<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended June 30, 1999.
-------------
[ ] 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
(State or other jurisdiction of incorporation or organization)
31-0783294
(I.R.S. Employer Identification No.)
136 North Third Street, Hamilton, Ohio
(Address of principal executive offices)
45025
(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
The aggregate market value as of August 2, 1999 of the voting stock held by
non-affiliates of the registrant was $947,098,454.
On August 2, 1999 there were 61,083,584 shares outstanding.
Page 1 of 18
===============================================================================
<PAGE>
<TABLE>
PART I
ITEM 1. FINANCIAL STATEMENTS
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,441,661 and $2,307,734) $ 2,459,720 $ 2,415,904
Equity securities, at fair value
(cost: $160,668 and $245,129) 712,941 924,906
Short-term investments, at fair value
(cost: $216,441 and $262,939) 216,473 262,863
------------ ------------
Total investments 3,389,134 3,603,673
Cash 40,883 42,139
Premiums and other receivables, net of
allowance for bad debts of $9,039 and
$8,739, respective 368,471 301,943
Deferred policy acquisition costs 178,020 176,606
Property and equipment, net of accumulated
depreciation of $106,346 and $97,991,
respectively 92,685 80,065
Reinsurance recoverable 172,642 186,861
Agent relationships, net of accumulated
amortization of $6,188 and $1,031,
respectively 302,173 308,206
Other assets 129,775 102,771
- ----------------------------------------------------------------------------
Total assets $ 4,673,783 $ 4,802,264
============================================================================
Liabilities
Insurance reserves:
Unearned premiums $ 723,957 $ 668,550
Losses 1,560,211 1,580,599
Loss adjustment expenses 367,307 376,340
Future policy benefits 20,883 25,518
Note payable 255,000 265,000
California Proposition 103 reserve 49,264 48,043
Deferred income taxes 67,175 140,730
Other liabilities 398,753 376,503
------------ ------------
Total liabilities 3,442,550 3,481,283
Shareholders' equity
Common stock, $.125 par value 5,850 5,850
Authorized: 300,000,000 shares
Issued: 94,418,344
Additional paid-in capital 4,312 4,186
Common stock purchase warrants 21,138 21,138
Accumulated other comprehensive income:
Unrealized gain on investments, net of
applicable income taxes 371,551 511,816
Retained earnings 1,264,917 1,185,349
Treasury stock, at cost:
(Shares: 33,340,760; 31,070,178) (436,535) (407,358)
------------ ------------
Total shareholders' equity 1,231,233 1,320,981
- ----------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 4,673,783 $ 4,802,264
============================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements.
For complete disclosures see Notes to Consolidated Financial Statements on
pages 48-61 of the Corporation's 1998 Form 10-K, Item 14.
All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend.
2
<PAGE>
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<CAPTION>
Three Months
Ended June 30,
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Premiums and finance charges earned $ 374,309 $ 311,663
Investment income less expenses 41,013 41,300
Investment gains realized, net 167,340 8,151
------------ ------------
Total revenues 582,662 361,114
Losses and benefits for policyholders 257,724 216,551
Loss adjustment expenses 44,861 30,088
General operating expenses 42,305 29,826
Amortization of agent relationships 3,094 0
California Proposition 103 reserve,
including interest 611 896
Amortization of deferred policy acquisition
costs 100,074 75,126
------------ ------------
Total expenses 448,669 352,487
Income from continuing operations
before income taxes 133,993 8,627
Income taxes
Current 34,981 (194)
Deferred 2,339 (1,168)
------------ ------------
Total income taxes 37,320 (1,362)
- -----------------------------------------------------------------------------
Income from continuing operations 96,673 9,989
Income from discontinued operations net of
taxes of $150 and $158, respectively 104 345
- -----------------------------------------------------------------------------
Net income $ 96,777 $ 10,334
=============================================================================
Other comprehensive income/(loss), net of tax:
Net change in unrealized gains (losses),
net of income tax expense/(benefit)
of $(60,684) and $(5,054), respectively (112,696) (9,387)
------------ ------------
Comprehensive income/(loss) $ (15,919) $ 947
=============================================================================
Average shares outstanding - basic 61,376 66,852
Average shares outstanding - diluted 61,400 66,952
=============================================================================
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 1.58 $ 0.15
Income from discontinued operations, per share 0.00 0.00
Effect of change in accounting principle
(net of tax) 0.00 0.00
------------ ------------
Net income, per share $ 1.58 $ 0.15
Cash dividends, per share $ 0.23 $ 0.22
=============================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
48-61 of the Corporation's 1998 Form 10-K, Item 14.
All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend.
3
<PAGE>
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<CAPTION>
Six Months
Ended June 30,
1999 1998
<S> <C> <C>
Premiums and finance charges earned $ 758,854 $ 621,290
Investment income less expenses 82,822 85,933
Investment gains realized, net 168,243 12,233
------------ ------------
Total revenues 1,009,919 719,456
Losses and benefits for policyholders 489,477 404,668
Loss adjustment expenses 78,922 56,468
General operating expenses 85,292 58,178
Amortization of agent relationships 6,188 0
California Proposition 103 reserve,
including interest 1,222 1,793
Amortization of deferred policy acquisition
costs 200,043 148,857
------------ ------------
Total expenses 861,144 669,964
Income from continuing operations
before income taxes 148,775 49,492
Income taxes
Current 37,218 7,263
Deferred 3,167 1,326
------------ ------------
Total income taxes 40,385 8,589
- -----------------------------------------------------------------------------
Income from continuing operations 108,390 40,903
Income from discontinued operations net of
taxes of $(352) and $337, respectively 1,899 625
Cumulative effect of accounting change, net of (2,255) 0
- -----------------------------------------------------------------------------
Net income $ 108,034 $ 41,528
=============================================================================
Other comprehensive income/(loss), net of tax:
Net change in unrealized gains (losses),
net of income tax expense/(benefit) of
$(75,528) and $33,416 (140,265) 62,058
- -----------------------------------------------------------------------------
Comprehensive income/(loss) $ (32,231) $ 103,586
=============================================================================
Average shares outstanding - basic 61,830 67,046
Average shares outstanding - diluted 61,860 67,136
=============================================================================
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 1.75 $ 0.61
Income from discontinued operations, per share 0.03 0.01
Effect of change in accounting principle
(net of tax) (0.03) 0.00
------------ ------------
Net income, per share $ 1.75 $ 0.62
Cash dividends, per share $ 0.46 $ 0.44
=============================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 48-61 of the Corporation's 1998 Form 10-K, Item 14.
All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend.
4
<PAGE>
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<CAPTION>
Accumulated
Additional Common other Total
Common paid-in stock purchase comprehensive Retained Treasury shareholders'
Stock capital warrants income earnings stock equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1998 $ 5,850 $ 3,923 $ 0 $ 454,241 $ 1,158,308 $ (307,493) $ 1,314,829
Unrealized gain (loss) 95,474 95,474
Deferred income tax benefit on
net unrealized gain (loss) (33,416) (33,416)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (20,102 shares) 262 127 389
Repurchase of treasury
stock (1,668,000 shares) (39,253) (39,253)
Net income 41,528 41,528
Cash dividends paid
($.44 per share) (29,582) (29,582)
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
June 1, 1998 $ 5,850 $ 4,185 $ 0 $ 516,299 $ 1,170,254 $ (346,619) $ 1,349,969
================================================================================================================================
Balance
January 1, 1999 $ 5,850 $ 4,186 $ 21,138 $ 516,299 $ 1,185,349 $ (407,358) $ 1,320,981
Unrealized gain (loss) (215,793) (215,793)
Deferred income tax benefit on
net unrealized gain (loss) 75,528 75,528
Net issuance of treasury
stock under stock option
plan and by charitable
donation (18,018 shares) 126 212 338
Repurchase of treasury
stock (1,478,000 shares) (29,389) (29,389)
Net income 108,034 108,034
Cash dividends paid
($.46 per share) (28,466) (28,466)
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 1999 $ 5,850 $ 4,312 $ 21,138 $ 371,551 $ 1,264,917 $ (436,535) $ 1,231,233
================================================================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 48-61 of the Corporation's 1998 Form 10-K, Item 14.
All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend.
5
<PAGE>
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months
Ended June 30,
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from:
Operations
Net income $ 108,034 $ 41,528
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves 21,350 11,247
Income taxes 36,820 (13,057)
Premiums and other receivables (66,528) (33,426)
Deferred policy acquisition costs (1,414) (9,420)
Reinsurance recoverable 14,217 (5,085)
Other assets (17,204) (5,473)
Other liabilities (31,747) 13,384
Amortization of agent relationships 6,188 0
Depreciation and amortization 15,896 7,541
Investment gains and losses (169,443) (12,437)
Cumulative effect of an accounting change 2,255 0
California Proposition 103 1,222 1,793
------------ ------------
Net cash generated (used) by operations (80,354) (3,405)
Investments
Purchase of investments:
Fixed income securities - available for sale (701,362) (115,809)
Equity securities (7,881) (8,368)
Proceeds from sales:
Fixed income securities - available for sale 502,982 95,194
Equity securities 262,836 32,160
Proceeds from maturities and calls:
Fixed income securities - available for sale 61,857 66,289
Equity securities 3,000 4,601
Property and equipment
Purchases (21,232) (8,442)
Sales 257 276
------------ ------------
Net cash from investments 100,457 65,901
Financing
Note payable (10,000) (5,000)
Proceeds from exercise of stock options 106 1
Purchase of treasury stock (29,389) (37,891)
Dividends paid to shareholders (28,466) (29,582)
------------ ------------
Net cash used in financing activity (67,749) (72,472)
Net change in cash and cash equivalents (47,646) (9,976)
Cash and cash equivalents, beginning of period 305,002 120,055
- -----------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 257,356 $ 110,079
===================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 48-61 of the Corporation's 1998 Form 10-K, Item 14.
All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend.
6
<PAGE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS
During the first quarter of 1999, the Corporation adopted 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. In accordance with
SOP 97-3, the Corporation has accrued a total liability for insurance
assessments of $2.3 million net of tax, as of January 1, 1999. This was
recorded as a change in accounting method.
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, 2000 (January 1,
2001 for the Corporation).
NOTE II - 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.
Basic and diluted earnings per share are summarized as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income from continuing operations $96,673 $ 9,989 $108,390 $40,903
Weighted average common shares
outstanding - basic 61,376 66,852 61,830 67,046
Basic income from continuing
operations - per average share $ 1.58 $ 0.15 $ 1.75 $ 0.61
===============================================================================
Weighted average common shares
outstanding 61,376 66,852 61,830 67,046
Effect of dilutive securities 24 100 30 90
- -------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 61,400 66,952 61,860 67,136
Diluted income from continuing
operations - per average share $ 1.58 $ 0.15 $ 1.75 $ 0.61
===============================================================================
</TABLE>
NOTE III - INTERIM ADJUSTMENTS
It is believed that all material adjustments necessary to present a fair
statement of the results of the interim period covered are reflected in this
report. The operating results for the interim periods are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with the financial statements and notes thereto
in the Corporation's 1998 Form 10-K, Item 14.
7
<PAGE>
NOTE IV -- 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 of June 30, 1999
and 1998 as it is reported internally to management. Asset information by
reportable segment is not reported, since the Corporation does not produce
such information internally.
Six months ended June 30
<TABLE>
<CAPTON>
Private Passenger Auto 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Net premiums written $295,055 $254,333
% Increase(decrease) 16.0% 9.6%
Net premiums earned 264,945 247,688
% Increase(decrease) 7.0% 7.5%
Underwriting gain/(loss)
(before tax) (18,710) (7,411)
Loss ratio 67.2% 67.9%
Loss expense ratio 11.2% 10.3%
Underwriting expense ratio 25.7% 24.1%
Combined ratio 104.1% 102.3%
Impact of catastrophe losses
on combined ratio 0.9% 2.0%
CMP, Fire, Inland Marine 1999 1998
- -----------------------------------------------------------
Net premiums written $150,896 $180,830
% Increase(decrease) 38.7% 4.0%
Net premiums earned 148,306 103,993
% Increase(decrease) 42.6% 5.0%
Underwriting gain/(loss)
(before tax) (42,991) (10,249)
Loss ratio 76.1% 60.8%
Loss expense ratio 10.6% 4.4%
Underwriting expense ratio 41.6% 42.7%
Combined ratio 128.3% 107.9%
Impact of catastrophe losses
on combined ratio 9.7% 6.2%
General Liability 1999 1998
- ------------------------------------------------------------
Net premiums written $72,430 $50,091
% Increase(decrease) 44.6% (7.2%)
Net premiums earned 62,175 47,364
% Increase(decrease) 31.3% (6.6%)
Underwriting gain/(loss)
(before tax) 7,168 (786)
Loss ratio 30.9% 35.9%
Loss expense ratio 5.8% 14.3%
Underwriting expense ratio 44.4% 48.7%
Combined ratio 81.1% 98.9%
Impact of catastrophe losses
on combined ratio N/A N/A
Workers' Compensation 1999 1998
- ---------------------------------------------------------------
Net premiums written $84,601 $49,523
% Increase(decrease) 70.8% (13.4)%
Net premiums earned 87,755 47,925
% Increase(decrease) 83.1% (12.9)%
Underwriting gain/(loss)
(before tax) (7,179) (8,371)
Loss ratio 59.8% 78.1%
Loss expense ratio 11.9% 8.2%
Underwriting expense ratio 37.8% 30.2%
Combined ratio 109.5% 116.5%
Impact of catastrophe losses
on combined ratio N/A N/A
</TABLE>
8
<PAGE>
<TABLE>
<CAPTON>
Commercial Auto 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Net premiums written $89,852 $72,099
% Increase(decrease) 24.6% (7.1)%
Net premiums earned 85,436 68,359
% Increase(decrease) 25.0% (3.3)%
Underwriting gain/(loss)
(before tax) (11,557) (8,723)
Loss ratio 66.2% 67.6%
Loss expense ratio 11.4% 9.0%
Underwriting expense ratio 34.2% 34.3%
Combined ratio 111.8% 110.9%
Impact of catastrophe losses
on combined ratio 1.1% 1.1%
Homeowners 1999 1998
- -----------------------------------------------------------
Net premiums written $88,600 $87,778
% Increase(decrease) 1.0% 6.3%
Net premiums earned 91,528 87,753
% Increase(decrease) 4.3% 6.0%
Underwriting gain/(loss)
(before tax) (29,897) (24,421)
Loss ratio 87.7% 81.4%
Loss expense ratio 9.6% 9.7%
Underwriting expense ratio 36.5% 36.7%
Combined ratio 133.8% 127.8%
Impact of catastrophe losses
on combined ratio 14.8% 17.2%
Fidelity & Surety 1999 1998
- -----------------------------------------------------------
Net premiums written $19,387 $18,627
% Increase(decrease) 4.1% 4.5%
Net premiums earned 18,488 17,720
% Increase(decrease) 4.3% 1.4%
Underwriting gain/(loss)
(before tax) 3,781 1,812
Loss ratio 3.4% 15.8%
Loss expense ratio 4.7% 5.9%
Underwriting expense ratio 68.1% 64.8%
Combined ratio 76.2% 86.5%
Impact of catastrophe losses
on combined ratio N/A N/A
Total Property & Casualty 1999 1998
- -----------------------------------------------------------
Net premiums written $800,821 $641,281
% Increase(decrease) 24.9% 2.4%
Net premiums earned 758,633 620,802
% Increase(decrease) 22.2% 2.4%
Underwriting gain/(loss)
(before tax) (99,387) (58,150)
Loss ratio 65.9% 65.5%
Loss expense ratio 10.4% 9.1%
Underwriting expense ratio 34.9% 33.7%
Combined ratio 111.2% 108.3%
Impact of catastrophe losses
on combined ratio 4.1% 4.3%
All other 1999 1998
- -----------------------------------------------------------
Revenues $7,985 $3,096
Expenses 8,649 3,355
- -----------------------------------------------------------
Net income $ (664) $ (259)
Reconciliation of Revenues 1999 1998
- -----------------------------------------------------------
Net premiums earned for
reportable segments $758,633 $620,802
Investment income 84,730 83,236
Realized gains 158,010 17,539
Miscellaneous income 93 146
- -----------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 1,001,466 721,723
Property and casualty statutory
to GAAP adjustment 468 (5,363)
- ----------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 1,001,934 716,360
Other segment revenues 7,985 3,096
- ----------------------------------------------------------
Total revenues $1,009,919 $719,456
==========================================================
Reconciliation of Underwriting
gain/(loss) (before tax) 1999 1998
- ----------------------------------------------------------
Property and casualty under-
writing gain/(loss)
(before tax)
(Statutory basis) $(99,387) $(58,150)
Statutory to GAAP adjustment 5,734 12,474
- ----------------------------------------------------------
Property and casualty under-
writing gain/(loss) (before
tax) (GAAP basis) (93,653) (45,676)
Net investment income 82,822 85,933
Realized gains 168,243 12,233
Other income (8,637) (2,998)
- ----------------------------------------------------------
Income from continuing
operations before income
taxes $148,775 $49,492
==========================================================
</TABLE>
9
<PAGE>
Three months ended June 30
<TABLE>
<CAPTON>
Private Passenger Auto 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Net premiums written $141,907 $128,841
% Increase(decrease) 10.1% 9.6%
Net premiums earned 132,957 126,018
% Increase(decrease) 5.5% 5.1%
Underwriting gain/(loss)
(before tax) (12,698) (4,736)
Loss ratio 70.1% 69.2%
Loss expense ratio 11.6% 9.8%
Underwriting expense ratio 26.1% 24.2%
Combined ratio 107.8% 103.2%
Impact of catastrophe losses
on combined ratio 1.5% 3.7%
CMP, Fire, Inland Marine 1999 1998
- ------------------------------------------------------------
Net premiums written $75,971 $56,203
% Increase(decrease) 35.2% 8.5%
Net premiums earned 74,513 52,346
% Increase(decrease) 42.4% 5.6%
Underwriting gain/(loss)
(before tax) (28,796) (8,051)
Loss ratio 82.4% 64.6%
Loss expense ratio 13.2% 5.1%
Underwriting expense ratio 42.2% 42.5%
Combined ratio 137.8% 112.2%
Impact of catastrophe losses
on combined ratio 15.0% 10.7%
General Liability 1999 1998
- ------------------------------------------------------------
Net premiums written $40,268 $26,008
% Increase(decrease) 54.8% (5.5)%
Net premiums earned 31,292 23,421
% Increase(decrease) 33.6% (8.4)%
Underwriting gain/(loss)
(before tax) 1,061 (2,871)
Loss ratio 31.2% 38.3%
Loss expense ratio 11.6% 18.9%
Underwriting expense ratio 41.8% 49.6%
Combined ratio 84.6% 106.8%
Impact of catastrophe losses
on combined ratio N/A N/A
Workers' Compensation 1999 1998
- ------------------------------------------------------------
Net premiums written $37,475 $24,333
% Increase(decrease) 54.0% (13.3)%
Net premiums earned 37,327 23,260
% Increase(decrease) 60.5% (14.1)%
Underwriting gain/(loss)
(before tax) (12,622) (531)
Loss ratio 75.2% 64.8%
Loss expense ratio 16.4% 7.6%
Underwriting expense ratio 42.0% 28.6%
Combined ratio 133.6% 101.0%
Impact of catastrophe losses
on combined ratio N/A N/A
Commercial Auto 1999 1998
- -------------------------------------------------------------
Net premiums written $46,728 $36,529
% Increase(decrease) 27.9% (7.3)%
Net premiums earned 42,934 33,903
% Increase(decrease) 26.6% (4.8)%
Underwriting gain/(loss)
(before tax) (5,567) (7,943)
Loss ratio 65.3% 77.1%
Loss expense ratio 10.5% 8.3%
Underwriting expense ratio 34.1% 35.3%
Combined ratio 109.9% 120.7%
Impact of catastrophe losses
on combined ratio 1.5% 2.0%
Homeowners 1999 1998
- -------------------------------------------------------------
Net premiums written $51,122 $47,703
% Increase(decrease) 7.2% 7.7%
Net premiums earned 45,874 43,608
% Increase(decrease) 5.2% 6.2%
Underwriting gain/(loss)
(before tax) (19,294) (23,371)
Loss ratio 92.7% 102.7%
Loss expense ratio 10.5% 12.5%
Underwriting expense ratio 34.9% 35.1%
Combined ratio 138.1% 150.3%
Impact of catastrophe losses
on combined ratio 21.8% 30.3%
Fidelity & Surety 1999 1998
- -------------------------------------------------------------
Net premiums written $9,986 $9,863
% Increase(decrease) 1.3% 3.9%
Net premiums earned 9,213 8,880
% Increase(decrease) 3.8% 2.5%
Underwriting gain/(loss)
(before tax) 1,969 621
Loss ratio 4.0% 16.7%
Loss expense ratio 4.8% 5.8%
Underwriting expense ratio 64.4% 63.5%
Combined ratio 73.2% 86.0%
Impact of catastrophe losses
on combined ratio N/A N/A
Total Property & Casualty 1999 1998
- -------------------------------------------------------------
Net premiums written $403,457 $329,480
% Increase(decrease) 22.5% 3.4%
Net premiums earned 374,110 311,436
% Increase(decrease) 20.1% 1.3%
Underwriting gain/(loss)
(before tax) (75,947) (46,883)
Loss ratio 70.4% 69.8%
Loss expense ratio 12.0% 9.7%
Underwriting expense ratio 35.2% 33.6%
Combined ratio 117.6% 113.1%
Impact of catastrophe losses
on combined ratio 6.4% 7.6%
All other 1999 1998
- ------------------------------------------------------------
Revenues $8,361 $1,439
Expenses 3,676 1,380
- ------------------------------------------------------------
Net income $4,685 $ 59
Reconciliation of Revenues 1999 1998
- ------------------------------------------------------------
Net premiums earned for
reportable segments $374,110 $311,436
Investment income 42,263 40,006
Realized gains 156,932 13,003
Miscellaneous income 50 59
- ------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 573,355 364,504
Property and casualty statutory
to GAAP adjustment 946 (4,829)
- ------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 574,301 359,675
Other segment revenues 8,361 1,439
- ------------------------------------------------------------
Total revenues $582,662 $361,114
============================================================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTON>
Reconciliation of Underwriting
gain/(loss) (before tax) 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Property and casualty under-
writing gain/(loss) (before tax)
(Statutory basis) $(75,947) $(46,883)
Statutory to GAAP
adjustment 5,657 7,166
- -----------------------------------------------------------
Property and casualty under-
writing gain/(loss) (before tax)
(GAAP basis) (70,290) (39,717)
Net investment income 41,013 41,299
Realized gains 167,340 8,151
Other income (4,070) (1,106)
- ----------------------------------------------------------
Income from continuing
operations before income
taxes $133,993 $8,627
==========================================================
</TABLE>
NOTE V - 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 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.
The transaction was accounted for using the purchase method of accounting.
The following table presents the unaudited quarterly proforma results of
operations had the acquisition occurred on January 1, 1998.
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
(Unaudited) 1998 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues $442,310 $894,636
Net income (2,315) 30,327
Diluted earnings
per share (.03) 0.45
Average shares
outstanding-diluted 67,362 67,445
</TABLE>
NOTE VI - RESTRUCTURING 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 expenses 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. During the second quarter of 1999, the
Corporation released $663 of liability due to payments under leases. The
restructuring activity is expected to be completed by the end of 1999 and
the restructuring reserve will continue to be decreased as the leases expire
or subleases are obtained.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Property and casualty pre-tax underwriting losses for the six months ended June
30, 1999 were $93.7 million, $1.51 per share, compared with $45.7 million, $.68
per share for the same period in 1998. Gross premiums for the first six months
of 1999 increased 8.7% for all lines of business excluding the effect of $157.3
million in gross premium written from the GAI acquisition. Commercial lines
decreased .7% and personal lines increased 15.6% from the same period last year
excluding the effects of the GAI acquisition. Property and casualty net
premiums increased 3.8% for the second quarter of 1999 and 5.3% year-to-date
from the same period a year ago excluding $59.8 and $123.7 million respectively
in net premiums related to the GAI acquisition.
Premium from Key Agents grew 6.9% year to date. Key Agents work closely with
the Corporation to establish goals to increase profitability, growth and
retention. Non-key active agents grew 5.2% over 1998. These together with new
appointments brings total active agent premium growth to 9.4% for 1999.
New Jersey is our largest state with 18.3% of total net premiums written during
the year. Legislation passed in 1992 requires automobile insurers operating in
the state to accept all risks that meet underwriting guidelines regardless of
risk concentration. This leads to a greater risk concentration in the state
than the Corporation would otherwise accept. New Jersey also requires
assessments to be paid for the New Jersey Unsatisfied Claim and Judgment Fund
(UCJF). 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 in 1998. 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 reform bill became effective on March 22, 1999, and all new
policies and renewal policies written on or after that date reflect the 15%
rate reduction. 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 June 30, 1999, the Corporation had personal auto net premium written of
$81.5 million or 55.6% of total premium that the Corporation writes in New
Jersey compared with $114.5 million or 53.1% at year-end 1998. The projected
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.
The state of New Jersey has also begun to require insurance companies to write
a portion of their premiums in Urban Enterprise Zones (UEZ). These zones are
urban areas normally having high loss ratios. The Corporation is assigned
premiums if it does not write the required amount on its own. As of June 30,
1999, the Corporation has written $3.9 million year-to-date in UEZ premiums,
with an approximate $4.0 million in additional assigned premiums. The loss
ratio on the UEZ premiums is 127.8% as of June 30, 1999.
The combined ratio for the first six months increased 2.9 points to 111.2%
from 108.3% for the same period last year. The six-month combined ratio for
homeowners increased 6.0 points to 133.8% from 127.8% in the same period last
year. This is primarily due to an increase in catastrophe weather related
losses in 1999 compared with the same period of 1998. The Corporation is
reviewing its exposure to underinsured homeowner properties to maintain
adequate replacement cost values on our homeowners book of business.
Selected homeowners accounts will be reviewed upon renewal for a replacement
cost valuation and any necessary premium increases will be implemented at
that time.
Personal automobile, the Corporation's largest line, recorded a 1999
six-month combined ratio of 104.1% increasing from 102.3% in 1998. Workers'
compensation combined ratio for the first six months of 1999 decreased 7.0
points to 109.5% from 116.5% during the same period last year. The decrease
in the workers' compensation ratio is due to a greater benefit derived from
an increased use of reinsurance on the new GAI workers' compensation book of
business. The gross results, however, appear to be deteriorating due to
tremendous competitive pricing pressures.
12
<PAGE>
The general liability combined ratio decreased during the first six months of
1999 to 81.1% from 98.9% in 1998. This reduction is a result of the nature of
general liability being a volatile segment and having favorable loss
developments during the first six months of 1999. The combined ratio for CMP,
fire and inland marine increased 20.4 points to 128.3% from 107.9% during the
first six months of 1999. This increase is primarily due to large weather
related catastrophe losses in the Cincinnati and Oklahoma areas.
The second quarter catastrophe losses were $23.8 million and accounted for 6.4
points on the combined ratio. This compares with $23.8 million and 7.6 points
for the same period in 1998. Year-to-date catastrophe losses increased $4.4
million from $26.8 in 1998 to $31.3 million in 1999. The effect of
catastrophes on the Corporation's future results cannot be accurately
predicted. Severe weather patterns can have a material adverse impact on the
Corporation's results. During the second quarter of 1999 there were 13
catastrophes compared with 16 catastrophes in the second quarter of 1998.
The largest catastrophe in each quarter was $9.6 million and $6.8 million,
respectively, in incurred losses. For additional disclosure 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 the Corporation's
1998 Form 10-K.
During the quarter, the Corporation recognized $3.0 million in non-recurring
reorganization expenses that had not been previously reserved. This brings
year-to-date non-recurring reorganization expenses to $3.7 million. These
expenses along with an increase in advertising expenses over 1998 increased
the underwriting expense ratio to 34.9% for the first six months of 1999.
For the quarter, property and casualty before tax investment income was $42.3
million, $0.70 per share, increasing slightly from $40.0 million, $0.60 per
share, for the same period last year. The effective tax rate on investment
income for the second quarter of 1999 was 24.4% compared with 24.8% for the
comparable period in 1998.
After-tax realized capital gains were $110.0 million against $5.3 million
capital gains in the June 1998 period. As previously reported in our 8-K
filing on July 13, the Corporation completed a strategic asset reallocation
of its investment portfolio in the second quarter. A combination of share
repurchases and outstanding growth in the equity portfolio caused the
relationship of asset classes to fall outside the Corporation's long standing
guidelines. The Corporation responded by selling approximately $200 million
in equity securities, recognizing a gain of $145 million before tax or $1.54
per share after tax. The after tax proceeds have been invested in fixed
income instruments which we anticipate will increase investment income in
subsequent quarters. As a result of this sale, unrealized gains and
corresponding deferred taxes thereon were ratably reduced.
Net cash used by operations was $80.4 million for the first six months of the
year compared with net cash used of $3.4 million for the same period in 1998.
This change is largely due to the increase in the underwriting loss which
increased $46.6 million from $45.8 million in 1998 to $92.3 million in 1999
before taxes, an increase in agents balances receivable, largely caused by a
shift from a six month billing period to a twelve month billing period and
payment of $40.0 million for other liabilities assumed from GAI. Shareholder
dividend payments were $28.5 million for the six month period of 1999 compared
with $29.6 million for the same period in 1998.
In 1995, the Ohio Life Insurance Company, a subsidiary of the Corporation,
reinsured substantially all of its life insurance and related businesses to
Great Southern Life Insurance Company. 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 of
1998. There remains approximately $1.0 million in unamortized ceding
commission. This will continue to be amortized over the remaining life of
the underlying policies or recognized in full at the time of sale. The
Corporation has signed a contingent agreement to sell the Ohio Life shell.
The closing is anticipated before the end of 1999. The final gain on the
sale has not yet been determined by the Corporation. Additional information
related to the discontinued life insurance operations is included in Item 14,
Note 20 Discontinued Operations on page 60 of the Corporation's 1998 Form
10-K.
13
<PAGE>
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) and unrated securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Below investment grade securities:
Carrying value $211.7 $207.3
Amortized cost 217.1 208.8
Unrated securities:
Carrying value $320.0 $281.8
Amortized cost 310.8 264.8
</TABLE>
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>
June 30, December 31,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Below investment grade securities
at carrying value $211.7 $207.3
Other rating agencies categorizing
unrated securities as below
investment grade 23.7 7.7
------ ------
Below investment grade securities at
carrying value $235.4 $215.0
All of the Corporation's below investment grade securities 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 65 corporate borrowers in approximately
44 industries.
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. Current liquidity needs are expected to be met
by scheduled bond maturities, even if the below investment grade and unrated
securities are excluded. 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.
For further discussion of the Corporation's investments, see Item 1 of the
Corporation's 1998 Form 10-K for the year ended December 31, 1998.
In 1994, the National Association of Insurance Commissioners developed a
risk-based capital model to establish standards which will compare insurance
company statutory surplus to required minimum capital based on 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
reserve and premiums written risks. Based on current calculations, all of
the Ohio Casualty Group companies are in excess of the necessary capital to
conform with the risk-based capital model.
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 were less than what would be considered "fair" by
14
<PAGE>
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 permitted 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 $49.3 million at
June 30, 1999.
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.
During the first six months of 1999, Ohio Casualty continued its share
repurchase program. The total number of shares acquired during the period was
1,478,000, at an average price of $19.88 per share. The Company has remaining
authorization to repurchase 2,649,824 additional shares.
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. All
phases, including awareness, planning, execution/testing and compliance
verification are complete; however, we continue testing to ensure utmost
preparedness.
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
ensure that the conversion was completed on time.
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
15
<PAGE>
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 have completed LPAR compliance testing.
All systems have undergone integrated testing of the production environment.
Contingency plans include compliance reverification of this integrated
test in the third quarter 1999 and again early in the fourth quarter 1999.
As of June 30, 1999, the total amount spent to date for I/S related costs on
the Year 2000 project is $2.5 million and the Corporation anticipates minimal
additional I/S related expenses. 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
has identified all significant vendors, suppliers and agents of the
Corporation and has completed 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. 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. The Year 2000 team has completed an assessment
of the non-IT assets; and, 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.
16
<PAGE>
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
taking varous steps to manage this concern including providing educational
information on Year 2000 to insureds and agents; adding clarification and
exclusionary language to certain policies; and by evaluating underwriting
practices. The Corporation believes that no coverage exists; however,
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 underwriting
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.
The Corporation's management 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, 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.
From time to time, the Company may publish 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 Management's Discussion and Analysis of Financial Condition and
Results of Operations 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. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
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 and pricing
of reinsurance; litigation and administrative proceedings, year 2000 issues
; ability of Ohio Casualty to integrate and to retain the acquired insurance
business; and general economic and market conditions.
17
<PAGE>
PART II
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K -
The Corporation filed a Form 8-K on July 2, 1999, to file a
Certificate of Adjustment to Rights Agreement.
The Corporation filed Form 8-K/A on July 2, 1999, to amend
Form 8-K filed on March 5, 1998.
The Corporation filed Form 8-K on July 13, 1999, to announce
expected 2nd qtr operating loss.
Attached hereto as Exhibit No. 27 is the Financial Data Schedule.
Attached hereto as Exhibit No. 10.4 is the Commercial Lines
Division Incentive Plan.
SIGNATURE
Pursuant to the requirements 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)
August 13, 1999 -------------------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
18
</TABLE>
<PAGE>
THE OHIO CASUALTY INSURANCE COMPANY
COMMERCIAL LINES DIVISION INCENTIVE PLAN
----------------------------------------
The Ohio Casualty Insurance Company (the "Company") establishes The
Ohio Casualty Insurance Company Commercial Lines Division Incentive Plan (the
"Plan") as of the day of , 1998 for the benefit of
---------- ----------------
certain of its employees, upon the terms and conditions stated herein.
WITNESSETH:
WHEREAS, the Company acquired the Commercial Lines Division of Great
American Insurance Company ("GAIC") and certain of GAIC's subsidiaries
pursuant to an Asset Purchase Agreement dated September 14, 1998 (the "Asset
Purchase Agreement"); and
WHEREAS, the Asset Purchase Agreement provides, among other things,
that the Company shall make a payment to GAIC if certain Commercial Lines
business goals are attained, as set forth in Schedule 2.2.1.2 of the Asset
Purchase Agreement (the "GAIC Earnout Payment"); and
WHEREAS, the Company and GAIC value the efforts, abilities and
accomplishments of certain of the employees of the Commercial Lines Division;
and
WHEREAS, the Company desires to establish the Plan for the benefit of
personnel who by their position, ability and diligence are able to make
important contributions to the business acquired pursuant to the Asset
Purchase Agreement;
NOW, THEREFORE, the Company hereby establishes the Plan, the terms and
conditions of which shall be as follows:
1. EFFECTIVE DATE. The Plan shall be effective as of the Closing
--------------
Date, as that term is defined in the Asset Purchase Agreement.
2. (a) ELIGIBILITY. The persons eligible to participate in
-----------
the Plan (which persons shall be hereinafter referred to individually as a
"Participating Employee" and collectively as the "Participating Employees")
shall be those persons selected from time to time by a committee of the
Company's executives; such committee shall initially be composed of Thomas A.
Hayes, Barbara Aras, Hank Hunter and John J. McGovern, with Thomas A. Hayes
being Chairperson (hereinafter such committee shall be referred to as the
"Incentive Plan Committee"). In the event that any member of the Incentive
Plan Committee should resign, die, become disabled or otherwise terminate his
membership on the committee, the remaining members of the Incentive Plan
Committee shall select, by a majority vote, a replacement for such individual.
<PAGE>
(b) Each Participating Employee shall be an employee of
the Company at the time he or she is selected to participate in the Plan. The
Plan is intended to cover only employees of the Company who are designated to
participate therein by the Incentive Plan Committee by reason of their
significant role in the retention of the Business, as that term is defined in
the Asset Purchase Agreement. Each Participating Employee shall execute a
Participation Agreement substantially in the form attached hereto as Exhibit
A.
3. ALLOCATION OF UNITS. No later than the date of the GAIC
-------------------
Earnout Payment, the Incentive Plan Committee shall allocate 1,000 units, each
unit representing one-tenth of 1% of the Incentive Plan Amount (as hereinafter
defined), among Participating Employees. In the discretion of the Incentive
Committee, a Participating Employee may be allocated whole and/or fractional
units. In the event that a Participating Employee who receives an allocation
of units is not employed by the Company on the date that the GAIC Earnout
Payment is made, the treatment of units allocated to such Participating
Employee shall be determined in the discretion of the Incentive Plan
Committee.
For purposes of this Plan, the term "Incentive Plan Amount" shall mean
a portion of the GAIC Earnout Payment not to exceed 10% of such payment,
calculated as follows:
(a) If the Commercial Lines insurance business retention goals set
forth in Schedule 2.2.1.2 of the Asset Purchase Agreement (the "Retention
Goals") are met and if the combined loss ratio of the Commercial Lines
insurance business subject to the Retention Goals is one hundred four percent
(104%) or lower, calculated on an accident year basis (the "Profitability
Goal"), then the Incentive Plan Amount shall equal ten percent (10%) of the
GAIC Earnout Payment.
(b) If the Retention Goals are met but the Profitability Goal is
not met, then the Incentive Plan Amount shall equal six percent (6%) of the
GAIC Earnout Payment.
(c) If the Retention Goals are not met, the Incentive Plan Amount
shall be zero (0), regardless of whether the Profitability Goal is met.
The Incentive Plan Committee, in its sole discretion, is authorized to
determine whether or not the Retention Goals and Profitability Goal have been
met.
4. CALCULATION OF AWARDS. At the time that the GAIC Earnout
---------------------
Payment is made, the award under the Plan for each Participating Employee
(hereinafter referred to individually as an "Award" and collectively as the
"Awards") shall be determined by multiplying (a) the Incentive Plan Amount by
(b) a fraction, the numerator of which shall be the number of units credited
to such Participating Employee pursuant to Section 3, and the denominator of
which shall be the total number of units credited to all Participating
Employees under the Plan. Notwithstanding any provision contained herein, a
Participating Employee shall not receive an Award unless he or she is employed
by the Company on the date that the GAIC Earnout Payment is made. Upon
calculation of each Participating Employee's Award, the amount determined
pursuant to the preceding
<PAGE>
sentence shall be credited to a bookkeeping account maintained by the Company
for each such Participating Employee. The account of each Participating
Employee shall thereafter be credited with any earnings attributed thereto
pursuant to Section 5 hereof and debited for any distributions made to such
Participating Employee under the Plan. The outstanding balance, if any, of
the account for each Participating Employee shall be referred to hereunder as
the "Account Balance."
5. (a) PAYMENT OF AWARDS. The Account Balance of each
-----------------
Participating Employee shall be paid, in the sole and absolute discretion of
the Incentive Plan Committee, (i) in a single lump-sum payment within 30 days
following the GAIC Earnout Payment; or (ii) in substantially equal annual
installments (not to exceed 5), with the initial payment to be made within 30
days following the GAIC Earnout Payment and each annual installment made on
the succeeding anniversaries of such date. Notwithstanding any provision
contained herein, in the sole discretion of the Incentive Plan Committee,
annual installment payments made to a Participating Employee under this
paragraph (a) may be accelerated (including, but not limited to, a situation
in which the employment of a Participating Employee with the Company
terminates prior to the payment of the last installment due under this
paragraph) to the extent that the Incentive Plan Committee deems it
appropriate. In the event that the lump-sum payment method is not selected by
the Incentive Plan Committee for a Participating Employee, the Account Balance
of such Participating Employee shall be credited with interest, compounded
semiannually, at a rate equal to the rate earned on a six month Treasury Bill.
For this purpose, a rate earned on a six month Treasury Bill shall be the
average of the bid and asked rate of interest on six month Treasury Bills as
reported in the Wall Street Journal on the first business day of the relevant
time period.
(b) All payments under the Plan shall be made only to the
Participating Employee; however, in the event of the death of a former
Participating Employee (either before any payment is made or before the final
installment payment is made), any remaining Account Balance under the Plan
will be paid, in a single lump-sum payment within 30 days following the former
Participating Employee's death, to such former Participating Employee's
estate, unless he has named a beneficiary as provided in Exhibit B attached
hereto, in which event payment will be made to said beneficiary. If any
dispute arises as to the entitlement by any person to all or any portion of
the amounts payable upon the death of a former Participating Employee, the
obligations of the Company under the Plan will be satisfied by making payment
to the personal representative of the former Participating Employee's estate.
(c) In the event any taxes are required by law to be
withheld or paid from any payments made pursuant to the Plan, the Incentive
Plan Committee shall deduct such amounts from such payments and shall transmit
the withheld amounts to the appropriate taxing authority.
6. PARTICIPATING EMPLOYEES AS GENERAL CREDITORS. The Plan shall
--------------------------------------------
be unfunded and payments, when due, shall be made from the general corporate
assets of the
<PAGE>
Company. A Participating Employee's interest in the Plan shall be only that
of a general creditor of the Company and no greater. Notwithstanding any
provision contained herein, it is contemplated that, pursuant to the terms of
the Letter of Understanding, dated October 14, 1998, between the Company and
GAIC, which is attached hereto as Exhibit C and incorporated by reference into
this Agreement, payments to Participating Employees under the Plan shall be
made 50% from the general corporate assets of the Company and 50% from a
reduction in the GAIC Earnout Payment to be made by the Company to GAIC. As a
result, the Incentive Plan Amount, as described in Section 3, shall be
determined by doubling the amount by which GAIC agrees to reduce the GAIC
Earnout Payment.
7. REPORTS. The Company shall, as soon as practicable following
-------
the time that a calculation is made in accordance with Schedule 2.2.1.2 of the
Asset Purchase Agreement, provide each Participating Employee with a statement
of his Account Balance and, in the event that such Account Balance is to be
paid in annual installments, provide such a statement on each anniversary date
of the GAIC Earnout Payment during which such installment payments are to be
made.
8. AMENDMENT OR TERMINATION. The Plan may from time to time be
------------------------
amended, or may be terminated at any time, in the sole discretion of the
Company's Board of Directors, without obtaining the consent of any
Participating Employee; provided that Section 5 hereof shall not be amended
without the written approval of GAIC, which approval shall not be unreasonably
withheld. In addition, the Plan shall automatically terminate as of the date
that the final payment is made to the final Participating Employee (or in the
event of the death of such Participating Employee, his estate or beneficiary)
for whom an Account Balance is retained.
9. NO CONTRACT OF EMPLOYMENT. The Plan shall not be construed as
-------------------------
a contract of employment between the Company and a Participating Employee, or
as an amendment to an existing employment contract of a Participating
Employee, if in fact one exists, nor shall participation in the Plan be
construed as affording to a Participating Employee any representation or
guarantee regarding his continued employment.
10. TAX CONSIDERATIONS. In the event the Internal Revenue Service
------------------
determines that any Award allocated to a Participating Employee under the
Plan, or any amount compounded and paid on a Participating Employee's Award,
is income and should be taxed to him, and such amount then still remains in
the Participating Employee's Account Balance, the lesser of the value of the
amount upon which he is being taxed, or that portion thereof then remaining in
the Participating Employee's Account Balance, shall be distributed to the
Participating Employee upon his written request.
11. EXCLUSION FROM PENSION COMPUTATION. By agreeing to
----------------------------------
participate in the Plan, each Participating Employee shall be deemed to agree
that an Award constitutes special incentive compensation and is not to be
taken into account as "wages," "salary" or "covered compensation" in
determining the amount of any Company contribution to any
<PAGE>
pension, retirement or deferred profit sharing plan or any other employee
benefit plan of the Company with respect to such Participating Employee. In
addition, each beneficiary of a deceased former Participating Employee shall
be deemed to agree that an Award allocated to his or her Account Balance will
not affect the amount of any life insurance coverage available to such
beneficiary under any life insurance plan covering employees of the Company.
12. AUTHORITY OF INCENTIVE PLAN COMMITTEE, ETC. The Incentive
------------------------------------------
Plan Committee, in its sole discretion, is authorized to decide and to resolve
any questions of fact regarding a Participating Employee or his or her Account
Balance and all such decisions shall be final and binding upon the
Participating Employee.
The Incentive Plan Committee, in its sole discretion, is
authorized to construe the Plan and to resolve any ambiguity in the Plan,
provided that all such decisions and interpretations are applied thereafter
uniformly to all other Participating Employees until the Plan is subsequently
amended or unless the facts and circumstances applicable to a particular
Participating Employee are substantially different.
Each member of the Incentive Plan Committee and each member of
the Board shall be fully justified in relying or acting in good faith upon any
report made by employees of the Company, its subsidiaries or affiliates or
upon any other information furnished in connection with the Plan by any
employee of the Company, its subsidiaries or affiliates. In no event shall
any person who is or shall have been a member of the Incentive Plan Committee
or of the Board be liable for any determination made or other action taken or
any omission to act in reliance upon any such report or information or for any
action taken, including the furnishing of information, or failure to act, if
in good faith.
The Company shall hold the members of the Incentive Plan
Committee harmless from, and indemnify the members of the committee against,
personal financial loss resulting from liability incurred in the
administration of the Plan, unless such liability and loss are caused by such
individual's gross negligence or willful misconduct.
13. NONASSIGNABILITY. The Participating Employee shall not have
----------------
any right to commute, sell, assign, encumber, hypothecate, transfer or
otherwise convey the right to receive any payments hereunder, which payments
and right thereto are expressly declared to be non-assignable and
nontransferable, other than as provided elsewhere herein, and any such
assignment or transfer shall not be recognized by the Company.
14. GENDER. Whenever used herein, the masculine gender includes
------
the feminine and the singular includes the plural, and vice versa, unless the
provisions of the Plan specifically require a different construction.
15. ENTIRE AGREEMENT. The Plan, the Participation Agreement and
----------------
the Designation of Beneficiary attached as Exhibits A and B, respectively,
constitute the full and complete understanding and agreement between the
Company and each Participating
<PAGE>
Employee and supersede all prior understandings and agreements (whether
written or oral).
16. APPLICABLE LAW. The Plan shall be governed by, and construed
--------------
in accordance with, the substantive laws of the State of Ohio without giving
effect to principles of conflict of laws.
<PAGE>
EXHIBIT A
---------
PARTICIPATION AGREEMENT
-----------------------
The Ohio Casualty Insurance Company
136 North Third Street
Hamilton, Ohio
Attention:
Gentlemen:
I am in receipt of The Ohio Casualty Insurance Company Commercial
Lines Division Incentive Plan (the "Plan"), as adopted by the Board of
Directors of Ohio Casualty. I have read and reviewed the Plan, and I hereby
consent and agree to be bound by, and fully comply with, the terms and
conditions of the Plan.
Ohio Casualty has as of this date agreed to grant an Award to me of
units under the Plan to be earned as provided in the Plan to the extent
- ------
and only the extent that a GAIC Earnout Payment is made. Ohio Casualty has
also agreed to maintain an Account Balance on my behalf. ("Award," "GAIC
Earnout Payment" and "Account Balance" are defined in the Plan.)
I hereby acknowledge that I am not relying on any tax advice given to
me by Ohio Casualty or by any affiliate, employee, contractee, agent, director
or officer thereof regarding federal or state income tax consequences arising
to me as a result of my participation in the Plan. I further hereby
acknowledge that I have been advised to consult with my own advisors regarding
any such tax consequences to me. Finally, I hereby agree that I may not seek
recovery against the Company, GAIC, any member of the Incentive Plan Committee
or any affiliates, controlling persons, employees, directors, contractees or
agents of the Company or GAIC, or against any other person having an
administrative or investment position relative to the Plan for any loss, if
any, sustained by me as a result of the nonperformance by any of the above-
named persons of their respective duties, or the negligence or any other
misconduct of the above-named persons, except that this provision shall not
excuse fraud or a wrongful taking by any person. The terms "Company", "GAIC"
and "Incentive Plan Committee" are defined in the Plan.
Very truly yours,
- -------------------------------------
Date:
------------------------------
<PAGE>
EXHIBIT B
---------
DESIGNATION OF BENEFICIARY TO
THE OHIO CASUALTY INSURANCE COMPANY
COMMERCIAL LINES DIVISION INCENTIVE PLAN
----------------------------------------
TO: The Ohio Casualty Insurance Company
I hereby direct that upon my death any payments remaining to be paid
in accordance with The Ohio Casualty Insurance Company Commercial Lines
Division Incentive Plan between the undersigned and Ohio Casualty shall be
paid to the following person(s):
(A) Primary Beneficiary Name:
------------------- -------------------------
Address:
----------------------
----------------------
T.I.N.:
_ -----------------------
(B) Alternative Beneficiary Name:
----------------------- -------------------------
(in the event of the death or non-
existence of the Primary Address:
Beneficiary listed above) ----------------------
----------------------
T.I.N.:
-----------------------
The undersigned hereby reserves the right to change the beneficiary or
beneficiaries designated herein at any time by filing in writing a new
Designation of Beneficiary form with Ohio Casualty.
WITNESS:
- --------------------------- ------------------------------
EMPLOYEE:
Date:
-------------------------
<PAGE>
EXHIBIT C
---------
[Letter of Understanding]
<PAGE>
ACKNOWLEDGMENT
--------------
THE OHIO CASUALTY INSURANCE
COMPANY
Date: By:
-------------------------- ----------------------------
Lauren Patch
President and Chief Executive Officer
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