993
Exhibit 10a1 Ohio Casualty Corporation amended 1993 Stock Incentive
Program filed with Form 10-Q dated May 14, 1997
Exhibit 10b Coinsurance Life, Annuity and Disability Income Reinsurance
Agreement between Employer's Reassurance Corporation and
The Ohio Life Insurance Company dated as of October 2, 1995
Exhibit 10c Credit Agreement dated October 27, 1997 with Chase
Manhattan Bank, N.A. as agent, filed with Form 10-Q on
November 13, 1997
</TABLE>
74
<PAGE> 1
Exhibit 21
Ohio Casualty Corporation
Subsidiaries of Registrant
December 31, 1998
Name of Subsidiary State of Incorporation
The Ohio Casualty Insurance Company Ohio
West American Insurance Company Indiana
Ohio Casualty of New Jersey, Inc. Ohio
Ohio Security Insurance Company Ohio
American Fire and Casualty Company Ohio
Avomark Insurance Company Indiana
The Ohio Life Insurance Company Ohio
Ocasco Budget, Inc. Ohio
Hamilton Intermediaries Ohio
75
<PAGE> 1
Exhibit 22
OHIO CASUALTY CORPORATION
136 NORTH THIRD STREET
HAMILTON, OHIO 45025
NOTICE OF ANNUAL MEETING
OF
SHAREHOLDERS
TO BE HELD APRIL 21, 1999
Hamilton, Ohio
March 18, 1999
To the Shareholders:
The Annual Meeting of Shareholders (the "Annual Meeting") of Ohio Casualty
Corporation (the "Company") will be held in the Ohio Casualty University
Auditorium of Ohio Casualty Corporation, 9450 Seward Road, Fairfield, Ohio,
45014, on Wednesday, April 21, 1999, at 10:30 a.m., local time, for the
following purposes:
(1) To elect the following three Directors for terms expiring in 2002
(Class III): Arthur J. Bennert, Catherine E. Dolan and Lauren N.
Patch.
(2) In their discretion, to consider and vote upon such other matters
as may properly come before the Annual Meeting or any adjournment
thereof.
Holders of record of common shares of the Company as of the close of
business on March 1, 1999 are entitled to notice of and to vote at the Annual
Meeting and at any adjournment thereof. As of March 1, 1999, there were
31,221,531 common shares outstanding. Each common share is entitled to one vote
on all matters properly brought before the Annual Meeting.
By Order of the Board of Directors,
Howard L. Sloneker III, Secretary
EVERY SHAREHOLDER'S VOTE IS IMPORTANT. IF YOU ARE UNABLE TO BE PRESENT AT THE
ANNUAL MEETING, YOU ARE REQUESTED TO COMPLETE AND RETURN PROMPTLY THE ENCLOSED
PROXY SO THAT YOUR COMMON SHARES WILL BE REPRESENTED. A POSTAGE PAID, ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
76
<PAGE> 2
OHIO CASUALTY CORPORATION
136 NORTH THIRD STREET
HAMILTON, OHIO 45025
PROXY STATEMENT
---------------
ANNUAL MEETING OF SHAREHOLDERS
APPROXIMATE DATE TO MAIL -- MARCH 18, 1999
On behalf of the Board of Directors of Ohio Casualty Corporation (the
"Company"), a proxy is solicited from you to be used at the Company's 1999
Annual Meeting of Shareholders (the "Annual Meeting") scheduled for Wednesday,
April 21, 1999 at 10:30 a.m., local time, in the Ohio Casualty University
Auditorium of Ohio Casualty Corporation, 9450 Seward Road, Fairfield, Ohio
45014, or at any adjournment thereof.
Proxies in the form enclosed herewith are being solicited on behalf of the
Company's Board of Directors. The common shares represented by proxies which are
properly executed and returned will be voted at the Annual Meeting, or any
adjournment thereof, as directed. Common shares represented by proxies properly
executed and returned which indicate no direction will be voted in favor of the
nominees of the Board of Directors identified in the Notice of Annual Meeting
accompanying this Proxy Statement. Any shareholder giving the enclosed proxy has
the power to revoke the same prior to its exercise by filing with the Secretary
of the Company a written revocation or duly executed proxy bearing a later date,
or by giving notice of revocation in open meeting. ATTENDANCE AT THE ANNUAL
MEETING WILL NOT, IN AND OF ITSELF, CONSTITUTE REVOCATION OF A PROXY.
VOTING AT ANNUAL MEETING
As of March 1, 1999, the record date fixed for the determination of
shareholders entitled to notice of and to vote at the Annual Meeting, there were
outstanding 31,221,531 common shares, which is the only outstanding class of
capital stock of the Company. Each such common share is entitled to one vote on
all matters properly coming before the Annual Meeting.
A quorum for the Annual Meeting is a majority of the outstanding common
shares. Common shares represented by signed proxies that are returned to the
Company will be counted toward the quorum in all matters even though they are
marked "Abstain", "Against" or " Withhold Authority" on one or more or all
matters or they are not marked at all. Broker non-votes are also counted for
purposes of determining the presence or absence of a quorum. Broker non-votes
occur when brokers, who hold their customers' shares in street name, sign and
submit proxies for such shares on some matters, but not others. Typically, this
would occur when brokers have not received any instructions from their
customers, in which case the brokers, as the holders of record, are permitted to
vote on "routine" matters, which typically include the election of directors,
but not on non-routine matters.
77
<PAGE> 3
PRINCIPAL SHAREHOLDERS
The table below identifies the only persons known to the Company to own
beneficially (within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934) more than 5% of the Company's outstanding common shares.
<TABLE>
<CAPTION>
COMMON SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OF COMMON
OF BENEFICIAL OWNER OWNED SHARES DATE
------------------- ----- ------ ----
<S> <C> <C> <C>
FIRST NATIONAL BANK OF 3,130,957(1) 10.01% 12-31-98
SOUTHWESTERN OHIO
Third and High Streets
Hamilton, Ohio 45011
CAPITAL RESEARCH AND 2,997,500(2) 9.59% 12-31-98
MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071
THE INCOME FUND OF AMERICA, INC. 2,280,000(2) 7.29% 12-31-98
333 South Hope Street
Los Angeles, California 90071
THE CHASE MANHATTAN BANK, N.A., 2,240,792(3) 7.17% 12-31-98
Trustee
1211 Avenue of the Americas
New York, New York 10036
JOSEPH L. MARCUM 2,190,816(4) 7.02% 03-01-99
136 North Third Street
Hamilton, Ohio 45025
AMVESCAP PLC 1,641,800(5) 5.25% 12-31-98
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
- --------------------
(1) Based upon information provided to the Company by First National Bank of
Southwestern Ohio (the "Bank"). The Bank holds the reported shares as
trustee under various trust agreements and arrangements. The Bank has
advised the Company that it has sole voting power for 2,448,889 shares,
shared voting power for 0 shares, sole investment power for 1,346,495
shares, and shared investment power for 1,295,864 shares. 399,019 shares
are held under trust arrangements for certain directors of the Company
and their respective spouses, which shares are also reported in the
following table showing share ownership by directors and executive
officers of the Company. The share information reflects beneficial
ownership as of December 31, 1998.
78
<PAGE> 4
(2) Based upon information contained in a Schedule 13G (Amendment No. 1)
dated February 8, 1999, filed with the Securities and Exchange Commission
by Capital Research and Management Company and The Income Fund of
America, Inc. According to the Schedule 13G filing, The Income Fund of
America, Inc. is advised by Capital Research and Management Company.
Capital Research and Management Company reported sole voting power for 0
shares, shared voting power for 0 shares and sole investment power for
2,997,500. The Income Fund of America, Inc. reported sole voting power
for 2,280,000 shares, shared voting power for 0 shares and sole
investment power for 0 shares. The Company has been advised by Capital
Research and Management Company that the same 2,280,000 shares reported
to be beneficially owned by The Income Fund of America, Inc. are also
reported to be beneficially owned by Capital Research and Management
Company in the Schedule 13G. Beneficial ownership information is reported
as of December 31, 1998.
(3) 1,398,560 shares are held as trustee for the Company's Employee Savings
Plan and 842,232 shares are held as trustee for the Company's Employees
Retirement Plan. Voting power with respect to shares held in the Employee
Savings Plan is exercised by the plan participants; investment power with
respect to these shares is held by plan participants subject to
limitations in the Plan. Voting and investment power with respect to
shares held in the Employees Retirement Plan is exercised by the
committee which administers the Employees Retirement Plan (the
"Retirement Committee"). The Retirement Committee consists of Joseph L.
Marcum, Lauren N. Patch and Barry S. Porter.
(4) See share ownership information for Mr. Marcum in the following table.
(5) Based upon information contained in a Schedule 13G dated February 8,
1999, filed with the Securities and Exchange Commission by AMVESCAP PLC,
the parent holding company for the following subsidiaries which acquired
shares reported by the parent holding company: AVZ, Inc.; AIM Management
Group, Inc.; AMVESCAP Group Services, Inc.; INVESCO, Inc.; INVESCO North
American Holdings, Inc.; INVESCO Capital Management, Inc.; INVESCO Funds
Group, Inc. AMVESCAP PLC reported sole voting power for 0 shares, shared
voting power for 1,641,800 shares, sole dispositive power for 0 shares
and shared dispositive power for 1,641,800 shares as of December 31,
1998.
SHAREHOLDINGS OF DIRECTORS, EXECUTIVE OFFICERS
AND NOMINEES FOR ELECTION AS DIRECTOR
As of March 1, 1999, the directors of the Company, including the three
persons intended by the Board of Directors to be nominated for election as
directors, the executive officers of the Company named in the Summary
Compensation Table, and all executive officers and directors of the Company as a
group, beneficially owned common shares of the Company as set forth below.
79
<PAGE> 5
<TABLE>
<CAPTION>
SHARED INVESTMENT/
NUMBER OF OPTIONS VOTING POWER
COMMON SHARES EXERCISABLE OVER EMPLOYEES
NAME OF BENEFICIALLY WITHIN RETIREMENT PERCENT
INDIVIDUAL OR GROUP OWNED(1) 60 DAYS PLAN SHARES(2) TOTAL OF CLASS(3)
- ------------------- -------- ------- -------------- ----- -----------
<S> <C> <C> <C> <C> <C>
Arthur J. Bennert 16,178 6,000 22,178
Jack E. Brown 1,100 6,000 7,100
Catherine E. Dolan 100 6,000 6,100
Wayne Embry 200 9,000 9,200
Vaden Fitton 227,779(4) 6,000 233,779
Jeffery D. Lowe 169,068(4) 0 169,068
Joseph L. Marcum 1,345,584(4)(5)(6) 3,000 842,232 2,190,816 7.02%
Stephen S. Marcum 215,744(4) 9,000 224,744
Lauren N. Patch 252,605(4)(7) 60,000 842,232 1,154,837 3.69%
Stanley N. Pontius 1,163 9,000 10,163
Howard L. Sloneker III 221,438(7) 16,666 238,104
William L. Woodall 20,700 9,000 29,700
Michael L. Evans 6,131(7) 19,999 26,130
Coy Leonard, Jr 1,196(7) 6,000 7,196
Barry S. Porter 28,667(7) 19,999 842,232 890,898 2.85%
All Executive Officers
and Directors as a 2,757,235 245,664 842,232 3,845,131 12.31%
Group (38 Persons)
</TABLE>
- ---------------
(1) Unless otherwise indicated, each named person has voting and investment
power over the listed shares and such voting and investment power is
exercised solely by the named person or shared with a spouse.
(2) Includes 842,232 shares held in the Company's Employees Retirement Plan as
to which the named individuals share voting and investment power solely by
reason of being a member of the Retirement Committee which administers
such Plan. See Note (3) of the preceding table. Messrs. Marcum, Patch and
Porter disclaim beneficial ownership of these shares.
(3) Percentages are listed only for those individuals who are the beneficial
owners of more than 1% of the outstanding shares.
(4) Includes the following number of shares owned by family members as to
which beneficial ownership is disclaimed: Mr. Fitton, 102,857; Mr. Lowe,
143,750; Mr. Joseph L. Marcum, 611,354; Mr. Stephen S. Marcum, 84,090; and
Mr. Patch, 211,847.
(5) Includes 213,852 shares held by Mr. Marcum's wife in her capacity as a
co-trustee of the estate of Howard Sloneker as to which shares Mr. Marcum
has no voting or investment power.
(6) Includes 97,806 shares held as co-trustee of the Joseph L. and Sarah S.
Marcum Foundation as to which voting and investment power is shared by
Joseph L. and Stephen S. Marcum.
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<PAGE> 6
(7) The share ownership for Messrs. Patch, Sloneker, Evans, Leonard and Porter
includes 4,951; 2,592; 1,447; 183, and 10,259 shares, respectively, held
for the accounts of these individuals by the trustee of the Company's
Employee Savings Plan. Such persons have sole voting power with respect to
these shares and also hold investment power subject to limitations in the
Plan.
ELECTION OF DIRECTORS
The Board of Directors intends that the three persons named under Class III
in the following table (the "Nominees") will be nominated for election at the
Annual Meeting for three-year terms expiring in 2002. The terms of the remaining
directors in Classes I and II will continue after the Annual Meeting. It is
intended that the common shares represented by the accompanying Proxy will be
voted for the election as directors of the Nominees, unless otherwise instructed
on the Proxy. In the event that any one or more of the Nominees unexpectedly
becomes unavailable for election, the common shares represented by the
accompanying Proxy will be voted in accordance with the best judgment of the
proxy holders for the election of the remaining Nominees and for the election of
any substitute nominee or nominees designated by the Board of Directors. The
proxies cannot be voted for more than three nominees designated by the Board of
Directors.
Under Ohio law and the Company's Code of Regulations, the nominees
receiving the greatest number of votes will be elected as directors. Shares as
to which the authority to vote is withheld will be counted for quorum purposes
but will not be counted toward the election of the Nominees.
<TABLE>
<CAPTION>
POSITION WITH COMPANY AND/OR
PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR
NAME AND AGE(1) DURING LAST FIVE YEARS(2) SINCE
- --------------- ---------------------------------------------------------------------------- --------
NOMINEES: CLASS III --TERMS EXPIRING IN 2002: (3)
<S> <C> <C>
Arthur J. Bennert, Director of the Company, The Ohio Casualty Insurance Company, West 1989
72 American Insurance Company, American Fire and Casualty Company, Ohio
Security Insurance Company, Ohio Casualty of New Jersey, Inc. and The Ohio
Life Insurance Company; retired executive officer of the Company and its
subsidiaries.
Catherine E. Dolan, Managing Director of the Financial Institutions Group, First Union 1994
41 National Bank, Charlotte, North Carolina.
Lauren N. Patch, President, Chief Executive Officer and Director of the Company, The Ohio 1987
48 Casualty Insurance Company, West American Insurance Company, American Fire
and Casualty Company, Ohio Security Insurance Company, Avomark Insurance
Company, Ohio Casualty of New Jersey, Inc. and OCASCO Budget, Inc.; Vice
Chairman and Director of The Ohio Life Insurance Company.
</TABLE>
81
<PAGE> 7
<TABLE>
<CAPTION>
POSITION WITH COMPANY AND/OR
PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR
NAME AND AGE(1) DURING LAST FIVE YEARS(2) SINCE
- ---------------- ---------------------------------------------------------------------------- --------
DIRECTORS WHOSE TERMS CONTINUE BEYOND THE ANNUAL MEETING:
CLASS I -- TERMS EXPIRING IN 2000
<S> <C> <C>
Jack E. Brown, Chairman of the Board, BBI Marketing Services, Inc., Cincinnati, Ohio 1994
55 (professional marketing consulting firm).
Vaden Fitton, Director and Retired First Vice President of First National Bank of 1967
70 Southwestern Ohio, Hamilton, Ohio.
Joseph L. Marcum, Chairman of the Board and Director of the Company, The Ohio Casualty 1949
75 Insurance Company, West American Insurance Company, American Fire and
Casualty Company, Ohio Security Insurance Company, Avomark Insurance
Company, Ohio Casualty of New Jersey, Inc., OCASCO Budget, Inc. and The Ohio
Life Insurance Company.
Howard L. Sloneker III, Senior Vice President, Secretary and Director of the Company, The Ohio 1983
42 Casualty Insurance Company, West American Insurance Company, American Fire
and Casualty Company, Ohio Security Insurance Company, Avomark Insurance
Company, Ohio Casualty of New Jersey, Inc. and OCASCO Budget, Inc.;
Secretary and Director of The Ohio Life Insurance Company.
CLASS II: TERMS EXPIRING IN 2001
Wayne Embry, Executive Vice President and General Manager of the Cleveland Cavaliers
62 (professional basketball franchise).
1991
Stephen S. Marcum, Member of the law firm of Parrish, Beimford, Fryman, Smith & Marcum Co., 1989
41 L.P.A., Hamilton, Ohio; such firm has provided legal services to the Company
and its subsidiaries during the last fiscal year and continues to do so.
Stanley N. Pontius, President and Chief Executive Officer of First Financial Bancorp and its 1994
52 principal subsidiary, First National Bank of Southwestern Ohio, Hamilton,
Ohio.
William L. Woodall, Director of the Company, The Ohio Casualty Insurance Company, West 1986
75 American Insurance Company, American Fire and Casualty Company, Ohio
Security Insurance Company, OCASCO Budget, Inc. and The Ohio Life
Insurance Company; retired executive officer of the Company and its
subsidiaries.
- ----------------------------
</TABLE>
(1) Ages are listed as of the date of the Annual Meeting.
(2) The Ohio Casualty Insurance Company, Ohio Security Insurance Company,
American Fire and Casualty Company, West American Insurance Company, OCASCO
Budget, Inc. and The Ohio Life Insurance Company are subsidiaries of the
Company.
(3) Jeffery D. Lowe, who is currently a Class III director whose term expires in
1999, has decided not to run for re-election at the Annual Meeting and will
resign from the Board effective as of the date of the Annual Meeting. Because
the Board of Directors is still in the process of identifying and interviewing
potential candidates to fill the vacancy to be created by Mr. Lowe's
resignation, the
82
<PAGE> 8
Board has not nominated a successor to Mr. Lowe for election at the Annual
Meeting. The Board intends to fill the vacancy following the Annual Meeting when
an appropriate replacement for Mr. Lowe has been selected. Mr. Lowe, 53, is a
director of The Ohio Casualty Insurance Company, West American Insurance
Company, American Fire and Casualty Company, Ohio Security Insurance Company,
Avomark Insurance Company and The Ohio Life Insurance Company. Mr. Lowe also
served as an executive officer of the Company and its Subsidiaries until
December 31, 1996.
OTHER DIRECTORSHIPS AND RELATED TRANSACTIONS AND RELATIONSHIPS
Wayne Embry is also a director of M. A. Hanna Company and Key Bank,
Commercial Line of Business; Vaden Fitton, Stephen S. Marcum and Stanley N.
Pontius are also directors of First Financial Bancorp.
Joseph L. Marcum, the Chairman of the Board of the Company, retired as the
Chief Executive Officer of the Company on December 31, 1993. Mr. Marcum receives
annual benefits from the Company of $146,309 pursuant to the Company's Employees
Retirement Plan. See "Pension Plans."
Jeffery D. Lowe is the son-in-law of Joseph L. Marcum; Lauren N. Patch and
Howard L. Sloneker III are brothers-in-law; and Stephen S. Marcum is the son of
Joseph L. Marcum.
MEETINGS OF THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
During 1998, the Board of Directors held nine meetings. No director
attended less than 75% of the aggregate number of meetings of the Board of
Directors and the committees on which he or she served. The Board of Directors
has standing Executive, Audit, Executive Compensation and Nominating Committees.
The Executive Committee did not meet during 1998. The members of the
Executive Committee are Joseph L. Marcum, Lauren N. Patch, and Howard L.
Sloneker III. The Executive Committee is empowered to exercise all the powers of
the Board of Directors in the management of the Company between meetings of the
Board of Directors, other than filling vacancies on the Board or any other
committee of the Board.
The Audit Committee held four meetings during 1998. The members of the
Audit Committee are Arthur J. Bennert, Jack E. Brown, Catherine E. Dolan, Wayne
Embry, Vaden Fitton, Joseph L. Marcum, Stephen S. Marcum, Stanley N. Pontius and
William L. Woodall. Each Audit Committee member attended all of the meetings in
1998 except Mr. Brown, who attended two meetings. The Audit Committee's primary
function is to meet with the independent auditors for the Company and to review
the Company's internal and independent auditing and financial controls.
The Executive Compensation Committee held one meeting during 1998. The
members of the Executive Compensation Committee are Jack E. Brown, Vaden Fitton,
Stephen S. Marcum and Stanley N. Pontius. All members of the Executive
Compensation Committee attended the meeting in 1998.
83
<PAGE> 9
The Executive Compensation Committee administers the Company stock option plans
and carries out the responsibilities described in the Executive Compensation
Committee Report in this Proxy Statement.
The Nominating Committee did not meet during 1998. The members of the
Nominating Committee are Jack E. Brown, Wayne Embry, Vaden Fitton, Joseph L.
Marcum, Stephen S. Marcum, Stanley N. Pontius and Howard L. Sloneker III. The
Nominating Committee's responsibilities include the selection of potential
candidates for director and the recommendation of candidates to the Board.
The Nominating Committee will consider nominees for director recommended
by shareholders for the 2000 Annual Meeting of Shareholders provided that the
names of such nominees are submitted not later than November 18, 1999, to Howard
L. Sloneker III, Secretary, 136 North Third Street, Hamilton, Ohio 45025.
DIRECTORS' FEES AND COMPENSATION
Each director receives $25,000 for services as a director of the Company.
Each non-employee director of the Company also receives $1,500 per meeting for
attending meetings of the Board of Directors. Members of the Audit Committee
also receive $5,000 each for serving on that committee. In addition, members of
the Executive Compensation Committee receive $300 per meeting for each meeting
attended. Joseph L. Marcum was paid an additional $65,000 during 1998 as
compensation for serving as the Chairman of the Board.
On May 27, 1998, Wayne Embry, Stephen S. Marcum, Stanley N. Pontius and
William L. Woodall, each of whom is a non-employee director of the Company, were
granted a non-qualified stock option (an "NQSO") to purchase 3,000 common shares
of the Company at an exercise price of $42.25 per share, the closing market
price of the common shares on the date of grant. Any individual who becomes or
is re-elected a non-employee director is automatically granted an NQSO to
purchase 3,000 common shares effective on the third business day following the
first meeting of the Board of Directors after his/her election or appointment to
the Board. The exercise price of each NQSO granted to a non-employee director is
equal to the fair market value of the common shares on the date of grant. NQSOs
granted to non-employee directors have terms of ten years (subject to earlier
termination in certain cases) and may not be exercised during the six months
following their date of grant.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents information concerning compensation provided
by the Company to its Chief Executive Officer and to each of the Company's four
most highly compensated executive officers, other than the Chief Executive
Officer, for services rendered in all capacities for each of the Company's last
three completed fiscal years:
84
<PAGE> 10
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------------------------- -------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING DIVIDEND
NAME AND SALARY BONUS COMPENSATION STOCK OPTIONS/ PAYMENT
PRINCIPAL POSITION YEAR ($)(1) ($) ($)(2)(3) AWARDS($)(4) SARS(#) RIGHTS(#)(5)
------------------ ---- ------ --- --------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lauren N. Patch 1998 530,000 32,124 60,601 60,722 30,000 30,000
President and Chief 1997 530,000 0 70,898 98,025 30,000 30,000
Executive Officer 1996 529,560 0 47,881 57,709 30,000 30,000
Barry S. Porter 1998 267,528 13,700 29,051 25,798 10,000 10,000
Chief Financial 1997 258,000 0 32,463 40,165 10,000 10,000
Officer and Treasurer 1996 248,604 0 22,484 24,956 10,000 10,000
Michael L. Evans 1998 220,224 6,867 17,390 11,965 10,000 10,000
Senior Vice President 1997 213,750 0 11,083 6,694 10,000 10,000
1996 199,500 0 19,051 18,686 10,000 10,000
Howard L. Sloneker III 1998 216,838 10,756 22,563 19,186 10,000 10,000
Senior Vice President 1997 209,500 0 23,488 27,760 10,000 10,000
1996 197,698 0 16,603 16,335 10,000 10,000
Coy Leonard, Jr. 1998 170,994 8,722 15,714 15,170 3,000 3,000
Senior Vice President 1997 158,821 0 14,312 18,163 3,000 3,000
1996 132,352 0 7,952 9,446 3,000 3,000
</TABLE>
(1) Includes annual directors' fees for Messrs. Patch and Sloneker.
(2) Includes for Messrs. Patch, Porter, Evans, Sloneker and Leonard for 1998
the amounts of $4,800, $4,800, $4,800, $4,800 and $1,600, respectively,
contributed by the Company under the Company's Employee Savings Plan. Also
includes for Messrs. Patch, Porter, Evans, Sloneker and Leonard for 1998
the amounts of $10,350, $3,226, $1,549, $955 and $110, respectively,
contributed by the Company under the Company's Supplemental Executive
Savings Plan.
(3) Includes for Messrs. Patch, Porter, Evans, Sloneker and Leonard for 1998,
the amounts of $45,451, $21,025, $11,041, $16,808 and $14,004,
respectively, for income taxes incurred as a result of the grant of
restricted shares described in note (4) below. These amounts were paid in
1999.
(4) The aggregate values of all outstanding restricted stock awards at the end
of the fiscal year 1998 were $143,866, $60,256, $24,547, $40,322 and
$25,412 for Messrs. Patch, Porter, Evans, Sloneker and Leonard,
respectively. The number of the restricted stock awards held by Messrs.
Patch, Porter, Evans, Sloneker and Leonard at the end of the fiscal year
1998 was 3,493, 1,463, 596, 979 and 617, respectively. Such restricted
common shares vest on the third anniversary of the date of the grant so
long as the executive officer is an employee on such date (with earlier
vesting occurring on retirement, death or disability or termination of
employment following a change of control). During the restriction period,
the executive officer will receive all dividends paid on the shares.
(5) Dividend payment rights were granted to the named executive officers in
1997, 1998 and 1999. These rights entitle the executive officer on the
April 15th following the third anniversary of the grant date to receive,
for each dividend payment right, an amount in cash equal to the aggregate
amount of dividends that the Company has paid on each common share from
the date on which such right becomes effective through the payout date
subject to certain restrictions.
85
<PAGE> 11
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grant of stock
options during the last fiscal year to each of the executive officers of the
Company named in the Summary Compensation Table. No stock appreciation rights
were granted during the last fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
NUMBER OF GRANTED PRICE APPRECIATION FOR
SHARES TO OPTION TERM(2)
UNDERLYING EMPLOYEES EXERCISE ----------------------
OPTIONS IN FISCAL PRICE EXPIRATION ($) ($)
NAME GRANTED # (1) YEAR ($/SH) DATE 5% 10%
---- ------------- --------- -------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Lauren N. Patch 30,000 24.39 46.9375 02-19-08 885,562 2,244,189
Barry S. Porter 10,000 8.13 46.9375 02-19-08 295,187 748,063
Michael L. Evans 10,000 8.13 46.9375 02-19-08 295,187 748,063
Howard L. Sloneker III 10,000 8.13 46.9375 02-19-08 295,187 748,063
Coy Leonard, Jr. 3,000 2.43 46.9375 02-19-08 88,556 224,419
</TABLE>
(1) All reported stock options were granted pursuant to the Ohio Casualty
Corporation 1993 Stock Incentive Program at the fair market value of the
underlying option shares on the date of grant, become exercisable as to
one-third of the option shares on each of the first three anniversaries of
the date of grant and have a term of ten years. In the event of a change
in control of the Company, the stock options would become exercisable in
full. Stock options reported consist of incentive stock options and
non-qualified stock options.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% annual appreciation rates set by the Securities and
Exchange Commission for illustrative purposes, and, therefore, are not
intended to forecast future financial performance or possible future
appreciation in the price of the Company's common shares. Shareholders are
therefore cautioned against drawing any conclusions from the appreciation
data shown, aside from the fact that optionees will only realize value
from the option grants shown when the price of the Company's common shares
appreciates, which benefits all shareholders commensurately.
OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth information concerning the exercise of
stock options during the last fiscal year by each of the executive officers of
the Company named in the Summary Compensation Table and the fiscal year-end
value of unexercised stock options and SARs held by such executive officers:
86
<PAGE> 12
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
-------------------------------------------------
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- -------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ----------- ----------- ------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Lauren N. Patch 0 0 30,000 60,000 121,860 0
Barry S. Porter 0 0 9,999 20,001 40,616 0
Michael L. Evans 0 0 9,999 20,001 40,616 0
Howard L. Sloneker III 0 0 6,666 20,001 19,994 0
Coy Leonard, Jr. 0 0 3,000 6,000 12,186 0
</TABLE>
(1) "Value of Unexercised In-the-Money Options at Fiscal Year-End" is based
upon the fair market value of the Company's common shares on December
31, 1998 ($41.187), less the exercise price of in-the-money options on
December 31, 1998.
PENSION PLANS
The following table sets forth the estimated annual benefits payable under the
Employees Retirement Plan and The Ohio Casualty Insurance Company Benefit
Equalization Plan (the "Benefit Equalization Plan") to participants in such
plans, including the executive officers named in the Summary Compensation Table,
upon retirement in specified compensation and years of service classifications:
PENSION PLANS TABLE
<TABLE>
<CAPTION>
15 20 25 30 35 40 45
ANNUAL EARNINGS YEARS YEARS YEARS YEARS YEARS YEARS YEARS
--------------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
$125,000 $27,802 $37,070 $46,337 $55,604 $64,872 $74,139 $83,407
175,000 39,802 53,070 66,337 79,604 92,872 106,139 119,407
225,000 51,802 69,070 86,337 103,604 120,872 138,139 155,407
275,000 63,802 85,070 106,337 127,604 148,872 170,139 191,407
325,000 75,802 101,070 126,337 151,604 176.872 202,139 227,407
375,000 87,802 117,070 146,337 175,604 204,872 234,139 263,407
400,000 93,802 125,070 156,337 187,604 218,872 250,139 281,407
425,000 99,802 133,070 166,337 199,604 232,872 266,139 299,407
450,000 105,802 141,070 176,337 211,604 246,872 282,139 317,407
475,000 111,802 149,070 186,337 223,604 260,872 298,139 335,407
500,000 117,802 157,070 196,337 235,604 274,872 314,139 353,407
525,000 123,802 165,070 206,337 247,604 288,872 330,139 371,407
550,000 129,802 173,070 216,337 259,604 302,872 346,139 389,407
600,000 141,802 189,070 236,337 283,604 330,872 378,139 425,407
</TABLE>
Retirement benefits under the Company's Employees Retirement Plan, a
defined benefit plan qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), are generally payable to full-time and regular
part-time salaried employees whose participation in the plan has vested
(currently requiring the completion of five years of service) upon retirement at
age 65 or in reduced amounts upon retirement prior to age 65 if the participant
has ten years of vested service. A
87
<PAGE> 13
retiree's benefit amount is based upon his or her credited years of service and
average annual compensation (salary) for the five consecutive calendar years of
highest salary during the last ten years of service immediately prior to age 65
or, if greater, the average annual compensation paid during the 60 consecutive
month period immediately preceding retirement or other termination of
employment. Such retirement benefits are calculated considering the retiree's
Social Security-covered compensation. Benefits figures shown in the table above
are computed on the assumption that participants retire at age 65 and are
entitled to a single life annuity.
Section 401(a)(17) of the Code limits compensation in excess of
$160,000 from being taken into account in determining benefits payable under a
qualified pension plan. As a result, the Benefit Equalization Plan was adopted
for those employees who are adversely affected by these provisions of the Code.
The Benefit Equalization Plan provides for payment of benefits that would have
been payable under the Employees Retirement Plan but for the limitation on
compensation imposed by the Code. Upon retirement, participants receive the
actuarial equivalent present value of the benefit payable under the Benefit
Equalization Plan in a lump sum.
At December 31, 1998, credited years of service and average annual
earnings for purposes of the Employees Retirement Plan and the Benefit
Equalization Plan for the executive officers named in the Summary Compensation
Table were: Lauren N. Patch, 22.5 years ($462,681); Barry S. Porter, 24.5 years
($244,525); Michael L. Evans, 23.5 years ($192,894); Howard L. Sloneker III,
16.75 years ($168,628); and Coy Leonard, Jr., 5.4 years ($138,398). The
compensation covered by the Employees Retirement Plan and the Benefit
Equalization Plan is the amount shown in the Summary Compensation Table as
salary, less any directors' fees.
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
EXECUTIVE COMPENSATION POLICIES
The Company's executive compensation programs are designed to attract
and retain quality talent, and to motivate the Company's key employees to
maximize shareholder returns by achieving both the short-term and long-term
goals of the Company. The Executive Compensation Committee of the Board of
Directors (the "Committee"), consisting entirely of non-employee directors,
approves all of the policies under which compensation is paid or awarded to the
Company's executive officers.
The Committee believes that the Company's executive compensation
opportunities, including those for the Company's Chief Executive Officer
("CEO"), should create incentives for superior performance and consequences for
below-target performance. In 1996, the Company's executive compensation program
was re-designed to link each executive officer's compensation directly to
individual and Company performance. A significant portion of each executive
officer's total compensation is now variable and dependent upon the attainment
of annual objectives and long-term shareholder returns. The compensation
structure provides a portion of each executive officer's compensation in stock
thereby creating a mutuality of interest between executive officers and
shareholders.
88
<PAGE> 14
The Committee annually reviews the short-term and long-term
compensation levels for the CEO and other senior executives to consider and
implement any changes necessary to achieve its on-going objectives. In
determining the comparable compensation levels discussed further below, the
Committee considers information from surveys of compensation practices within
the property and casualty industry which surveys may include some or all of the
companies included in the Performance Graph on page 15.
SPECIFIC COMPENSATION PROGRAMS
There are three components to the Company's "pay for performance"
system established for its officers named in the Summary Compensation Table on
page 8 and 23 additional key executives (collectively called the "executive
officers"): (i) base salary established on an annual basis, (ii) awards under
the Annual Incentive Plan and (iii) awards under the Long-Term Incentive Plan.
Each component of the Company's executive compensation program aims to
accomplish a different purpose.
BASE SALARY. Base salary levels for the CEO and the other executive
officers of the Company are based on individual performance, the
responsibilities associated with an individual's position in the Company, skill
level and experience and potential future contribution, all of which are
reviewed annually and benchmarked against similar positions within the survey
companies. The base salary of the CEO is established by the Committee. The base
salaries of the other executive officers are established by the CEO on an annual
basis. Salary adjustments are based on individual performance, as determined in
accordance with the Company's executive performance evaluation system, and
reflective of competitive conditions existing at the time.
ANNUAL INCENTIVE PLAN AWARDS: The potential award opportunities for
each of the executive officers who participates in the Annual Incentive Plan are
determined at the beginning of each fiscal year. Potential award opportunities
for a fiscal year, which are expressed as a percentage of a participant's salary
for that fiscal year, are based on the participant's level within the
organization, with higher percentages being assigned to executive officers who
hold more senior positions. Actual awards are based on a combination of
individual and team performance. This balance supports the accomplishment of
overall objectives and rewards individual contributions by the executives. Team
performance, which accounts for up to 50% of the total award potential, is based
on the Company's actual performance against pre-determined targets for return on
equity and growth in premiums for the year. A performance threshold for each
measure ensures that no awards are made for substandard accomplishments. If the
performance threshold is achieved, each of the eligible executive officers
receives a team award, the amount of which depends on the extent to which the
Company's performance exceeds the threshold level and the potential award
opportunity assigned to that participant, as described above. The Executive
Compensation Committee determines, based on a recommendation from the CEO, the
level of funding for the individual award pool based on the performance achieved
by the management team on a number of criteria such as the achievement of
pre-established Company and individual goals. The pool is allocated among the
participants on the basis of their performance evaluations as determined by the
CEO (the CEO's performance evaluation is conducted by the Committee).
89
<PAGE> 15
Currently, awards under the Annual Incentive Plan are paid in cash
(25%) and restricted shares of Company stock (75%). Such restricted shares may
not be transferred by the participant for a three-year period following the date
of the grant, unless the participant dies or his employment is terminated as a
result of disability or retirement or following a change in control of the
Company. If the employment of the participant terminates for any other reason
during such three year period, the restricted shares will be forfeited to the
Company. Awards under the Annual Incentive Plan for the 1998 fiscal year were
paid in the form of cash (25%) and restricted common shares (75%) issued in
February of 1999.
LONG-TERM INCENTIVE PLAN Awards under the Long-Term Incentive Plan
consist of incentive stock options, non-qualified stock options, or a
combination of both, and dividend payment rights, as described below. Stock
options are granted at market value on the date of grant and increase in value
only to the extent of appreciation in the Company's common shares. Stock options
expire at the end of ten years from the date of grant. Stock option grants are
generally made at the beginning of the fiscal year, although grants may be made
at different times to participants who are promoted or newly hired. The number
of stock options to be granted is based on the participant's salary level and
position. While it is the intention of the Committee to make stock option grants
annually, the Committee has reserved the right to eliminate stock option awards
or make other modifications in the Long-Term Incentive Plan.
DIVIDEND PAYMENT RIGHTS In addition to stock options, the participants
in the Long-Term Incentive Plan may be granted dividend payment rights.
One-third of these rights become effective on each anniversary of the grant
date. These rights entitle the holder on the April 15th following the third
anniversary of the grant date (or earlier if the holder dies, becomes disabled
or retires or is terminated from employment after a change in control of the
Company) to receive, for each dividend payment right, an amount in cash equal to
the aggregate amount of dividends that the Company has paid on each common share
from the date on which the dividend payment right becomes effective through the
payout date. Unless the employment of the holder of a dividend payment right
terminates as a result of death, disability, retirement at normal retirement
age, or following a change in control, the holder forfeits the right if his or
her employment terminates prior to the scheduled payout date. The employees to
whom stock options and dividend payment rights are to be awarded are determined
annually by the Committee for the executive officers, including the CEO, and by
the CEO for all other officers.
The Company's Annual Incentive Plan and its Long-Term Incentive Plan
are designed to provide participants with the opportunity to receive total
compensation targeted at the 75th percentile of salaries for similar positions
among the survey companies.
Section 162(m) of the Code generally limits the corporate tax deduction
for the compensation paid to executive officers named in the Summary
Compensation Table in the proxy statement to $1 million, unless certain
requirements for qualifying compensation as "performance based" are met. The
compensation paid to each of the executive officers of the Company in 1998 was
less than the threshold for deductibility under Section 162(m).
90
<PAGE> 16
BASES FOR CHIEF EXECUTIVE OFFICER COMPENSATION
The Committee evaluates the performance of the CEO at least annually.
In 1998, Mr. Patch received a base salary of $505,000. Mr. Patch also received
an award under the Annual Incentive Plan for service in 1998 of a total of 1,497
restricted common shares of the Company, which were issued to him in February of
1999 and which will be forfeited to the Company if he leaves the Company during
the three-year period following the date of issue. As described in detail above,
the Committee's determination of the number of restricted common shares awarded
to Mr. Patch (and to all of the other executive officers) under the Annual
Incentive Plan was based on the Company's 1998 total return performance as
measured against established return on equity and growth in premium targets. The
Company also granted to Mr. Patch in early 1998, pursuant to the Long-Term
Incentive Plan, a non-qualified stock option for 30,000 shares. The number of
stock options granted to Mr. Patch was based on his salary level and position
with the Company. As previously indicated, in establishing the compensation of
Mr. Patch and the other executive officers, the goal of the Committee has been
to create a total compensation opportunity through base salary and awards under
the Annual Incentive Plan and the Long-Term Incentive Plan which, if realized as
a result of the Company's performance, would result in total compensation being
at the 75th percentile for similar positions at the survey companies.
The foregoing report on executive compensation is provided by the
following directors, who constituted the Executive Compensation Committee during
1998:
Jack E. Brown Vaden Fitton Stephen S. Marcum Stanley N. Pontius
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The directors of the Company who served as members of the Company's
Executive Compensation Committee during 1998 were Jack E. Brown, Vaden Fitton,
Stephen S. Marcum and Stanley N. Pontius. Mr. Fitton, Mr. Marcum and Mr. Porter,
the Company's Chief Financial Officer and Treasurer, also served as members of
the Executive Compensation Committee of First Financial Bancorp during 1998,
whose Chief Executive Officer, Stanley N. Pontius, is a member of the Executive
Compensation Committee of the Company.
As indicated in the Executive Compensation Committee Report on
Executive Compensation, Lauren N. Patch, the Company's President and Chief
Executive Officer, participates in decision-making regarding the compensation of
certain executive officers named in the Summary Compensation Table. Mr. Patch is
not a member of the Executive Compensation Committee.
91
<PAGE> 17
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The following graph compares the five-year cumulative total shareholder
return, including reinvested dividends, of the Company with the Dow Jones Equity
Market Index and the Dow Jones Insurance Index for Property and Casualty
Companies(1):
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
DJ EQUITY MARKET INDEX 100.00 100.73 138.69 170.63 228.57 294.05
DJ INSURANCE P&C 100.00 105.21 147.38 177.23 261.10 281.94
OHIO CASUALTY CORP 100.00 93.11 133.54 128.02 167.12 160.39
</TABLE>
(1) The Dow Jones Insurance Index for Property and Casualty Companies is
comprised of 11 companies that are traditionally considered as a peer
group of property and casualty insurance companies within the United
States. The companies making up the 1998 Index are Allstate Corp.;
American International Group Inc.; Chubb Corp.; Cincinnati Financial
Corp.; Loews Corp.; MBIA Inc.; Mercury General Corp.; Old Republic
International Corp.; Progressive Corp.; SAFECO Corp.; and The St. Paul
Cos.
ANNUAL REPORT
The Company's Annual Report for the fiscal year ended December 31,
1998, accompanies this Proxy Statement.
92
<PAGE> 18
INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers, LLP served as independent public accountants of
the Company for the fiscal year ended December 31, 1998, and the Board of
Directors, based on the recommendation of the Audit Committee, has selected that
firm to serve as independent public accountants for the Company for the fiscal
year ending December 31, 1999. A representative of PricewaterhouseCoopers will
be present at the Annual Meeting with the opportunity to make a statement and/or
respond to appropriate questions from the shareholders.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Proposals of shareholders intended to be presented at the 2000 Annual
Meeting of Shareholders scheduled to be held on April 19, 2000, must be received
by the Company no later than November 18, 1999 for inclusion in the Company's
proxy statement and proxy relating to that meeting. Upon receipt of any such
proposal, the Company will determine whether or not to include such proposal in
the proxy statement and proxy in accordance with applicable rules and
regulations promulgated by the Securities and Exchange Commission.
In order for a shareholder to nominate a candidate for director at a
meeting of shareholders, under the Company's Code of Regulations, timely notice
of the nomination must be received by the Company in advance of the meeting.
Ordinarily, in the case of an annual meeting, such notice of a proposed
nomination must be received by the Company on or before the later of (1) the
first day of February immediately preceding such annual meeting or (2) the
sixtieth day prior to the first anniversary of the most recent annual meeting of
shareholders. The shareholder filing the notice of nomination must describe
various matters regarding the proposed nominee, including such information as
name, address, occupation and shares of the Company held. These requirements are
separate from the requirements a shareholder must meet in order to have a
proposed nominee considered by the Nominating Committee of the Company's Board
of Directors for nomination by the Board of Directors and inclusion as a nominee
in the Company's proxy statement.
The Securities and Exchange Commission has promulgated rules relating
to the exercise of discretionary voting authority pursuant to proxies solicited
by the Company's Board of Directors. If a shareholder intends to present a
proposal at the 2000 Annual Meeting of Shareholders and does not notify the
Company of such proposal by February 3, 2000, or if a shareholder intends to
nominate a director at the 2000 Annual Meeting and does not comply with the
notification requirements described in the preceding paragraph, the proxies
solicited by the Company's Board of Directors for use at the Annual Meeting may
be voted on such proposal or such nominee, as the case may be, without
discussion of the proposal or nominee in the Proxy Statement for that Annual
Meeting.
In each case, written notice must be given to the Secretary of the
Company, whose name and address are: Howard L. Sloneker III, Secretary, Ohio
Casualty Corporation, 136 North Third Street, Hamilton, Ohio 45025.
93
<PAGE> 19
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and
Exchange Commission (SEC). Officers, directors and greater than ten percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Forms 3, 4 and 5 they file.
Based on the Company's review of the copies of such forms it has
received, the Company believes that all its officers, directors, and greater
than ten percent beneficial owners complied with all filing requirements
applicable to them with respect to transactions during fiscal 1998.
OTHER MATTERS
The Company files annually with the Securities and Exchange Commission
an Annual Report on Form 10-K. This report includes financial statements and
financial statement schedules.
A SHAREHOLDER OF THE COMPANY MAY OBTAIN A COPY OF THE ANNUAL REPORT ON
FORM 10-K, INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1998, WITHOUT CHARGE BY SUBMITTING A WRITTEN
REQUEST TO THE FOLLOWING ADDRESS:
OHIO CASUALTY CORPORATION
Attention: Barry S. Porter
Chief Financial Officer/Treasurer
136 North Third Street
Hamilton, Ohio 45025
Management and the Board of Directors of the Company know of no
business to be brought before the Annual Meeting other than as set forth in this
Proxy Statement. However, if any matters other than those referred to in this
Proxy Statement should properly come before the Annual Meeting, it is the
intention of the persons named in the enclosed proxy to vote the common shares
represented by such proxy on such matters in accordance with their best
judgment.
94
<PAGE> 20
EXPENSES OF SOLICITATION
The expense of proxy solicitation will be borne by the Company. Proxies
will be solicited by mail and may be solicited, for no additional compensation,
by officers, directors or employees of the Company or its subsidiaries, by
telephone, telegraph or in person. Brokerage houses and other custodians,
nominees and fiduciaries may be requested to forward soliciting material to the
beneficial owners of common shares of the Company, and will be reimbursed for
their related expenses. In addition, the Company has retained Morrow & Co.,
Inc., a professional soliciting organization, to assist in soliciting proxies
from brokerage houses, custodians and nominees. The fees and expenses of that
firm in connection with such solicitation are not expected to exceed $12,000.
By Order of the Board of Directors,
Howard L. Sloneker III, Secretary
March 18, 1999
95
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Ohio Casualty Corporation on Form S-3 (File Nos. 333-70761 and 333-29483) and
Form S-8 (File Nos. 333-69895 and 33-67962) of our reports dated February 4,
1999, on our audits of the consolidated financial statements and financial
statement schedules of Ohio Casualty Corporation as of December 31, 1998, 1997
and 1996 and for the year then ended, which reports are included in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 2,678,767,455
<DEBT-CARRYING-VALUE> 2,678,767,455
<DEBT-MARKET-VALUE> 2,678,767,455
<EQUITIES> 924,906,199
<MORTGAGE> 0
<REAL-ESTATE> 37,937,905
<TOTAL-INVEST> 3,641,611,559
<CASH> 45,138,943
<RECOVER-REINSURE> 186,859,940
<DEFERRED-ACQUISITION> 176,605,664
<TOTAL-ASSETS> 4,802,263,877
<POLICY-LOSSES> 196,938,901
<UNEARNED-PREMIUMS> 668,550,288
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 25,517,528
<NOTES-PAYABLE> 265,000,000
5,850,484
0
<COMMON> 0
<OTHER-SE> 1,315,128,975
<TOTAL-LIABILITY-AND-EQUITY> 4,802,263,877
1,268,824,036
<INVESTMENT-INCOME> 169,024,082
<INVESTMENT-GAINS> 14,410,881
<OTHER-INCOME> 0
<BENEFITS> 920,274,080
<UNDERWRITING-AMORTIZATION> 316,515,539
<UNDERWRITING-OTHER> 112,470,045
<INCOME-PRETAX> 102,999,336
<INCOME-TAX> 19,988,907
<INCOME-CONTINUING> 83,010,428
<DISCONTINUED> 1,916,517
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,926,945
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.58
<RESERVE-OPEN> 1,421,704,210
<PROVISION-CURRENT> 475,823,162
<PROVISION-PRIOR> 1,389,799,425
<PAYMENTS-CURRENT> 513,292,073
<PAYMENTS-PRIOR> 449,802,296
<RESERVE-CLOSE> 1,865,622,587
<CUMULATIVE-DEFICIENCY> 417,897,511
</TABLE>
<PAGE> 1
OHIO CASUALTY GROUP Exhibit 28
SCHEDULE P-PART 1 - SUMMARY
<TABLE>
<CAPTION>
PREMIUMS EARNED LOSS PAYMENTS
(1) (2) (3) (4) (5) (6)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 16,173,485 9,119,653
1989 1,393,527,230 29,350,534 1,364,176,696 797,552,297 15,424,545
1990 1,462,962,148 24,961,247 1,438,000,901 859,124,775 10,921,310
1991 1,495,615,389 26,560,767 1,469,054,622 897,763,987 36,621,720
1992 1,550,273,214 32,683,713 1,517,589,501 917,421,951 24,834,805
1993 1,423,123,140 43,696,082 1,379,427,058 820,224,976 8,123,780
1994 1,342,790,625 45,133,158 1,297,657,467 784,813,020 4,550,440
1995 1,305,588,605 41,012,065 1,264,576,540 685,672,605 -1,589,973
1996 1,253,886,669 30,533,833 1,223,352,836 687,458,390 -11,868,310
1997 1,236,434,526 32,169,380 1,204,265,146 528,629,625 -25,942,202
1998 1,321,641,601 53,814,016 1,267,827,585 418,206,780 -37,472,766
TOTAL XXXX XXXX XXXX 7,413,041,893 32,723,003
</TABLE>
<TABLE>
<CAPTION>
SALVAGE &
SUBROGATION
ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED
(1) (7) (8) (9) (10) (11)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 6,151,342 1,098,023 549,054 -188,404 836,102
1989 68,534,419 731,016 65,165,741 -15,222 34,888,751
1990 77,652,581 766,464 67,441,224 -11,775 34,870,878
1991 74,759,936 2,032,553 67,373,610 -37,105 34,311,791
1992 73,668,813 1,085,561 73,166,000 -35,041 35,334,605
1993 63,347,188 425,123 66,315,395 -114,426 28,635,507
1994 53,255,826 -779,490 70,194,665 -326,974 28,555,095
1995 39,977,558 -1,662,729 64,210,501 -700,728 27,022,759
1996 30,617,305 -3,088,478 69,584,998 -1,610,736 25,347,505
1997 12,130,316 -3,969,417 57,587,707 -2,883,083 23,053,561
1998 -1,304,515 -2,794,878 52,698,047 -3,424,117 11,596,967
TOTAL 498,790,770 -6,156,252 654,286,942 -9,347,611 284,453,523
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CLAIMS
TOTAL NET PAID REPORTED
(1) (12) (13)
ACC/YR DIR & ASSUMED
<S> <C> <C>
PRIOR 12,844,609 XXXX
1989 915,112,118 XXXX
1990 992,542,582 XXXX
1991 1,001,280,365 XXXX
1992 1,038,371,438 XXXX
1993 941,453,082 XXXX
1994 904,819,535 XXXX
1995 793,814,096 XXXX
1996 804,228,217 XXXX
1997 631,142,350 XXXX
1998 513,292,073 XXXX
TOTAL 8,548,900,465 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS
(1) (14) (15) (16) (17) (18)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 104,691,883 37,787,926 22,232,210 418,943 4,550,154
1989 22,660,564 4,256,391 5,147,714 175,050 1,483,205
1990 25,660,455 6,821,926 8,778,309 260,533 1,906,004
1991 20,876,086 690,148 10,825,731 253,179 2,680,352
1992 26,123,905 1,620,418 12,234,273 241,979 3,396,467
1993 45,230,670 14,058,243 16,474,200 566,800 4,812,773
1994 45,003,647 5,095,389 16,208,560 1,002,561 6,594,755
1995 67,078,121 9,199,601 22,174,963 1,747,849 10,903,151
1996 97,303,597 14,437,904 39,065,207 4,025,418 17,388,194
1997 131,586,376 17,791,523 97,445,732 13,724,488 24,415,975
1998 218,120,132 21,303,087 236,062,308 34,443,446 30,672,478
TOTAL 804,335,438 133,062,556 486,649,207 56,860,245 108,803,509
</TABLE>
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES
CASE BASIS BULK + IBNR UNPAID
(1) (19) (20) (21) (22) (23)
ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 561,994 20,615,651 114,368 8,445,636 4,016,000
1989 166,967 3,764,691 35,094 1,193,668 126,596
1990 204,996 4,677,183 38,671 1,810,703 229,910
1991 262,117 6,689,724 72,297 1,673,740 46,914
1992 380,523 6,139,423 126,223 2,201,212 242,318
1993 515,949 6,883,200 231,674 2,939,038 166,382
1994 718,898 5,348,740 477,721 3,111,040 110,564
1995 1,218,488 8,707,648 910,330 4,945,841 259,600
1996 1,916,938 14,544,345 1,577,936 8,538,522 640,281
1997 2,859,966 19,816,248 2,272,733 15,274,091 1,791,471
1998 3,311,227 22,517,310 2,476,795 33,795,334 3,809,844
TOTAL 12,118,063 119,704,164 8,333,842 83,928,825 11,439,880
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & TOTAL NET NUMBER OF
(1) SUBROGATION LOSSES & CLAIMS
ACC/YR ANTICIPATED EXPENSES UNPAID OUTSTANDING
(24) (25) (26)
DIR & ASSUMED
<S> <C> <C> <C>
PRIOR 0 117,636,303 XXXX
1989 0 29,489,745 XXXX
1990 0 35,276,620 XXXX
1991 0 41,420,979 XXXX
1992 0 47,483,820 XXXX
1993 0 60,800,833 XXXX
1994 0 68,861,609 XXXX
1995 0 100,473,856 XXXX
1996 0 154,241,388 XXXX
1997 0 250,098,241 XXXX
1998 0 475,823,162 XXXX
TOTAL 0 1,381,606,557 XXXX
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE
(1) (27) (28) (29) (30) (31)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX
1989 965,502,300 20,900,437 944,601,863 69.3 71.2
1990 1,047,051,236 19,232,034 1,027,819,202 71.6 77.0
1991 1,082,643,167 39,941,823 1,042,701,344 72.4 150.4
1992 1,114,352,044 28,496,786 1,085,855,258 71.9 87.2
1993 1,026,227,440 23,973,525 1,002,253,916 72.1 54.9
1994 984,530,253 10,849,109 973,681,143 73.3 24.0
1995 903,670,389 9,382,436 894,287,952 69.2 22.9
1996 964,500,558 6,030,952 958,469,606 76.9 19.8
1997 886,886,071 5,645,480 881,240,592 71.7 17.5
1998 1,010,767,873 21,652,638 989,115,235 76.5 40.2
TOTAL XXXX XXXX XXXX XXXX XXXX
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT
(1) (32) (33) (34) (35) (36)
ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID
<S> <C> <C> <C> <C> <C>
PRIOR XXXX 0 0 XXXX 88,717,224
1989 69.2 0 0 0.0 23,376,837
1990 71.5 0 0 0.0 27,356,306
1991 71.0 0 0 0.0 30,758,490
1992 71.6 0 0 0.0 36,495,782
1993 72.7 0 0 0.0 47,079,828
1994 75.0 0 0 0.0 55,114,257
1995 70.7 0 0 0.0 78,305,635
1996 78.3 0 0 0.0 117,905,482
1997 73.2 0 0 0.0 197,516,096
1998 78.0 0 0 0.0 398,435,907
TOTAL XXXX 0 0 XXXX 1,101,061,844
</TABLE>
<TABLE>
<CAPTION>
NET BALANCE SHEET RESERVES
AFTER DISCOUNT
(1) (37)
ACC/YR LOSS EXPENSES
UNPAID
<S> <C>
PRIOR 28,919,079
1989 6,112,908
1990 7,920,314
1991 10,662,489
1992 10,988,038
1993 13,721,006
1994 13,747,352
1995 22,168,222
1996 36,335,906
1997 52,582,145
1998 77,387,255
TOTAL 280,544,713
</TABLE>
98
<PAGE> 2
OHIO CASUALTY GROUP
SCHEDULE P-PART 1A - HOMEOWNERS
<TABLE>
<CAPTION>
PREMIUMS EARNED LOSS PAYMENTS
(1) (2) (3) (4) (5) (6)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 67,468 0
1989 167,250,533 2,262,236 164,988,297 103,364,639 0
1990 172,691,271 2,320,885 170,370,386 114,504,433 378,204
1991 180,475,310 3,102,136 177,373,174 145,961,190 19,995,461
1992 187,626,381 3,099,967 184,526,414 138,453,118 6,593,491
1993 176,137,420 8,407,961 167,729,459 127,072,206 494,000
1994 167,093,737 9,016,379 158,077,358 136,082,199 91,905
1995 169,545,732 8,427,980 161,117,752 108,890,701 0
1996 170,607,856 4,977,843 165,630,013 153,126,180 31,267
1997 172,710,473 6,175,490 166,534,984 103,209,689 0
1998 184,421,391 6,621,418 177,799,973 100,930,521 0
TOTAL XXXX XXXX XXXX 1,231,662,344 27,584,327
</TABLE>
<TABLE>
<CAPTION>
SALVAGE &
SUBROGATION
ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED
(1) (7) (8) (9) (10) (11)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 50,383 0 1,990 0 6,108
1989 5,837,566 13 4,061,915 0 1,563,079
1990 5,787,343 179 4,578,527 0 1,893,434
1991 6,111,848 287,977 5,505,837 0 1,349,127
1992 7,119,820 618,218 9,469,920 0 1,738,895
1993 7,213,620 4,165 9,078,270 0 1,315,968
1994 7,322,545 595 10,846,833 0 1,709,812
1995 5,292,919 0 8,359,084 0 1,030,529
1996 6,448,538 0 12,193,490 0 996,372
1997 2,660,839 0 9,347,999 0 597,734
1998 62,866 0 10,062,660 0 242,411
TOTAL 53,908,288 911,148 83,506,526 0 12,443,469
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CLAIMS
TOTAL NET PAID REPORTED
(1) (12) (13)
ACC/YR DIR & ASSUMED
<S> <C> <C>
PRIOR 119,841 XXXX
1989 113,264,106 65,762
1990 124,491,920 65,037
1991 137,295,437 66,256
1992 147,831,150 67,902
1993 142,865,932 67,895
1994 154,159,077 72,556
1995 122,542,705 54,989
1996 171,736,941 73,234
1997 115,218,527 48,176
1998 111,056,046 51,494
TOTAL 1,340,581,682 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS
(1) (14) (15) (16) (17) (18)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 477,872 2,000 0 0 41,717
1989 154,164 0 0 0 38,674
1990 162,295 0 4,085 0 39,435
1991 138,744 11,632 0 0 39,302
1992 469,183 1 10,705 391 84,197
1993 1,184,020 5,000 545,389 783 170,269
1994 1,299,464 0 52,122 783 285,648
1995 2,007,989 3 194,210 4,698 596,687
1996 2,816,643 0 340,228 8,613 1,015,637
1997 7,105,124 5,000 1,392,833 47,370 1,650,410
1998 24,436,501 134,300 9,024,376 328,848 2,507,353
TOTAL 40,251,999 157,936 11,563,948 391,486 6,469,329
</TABLE>
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES
CASE BASIS BULK + IBNR UNPAID
(1) (19) (20) (21) (22) (23)
ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 140 12,019 358 6,092 39
1989 64 5,508 164 5,813 0
1990 87 10,847 224 6,554 0
1991 145 12,519 373 4,233 225
1992 262 22,535 670 14,624 14
1993 640 482,987 1,640 175,987 125
1994 1,308 137,755 3,355 46,512 28
1995 2,732 289,061 7,008 79,821 170
1996 4,650 486,142 11,928 117,056 312
1997 7,557 730,681 19,383 271,667 1,814
1998 11,481 1,015,512 29,448 992,365 14,518
TOTAL 29,066 3,205,566 74,551 1,720,723 17,246
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & TOTAL NET NUMBER OF
SUBROGATION LOSSES & CLAIMS
ANTICIPATED EXPENSES UNPAID OUTSTANDING
(1) (24) (25) (26)
ACC/YR DIR & ASSUMED
<S> <C> <C> <C>
PRIOR 0 535,163 11
1989 0 203,931 8
1990 0 222,906 11
1991 0 182,423 13
1992 0 599,905 16
1993 0 2,550,464 34
1994 0 1,816,028 70
1995 0 3,153,156 104
1996 0 4,750,203 235
1997 0 11,069,591 620
1998 0 37,457,511 5,881
TOTAL 0 62,541,280 7,003
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE
(1) (27) (28) (29) (30) (31)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX
1989 113,468,279 241 113,468,038 67.8 0.0
1990 125,093,520 378,694 124,714,825 72.4 16.3
1991 157,773,674 20,295,813 137,477,861 87.4 654.3
1992 155,644,102 7,213,047 148,431,054 83.0 232.7
1993 145,922,748 506,353 145,416,395 82.8 6.0
1994 156,073,079 97,974 155,975,104 93.4 1.1
1995 125,710,472 14,611 125,695,861 74.1 0.2
1996 176,543,914 56,771 176,487,143 103.5 1.1
1997 126,369,243 81,124 126,288,119 73.2 1.3
1998 149,032,153 518,595 148,513,558 80.8 7.8
TOTAL XXXX XXXX XXXX XXXX XXXX
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT
(1) (32) (33) (34) (35) (36)
ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID
<S> <C> <C> <C> <C> <C>
PRIOR XXXX 0 0 XXXX 475,872
1989 68.8 0 0 0.0 154,164
1990 73.2 0 0 0.0 166,380
1991 77.5 0 0 0.0 127,112
1992 80.4 0 0 0.0 479,495
1993 86.7 0 0 0.0 1,723,626
1994 98.7 0 0 0.0 1,350,803
1995 78.0 0 0 0.0 2,197,498
1996 106.6 0 0 0.0 3,148,259
1997 75.8 0 0 0.0 8,445,587
1998 83.5 0 0 0.0 32,997,728
TOTAL XXXX 0 0 XXXX 51,266,525
</TABLE>
<TABLE>
<CAPTION>
NET BALANCE SHEET RESERVES
AFTER DISCOUNT
(1) (37)
ACC/YR LOSS EXPENSES
UNPAID
<S> <C>
PRIOR 59,291
1989 49,767
1990 56,526
1991 55,311
1992 120,409
1993 826,837
1994 465,224
1995 955,658
1996 1,601,944
1997 2,624,004
1998 4,459,783
TOTAL 11,274,755
</TABLE>
99
<PAGE> 3
OHIO CASUALTY GROUP
SCHEDULE P-PART 1B - PRIVATE PASSENGER AUTO
<TABLE>
<CAPTION>
PREMIUMS EARNED LOSS PAYMENTS
(1) (2) (3) (4) (5) (6)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 1,883,433 1,729,080
1989 318,461,609 7,648,858 310,812,750 239,774,149 3,138,448
1990 333,396,443 6,675,812 326,720,631 255,431,866 2,283,257
1991 339,450,775 6,390,994 333,059,781 245,162,411 2,096,752
1992 362,947,213 7,108,258 355,838,955 262,640,280 2,299,626
1993 334,285,756 12,196,407 322,089,349 247,830,720 3,418,530
1994 320,149,419 12,617,186 307,532,233 229,202,180 -594,389
1995 305,098,094 7,698,429 297,399,665 206,334,129 -6,087,691
1996 290,090,509 7,674,484 282,416,025 166,903,090 -17,008,639
1997 286,421,257 9,267,645 277,153,612 116,746,799 -28,483,962
1998 312,015,418 19,374,078 292,641,340 51,126,525 -33,730,800
TOTAL XXXX XXXX XXXX 2,023,035,582 -70,939,788
<CAPTION>
SALVAGE &
SUBROGATION
ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED
(1) (7) (8) (9) (10) (11)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 89,924 16,944 -30,514 -188,404 109,845
1989 12,725,299 -88,045 24,200,959 -15,222 5,812,547
1990 13,906,394 -27,545 24,773,067 -11,775 5,884,787
1991 14,358,647 -93,309 22,909,716 -37,105 4,878,591
1992 16,522,577 -116,396 22,770,834 -35,041 4,914,989
1993 15,496,887 -292,329 21,249,766 -114,426 5,557,753
1994 13,455,490 -899,654 21,817,646 -326,974 4,548,201
1995 10,335,866 -1,747,531 20,627,918 -700,728 4,398,141
1996 5,254,937 -3,076,218 20,960,938 -1,610,736 3,300,086
1997 -119,712 -4,046,988 15,460,709 -2,883,083 2,560,412
1998 -2,200,973 -2,724,212 10,572,830 -3,444,913 1,273,060
TOTAL 99,825,337 -13,095,285 205,313,870 -9,368,406 43,238,413
<CAPTION>
NUMBER OF
CLAIMS
TOTAL NET PAID REPORTED
(1) (12) (13)
ACC/YR DIR & ASSUMED
<S> <C> <C>
PRIOR 385,222 XXXX
1989 273,665,226 64,144
1990 291,867,391 61,389
1991 280,464,437 57,898
1992 299,785,502 60,080
1993 281,565,598 54,982
1994 266,296,332 53,275
1995 245,833,865 49,218
1996 214,814,557 48,013
1997 167,501,830 46,848
1998 99,398,307 48,344
TOTAL 2,421,578,268 XXXX
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS
(1) (14) (15) (16) (17) (18)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 15,088,996 11,734,451 1,475,491 401,667 547,828
1989 1,095,472 348,251 618,754 168,441 142,592
1990 849,879 268,458 880,535 239,705 154,642
1991 2,043,045 655,204 793,358 223,973 260,061
1992 4,054,424 1,129,332 705,685 198,059 494,873
1993 5,897,334 1,622,357 1,746,761 502,695 818,063
1994 14,111,817 5,038,496 3,015,153 918,649 1,488,289
1995 25,331,078 7,978,935 4,951,459 1,603,300 2,913,809
1996 46,904,292 14,033,134 11,009,402 3,730,583 5,020,500
1997 63,157,304 15,448,250 41,338,445 13,048,475 7,517,883
1998 96,615,649 18,162,545 104,397,282 31,648,370 8,032,861
TOTAL 275,149,290 76,419,413 170,932,326 52,683,917 27,391,401
<CAPTION>
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES
CASE BASIS BULK + IBNR UNPAID
(1) (19) (20) (21) (22) (23)
ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 195,823 373,916 104,520 1,207,964 3,267,317
1989 47,612 101,848 30,737 109,726 12,883
1990 50,684 108,591 32,639 112,176 18,334
1991 79,865 193,874 62,707 182,140 45,965
1992 161,266 356,039 109,353 378,153 228,296
1993 248,042 614,813 200,961 504,109 50,800
1994 399,325 1,194,498 423,478 937,326 106,796
1995 793,274 2,323,174 817,037 1,843,207 218,640
1996 1,350,792 4,024,411 1,424,606 3,785,592 613,251
1997 2,097,990 5,924,937 2,054,103 7,970,216 1,711,286
1998 2,254,648 6,313,364 2,181,241 16,381,950 3,708,153
TOTAL 7,679,320 21,529,465 7,441,382 33,412,560 9,981,721
<CAPTION>
SALVAGE & TOTAL NET NUMBER OF
SUBROGATION LOSSES & CLAIMS
(1) ANTICIPATED EXPENSES UNPAID OUTSTANDING
ACC/YR (24) (25) (26)
DIR & ASSUMED
<S> <C> <C> <C>
PRIOR 0 2,990,416 150
1989 0 1,460,468 23
1990 0 1,496,003 31
1991 0 2,404,765 42
1992 0 4,162,867 95
1993 0 6,956,226 181
1994 0 13,860,339 364
1995 0 25,951,542 763
1996 0 49,591,833 1,641
1997 0 91,548,682 3,545
1998 0 173,786,148 14,654
TOTAL 0 374,209,288 21,489
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE
(1) (27) (28) (29) (30) (31)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX
1989 278,768,799 3,643,105 275,125,695 87.5 47.6
1990 296,217,150 2,853,756 293,363,394 88.8 42.7
1991 285,903,253 3,034,051 282,869,202 84.2 47.5
1992 307,922,865 3,974,496 303,948,369 84.8 55.9
1993 294,158,454 5,636,630 288,521,824 88.0 46.2
1994 285,222,399 5,065,727 280,156,671 89.1 40.1
1995 274,660,641 2,875,235 271,785,406 90.0 37.3
1996 263,863,163 -543,227 264,406,390 91.0 -7.1
1997 257,996,582 -1,053,930 259,050,512 90.1 -11.4
1998 291,239,488 18,055,033 273,184,454 93.3 93.2
TOTAL XXXX XXXX XXXX XXXX XXXX
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT
(1) (32) (33) (34) (35) (36)
ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID
<S> <C> <C> <C> <C> <C>
PRIOR XXXX 0 0 XXXX 4,428,369
1989 88.5 0 0 0.0 1,197,534
1990 89.8 0 0 0.0 1,222,251
1991 84.9 0 0 0.0 1,957,226
1992 85.4 0 0 0.0 3,432,718
1993 89.6 0 0 0.0 5,519,044
1994 91.1 0 0 0.0 11,169,824
1995 91.4 0 0 0.0 20,700,302
1996 93.6 0 0 0.0 40,149,978
1997 93.5 0 0 0.0 75,999,023
1998 93.4 0 0 0.0 151,202,016
TOTAL XXXX 0 0 XXXX 316,978,286
<CAPTION>
NET BALANCE SHEET RESERVES
AFTER DISCOUNT
(37)
(1) LOSS EXPENSES
ACC/YR UNPAID
<S> <C>
PRIOR -1,437,953
1989 262,934
1990 273,752
1991 447,539
1992 730,149
1993 1,437,182
1994 2,690,515
1995 5,251,240
1996 9,441,855
1997 15,549,658
1998 22,584,132
TOTAL 57,231,002
</TABLE>
100
<PAGE> 4
OHIO CASUALTY GROUP
SCHEDULE P-PART 1C - COMMERCIAL AUTO
<TABLE>
<CAPTION>
PREMIUMS EARNED LOSS PAYMENTS
(1) (2) (3) (4) (5) (6)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 575,838 244,357
1989 115,498,723 3,154,328 112,344,396 65,394,253 1,194,192
1990 123,518,477 3,020,941 120,497,536 77,078,704 889,524
1991 130,823,468 3,059,789 127,763,679 80,384,660 706,087
1992 135,772,129 3,261,305 132,510,824 79,469,920 1,933,769
1993 129,920,600 4,227,838 125,692,762 75,211,479 1,023,625
1994 124,061,161 4,326,619 119,734,542 84,449,257 1,563,365
1995 118,167,750 3,897,033 114,270,717 65,224,377 1,776,786
1996 111,494,112 3,041,823 108,452,289 53,317,867 2,144,842
1997 108,150,971 2,584,990 105,565,981 39,461,255 928,548
1998 107,482,733 2,436,283 105,046,450 20,261,760 742,269
TOTAL XXXX XXXX XXXX 640,829,370 13,147,365
<CAPTION>
SALVAGE &
SUBROGATION
ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED
(1) (7) (8) (9) (10) (11)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 82,870 21,964 39,331 0 8,310
1989 5,600,639 16,253 6,032,892 0 755,970
1990 6,451,310 15,302 6,224,801 0 768,360
1991 6,603,333 8,280 6,203,507 0 704,345
1992 7,049,681 17,459 5,625,981 0 1,120,266
1993 7,099,178 251,005 5,436,767 0 709,924
1994 6,740,856 10,790 6,278,472 0 763,640
1995 4,692,426 25,861 5,802,285 0 695,645
1996 2,988,758 42,544 5,470,920 0 474,935
1997 1,369,307 0 4,261,754 0 595,048
1998 72,476 0 3,427,211 0 215,897
TOTAL 48,750,834 409,457 54,803,922 0 6,812,340
<CAPTION>
ACC/YR TOTAL NET PAID NUMBER OF CLAIMS REPORTED
(1) (12) (13)
DIR & ASSUMED
<S> <C> <C>
PRIOR 431,717 XXXX
1989 75,817,340 13,362
1990 88,849,989 13,344
1991 92,477,134 13,263
1992 90,194,355 13,837
1993 86,472,794 13,771
1994 95,894,429 13,930
1995 73,916,441 12,342
1996 59,590,160 12,429
1997 44,163,767 11,620
1998 23,019,177 10,449
TOTAL 730,827,304 XXXX
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS
(1) (14) (15) (16) (17) (18)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 1,457,450 992,977 1,159,139 1,389 39,937
1989 480,118 70,103 266,793 548 26,624
1990 1,128,686 567,547 112,647 548 41,601
1991 1,076,707 0 319,485 914 83,201
1992 1,169,123 0 225,563 950 99,842
1993 2,697,080 74,001 542,578 1,571 200,742
1994 5,341,057 5,000 530,460 3,472 383,079
1995 9,036,278 122,771 363,423 2,193 815,725
1996 12,791,145 279,500 4,598,633 33,985 1,555,863
1997 19,529,357 500,372 14,001,809 103,525 2,246,434
1998 19,447,570 414,666 30,641,781 216,332 2,928,843
TOTAL 74,154,571 3,026,937 52,762,311 365,426 8,421,890
<CAPTION>
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES
CASE BASIS BULK + IBNR UNPAID
(1) (19) (20) (21) (22) (23)
ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 1,652 821,011 239 364,027 45,122
1989 1,102 175,853 159 85,978 3,223
1990 1,721 60,387 249 82,250 25,768
1991 3,443 217,875 497 125,338 65
1992 4,131 148,712 597 104,470 68
1993 8,262 162,230 1,193 182,036 3,461
1994 15,836 233,910 2,287 337,571 482
1995 33,737 539,664 4,871 546,246 5,728
1996 64,375 1,084,195 9,296 1,067,250 15,100
1997 92,948 1,563,270 13,422 2,096,672 30,097
1998 117,045 1,967,477 16,901 3,211,919 34,279
TOTAL 344,251 6,974,585 49,709 8,203,757 163,394
<CAPTION>
TOTAL NET
SALVAGE & LOSSES & NUMBER OF
SUBROGATION EXPENSES CLAIMS
ANTICIPATED UNPAID OUTSTANDING
(1) (24) (25) (26)
ACC/YR DIR & ASSUMED
<S> <C> <C> <C>
PRIOR 0 2,800,185 23
1989 0 960,233 6
1990 0 829,737 6
1991 0 1,817,687 19
1992 0 1,741,963 26
1993 0 3,696,178 44
1994 0 6,799,002 105
1995 0 11,132,036 187
1996 0 20,694,833 394
1997 0 38,697,178 845
1998 0 57,398,365 2,723
TOTAL 0 146,567,397 4,378
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE
(1) (27) (28) (29) (30) (31)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX
1989 78,063,152 1,285,579 76,777,572 67.6 40.8
1990 91,180,386 1,500,660 89,679,726 73.8 49.7
1991 95,014,106 719,286 94,294,821 72.6 23.5
1992 93,893,291 1,956,973 91,936,318 69.2 60.0
1993 91,532,090 1,363,118 90,168,972 70.5 32.2
1994 104,294,662 1,601,231 102,693,431 84.1 37.0
1995 87,020,424 1,971,947 85,048,477 73.6 50.6
1996 82,874,634 2,589,641 80,284,993 74.3 85.1
1997 84,529,857 1,668,912 82,860,945 78.2 64.6
1998 81,959,035 1,541,493 80,417,542 76.3 63.3
TOTAL XXXX XXXX XXXX XXXX XXXX
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT
(1) (32) (33) (34) (35) (36)
ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID
<S> <C> <C> <C> <C> <C>
PRIOR XXXX 0 0 XXXX 1,622,223
1989 68.3 0 0 0.0 676,260
1990 74.4 0 0 0.0 673,238
1991 73.8 0 0 0.0 1,395,279
1992 69.4 0 0 0.0 1,393,736
1993 71.7 0 0 0.0 3,164,086
1994 85.8 0 0 0.0 5,863,046
1995 74.4 0 0 0.0 9,274,737
1996 74.0 0 0 0.0 17,076,294
1997 78.5 0 0 0.0 32,927,269
1998 76.6 0 0 0.0 49,458,352
TOTAL XXXX 0 0 XXXX 123,524,519
<CAPTION>
(1) (37)
ACC/YR LOSS EXPENSES UNPAID
<S> <C>
PRIOR 1,177,962
1989 283,973
1990 156,500
1991 422,408
1992 348,227
1993 532,092
1994 935,956
1995 1,857,299
1996 3,618,539
1997 5,769,909
1998 7,940,013
TOTAL 23,042,878
</TABLE>
101
<PAGE> 5
OHIO CASUALTY GROUP
SCHEDULE P-PART 1D - WORKERS COMPENSATION
<TABLE>
<CAPTION>
PREMIUMS EARNED LOSS PAYMENTS
(1) (2) (3) (4) (5) (6)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX 0 0 8,172,432 7,026,983
1989 201,801,876 4,147,639 197,654,237 134,124,067 1,530,842
1990 220,036,820 3,333,416 216,703,404 153,544,228 1,258,878
1991 219,109,861 3,143,510 215,966,351 141,796,984 1,017,016
1992 213,577,106 2,909,054 210,668,052 120,830,232 1,500,669
1993 185,737,510 2,443,331 183,294,179 91,873,520 1,809,179
1994 153,211,860 1,955,046 151,256,814 63,499,739 1,136,002
1995 143,658,352 1,654,337 142,004,015 54,678,702 463,187
1996 124,749,682 592,288 124,157,394 41,883,106 545,684
1997 103,906,558 422,962 103,483,596 31,578,462 -650,038
1998 101,505,174 1,169,564 100,335,609 13,142,274 -5,237,171
TOTAL XXXX XXXX XXXX 855,123,746 10,401,231
</TABLE>
<TABLE>
<CAPTION>
SALVAGE &
SUBROGATION
ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED
(1) (7) (8) (9) (10) (11)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 511,397 258,795 296,235 0 472,394
1989 11,716,186 86,120 5,187,650 0 3,290,646
1990 13,641,914 3,716 5,758,225 0 4,766,277
1991 12,801,378 21,905 5,890,242 0 3,663,948
1992 9,326,184 1,771 6,675,126 0 3,434,243
1993 6,255,901 0 5,132,490 0 1,469,962
1994 4,316,897 1,696 4,094,793 0 1,306,299
1995 3,426,783 0 4,448,276 0 809,704
1996 2,881,636 1,650 3,654,616 0 473,029
1997 2,008,200 0 3,271,320 0 241,699
1998 519,658 0 2,217,650 0 23,562
TOTAL 67,406,136 375,653 46,626,622 0 19,951,763
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CLAIMS
TOTAL NET PAID REPORTED
(1) (12) (13)
ACC/YR DIR & ASSUMED
<S> <C> <C>
PRIOR 1,694,286 XXXX
1989 149,410,941 33,420
1990 171,681,774 32,853
1991 159,449,683 28,101
1992 135,329,102 24,650
1993 101,452,732 17,627
1994 70,773,731 13,957
1995 62,090,574 11,815
1996 47,872,023 10,820
1997 37,508,020 9,957
1998 21,116,754 8,780
TOTAL 958,379,620 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS
(1) (14) (15) (16) (17) (18)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 75,315,253 24,807,678 8,798,660 4,923 1,742,839
1989 18,726,219 3,838,027 3,137,403 1,919 573,911
1990 18,934,285 5,473,254 4,687,068 2,837 747,563
1991 12,969,571 0 5,957,353 4,089 917,556
1992 17,124,581 459,158 6,751,613 5,424 1,146,028
1993 14,549,824 1,071,632 9,499,925 8,094 1,361,571
1994 13,240,314 0 9,567,393 8,261 1,513,768
1995 16,524,452 1,040,526 10,243,875 8,845 1,768,897
1996 12,994,788 15,899 10,823,717 9,345 1,981,505
1997 15,874,069 35,135 13,529,646 11,682 2,551,294
1998 17,268,439 102,302 24,936,311 18,023 3,879,812
TOTAL 233,521,794 36,843,611 107,932,963 83,441 18,184,745
</TABLE>
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES
CASE BASIS BULK + IBNR UNPAID
(1) (19) (20) (21) (22) (23)
ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 345,098 1,454,652 510 2,123,625 700,022
1989 110,436 453,521 173 575,399 110,333
1990 140,611 564,958 231 599,518 155,453
1991 161,605 606,052 302 441,161 145
1992 185,077 623,525 404 535,071 13,163
1993 207,589 642,946 500 556,596 30,644
1994 221,892 643,978 571 543,724 293
1995 259,289 752,514 667 711,804 29,751
1996 290,454 842,960 747 695,548 791
1997 373,975 1,085,357 962 963,188 1,426
1998 523,565 1,519,499 1,347 4,449,356 1,283
TOTAL 2,819,593 9,189,963 6,415 12,194,990 1,043,305
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & TOTAL NET NUMBER OF
SUBROGATION LOSSES & CLAIMS
ANTICIPATED EXPENSES UNPAID OUTSTANDING
(1) (24) (25) (26)
ACC/YR DIR & ASSUMED
<S> <C> <C> <C>
PRIOR 0 63,576,798 783
1989 0 19,405,564 165
1990 0 19,761,006 165
1991 0 20,725,554 178
1992 0 25,517,591 202
1993 0 25,292,404 196
1994 0 25,278,160 197
1995 0 28,662,463 256
1996 0 27,021,281 416
1997 0 33,580,373 900
1998 0 51,406,897 3,290
TOTAL 0 340,228,090 6,748
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE
(1) (27) (28) (29) (30) (31)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX
1989 174,494,356 5,677,851 168,816,505 86.5 136.9
1990 198,477,759 7,034,980 191,442,779 90.2 211.0
1991 181,380,298 1,205,061 180,175,237 82.8 38.3
1992 163,012,359 2,165,666 160,846,693 76.3 74.4
1993 129,872,774 3,127,639 126,745,135 69.9 128.0
1994 97,420,605 1,368,714 96,051,891 63.6 70.0
1995 92,555,302 1,802,265 90,753,037 64.4 108.9
1996 75,757,876 864,572 74,893,304 60.7 146.0
1997 70,861,535 -226,858 71,088,393 68.2 -53.6
1998 67,933,000 -4,590,650 72,523,651 66.9 -392.5
TOTAL XXXX XXXX XXXX XXXX XXXX
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT
(1) (32) (33) (34) (35) (36)
ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID
<S> <C> <C> <C> <C> <C>
PRIOR XXXX 0 0 XXXX 59,301,312
1989 85.4 0 0 0.0 18,023,676
1990 88.3 0 0 0.0 18,145,262
1991 83.4 0 0 0.0 18,922,836
1992 76.4 0 0 0.0 23,411,612
1993 69.1 0 0 0.0 22,970,023
1994 63.5 0 0 0.0 22,799,446
1995 63.9 0 0 0.0 25,718,956
1996 60.3 0 0 0.0 23,793,260
1997 68.7 0 0 0.0 29,356,898
1998 72.3 0 0 0.0 42,084,425
TOTAL XXXX 0 0 XXXX 304,527,705
</TABLE>
<TABLE>
<CAPTION>
NET BALANCE SHEET RESERVES
AFTER DISCOUNT
(1) (37)
ACC/YR LOSS EXPENSES
UNPAID
<S> <C>
PRIOR 4,275,486
1989 1,381,888
1990 1,615,744
1991 1,802,718
1992 2,105,979
1993 2,322,380
1994 2,478,715
1995 2,943,508
1996 3,228,020
1997 4,223,475
1998 9,322,472
TOTAL 35,700,385
</TABLE>
102
<PAGE> 6
OHIO CASUALTY GROUP
SCHEDULE P-PART 1E - COMMERCIAL MULTI-PERIL
<TABLE>
<CAPTION>
PREMIUMS EARNED LOSS PAYMENTS
(1) (2) (3) (4) (5) (6)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 1,534,733 0
1989 98,708,427 2,400,642 96,307,785 41,090,570 591,005
1990 109,609,476 2,062,177 107,547,299 50,102,925 1,783,294
1991 125,345,866 2,460,164 122,885,702 64,697,201 4,939,604
1992 147,343,234 4,565,315 142,777,919 96,613,603 8,778,709
1993 146,366,198 5,672,668 140,693,530 80,057,000 135,217
1994 143,239,939 6,537,857 136,702,082 80,376,149 790,434
1995 139,601,917 6,742,565 132,859,352 68,175,941 189,151
1996 136,835,193 4,550,420 132,284,773 76,919,933 667,493
1997 142,019,235 4,984,286 137,034,949 61,234,614 1,216,705
1998 156,599,795 5,866,941 150,732,854 53,880,629 346,515
TOTAL XXXX XXXX XXXX 674,683,299 19,438,127
<CAPTION>
SALVAGE &
SUBROGATION
ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED
(1) (7) (8) (9) (10) (11)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 1,633,774 0 51,682 0 7,236
1989 6,914,822 58,206 2,560,439 0 1,795,064
1990 9,349,995 18,100 3,358,024 0 1,656,154
1991 10,031,651 107,587 4,263,484 0 5,034,515
1992 11,557,232 56,139 5,446,452 0 2,437,496
1993 10,473,481 89,650 5,111,254 0 1,543,776
1994 8,794,055 226,653 5,378,363 0 1,932,879
1995 6,913,054 0 5,154,305 0 1,589,618
1996 5,543,825 0 5,228,167 0 1,494,395
1997 2,552,859 2,332 4,129,950 0 925,106
1998 140,988 0 5,329,610 0 459,278
TOTAL 73,905,735 558,666 46,011,729 0 18,875,517
<CAPTION>
NUMBER OF
CLAIMS
TOTAL NET PAID REPORTED
(1) (12) (13)
ACC/YR DIR & ASSUMED
<S> <C> <C>
PRIOR 3,220,189 XXXX
1989 49,916,620 12,541
1990 61,009,550 13,472
1991 73,945,145 15,817
1992 104,782,440 19,226
1993 95,416,868 19,601
1994 93,531,480 19,647
1995 80,054,148 17,068
1996 87,024,432 17,982
1997 66,698,386 15,332
1998 59,004,712 15,404
TOTAL 774,603,970 XXXX
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS
(1) (14) (15) (16) (17) (18)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 4,710,918 118,310 3,522,185 7,189 826,793
1989 239,040 5 76,184 2,875 152,875
1990 1,086,796 0 211,319 5,751 195,674
1991 1,033,898 5,000 895,787 5,751 473,015
1992 1,135,097 5,750 393,859 11,502 471,245
1993 3,581,386 18,000 878,322 15,815 849,540
1994 4,483,499 0 778,945 23,003 1,419,939
1995 4,089,555 3 2,068,657 61,821 2,418,200
1996 9,342,733 0 5,414,799 158,148 4,025,896
1997 13,246,204 385,083 12,033,740 359,427 5,464,615
1998 22,588,275 61,022 30,656,075 786,426 7,218,942
TOTAL 65,537,401 593,173 56,929,873 1,437,707 23,516,734
<CAPTION>
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES
CASE BASIS BULK + IBNR UNPAID
(1) (19) (20) (21) (22) (23)
ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 1,061 6,003,477 4,347 1,551,319 3,381
1989 433 169,970 1,774 33,732 121
1990 487 293,081 1,996 113,841 242
1991 975 1,383,943 3,992 81,069 372
1992 1,841 538,190 7,540 101,954 634
1993 3,606 1,133,307 14,770 254,876 1,133
1994 7,147 1,145,977 29,273 309,817 968
1995 12,171 1,942,719 49,853 338,663 2,603
1996 20,249 3,347,883 82,940 832,466 6,658
1997 27,504 4,612,120 112,657 1,386,137 25,150
1998 32,810 5,228,788 134,390 2,749,484 34,694
TOTAL 108,284 25,799,456 443,531 7,753,358 75,956
<CAPTION>
SALVAGE & TOTAL NET NUMBER OF
SUBROGATION LOSSES & CLAIMS
ANTICIPATED EXPENSES UNPAID OUTSTANDING
(1) (24) (25) (26)
ACC/YR DIR & ASSUMED
<S> <C> <C> <C>
PRIOR 0 16,480,405 358
1989 0 666,593 20
1990 0 1,892,235 19
1991 0 3,851,623 24
1992 0 2,613,079 48
1993 0 6,644,107 67
1994 0 8,077,786 133
1995 0 10,731,343 212
1996 0 22,695,783 398
1997 0 35,832,996 881
1998 0 67,392,222 3,085
TOTAL 0 176,878,171 5,245
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE
(1) (27) (28) (29) (30) (31)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX
1989 51,237,633 654,420 50,583,213 51.9 27.3
1990 64,711,654 1,809,869 62,901,785 59.0 87.8
1991 82,860,048 5,063,280 77,796,768 66.1 205.8
1992 116,257,633 8,862,114 107,395,519 78.9 194.1
1993 102,339,166 278,191 102,060,975 69.9 4.9
1994 102,686,744 1,077,478 101,609,266 71.7 16.5
1995 91,101,094 315,602 90,785,491 65.3 4.7
1996 110,655,703 935,487 109,720,215 80.9 20.6
1997 104,660,239 2,128,857 102,531,382 73.7 42.7
1998 127,792,791 1,395,857 126,396,934 81.6 23.8
TOTAL XXXX XXXX XXXX XXXX XXXX
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT
(1) (32) (33) (34) (35) (36)
ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID
<S> <C> <C> <C> <C> <C>
PRIOR XXXX 0 0 XXXX 8,107,605
1989 52.5 0 0 0.0 312,343
1990 58.5 0 0 0.0 1,292,365
1991 63.3 0 0 0.0 1,918,934
1992 75.2 0 0 0.0 1,511,704
1993 72.5 0 0 0.0 4,425,893
1994 74.3 0 0 0.0 5,239,441
1995 68.3 0 0 0.0 6,096,388
1996 82.9 0 0 0.0 14,599,384
1997 74.8 0 0 0.0 24,535,434
1998 83.9 0 0 0.0 52,396,902
TOTAL XXXX 0 0 XXXX 120,436,394
<CAPTION>
NET BALANCE SHEET RESERVES
AFTER DISCOUNT
(1) (37)
ACC/YR LOSS EXPENSES
UNPAID
<S> <C>
PRIOR 8,372,800
1989 354,249
1990 599,870
1991 1,932,689
1992 1,101,375
1993 2,218,214
1994 2,838,345
1995 4,634,955
1996 8,096,399
1997 11,297,561
1998 14,995,319
TOTAL 56,441,777
</TABLE>
103
<PAGE> 7
OHIO CASUALTY GROUP
SCHEDULE P-PART 1G - BOILER & MACHINERY
<TABLE>
<CAPTION>
PREMIUMS EARNED LOSS PAYMENTS
(1) (2) (3) (4) (5) (6)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX 0 0
1989 0 0 0 0
1990 143,036 57,628 85,408 94,811 62,034
1991 271,065 213,756 57,309 82,738 70,799
1992 225,513 183,902 41,611 326,539 260,881
1993 36,594 43,445 -6,851 0 0
1994 18,241 16,879 1,362 9,366 2,238
1995 32,924 30,389 2,535 0 0
1996 49,025 48,882 143 5,068 5,068
1997 59,177 59,177 0 0 0
1998 158,676 100,924 57,752 3,988 0
TOTAL XXXX XXXX XXXX 522,510 401,019
<CAPTION>
SALVAGE &
SUBROGATION
ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED
(1) (7) (8) (9) (10) (11)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 0 0 0 0 0
1989 0 0 0 0 0
1990 669 0 0 0 0
1991 12,530 0 0 0 0
1992 0 0 0 0 0
1993 0 0 0 0 0
1994 209 0 0 0 0
1995 0 0 0 0 0
1996 0 0 0 0 0
1997 0 0 0 0 0
1998 0 0 10 0 0
TOTAL 13,409 0 10 0 0
<CAPTION>
NUMBER OF
CLAIMS
TOTAL NET PAID REPORTED
(1) (12) (13)
ACC/YR DIR & ASSUMED
<S> <C> <C>
PRIOR 0 XXXX
1989 0 XXXX
1990 33,447 XXXX
1991 24,470 XXXX
1992 65,659 XXXX
1993 0 XXXX
1994 7,338 XXXX
1995 0 XXXX
1996 0 XXXX
1997 0 XXXX
1998 3,998 XXXX
TOTAL 134,910 XXXX
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS
(1) (14) (15) (16) (17) (18)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 0 0 0 0 0
1989 0 0 0 0 0
1990 0 0 0 0 0
1991 0 0 0 0 0
1992 0 0 0 0 0
1993 0 0 0 0 0
1994 0 0 0 0 0
1995 0 0 0 0 0
1996 0 0 0 0 0
1997 0 0 0 0 0
1998 7,000 0 0 0 0
TOTAL 7,000 0 0 0 0
<CAPTION>
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES
CASE BASIS BULK + IBNR UNPAID
(1) (19) (20) (21) (22) (23)
ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR 0 0 0 0 0
1989 0 0 0 0 0
1990 0 0 0 0 0
1991 0 0 0 0 0
1992 0 0 0 0 0
1993 0 0 0 0 0
1994 0 0 0 0 0
1995 0 0 0 0 0
1996 0 0 0 0 0
1997 0 0 0 0 0
1998 0 0 0 0 0
TOTAL 0 0 0 0 0
<CAPTION>
SALVAGE & TOTAL NET NUMBER OF
SUBROGATION LOSSES & CLAIMS
ANTICIPATED EXPENSES UNPAID OUTSTANDING
(1) (24) (25) (26)
ACC/YR DIR & ASSUMED
<S> <C> <C> <C>
PRIOR 0 0 0
1989 0 0 0
1990 0 0 0
1991 0 0 0
1992 0 0 0
1993 0 0 0
1994 0 0 0
1995 0 0 0
1996 0 0 0
1997 0 0 0
1998 0 7,000 1
TOTAL 0 7,000 1
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE
(1) (27) (28) (29) (30) (31)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX
1989 0 0 0 0.0 0.0
1990 95,480 62,034 33,447 66.8 107.6
1991 95,268 70,799 24,470 35.1 33.1
1992 326,539 260,881 65,659 144.8 141.9
1993 0 0 0 0.0 0.0
1994 9,576 2,238 7,338 52.5 13.3
1995 0 0 0 0.0 0.0
1996 5,068 5,068 0 10.3 10.4
1997 0 0 0 0.0 0.0
1998 10,998 0 10,998 6.9 0.0
TOTAL XXXX XXXX XXXX XXXX XXXX
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT
(1) (32) (33) (34) (35) (36)
ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID
<S> <C> <C> <C> <C> <C>
PRIOR XXXX 0 0 XXXX 0
1989 0.0 0 0 0.0 0
1990 39.2 0 0 0.0 0
1991 42.7 0 0 0.0 0
1992 157.8 0 0 0.0 0
1993 0.0 0 0 0.0 0
1994 538.7 0 0 0.0 0
1995 0.0 0 0 0.0 0
1996 0.0 0 0 0.0 0
1997 0.0 0 0 0.0 0
1998 19.0 0 0 0.0 7,000
TOTAL XXXX 0.00 0.00 XXXX 7,000
<CAPTION>
NET BALANCE SHEET RESERVES
AFTER DISCOUNT
(1) (37)
ACC/YR LOSS EXPENSES
UNPAID
<S> <C>
PRIOR 0
1989 0
1990 0
1991 0
1992 0
1993 0
1994 0
1995 0
1996 0
1997 0
1998 0
TOTAL 0
</TABLE>
104
<PAGE> 8
OHIO CASUALTY GROUP
SCHEDULE P-PART 1H(1) - GENERAL LIABILITY (OCCURENCE)
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSE
PREMIUMS EARNED LOSS PAYMENTS PAYMENTS
(1) (2) (3) (4) (5) (6) (7) (8)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 2,152,680 0 1,132,059 0
1989 138,825,255 2,811,203 136,014,052 47,151,940 3,244,810 15,119,845 87,049
1990 140,819,473 2,495,606 138,323,867 50,218,151 2,866,669 18,853,360 692,428
1991 128,769,170 2,252,476 126,516,694 47,057,109 1,685,068 14,705,319 138,853
1992 120,598,579 2,154,696 118,443,883 43,256,170 2,251,930 13,510,266 3,072
1993 111,023,544 1,962,492 109,061,052 34,439,418 615,683 10,572,609 29,690
1994 112,505,526 1,992,713 110,512,813 31,158,551 1,710,290 7,731,433 61,645
1995 111,545,266 1,892,511 109,652,755 20,469,817 0 4,883,951 0
1996 104,751,105 1,051,089 103,700,016 17,219,448 500,000 3,681,084 0
1997 98,938,574 726,289 98,212,286 10,328,546 200,000 1,494,523 128,270
1998 97,295,206 2,244,509 95,050,697 4,491,242 0 101,372 0
TOTAL XXXX XXXX XXXX 307,943,072 13,074,449 91,785,820 1,141,009
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & NUMBER OF
UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS
PAYMENTS RECEIVED TOTAL NET PAID REPORTED
(1) (9) (10) (11) (12) (13)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 94,860 0 48,868 3,379,599 XXXX
1989 7,796,012 0 1,208,217 66,735,938 7,488
1990 8,460,478 0 720,315 73,972,892 7,978
1991 8,201,468 0 675,527 68,139,975 7,425
1992 5,978,032 0 1,145,937 60,489,465 7,083
1993 4,600,991 0 623,182 48,967,645 6,721
1994 5,409,080 0 464,121 42,527,129 6,562
1995 3,260,322 0 375,420 28,614,090 5,654
1996 4,564,257 0 427,747 24,964,789 5,460
1997 2,342,789 0 293,776 13,837,588 4,841
1998 1,977,326 0 136,198 6,569,940 3,675
TOTAL 52,685,615 0 6,119,307 438,199,049 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR
(1) (14) (15) (16) (17) (18) (19) (20) (21)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR 4,668,206 10 7,096,885 1,052 807,130 10,301 11,850,448 2,243
1989 507,540 5 1,003,382 319 316,778 3,863 2,817,747 841
1990 2,897,119 500,000 2,767,282 956 431,726 5,794 3,582,669 1,261
1991 2,448,817 0 2,705,548 1,275 572,021 9,979 4,211,793 2,173
1992 1,782,720 1 3,903,082 1,275 756,663 18,026 4,372,408 3,925
1993 16,769,535 11,230,665 3,010,600 3,411 1,075,427 32,188 3,746,984 7,008
1994 6,215,319 13,000 2,030,845 10,840 1,294,044 48,925 1,872,362 10,653
1995 8,526,322 3 4,030,497 24,230 2,034,608 76,929 2,659,637 16,750
1996 11,084,509 0 6,472,329 37,301 3,234,649 122,314 4,441,715 26,632
1997 7,528,545 200,000 14,413,579 86,717 4,085,873 154,502 5,390,401 33,640
1998 8,460,955 0 26,026,566 151,441 4,481,301 160,939 5,565,351 35,044
TOTAL 70,889,587 11,943,684 73,460,595 318,818 19,090,220 643,760 50,511,515 140,169
</TABLE>
<TABLE>
<CAPTION>
TOTAL NET
SALVAGE & LOSSES & NUMBER OF
UNALLOCATED LOSS EXPENSES SUBROGATION EXPENSES CLAIMS
UNPAID ANTICIPATED UNPAID OUTSTANDING
(1) (22) (23) (24) (25) (26)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 3,008,889 118 0 27,417,834 130
1989 272,065 35 0 4,912,449 34
1990 865,494 30,112 0 10,006,166 57
1991 786,481 142 0 10,711,092 63
1992 1,047,844 142 0 11,839,350 92
1993 1,247,845 80,218 0 14,496,901 116
1994 902,652 1,992 0 12,229,812 183
1995 1,315,595 2,698 0 18,446,049 252
1996 1,883,828 4,154 0 26,926,629 389
1997 2,294,479 21,661 0 33,216,357 521
1998 3,566,193 16,852 0 47,736,091 1,044
TOTAL 17,191,366 158,123 0 217,938,729 2,881
</TABLE>
<TABLE>
<CAPTION>
(1) TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT
ACC/YR (27) (28) (29) (30) (31) (32) (33) (34)
DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0
1989 74,985,309 3,336,923 71,648,386 54.0 118.7 52.7 0 0
1990 88,076,279 4,097,221 83,979,058 62.5 164.2 60.7 0 0
1991 80,688,557 1,837,489 78,851,067 62.7 81.6 62.3 0 0
1992 74,607,185 2,278,371 72,328,815 61.9 105.7 61.1 0 0
1993 75,463,409 11,998,864 63,464,546 68.0 611.4 58.2 0 0
1994 56,614,286 1,857,345 54,756,941 50.3 93.2 49.5 0 0
1995 47,180,749 120,610 47,060,139 42.3 6.4 42.9 0 0
1996 52,581,818 690,400 51,891,418 50.2 65.7 50.0 0 0
1997 47,878,735 824,790 47,053,945 48.4 113.6 47.9 0 0
1998 54,670,306 364,275 54,306,031 56.2 16.2 57.1 0 0
TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
PARTICIPATION % AFTER DISCOUNT
(1) (35) (36) (37)
ACC/YR LOSS EXPENSES
LOSSES UNPAID UNPAID
<S> <C> <C> <C>
PRIOR XXXX 11,764,029 15,653,806
1989 0.0 1,510,598 3,401,851
1990 0.0 5,163,444 4,842,722
1991 0.0 5,153,090 5,558,002
1992 0.0 5,684,526 6,154,824
1993 0.0 8,546,059 5,950,842
1994 0.0 8,222,325 4,007,487
1995 0.0 12,532,586 5,913,463
1996 0.0 17,519,537 9,407,092
1997 0.0 21,655,407 11,560,950
1998 0.0 34,336,080 13,400,011
TOTAL XXXX 132,087,680 85,851,049
</TABLE>
105
<PAGE> 9
OHIO CASUALTY GROUP
SCHEDULE P-PART 1H2 - GENERAL LIABILITY (CLAIMS MADE)
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSE
PREMIUMS EARNED LOSS PAYMENTS PAYMENTS
(1) (2) (3) (4) (5) (6) (7) (8)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 0 0 0 0
1989 0 0 0 0 0 0 0
1990 15,331 198 15,133 0 0 0 0
1991 49,676 606 49,070 0 0 0 0
1992 108,651 1,326 107,325 0 0 0 0
1993 137,578 1,728 135,850 60,000 0 23,077 0
1994 158,192 2,025 156,167 20,192 0 256,325 0
1995 395,268 108,203 287,065 255,868 0 177,225 0
1996 807,258 290,207 517,051 40,126 0 22,304 0
1997 1,010,179 369,462 640,717 13,736 0 10,090 0
1998 1,156,442 439,750 716,691 3,324 0 0 0
TOTAL XXXX XXXX XXXX 393,246 0 489,021 0
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & NUMBER OF
UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS
PAYMENTS RECEIVED TOTAL NET PAID REPORTED
(1) (9) (10) (11) (12) (13)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 0 0 0 0 XXXX
1989 0 0 0 0 0
1990 0 0 0 0 0
1991 0 0 0 0 0
1992 0 0 0 0 0
1993 25,830 0 0 108,907 0
1994 29,324 0 0 305,841 0
1995 50,137 0 0 483,230 0
1996 840 0 250 63,270 -1
1997 1,849 0 1,183 25,674 23
1998 0 0 0 3,324 8
TOTAL 107,979 0 1,433 990,246 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR
(1) (14) (15) (16) (17) (18) (19) (20) (21)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR 0 0 341 6 157 0 672 11
1989 0 0 103 2 59 0 252 4
1990 0 0 310 6 88 0 378 6
1991 0 0 413 8 152 0 651 10
1992 0 0 413 8 275 0 1,176 19
1993 0 0 1,104 20 491 0 2,099 34
1994 0 0 3,509 64 747 0 3,191 51
1995 0 0 7,844 143 1,174 0 5,017 80
1996 10,000 0 12,075 220 1,867 0 7,977 128
1997 5,000 0 28,071 511 2,359 0 10,077 162
1998 16,200 0 49,022 892 2,457 0 10,497 168
TOTAL 31,200 0 103,204 1,877 9,828 0 41,986 673
</TABLE>
<TABLE>
<CAPTION>
TOTAL NET
SALVAGE & LOSSES & NUMBER OF
SUBROGATION EXPENSES CLAIMS
UNALLOCATED LOSS EXPENSES UNPAID ANTICIPATED UNPAID OUTSTANDING
(1) (22) (23) (24) (25) (26)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 36 0 0 1,188 0
1989 11 0 0 419 0
1990 33 0 0 796 0
1991 44 1 0 1,241 0
1992 44 1 0 1,880 0
1993 116 1 0 3,756 0
1994 370 5 0 7,697 0
1995 827 10 0 14,629 0
1996 1,795 16 0 33,351 1
1997 3,221 37 0 48,018 1
1998 6,014 65 0 83,065 4
TOTAL 12,510 136 0 196,042 6
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT
(1) (27) (28) (29) (30) (31) (32) (33) (34)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0
1989 425 6 419 0 0 0 0 0
1990 809 12 796 5 6 5 0 0
1991 1,259 18 1,241 3 3 3 0 0
1992 1,907 27 1,880 2 2 2 0 0
1993 112,718 55 112,663 82 3 83 0 0
1994 313,658 120 313,538 198 6 201 0 0
1995 498,092 233 497,859 126 0 173 0 0
1996 96,985 363 96,621 12 0 19 0 0
1997 74,402 709 73,693 7 0 12 0 0
1998 87,514 1,124 86,389 8 0 12 0 0
TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
PARTICIPATION % AFTER DISCOUNT
(1) (35) (36) (37)
ACC/YR LOSS EXPENSES
LOSSES UNPAID UNPAID
<S> <C> <C> <C>
PRIOR XXXX 334 854
1989 0.0 101 318
1990 0.0 304 493
1991 0.0 405 836
1992 0.0 405 1,475
1993 0.0 1,084 2,672
1994 0.0 3,445 4,252
1995 0.0 7,701 6,928
1996 0.0 21,855 11,496
1997 0.0 32,561 15,457
1998 0.0 64,330 18,735
TOTAL XXXX 132,527 63,515
</TABLE>
106
<PAGE> 10
OHIO CASUALTY GROUP
SCHEDULE P-PART 1I - SPECIAL PROPERTY
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSE
PREMIUMS EARNED LOSS PAYMENTS PAYMENTS
(1) (2) (3) (4) (5) (6) (7) (8)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 473,088 0 170,550 0
1997 67,467,867 3,977,870 63,489,997 31,685,210 0 674,065 0
1998 70,487,663 4,140,649 66,347,014 29,520,360 15,388 8,363 0
TOTAL XXXX XXXX XXXX 61,678,657 15,388 852,979 0
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & NUMBER OF
UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS
PAYMENTS RECEIVED TOTAL NET PAID REPORTED
(1) (9) (10) (11) (12) (13)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 14,906 0 308,724 658,544 XXXX
1997 2,691,122 0 490,138 35,050,397 XXXX
1998 2,536,002 0 176,972 32,049,337 XXXX
TOTAL 5,242,029 0 975,835 67,758,278 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR
(1) (14) (15) (16) (17) (18) (19) (20) (21)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR 1,275,865 2,340 246,380 14,252 38,514 87 7,943 83
1997 571,113 0 115,882 6,703 18,462 48 4,364 46
1998 7,435,789 20,350 961,722 39,433 52,851 93 8,475 89
TOTAL 9,282,767 22,690 1,323,984 60,388 109,828 227 20,782 217
</TABLE>
<TABLE>
<CAPTION>
TOTAL NET
SALVAGE & LOSSES & NUMBER OF
UNALLOCATED LOSS EXPENSES SUBROGATION EXPENSES CLAIMS
UNPAID ANTICIPATED UNPAID OUTSTANDING
(1) (22) (23) (24) (25) (26)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 53,873 0 0 1,605,814 92
1997 39,257 0 0 742,282 99
1998 510,824 0 0 8,909,697 1,160
TOTAL 603,954 0 0 11,257,793 1,351
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT
(1) (27) (28) (29) (30) (31) (32) (33) (34)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0
1997 35,799,476 6,796 35,792,680 53.1 0.2 56.4 0 0
1998 41,034,386 75,352 40,959,034 58.2 1.8 61.7 0 0
TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT
(1) (33) (34) (35) (36) (37)
ACC/YR LOSS EXPENSES
LOSS LOSS EXPENSE LOSSES UNPAID UNPAID
<S> <C> <C> <C> <C> <C>
PRIOR 0 0 XXXX 1,505,654 100,160
1997 0 0 0.0 680,292 61,990
1998 0 0 0.0 8,337,727 571,970
TOTAL 0 0 XXXX 10,523,673 734,120
</TABLE>
107
<PAGE> 11
OHIO CASUALTY GROUP
SCHEDULE P-PART 1J - AUTO PHYSICAL DAMAGE
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSE
PREMIUMS EARNED LOSS PAYMENTS PAYMENTS
(1) (2) (3) (4) (5) (6) (7) (8)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX -2,074,371 -201,309 103,622 -100,757
1997 217,918,241 569,662 217,348,579 130,430,751 164,202 1,171,274 -89,845
1998 251,379,525 9,168,020 242,211,506 142,902,024 168,644 -54,626 -70,666
TOTAL XXXX XXXX XXXX 271,258,404 131,537 1,220,270 -261,268
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & NUMBER OF
UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS
PAYMENTS RECEIVED TOTAL NET PAID REPORTED
(1) (9) (10) (11) (12) (13)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR -98,799 0 2,317,048 -1,767,482 XXXX
1997 14,748,006 0 17,026,767 146,275,674 XXXX
1998 15,355,476 20,795 9,049,732 158,084,101 XXXX
TOTAL 30,004,683 20,795 28,393,546 302,592,293 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR
(1) (14) (15) (16) (17) (18) (19) (20) (21)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR 397,358 87,647 0 0 459,111 57,453 203,131 36,478
1997 1,184,417 202,283 0 0 345,561 39,499 158,413 25,079
1998 19,641,752 2,326,732 6,573,299 1,076,330 648,370 82,588 277,830 52,438
TOTAL 21,223,527 2,616,662 6,573,299 1,076,330 1,453,043 179,540 639,374 113,995
</TABLE>
<TABLE>
<CAPTION>
TOTAL NET
SALVAGE & LOSSES & NUMBER OF
SUBROGATION EXPENSES CLAIMS
UNALLOCATED LOSS EXPENSES UNPAID ANTICIPATED UNPAID OUTSTANDING
(1) (22) (23) (24) (25) (26)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 28,632 0 0 906,654 234
1997 94,409 0 0 1,515,939 567
1998 1,811,561 0 0 25,414,725 11,206
TOTAL 1,934,602 0 0 27,837,318 12,007
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT
(1) (27) (28) (29) (30) (31) (32) (33) (34)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0
1997 148,132,831 341,218 147,791,613 68.0 59.9 68.0 0 0
1998 187,155,687 3,656,861 183,498,825 74.5 39.9 75.8 0 0
TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
PARTICIPATION % AFTER DISCOUNT
(1) (35) (36) (37)
ACC/YR LOSS EXPENSES
LOSSES UNPAID UNPAID
<S> <C> <C> <C>
PRIOR XXXX 309,711 596,943
1997 0.0 982,134 533,805
1998 0.0 22,811,989 2,602,736
TOTAL XXXX 24,103,834 3,733,484
</TABLE>
108
<PAGE> 12
OHIO CASUALTY GROUP
SCHEDULE P-PART 1K - FIDELITY AND SURETY
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSE
PREMIUMS EARNED LOSS PAYMENTS PAYMENTS
(1) (2) (3) (4) (5) (6) (7) (8)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 473,985 -61,043 566,493 121,467
1997 36,372,708 1,967,157 34,405,551 3,667,382 503,208 262,218 36,814
1998 37,440,572 1,626,552 35,814,021 754,476 135,183 37,006 0
TOTAL XXXX XXXX XXXX 4,895,843 577,349 865,717 158,281
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & CLAIMS
UNALLOCATED LOSS EXPENSE SUBROGATION NUMBER OF
PAYMENTS RECEIVED TOTAL NET PAID REPORTED
(1) (9) (10) (11) (12) (13)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 62,014 0 585,386 1,042,068 XXXX
1997 1,009,550 0 318,319 4,399,128 XXXX
1998 575,251 0 16,176 1,231,550 XXXX
TOTAL 1,646,815 0 919,882 6,672,746 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR
(1) (14) (15) (16) (17) (18) (19) (20) (21)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR 1,838,025 132,504 910,702 41,442 769,350 120,020 525,519 24,050
1997 3,085,586 963,243 428,067 19,492 404,587 65,945 288,636 13,215
1998 1,946,447 699 2,518,270 114,667 785,669 128,058 560,504 25,661
TOTAL 6,870,058 1,096,446 3,857,040 175,601 1,959,606 314,023 1,374,660 62,926
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & TOTAL NET NUMBER OF
UNALLOCATED LOSS EXPENSES SUBROGATION LOSSES & CLAIMS
UNPAID ANTICIPATED EXPENSES UNPAID OUTSTANDING
(1) (22) (23) (24) (25) (26)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 58,515 0 0 3,784,095 225
1997 104,685 0 0 3,249,668 121
1998 65,821 0 0 5,607,626 322
TOTAL 229,021 0 0 12,641,389 668
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT
(1) (27) (28) (29) (30) (31) (32) (33) (34)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0
1997 9,250,712 1,601,916 7,648,796 25.4 81.4 22.2 0 0
1998 7,243,444 404,269 6,839,176 19.3 24.9 19.1 0 0
TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
PARTICIPATION % AFTER DISCOUNT
(1) (35) (36) (37)
ACC/YR LOSS EXPENSES
LOSSES UNPAID UNPAID
<S> <C> <C> <C>
PRIOR XXXX 2,574,781 1,209,314
1997 0.0 2,530,919 718,750
1998 0.0 4,349,351 1,258,275
TOTAL XXXX 9,455,051 3,186,338
</TABLE>
109
<PAGE> 13
OHIO CASUALTY GROUP
SCHEDULE P-PART 1L - ACCIDENT & HEALTH
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSE
PREMIUMS EARNED LOSS PAYMENTS PAYMENTS
(1) (2) (3) (4) (5) (6) (7) (8)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 127,809 227,809 1,789 1,789
1997 1,062,936 1,062,937 -1 179,135 179,135 0 0
1998 616,092 616,092 0 87,206 87,206 0 0
TOTAL XXXX XXXX XXXX 394,150 494,150 1,789 1,789
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & NUMBER OF
UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS
PAYMENTS RECEIVED TOTAL NET PAID REPORTED
(1) (9) (10) (11) (12) (13)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 0 0 0 -100,000 XXXX
1997 0 0 0 0 XXXX
1998 0 0 0 0 XXXX
TOTAL 0 0 0 -100,000 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR
(1) (14) (15) (16) (17) (18) (19) (20) (21)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR 309,375 209,375 161,700 161,700 0 0 0 0
1997 52,157 52,157 40,281 40,281 0 0 0 0
1998 80,471 80,471 62,148 62,148 0 0 0 0
TOTAL 442,004 342,004 264,129 264,129 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
TOTAL NET
SALVAGE & LOSSES & NUMBER OF
UNALLOCATED LOSS EXPENSES SUBROGATION EXPENSES CLAIMS
UNPAID ANTICIPATED UNPAID OUTSTANDING
(1) (22) (23) (24) (25) (26)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 0 0 0 100,000 1
1997 0 0 0 0 0
1998 0 0 0 0 0
TOTAL 0 0 0 100,000 1
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT
(1) (27) (28) (29) (30) (31) (32) (33) (34)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0
1997 271,573 271,573 0 25.5 25.5 -11.2 0 0
1998 229,826 229,826 0 37.3 37.3 0.0 0 0
TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
PARTICIPATION % AFTER DISCOUNT
(1) (35) (36) (37)
ACC/YR LOSS EXPENSES
LOSSES UNPAID UNPAID
<S> <C> <C> <C>
PRIOR 0 100,000 0
1997 0.0 0 0
1998 0.0 0 0
TOTAL XXXX 100,000 0
</TABLE>
110
<PAGE> 14
OHIO CASUALTY GROUP
SCHEDULE P-PART 1R1 - PRODUCT LIABILITY (OCCURRENCE)
<TABLE>
<CAPTION>
ALLOCATED LOSS EXPENSE
PREMIUMS EARNED LOSS PAYMENTS PAYMENTS
(1) (2) (3) (4) (5) (6) (7) (8)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX 1,939,978 181,250 2,462,949 731,490
1989 14,373,177 258,717 14,114,460 4,665,475 0 3,396,732 0
1990 13,298,268 218,187 13,080,081 4,278,801 0 3,422,074 0
1991 10,830,510 132,713 10,697,797 3,322,502 45,000 2,169,916 10,785
1992 9,395,225 114,623 9,280,602 2,164,705 0 1,507,204 0
1993 6,068,861 75,297 5,993,564 2,227,051 0 1,237,995 0
1994 1,231,286 15,761 1,215,525 784,178 0 537,537 0
1995 485,873 6,255 479,618 345,640 0 186,661 0
1996 384,859 1,279 383,580 543,015 0 165,704 0
1997 396,349 1,454 394,895 94,045 0 46,653 0
1998 1,082,805 9,236 1,073,569 1,102,452 0 8,354 0
TOTAL XXXX XXXX XXXX 21,467,841 226,250 15,141,779 742,275
</TABLE>
<TABLE>
<CAPTION>
SALVAGE & NUMBER OF
UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS
PAYMENTS RECEIVED TOTAL NET PAID REPORTED
(1) (9) (10) (11) (12) (13)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 107,495 0 3,088 3,597,682 XXXX
1989 628,126 0 26,870 8,690,333 532
1990 368,431 0 44,169 8,069,306 411
1991 358,471 0 109,081 5,795,103 348
1992 263,382 0 31,953 3,935,290 308
1993 324,610 0 22,663 3,789,655 128
1994 359,104 0 18,570 1,680,820 219
1995 1,111,768 0 7,261 1,644,069 133
1996 716,960 0 6,906 1,425,679 122
1997 322,661 0 3,379 463,359 95
1998 644,022 0 3,680 1,754,828 74
TOTAL 5,205,030 0 277,622 40,846,125 XXXX
</TABLE>
<TABLE>
<CAPTION>
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID
CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR
(1) (14) (15) (16) (17) (18) (19) (20) (21)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR 2,682,116 0 123,154 4 491,225 0 66,194 4
1989 945,530 0 25,493 1 196,941 0 26,484 2
1990 500,500 0 85,680 3 256,200 0 34,609 2
1991 1,079,000 0 75,753 5 286,430 0 39,400 4
1992 244,510 0 106,942 5 267,702 0 38,581 8
1993 334,500 0 86,712 12 229,138 0 36,410 14
1994 173,300 0 15,422 38 40,857 0 15,218 21
1995 422,000 0 34,472 86 64,148 0 23,917 33
1996 170,200 0 53,069 132 101,728 0 37,992 52
1997 247,500 0 123,374 306 128,498 0 47,990 66
1998 175,084 0 215,451 534 134,019 0 50,011 68
TOTAL 6,974,240 0 945,522 1,125 2,196,886 0 416,806 273
</TABLE>
<TABLE>
<CAPTION>
TOTAL NET
SALVAGE & LOSSES & NUMBER OF
UNALLOCATED LOSS EXPENSES SUBROGATION EXPENSES CLAIMS
UNPAID ANTICIPATED UNPAID OUTSTANDING
(1) (22) (23) (24) (25) (26)
ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED
<S> <C> <C> <C> <C> <C>
PRIOR 171,376 0 0 3,534,057 882
1989 108,790 0 0 1,303,236 41
1990 29,990 0 0 906,973 38
1991 51,584 0 0 1,532,158 31
1992 16,400 0 0 674,124 39
1993 14,794 0 0 701,529 20
1994 27,197 0 0 271,936 14
1995 65,863 0 0 610,282 13
1996 85,982 0 0 448,788 14
1997 50,160 0 0 597,151 22
1998 49,846 0 0 623,808 26
TOTAL 671,983 -1 0 11,204,040 1,140
</TABLE>
<TABLE>
<CAPTION>
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT
(1) (27) (28) (29) (30) (31) (32) (33) (34)
ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0
1989 9,993,572 3 9,993,569 69.5 0.0 70.8 0 0
1990 8,976,284 6 8,976,278 67.5 0.0 68.6 0 0
1991 7,383,054 55,794 7,327,261 68.2 42.0 68.5 0 0
1992 4,609,426 12 4,609,414 49.1 0.0 49.7 0 0
1993 4,491,209 26 4,491,184 74.0 0.0 74.9 0 0
1994 1,952,815 59 1,952,756 158.6 0.4 160.7 0 0
1995 2,254,469 118 2,254,351 464.0 1.9 470.0 0 0
1996 1,874,650 183 1,874,467 487.1 14.3 488.7 0 0
1997 1,060,882 371 1,060,511 267.7 25.5 268.6 0 0
1998 2,379,238 602 2,378,636 219.7 6.5 221.6 0 0
TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
</TABLE>
<TABLE>
<CAPTION>
INTER-COMPANY
POOLING NET BALANCE SHEET RESERVES
PARTICIPATION % AFTER DISCOUNT
(1) (35) (36) (37)
ACC/YR LOSS EXPENSES
LOSSES UNPAID UNPAID
<S> <C> <C> <C>
PRIOR XXXX 2,805,266 728,790
1989 0.0 971,022 332,214
1990 0.0 586,176 320,797
1991 0.0 1,154,749 377,409
1992 0.0 351,448 322,676
1993 0.0 421,200 280,328
1994 0.0 188,683 83,252
1995 0.0 456,387 153,895
1996 0.0 223,137 225,650
1997 0.0 370,568 226,583
1998 0.0 390,000 233,808
TOTAL XXXX 7,918,637 3,285,403
</TABLE>
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