-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AEZ6L0D2i+QBNYMs91q91COgteZtGA0OFzpbfSfYnHGkF4wMi7UzyXPlCqlGK/jY 1Y+78aqFCRzGgH67M99hbQ== 0000073952-99-000023.txt : 19990518 0000073952-99-000023.hdr.sgml : 19990518 ACCESSION NUMBER: 0000073952-99-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO CASUALTY CORP CENTRAL INDEX KEY: 0000073952 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310783294 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05544 FILM NUMBER: 99626701 BUSINESS ADDRESS: STREET 1: 136 N THIRD ST CITY: HAMILTON STATE: OH ZIP: 45025 BUSINESS PHONE: 5138673000 MAIL ADDRESS: STREET 1: 136 N THIRD ST CITY: HAMILTON STATE: OH ZIP: 45025 10-Q 1 1 ============================================================================== 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 March 31, 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 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 The aggregate market value as of May 3, 1999 of the voting stock held by non-affiliates of the registrant was $975,799,672. On May 3, 1999 there were 30,760,792 shares outstanding. Page 1 of 16 ============================================================================== 2 PART I ITEM 1. FINANCIAL STATEMENTS OHIO CASUALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands) (Unaudited)
March 31, December 31, 1999 1998 - ----------------------------------------------------------------------------- Assets Investments: Fixed maturities: Available for sale, at fair value (cost: $2,384,266 and $2,307,734) $2,460,593 $2,415,904 Equity securities, at fair value (cost: $237,867 and $245,129) 907,347 924,906 Short-term investments, at fair value (cost: $67,812 and $262,939) 67,814 262,863 ----------- ----------- Total investments 3,435,754 3,603,673 Cash 43,578 42,139 Premiums and other receivables, net of allowance for bad debts of $9,039 and $8,739, respectively 347,922 301,943 Deferred policy acquisition costs 174,559 176,606 Property and equipment, net of accumulated depreciation of $101,673 and $97,991, respectively 87,861 80,065 Reinsurance recoverable 170,271 186,861 Goodwill, net of accumulated amortization of $3,094 and $1,031, respectively 305,267 308,206 Other assets 123,380 102,771 - ---------------------------------------------------------------------------- Total assets $4,688,592 $4,802,264 ============================================================================ Liabilities Insurance reserves: Unearned premiums $ 693,367 $ 668,550 Losses 1,547,714 1,580,599 Loss adjustment expenses 368,031 376,340 Future policy benefits 20,883 25,518 Note payable 255,000 265,000 California Proposition 103 reserve 48,653 48,043 Deferred income taxes 125,509 140,730 Other liabilities 359,461 376,503 ----------- ----------- Total liabilities 3,418,618 3,481,283 Shareholders' equity Common stock, $.125 par value 5,850 5,850 Authorized: 150,000,000 shares Issued: 47,209,172 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 484,247 511,816 Retained earnings 1,182,255 1,185,349 Treasury stock, at cost: (Shares: 16,448,380; 15,535,089) (427,828) (407,358) ---------- ---------- Total shareholders' equity 1,269,974 1,320,981 - ---------------------------------------------------------------------------- Total liabilities and shareholders' equity $4,688,592 $4,802,264 ============================================================================
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. 2 3 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (In thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 - ---------------------------------------------------------------------------- Premiums and finance charges earned $ 384,545 $ 309,627 Investment income less expenses 41,809 44,633 Investment gains realized, net 903 4,082 ---------- ---------- Total revenues 427,257 358,342 Losses and benefits for policyholders 231,753 188,117 Loss adjustment expenses 34,061 26,380 General operating expenses 42,987 28,352 Amortization of goodwill 3,094 0 California Proposition 103 reserve, including interest 611 897 Amortization of deferred policy acquisition costs 99,969 73,731 ---------- ---------- Total expenses 412,475 317,477 Income from continuing operations before income taxes 14,782 40,865 Income taxes Current 2,237 7,457 Deferred 828 2,494 ---------- ---------- Total income taxes 3,065 9,951 - ---------------------------------------------------------------------------- Income before discontinued operations 11,717 30,914 Income from discontinued operations net of taxes of $(502) and $179, respectively 1,795 280 Cumulative effect of accounting change, net of taxes (2,255) 0 - ---------------------------------------------------------------------------- Net income $ 11,257 $ 31,194 ============================================================================ Other comprehensive income, net of tax: Net change in unrealized gains (losses), net of income tax expense/benefit of $(14,844) and $38,470, respectively (27,569) 71,445 ---------- ---------- Comprehensive income $ (16,312) $ 102,639 ============================================================================ Average shares outstanding - basic 31,145 33,621 Average shares outstanding - diluted 31,163 33,663 ============================================================================ Earnings per share (basic and diluted): Income from continuing operations, per share $ 0.38 $ 0.92 Income from discontinued operations, per share 0.05 0.01 Effect of change in accounting principle (net of tax) (0.07) 0.00 ---------- ---------- Net income, per share $ 0.36 $ 0.93 Cash dividends, per share $ 0.46 $ 0.44 ============================================================================
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. 3 4 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands) (Unaudited)
Common Accumulated Additional stock other Total Common paid-in purchase comprehensive Retained Treasury shareholders' Stock capital warrants income earnings stock equity Balance January 1, 1998 $ 5,850 $ 3,923 $ 0 $ 454,241 $ 1,158,308 $ (307,493) $ 1,314,829 Unrealized gain (loss) 109,915 109,915 Deferred income tax benefit on net unrealized gain (loss) (38,470) (38,470) Net issuance of treasury stock under stock option plan and by charitable donation (8,276 shares) 195 193 388 Repurchase of treasury stock (30,000 shares) (1,464) (1,464) Net income 31,194 31,194 Cash dividends paid ($.44 per share) (14,797) (14,797) - ----------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1998 $ 5,850 $ 4,118 $ 0 $ 525,686 $ 1,174,705 $ (308,764) $ 1,401,595 ============================================================================================================================= Balance January 1, 1999 $ 5,850 $ 4,186 $ 21,138 $ 511,816 $ 1,185,349 $ (407,358) $ 1,320,981 Unrealized gain (loss) (42,413) (42,413) Deferred income tax benefit on net realized gain (loss) 14,844 14,844 Net issuance of treasury stock under stock option plan and by charitable donation (9,009 shares) 126 212 338 Repurchase of treasury stock (517,100 shares) (20,682) (20,682) Net income 11,257 11,257 Cash dividends paid ($.46 per share) (14,351) (14,351) - ----------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1999 $ 5,850 $ 4,312 $ 21,138 $ 484,247 $ 1,182,255 $ (427,828) $ 1,269,974 =============================================================================================================================
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. 4 5 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 - ---------------------------------------------------------------------------- Cash flows from: Operations Net income $ 11,257 $ 31,194 Adjustments to reconcile net income to cash from operations: Changes in: Insurance reserves (21,013) 401 Income taxes 1,349 3,133 Premiums and other receivables (45,979) (11,822) Deferred policy acquisition costs 2,046 (3,648) Reinsurance recoverable 16,589 (9,160) Other assets (12,399) 13,674 Other liabilities (25,689) (3,899) Amortization of goodwill 2,939 0 Depreciation and amortization 8,318 3,463 Investment gains and losses (2,103) (4,042) Cumulative effect of an accounting change 2,255 0 California Proposition 103 611 896 --------- --------- Net cash generated (used) by operations (61,819) 20,190 Investments Purchase of investments: Fixed income securities - available for sale (255,146) (45,155) Equity securities (6,395) (2,986) Proceeds from sales: Fixed income securities - available for sale 140,013 10,426 Equity securities 15,146 6,678 Proceeds from maturities and calls: Fixed income securities - available for sale 27,998 39,640 Equity securities 3,000 0 Property and equipment Purchases (11,612) (4,081) Sales 135 164 --------- --------- Net cash from investments (86,861) 4,686 Financing Note payable (10,000) 0 Proceeds from exercise of stock options 103 1 Purchase of treasury stock (20,682) (1,686) Dividends paid to shareholders (14,351) (14,797) ---------- ---------- Net cash used in financing activity (44,930) (16,482) Net change in cash and cash equivalents (193,610) 8,394 Cash and cash equivalents, beginning of period 305,002 120,055 - ----------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 111,392 $ 128,449 =============================================================================
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. 5 6 OHIO CASUALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS During the quarter, 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 accrued a liability for insurance assessments of $2.3 million net of tax. 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, 1999 (January 1, 2000 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: Three months ended March 31 1999 1998 ---- ---- Income from continuing operations $11,717 $30,914 Weighted average common shares outstanding - basic 31,145 33,621 Basic income from continuing operations per weighted average share $ .38 $ .92 ============================================================================== Weighted average common shares outstanding 31,145 33,621 Effect of dilutive securities 18 42 - ------------------------------------------------------------------------------ Weighted average common shares outstanding - diluted 31,163 33,663 Diluted income from continuing operations per weighted average share $ .38 $ .92 ============================================================================== 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. 6 7 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 March 31, 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. Private Passenger Auto 1999 1998 - -------------------------------------------------------------- Net premiums written $153,148 $125,492 % Increase(decrease) 22.0% 9.3% Net premiums earned 131,988 121,670 % Increase(decrease) 8.5% 9.8% Underwriting gain/(loss) (before tax) (6,012) (2,675) Loss ratio 64.2% 66.6% Loss expense ratio 10.8% 10.8% Underwriting expense ratio 25.5% 24.0% Combined ratio 100.5% 101.4% Impact of catastrophe losses on combined ratio 0.3% 0.2% CMP, Fire, Inland Marine 1999 1998 - --------------------------------------------------------------- Net premiums written $74,925 $52,627 % Increase(decrease) 42.4% -0.4% Net premiums earned 73,793 51,647 % Increase(decrease) 42.9% 4.4% Underwriting gain/(loss) (before tax) (14,195) (2,198) Loss ratio 69.8% 57.0% Loss expense ratio 8.0% 3.6% Underwriting expense ratio 40.8% 42.8% Combined ratio 118.6% 103.4% Impact of catastrophe losses on combined ratio 2.1% 1.6% General Liability 1999 1998 - --------------------------------------------------------------- Net premiums written $32,162 $24,083 % Increase(decrease) 33.5% -9.0% Net premiums earned 30,883 23,943 % Increase(decrease) 29.0% -4.8% Underwriting gain/(loss) (before tax) 6,105 2,085 Loss ratio 30.5% 33.6% Loss expense ratio 0.1% 9.8% Underwriting expense ratio 47.7% 47.6% Combined ratio 78.3% 91.0% Impact of catastrophe losses on combined ratio N/A N/A Workers' Compensation 1999 1998 - --------------------------------------------------------------- Net premiums written $47,126 $25,190 % Increase(decrease) 87.1% -13.5% Net premiums earned 50,428 24,665 % Increase(decrease) 104.5% -11.7% Underwriting gain/(loss) (before tax) 5,443 (7,840) Loss ratio 48.4% 90.5% Loss expense ratio 8.5% 8.7% Underwriting expense ratio 34.6% 31.9% Combined ratio 91.5% 131.1% Impact of catastrophe losses on combined ratio N/A N/A 7 8 Commercial Auto 1999 1998 - -------------------------------------------------------------- Net premiums written $43,124 $35,571 % Increase(decrease) 21.2% -6.2% Net premiums earned 42,502 34,456 % Increase(decrease) 23.4% -1.1% Underwriting gain/(loss) (before tax) (5,990) (780) Loss ratio 67.1% 58.3% Loss expense ratio 12.4% 9.7% Underwriting expense ratio 34.1% 33.2% Combined ratio 113.6% 101.2% Impact of catastrophe losses on combined ratio 0.2% 0.2% Homeowners 1999 1998 - -------------------------------------------------------------- Net premiums written $37,478 $40,075 % Increase(decrease) -6.5% 4.6% Net premiums earned 45,654 44,145 % Increase(decrease) 3.4% 5.7% Underwriting gain/(loss) (before tax) (10,603) (1,050) Loss ratio 82.7% 60.4% Loss expense ratio 8.8% 6.9% Underwriting expense ratio 38.7% 38.6% Combined ratio 130.2% 105.9% Impact of catastrophe losses on combined ratio 7.8% 4.3% Fidelity & Surety 1999 1998 - --------------------------------------------------------------- Net premiums written $9,401 $8,764 % Increase(decrease) 7.3% 5.2% Net premiums earned 9,275 8,840 % Increase(decrease) 4.9% 0.3% Underwriting gain/(loss) (before tax) 1,812 1,191 Loss ratio 2.7% 15.0% Loss expense ratio 4.6% 5.8% Underwriting expense ratio 72.2% 66.3% Combined ratio 79.5% 87.1% Impact of catastrophe losses on combined ratio N/A N/A Total Property & Casualty 1999 1998 - ---------------------------------------------------------------- Net premiums written $397,364 $311,802 % Increase(decrease) 27.4% 1.3% Net premiums earned 384,523 309,366 % Increase(decrease) 24.3% 3.6% Underwriting gain/(loss) (before tax) (23,440) (11,267) Loss ratio 61.5% 61.1% Loss expense ratio 8.9% 8.5% Underwriting expense ratio 34.5% 33.8% Combined ratio 104.9% 103.4% Impact of catastrophe losses on combined ratio 1.8% 1.0% All other 1999 1998 - ----------------------------------------------------------------- Revenues $(376) $1,657 Expenses 4,973 1,975 - ----------------------------------------------------------------- Net income $(5,349) $(318) Reconciliation of Revenues 1999 1998 - ------------------------------------------------------------- Net premiums earned for reportable segments $384,523 $309,366 Investment income 42,467 43,230 Realized gains 1,078 4,236 Miscellaneous income 43 87 - ----------------------------------------------------------------- Total property and casualty revenues (Statutory basis) 428,111 356,919 Property and casualty statutory to GAAP adjustment (478) (234) - ----------------------------------------------------------------- Total revenues property and casualty (GAAP basis) 427,633 356,685 Other segment revenues (376) 1,657 - ----------------------------------------------------------------- Total revenues $427,257 $358,342 ================================================================= Reconciliation of Underwriting gain/(loss) (before tax) 1999 1998 - ----------------------------------------------------------------- Property and casualty under- writing gain/(loss) (before tax) (Statutory basis) (23,440) (11,267) Statutory to GAAP adjustment 77 5,307 - -------------------------------------------------------------- Property and casualty under- writing gain/(loss) (before tax) (GAAP basis) (23,363) (5,960) Net investment income 41,809 44,634 Realized gains 903 4,082 Other income (4,567) (1,891) - -------------------------------------------------------------- Income from continuing operations before income taxes $14,782 $40,865 ============================================================== 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. 8 9 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 at the beginning of first quarter 1998. (Unaudited) 1999 1998 - ---------------------------------------------------- Revenues $427,257 $452,326 Net income 11,257 32,642 Diluted earnings per share .36 .97 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. The activities under the plan are expected to be completed by year-end 1999 9 10 ITEM 2. Management's Discussion and Analysis of Financial Condition - ------- and Results of Operations ----------------------------------------------------------------- Property and casualty pre-tax underwriting losses for the quarter ended March 31, 1999 were $23.4 million, $.75 per share, compared with $6.0 million, $.18 per share for the same period in 1998. Gross premiums for the first three months of 1999 increased 12.3% for all lines of business excluding the effect of $76.5 million in gross premium written from the GAI acquisition. Commercial lines decreased .3% and personal lines increased 21.6% from the same period last year excluding the effects of the GAI acquisition. Property and casualty net premiums increased 6.3% for the first quarter of 1999 from the same period a year ago excluding $65.8 million related to the GAI acquisition. Premium from Key Agents grew 9.5% over the same period of 1998. Key Agents work closely with the Corporation to establish goals to increase profitability, growth and retention. Non-key active agents grew 8.2% over 1998. These together with new appointments brings total active agent premium growth to 11.4% for 1999. New Jersey is our largest state with 18.8% of total net premiums written during the quarter. 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. Current policyholders electing to cancel their current policy and renew with the effects of the rate rollback have so far been insignificant. 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 March 31, 1999, the Corporation had personal auto net premium written of $46.2 million or 62.0% 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 $6.9 million and $17.2 million for the periods ended March 31, 1999 and December 31, 1998 respectively. The combined ratio for the first three months increased 1.5 points to 104.9% from 103.4% from the same period last year. The three-month combined ratio for homeowners increased 24.3 points to 130.2% from 105.9% in the same period last year. This increase is due to an increase in non-catastrophe weather related losses in 1999 compared with the same period of 1998. Personal automobile, the Corporation's largest line, recorded a 1999 three-month combined ratio of 100.5% decreasing from 101.4% in 1998. Workers' compensation combined ratio for the first three months of 1999 decreased 39.6 points to 91.5% from 131.1% during the same period last year. The decrease in the workers' compensation ratio is due to reserve increases in 1998 from the additional development of certain pre-existing claims that have leveled off in the first quarter 1999. The general liability combined ratio decreased during the first quarter 1999 to 78.3% from 91.0% in 1998. This reduction is largely due to favorable loss development during the first quarter of 1999. The combined ratio for CMP, fire and inland marine increased 15.2 points to 118.6% from 103.4% during March 1999. This increase is due largely to an increase in frequency due to non-catastrophe weather related losses as well as adverse development in the first quarter of 1999 compared with the same period last year. The first quarter catastrophe losses were $5.6 million and accounted for 1.8 points on the combined ratio. This compares with $3.0 million and 1.0 point for the same period in 1998. The effect of catastrophes on 10 11 the Corporation's results cannot be accurately predicted. Severe weather patterns can have a material adverse impact on the Corporation's results. During the first quarter of 1999 there were 5 catastrophes compared with 8 catastrophes in the first quarter of 1998. The largest catastrophe in each quarter was $2.4 million and $1.7 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. For the quarter, property and casualty before tax investment income was $42.5 million, $1.36 per share, decreasing slightly from $43.2 million, $1.29 per share, for the same period last year. The effective tax rate on investment income for the first quarter of 1999 was 25.1% compared with 24.4% for the comparable period in 1998. Net cash used by operations was $61.8 million for the first three months of the year compared with net cash generated of $20.2 million for the same period in 1998. This change is due to a decrease in net income of $19.9 million from the same period last year, 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 $14.4 million in the first three months of 1999 compared with $14.8 million for the same period of 1998. In 1995, 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 $1.1 million in unamortized ceding commission. This will continue to be amortized over the remaining life of the underlying policies. 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. Investments in below investment grade securities (Standard and Poor's rating below BBB-) and unrated securities are summarized as follows: March 31, December 31, 1999 1998 - ------------------------------------------------------------------------------ Below investment grade securities: Carrying value $194.5 $207.3 Amortized cost 199.5 208.8 Unrated securities: Carrying value $328.6 $281.8 Amortized cost 317.5 264.8 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: March 31, December 31, 1999 1998 - ------------------------------------------------------------------------------ Below investment grade securities at carrying value $194.5 $207.3 Other rating agencies categorizing unrated securities as below investment grade 9.7 7.7 ------ ------ Below investment grade securities at carrying value $204.2 $215.0 11 12 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 62 corporate borrowers in approximately 39 industries. Investments in below investment grade securities have greater risks than investment 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 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 $48.7 million at March 31, 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. 12 13 During the first quarter, Ohio Casualty continued its share repurchase program. The total number of shares acquired during the quarter was 517,100, at an average price of $40 per share. The Company has remaining authorization to repurchase 546,812 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 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, and at this time, all have completed the LPAR compliance testing. All systems will undergo integrated testing of the production environment. In 1999, contingency plans include compliance reverification of this integrated test early in the third quarter 1999 and again early in the fourth quarter 1999. As of March 31, 1999, the total amount spent to date for I/S related costs on the Year 2000 project is $2.4 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 13 14 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. 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 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 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 which the Corporation could experience interruptions in normal business operations. These "worst-case scenarios" include: disruption 14 15 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 and general economic and market conditions. 15 16 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 - At the annual meeting on April 21, 1999, shareholders voted on board of director seats for three year terms. Those elected were: Arthur Bennert: For 28,103,879; against 126,743; abstentions 277,003 Catherine Dolan: For 28,053,210; against 169,345; abstentions 285,070 Lauren Patch: For 27,961,350; against 193,691; abstentions 352,584 Those directors whose term of office continued after the meeting were: Jack E. Brown, Wayne Embry, Vaden Fitton, Joseph L. Marcum, Stephen Marcum, Stanley Pontius, Howard L. Sloneker III and Bill Woodall. Jeffery D. Lowe whose term expired in 1999, decided not to run for re-election and resigned from the Board of Directors effective April 21, 1999. Item 5. Other Information - None Item 6. Exhibits and reports on Form 8-K - The Corporation filed a Form 8-K on February 16, 1999, to file the Corporation's 1998 financial statements. The Corporation filed Form 8-K/A on February 16, 1999, to amend Form 8-K filed on December 15, 1998, to include pro forma financial statements required for the GAI acquisition. The Corporation filed Form 8-K/A on March 26, 1999, to amend the 8-K filing on February 16, 1999. The Corporation filed Form 8-K/A on March 26, 1999, to amend the 8-K filing on December 15, 1998. Attached hereto as Exhibit No. 27 is the Financial Data Schedule. Attached hereto as Exhibits 10.1, 10.2 and 10.3 are management contracts. 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) May 17, 1999 -------------------------------- Barry S. Porter, CFO/Treasurer (on behalf of Registrant and as Principal Accounting Officer) 16 EX-10.1 2 MANAGEMENT CONTRACTS Exhibit 10.1 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made to be effective as of the Effective Date (as that term is defined in Section 24 hereof) by and between The Ohio Casualty Insurance Company (the "Company") and Thomas A. Hayes (the "Executive). WITNESSETH: WHEREAS, the Company has agreed to employ the Executive as its Executive Vice President and Chief Operating Officer to act on behalf of the Company, at the compensation hereinafter described; and WHEREAS, as a condition for the employment of the Executive, the Executive has agreed to enter into this Agreement; NOW, THEREFORE, in consideration of the premises and the agreements as hereinafter provided, the parties hereto agree as follows, each intending to be legally bound thereby: Section 1. Employment and Service. The Company hereby employs the ---------------------- Executive as its Executive Vice President and Chief Operating Officer, and the Executive hereby accepts employment as such by the Company, upon the terms and conditions hereinafter set forth. Section 2. Term. Subject to the provisions of Section 12 hereof, the ---- initial term of the Executive's employment pursuant to this Agreement shall be for a period of thirty-six (36) months, commencing on the Effective Date. Thereafter, Executive's employment shall have no term and shall be at will (the initial 36-month term and any at will employment extension thereafter being referred to as the "Services Period"). Subject to the provisions of Section 12 hereof, either party may notify the other party in writing of its intention not to continue the employment relationship created hereunder after the end of the initial 36-month term, which written notice shall be sent in accordance with the provisions of Section 15 hereof at least one hundred eighty (180) days prior to the last day of the initial 36-month term. Section 3. Compensation. The Executive will be entitled to the ------------ compensation described in the administrative guidelines of the compensation program for the senior officers of the Company (the "Guidelines"), a copy of which is attached hereto as Exhibit 2 A and is incorporated herein by this reference. If, from time to time and at any time during the Services Period, the Guidelines are amended, any and all such amendments shall be binding upon the Executive, as if fully re-written herein. Subject to the terms and conditions of the Guidelines, the compensation package for the Executive shall be as follows: (a) Initial base salary - $550,000 annually. (b) Annual bonus - (i) Maximum - 90% ($495,000 based on initial $550,000 salary). - (ii) Target - 60% ($330,000 based on initial $550,000 salary). - (iii) Minimum - 30% ($165,000 based on initial $550,000 salary). (c) Long term incentive - The Executive will be eligible for an annual long-term incentive grant having an expected value of 80% of the initial base salary ($440,000 initially). The incentive vehicles will be established under the Guidelines, consistent with those provided to other senior officers of the Company. (d) - If the employment of the Executive terminates during the course of an Employment Year (each twelve consecutive calendar month period beginning on the Effective Date)for any reason other than Just Cause termination under Section 12(b) hereof, any Annual bonus or Long term incentive benefits described above shall be prorated for such Employment Year (to the nearest calendar month) and credited to Executive's account or paid as bonus in accordance with the foregoing. Notwithstanding the foregoing, no payments shall be made under this Section if Executive's employment terminates for Just Cause under Section 12(b) hereof. Section 4. Participation in Employee Benefit Programs. In addition to ------------------------------------------ the compensation as provided in Section 3 hereof, the Executive shall be entitled (a) to participate to the full extent of such Executive's eligibility in all of the employee and retirement benefit programs listed on Exhibit B, attached hereto and made a part hereof, as such programs may from time to time be amended or modified as approved by the Board of Directors of the Company, and (b) to such other perquisites as are made available generally to the senior officers of the Company, a current 2 3 listing of which is contained on Exhibit C, attached hereto and made a part hereof. Section 5. Duties. During and throughout the Services Period, the ------ Executive shall devote his full working time and efforts to the business and affairs of the Company and its Affiliates. The Executive shall use his best efforts to promote the interests of the Company and its Affiliates, and shall discharge well and faithfully the duties which may be assigned to him from time to time. During and throughout the Services Period, the Executive shall not be engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage and shall not compete, directly or indirectly, with the Company and its Affiliates; provided, however, that such restrictions shall not be construed as preventing the Executive from investing his personal assets in (a) businesses which do not compete or do business with the Company and its Affiliates in such manner or form as will not require any services on the part of the Executive in the operation or affairs of the businesses in which such investments are made or (b) stock or corporate securities as described in the second paragraph of Section 7 hereof; and provided further, however, that, the foregoing not- withstanding, the Executive may engage in any other business activity with the prior written consent of the Company, which consent the Company shall not be under any obligation to give and shall be given in the Company's sole discretion. The Executive also may participate in, or serve as a trustee or director of, civic and/or charitable entities or activities as he may desire, so long as such activities or service do not interfere with the performance of his duties hereunder. Section 6. Certain Definitions. (a) The term "Restricted Competition ------------------- Period" as used in this Agreement shall have the following meaning or meanings: (i) With respect to the Non-Competition Covenants in Section 7 hereof, the "Restricted Competition Period" for Great American Insurance Company (or any Affiliate thereof) shall mean the period of time during any and all Services Period hereunder and for a period of two (2) years thereafter; and (ii) With respect to the Non-Competition Covenants described in Section 7 hereof, with respect to any property and casualty insurance company (other than Great American Insurance Company or any Affiliates thereof), or any other competitor of Company or its Affiliates, "Restricted Competition 3 4 Period" shall mean the period of time during any and all Services Period hereunder or for a period of three (3) years after the Effective Date, whichever shall be later to occur; (iii) With respect to the Other Prohibitions set forth in Section 8 hereof, "Restricted Competition Period" shall mean the period of time during any and all Services Period hereunder and for a period of one (1) year thereafter; or for a period of three (3) years after the Effective Date, whichever shall be later to occur; and (iv) With respect to Confidential Information set forth in Section 9 hereof, "Restricted Competition Period" mans the entire period of time during which such information retains its confidential or proprietary nature. (b) The term "Affiliates" as used in this Agreement shall mean any Person which controls, is controlled by or is under common control with another Person. Control includes the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten per cent or more of the voting securities of any other person. (c) "Person" means any individual, corporation, partnership, association, limited liability company, limited liability partnership, trust, unincorporated organization, Lloyd's company, reciprocal insurer, or any other business organization, or any combination of the foregoing acting in concert. Section 7. Non-Competition Covenants. During the applicable ------------------------- Restricted Competition Period described in Section 6 above, the Executive shall not, without the prior written consent of the Company: (a) directly or indirectly engage in, (b) assist or have an active interest in (whether as proprietor, partner, investor, shareholder, officer, director or any type of principal whatsoever), or 4 5 (c) enter the employment of or act as agent for, or advisor or consultant to, any Person including without limitation enterprises involving Persons related by blood or marriage to the Executive, which is or is about to become, directly or indirectly, engaged in the business of insurance (whether as an agent, broker, marketer, underwriter, reinsurer, manager, actuary, director, officer, employee, consultant or otherwise) in any and/or all of the lines and/or kinds of coverage, and/or any and all of the related businesses and services, provided by, or under development by, the Company and its Affiliates at any time during the Services Period. The foregoing provisions of this Section 7 are not intended to prohibit, and shall not prohibit, the Executive from purchasing, for investment purposes only, any stock or other corporate security which is listed on a national securities exchange or quoted in any national market system (except as in this Agreement otherwise provided), so long as such stock or other corporate security owned by the Executive does not represent more than one percent (1%) of the market value or voting power of the total stock or other corporate securities of that class. Section 8. Other Prohibitions. During the applicable Restricted ------------------ Competition Period described in Section 6 above, the Executive shall not at any time engage in any of the following activities in a manner which is inconsistent with his service as the Executive Vice President and Chief Operating Officer of the Company, without the prior written consent of the Company: (a) request or advise any customer or client of, or any Person having business dealings with the Company and/or any of its Affiliates to withdraw, curtail or cancel such business or business dealings; (b) disclose to any Person the names of customers or clients of, or other Persons having dealings with, the Company and/or any of its Affiliates; or (c) induce or attempt to influence any other employee of the Company and/or any of its Affiliates to terminate employment. Section 9. Confidential Information. The Executive recognizes and ------------------------ acknowledges that the Company's and its Affiliates' trade secrets and confidential or proprietary information, including without limitation (a) information of the 5 6 Company and/or its Affiliates concerning its and/or their insurance operations, customers or prospects, terms and conditions of sale and prices, technical knowledge relating to customer requirements and knowledge of markets for the Company's and/or its Affiliates' products, as such trade secrets or information may exist from time to time, and (b) information of third parties similar to that described in the foregoing clause (a) of this sentence which has been made available to the Company and/or its Affiliates pursuant to a business relationship with such third party, are valuable, special and unique assets of the Company's and/or its Affiliates' business, access to which and the knowledge of which are essential to the performance of the duties of the Executive hereunder. The Executive will not, in whole or in part, disclose such trade secrets or confidential or proprietary information to any Person for any reason or purpose whatsoever, nor will the Executive make use of any such trade secrets or confidential or proprietary information for his own purposes or for the benefit of any other Person. Section 10. Scope of Restrictions. If the scope of any restriction --------------------- contained in Sections 6, 7,8 and/or 9 of this Agreement is too broad to permit enforcement of any such restriction to its fullest extent, then such restriction shall be enforced to the maximum extent permitted by law, and the Executive hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restrictions. Section 11. Injunctive Relief. The Executive hereby acknowledges and ----------------- confirms that any restricted activity of the nature referred to in the preceding Sections of this Agreement would cause irreparable injury or damage to the Company and/or its Affiliates, acknowledges and agrees that the remedies at law of the Company for any breach of any of the Executive's obligations under this Agreement would be inadequate and agrees that the Company shall be entitled to institute and prosecute proceedings in a court of competent jurisdiction to obtain temporary and/or permanent injunctive relief to enforce any provision hereof, without the necessity of proof of actual injury or damage. Section 12. Termination. (a) The employment of the Executive by the ----------- Company and the Executive's corresponding rights and obligations under Sections 1 through 8, inclusive, may be terminated by the Executive if the duties, responsibilities and/or positions and titles of the Executive are materially altered or materially adversely affected by action of the Company at any time during the Services Period. 6 7 Upon such termination, the Company shall pay to the Executive (y) the compensation and benefits set forth in Sections 3 and 4 hereof for the greater of (i) one year or (ii) the remaining term of the then current Services Period, and (z) all stock options, if any, then held by Executive shall fully vest. Additionally upon such termination, the provisions of Section 9 shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (b) The employment of the Executive by the Company and the Executive's corresponding rights and obligations under Sections 1 through 5, inclusive, may be terminated immediately at any time for just cause by the Company by giving written notice to the Executive. "Just Cause", for purposes of this subsection (b), shall mean dishonesty, immoral conduct detrimental to the Company, fraud, criminal activity and/or gross negligent performance of job responsibilities. Upon termination for Just Cause, Executive shall not be entitled to any severance or other compensation or benefits from and after the date of termination, and the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (c) The employment of the Executive by the Company and the Executive's corresponding rights and obligations under Sections 1 through 5, inclusive, may be terminated immediately at any time by the Company for a reason other than for Just Cause by giving fourteen (14) days prior written notice to the Executive. If such termination occurs during the initial 36-month term, then the only severance or other compensation or benefits to which the Executive is entitled from and after the date of termination is the compensation payable to him under (i) Section 3(a) hereof for the balance of the remaining 36-month term, payable on the normal bi-weekly schedule and (ii) Section 3(d) hereof. In addition, all of Executive's stock options shall be fully vested, and he shall also participate in all health insurance, group life insurance, long-term incentive plans and other employee benefit programs provided by the Company at the time of such termination, in the same manner and to the same extent to which the other senior officers of the Company would participate upon their termination. If such termination occurs during the at will employment extension after the initial 36-month term, then his only severance or other compensation or benefits from and after 7 8 the date of termination will be the compensation payable to him under Section 3(a) hereof for a period of six (6) months, payable on the normal bi-weekly schedule. Other than as provided above, upon the occurrence of such termination, Executive will be entitled to no other compensation or severance benefits from the Company. Additionally upon such termination, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (d) If the Executive terminates his employment at the end of the initial term, as provided in Section 2, then the Executive shall not be entitled to any severance or other compensation or benefits from and after the date of termination. However, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. If the Company terminates the Executive's employment at the end of the initial term, as provided in Section 2, then the only severance or other compensation or benefits to which the Executive is entitled from and after the date of termination will be the compensation payable to him under Section 3(a) hereof for a period of 6 months, payable on the normal bi-weekly schedule. Additionally, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (e) If the termination of Executive's employment occurs as a result of his death or disability (as defined herein), Executive (or his legal representative) shall be entitled to the following severance benefits: (i) If Executive's death or disability occurs during the initial 36-month period, he or his legal representative shall be entitled to those benefits described in subparagraph (c) of this Section 12 (Termination); and (ii) If such termination occurs after the expiration of the initial 36-month period, such compensation and benefits shall be the same as those described in subparagraph (d) of this Section 12 (Termination) in the same manner as if the Company had terminated Executive's employment at the end of the initial term; and 8 9 (iii) For purposes of this Agreement, Executive shall be deemed to be "disabled" if he for any reason, either by sickness or accident, is unable to perform his duties for Company on a full-time basis for a period of one hundred twenty (120) consecutive calendar days. For purposes hereof, "full-time basis" shall be deemed to be a situation in which Executive must perform at least thirty (30) office hours of service for Company on a weekly basis. (iv) Notwithstanding anything to the contrary in this Section, the compensation payable to the Executive by the Company in the event of disability shall be reduced, on a dollar-for- dollar basis, by the amount of any benefits paid to the Executive under any of the Company's disability programs. (f) If, upon termination of this Agreement for any reason, the Executive is serving as a Director of the Company or any of its Affiliates, the Executive shall resign all such directorships effective at the same time as the termination of his employment. If the appropriate resignation shall not have been executed and delivered by the Executive to the Company and/or its Affiliates within seven (7) days after a request therefor, the President of the Company and the Affiliates is hereby authorized and directed by the Executive to execute such resignations for and on behalf of and in the name of the Executive, as his attorney-in-fact for such purpose. (g) Upon termination of this Agreement in accordance with the terms hereof, the Executive shall forthwith deliver to the Company all records, documents, accounts, letters and papers of every type or description whatsoever within his possession or control relating to the affairs and business of the Company and/or its Affiliates, as well as any other property belonging to any of such parties. (h) Notwithstanding anything in this Agreement to the contrary, nothing shall be construed or interpreted to the effect that Executive is surrendering or otherwise forfeiting any benefits that are otherwise vested or given to him under law; including, without limitation, any and all 401(k) benefits or any other benefits from a qualified plan; any health insurance benefits, such as COBRA, any rights to convert life insurance, or any other benefits available to Executive in the employee and retirement benefit programs listed on Exhibit B. It is the 9 10 intent of the parties, and they do hereby confirm, that severance benefits set forth above do not replace, in any manner whatsoever, the benefits payable or available to Executive (or his beneficiaries or dependents) upon termination, and the Executive is entitled to participate to the same extent that and in the same manner in which other senior officers of the Company are entitled to or participate in such benefits. (i) The parties recognize that certain incentive plan awards may be paid to the Executive in restricted stock of the Company, and that the terms of the restricted stock may include forfeiture if the Executive leaves the Company during the restriction period. Notwithstanding anything contained in this Agreement, any such incentive plan or any such stock restrictions to the contrary, Executive shall not forfeit any incentive plan awards which are paid in restricted stock of the Company if the Company terminates Executive's employment during the restriction period; unless Executive's employment is terminated under Section 12 (b), in which case all restricted stock shall be forfeited as of the date of termination. Moreover, if the Employee terminates his employment during the initial 36-month term hereof for any reason, then he shall forfeit all restricted stock as of the date of termination. Section 13. Reimbursement of Expenses. The Company shall reimburse to ------------------------- the Executive all expenses reasonably and properly incurred by the Executive in the performance of the Executive's duties under this Agreement. Such reimbursement shall be made within thirty (30) days of the submission by the Executive to the Company, of appropriate evidence of such expenditure. Section 14. Relationship to Prior Employment Arrangements. This --------------------------------------------- Agreement shall supersede and take the place of any and all prior employment agreements, whether oral or written, between the Company and the Executive, including but not limited to the letter agreement dated September 14, 1998. Section 15. Notices. Any notice required or permitted to be given ------- under this Agreement shall be sufficient if in writing and if hand-delivered or sent by certified or registered mail to the residence address of the Executive then on file with the Company or to the principal office of the Company. Section 16. Benefit. This Agreement shall inure to the benefit of and ------- be binding upon the Company and its successors and assigns. Obligations of the Executive hereunder may not be delegated, assigned or otherwise transferred without the prior written consent of the Company. 10 11 Section 17. Waiver. Failure to insist upon strict compliance with any ------ of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any such failure at any one time or times be deemed a waiver or relinquishment at any other time or times of any right under the terms, covenants or conditions hereof. Section 18. Modifications and Amendments. No modification or ---------------------------- amendment hereof shall be effective unless and until the same shall be in a writing, duly executed by both parties hereto. Section 19. Headings. The headings of the various items of this -------- Agreement have been inserted for convenience only, and interpretations hereof shall be based strictly upon the text without reference to such headings. Section 20. Applicable Law and Forum. This Agreement shall be ------------------------ governed by and construed and enforced in accordance with the laws of the State of Ohio. ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE PROSECUTED AS TO ANY ONE OR MORE OF THE PARTIES HERETO AT CINCINNATI, OHIO. EACH PARTY HERETO JOINTLY AND SEVERALLY CONSENTS AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER HIS OR ITS PERSON BY ANY COURT SITUATED AT CINCINNATI, OHIO AND HAVING JURISDICTION OVER THE SUBJECT MATTER OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR IN RESPECT OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. ADEQUATE NOTICE OF SUCH ACTION, SUIT OR PROCEEDING IN ANY SUCH COURT SHALL CONCLUSIVELY BE DEEMED TO HAVE BEEN GIVEN TO ANY ONE OR MORE OF THE PARTIES HERETO AGAINST WHOM THE SAME IS INSTITUTED IF GIVEN TO SUCH PERSON IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT OR BY ANY OTHER MANNER CONSISTENT WITH DUE PROCESS OF LAW. Section 21. Duplicate Originals. This Agreement may be executed in ------------------- one or more counterparts, each of which shall be deemed to be a duplicate original, but all of which taken together, shall be deemed to constitute a single instrument. Section 22. Pronouns. The number and gender of each pronoun used in -------- this Agreement, if any, shall be construed to mean each such number and gender as the context, circumstances or its antecedent may require. Section 23. Entire Agreement. This Agreement (including each Exhibit ---------------- hereto) constitutes the entire agreement between the parties hereto in respect of the subject matter of this Agreement and supersedes all prior and contemporaneous agreements between the parties hereto in connection with the subject matter of this Agreement. 11 12 Section 24. Effective Date. This Employment Agreement shall be -------------- effective immediately upon the closing of the transactions contemplated by the Asset Purchase Agreement dated September 14, 1998, by and among the Company and Great American Insurance Company, among others (the date of such closing herein referred to as the "Effective Date"). If this closing shall not occur, then this Employment Agreement shall not have become effective for any purposes whatsoever, shall create no rights or liabilities in either party hereto, and shall be deemed to be null and void in all respects. IN WITNESS WHEREOF, this Employment Agreement has been duly executed on behalf of the Company and by the Executive, to be effective as of the Effective Date. WITNESSES: THE OHIO CASUALTY INSURANCE COMPANY By: - ---------------------------- --------------------------------- Lauren N. Patch - ---------------------------- President and Chief Executive - ---------------------------- --------------------------------- Thomas A. Hayes - ---------------------------- 12 13 EXHIBIT A --------- THE OHIO CASUALTY GROUP ----------------------- ADMINISTRATIVE GUIDELINES ------------------------- COMPENSATION PROGRAM FOR THE SENIOR OFFICERS OF THE COMPANY ----------------------------------------------------------- 13 14 EXHIBIT B --------- [Attach booklet entitled "Your Benefits At Ohio Casualty"] 14 15 EXHIBIT C --------- Current benefits provided to the Company's Senior Officers: a. ACCIDENTAL DEATH AND DISMEMBERMENT COVERAGE - $500,000 b. AIR TRAVEL - As a senior officer, you may fly first class. c. MEMBERSHIPS - Company paid memberships to the Hamilton City Club and the Metropolitan Club or the Bankers Club. d. COMPANY CAR PROGRAM - All officers receive a company car. Personal mileage is taxable. As a senior officer, you will be eligible for an upgrade from the basic program to an automobile of your choice with costs excess of the basic program, being payroll deducted over 2, 3 or 4 years. You may trade in your vehicle when either your loan obligation is fulfilled or at 60,000 miles. At the time of trade in, any outstanding loan balance shall be due. e. EXECUTIVE HEALTH PHYSICAL - You are entitled under our 1998 plan to a benefit valued at $710. f. EXECUTIVE FINANCIAL PLANNING - Maximum reimbursable expense is $2,250 per calendar year. Additional $1,000 paid two years prior to retirement, year of retirement, and for two years after retirement. g. OFFICE AND OFFICE FURNITURE - Officers are entitled to an office and appropriate wood furniture. h. PARKING SPACE - Home Office, immediate eligibility for a parking space. i. VACATION - Five weeks. One week may be used as your "Florida Trip". 15 EX-10.2 3 MANAGEMENT CONTRACTS Exhibit 10.2 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made to be effective as of the Effective Date (as that term is defined in Section 24 hereof) by and between The Ohio Casualty Insurance Company (the "Company") and John J. McGovern (the "Executive). WITNESSETH: WHEREAS, the Company has agreed to employ the Executive as a Senior Vice President to act on behalf of the Company, at the compensation hereinafter described; and WHEREAS, as a condition for the employment of the Executive, the Executive has agreed to enter into this Agreement; NOW, THEREFORE, in consideration of the premises and the agreements as hereinafter provided, the parties hereto agree as follows, each intending to be legally bound thereby: Section 1. Employment and Service. The Company hereby employs the ---------------------- Executive as a Senior Vice President, and the Executive hereby accepts employment as such by the Company, upon the terms and conditions hereinafter set forth. Section 2. Term. Subject to the provisions of Section 12 hereof, the ---- initial term of the Executive's employment pursuant to this Agreement shall be for a period of twenty-four (24) months, commencing on the Effective Date. Thereafter, Executive's employment shall have no term and shall be at will (the initial 24-month term and any at will employment extension thereafter being referred to as the "Services Period"). Subject to the provisions of Section 12 hereof, either party may notify the other party in writing of its intention not to continue the employment relationship created hereunder after the end of the initial 24-month term, which written notice shall be sent in accordance with the provisions of Section 15 hereof at least ninety (90) days prior to the last day of the initial 24-month term. Section 3. Compensation. The Executive will be entitled to the ------------ benefits which inure to the senior officers of the Company, as described in the administrative guidelines of the compensation program for the senior officers of the Company (the "Guidelines"), a copy of which is attached hereto as Exhibit A and is incorporated herein by this reference. If, from time to 2 time and at any time during the Services Period, the Guidelines are amended, any and all such amendments shall be binding upon the Executive, as if fully re-written herein. Subject to the terms and conditions of the Guidelines, the compensation package for the Executive shall be as follows: (a) Initial base salary - $255,000 annually. (b) Annual bonus - (i) Maximum - 75% ($191,250 based on initial $255,000 salary). - (ii) Target - 50% ($127,500 based on initial $255,000 salary). - (iii) Minimum - 25% ($63,750 based on initial $255,000 salary). (c) Long term incentive - The Executive will be eligible for an annual long-term incentive grant having an expected value of 80% of the initial base salary ($204,000 initially). The incentive vehicles will be established under the Guidelines, consistent with those provided to other senior officers of the Company. (d) - If the employment of the Executive terminates during the course of an Employment Year (each twelve consecutive calendar month period beginning on the Effective Date) for any reason other than Just Cause termination under Section 12(b) hereof, any Annual bonus or Long term incentive benefits described above shall be prorated for such Employment Year (to the nearest calendar month) and credited to Executive's account or paid as bonus in accordance with the foregoing. Notwithstanding the foregoing, no payments shall be made under this Section if Executive's employment terminates for Just Cause under Section 12(b) hereof. Section 4. Participation in Employee Benefit Programs. In addition to ------------------------------------------ the compensation as provided in Section 3 hereof, the Executive shall be entitled (a) to participate to the full extent of such Executive's eligibility in all of the employee and retirement benefit programs listed on Exhibit B, attached hereto and made a part hereof, as such programs may from time to time be amended or modified as approved by the Board of Directors of the Company, and (b) to such other perquisites as are made available generally to the senior officers of the Company, a current 2 3 listing of which is contained on Exhibit C, attached hereto and made a part hereof. Section 5. Duties. During and throughout the Services Period, the ------ Executive shall devote his full working time and efforts to the business and affairs of the Company and its Affiliates. The Executive shall use his best efforts to promote the interests of the Company and its Affiliates, and shall discharge well and faithfully the duties which may be assigned to him from time to time. During and throughout the Services Period, the Executive shall not be engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage and shall not compete, directly or indirectly, with the Company and its Affiliates; provided, however, that such restrictions shall not be construed as preventing the Executive from investing his personal assets in (a) businesses which do not compete or do business with the Company and its Affiliates in such manner or form as will not require any services on the part of the Executive in the operation or affairs of the businesses in which such investments are made or (b) stock or corporate securities as described in the second paragraph of Section 7 hereof; and provided further, however, that, the foregoing not- withstanding, the Executive may engage in any other business activity with the prior written consent of the Company, which consent the Company shall not be under any obligation to give and shall be given in the Company's sole discretion. The Executive shall perform his duties hereunder principally in Raleigh, North Carolina, and the Company agrees not to relocate the Executive from Raleigh, North Carolina without the Executive's prior written consent. The Executive also may participate in, or serve as a trustee or director of, civic and/or charitable entities or activities as he may desire, so long as such activities or service do not interfere with the performance of his duties hereunder. Section 6. Certain Definitions. (a) The term "Restricted Competition ------------------- Period" as used in this Agreement shall have the following meaning or meanings: (i) With respect to the Non-Competition Covenants in Section 7 hereof, the "Restricted Competition Period" for Great American Insurance Company (or any Affiliate thereof) shall mean the period of time during any and all Services Period hereunder and for a period of two (2) years thereafter; and 3 4 (ii) With respect to the Non-Competition Covenants described in Section 7 hereof, with respect to any property and casualty insurance company (other than Great American Insurance Company or any Affiliates thereof), or any other competitor of Company or its Affiliates, "Restricted Competition Period" shall mean the period of time during any and all Services Period hereunder or for a period of three (3) years after the Effective Date, whichever shall be later to occur; and (iii) With respect to the Other Prohibitions set forth in Section 8 hereof, "Restricted Competition Period" shall mean the period of time during any and all Services Period hereunder and for a period of one (1) year thereafter; or for a period of three (3) years after the Effective Date, whichever shall be later to occur; and (iv) With respect to Confidential Information set forth in Section 9 hereof, "Restricted Competition Period" means the entire period of time during which such information retains its confidential or proprietary nature. (b) The term "Affiliates" as used in this Agreement shall mean any Person which controls, is controlled by or is under common control with another Person. Control includes the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten per cent or more of the voting securities of any other person. (c) "Person" means any individual, corporation, partnership, association, limited liability company, limited liability partnership, trust, unincorporated organization, Lloyd's company, reciprocal insurer, or any other business organization, or any combination of the foregoing acting in concert. Section 7. Non-Competition Covenants. During the applicable ------------------------- Restricted Competition Period described in Section 6 above, the Executive shall not, without the prior written consent of the Company: 4 5 (a) directly or indirectly engage in, (b) assist or have an active interest in (whether as proprietor, partner, investor, shareholder, officer, director or any type of principal whatsoever), or (c) enter the employment of or act as agent for, or advisor or consultant to, any Person including without limitation enterprises involving Persons related by blood or marriage to the Executive, which is or is about to become, directly or indirectly, engaged in the business of insurance (whether as an agent, broker, marketer, underwriter, reinsurer, manager, actuary, director, officer, employee, consultant or otherwise) in any and/or all of the lines and/or kinds of coverage, and/or any and all of the related businesses and services, provided by, or under development by, the Company and its Affiliates at any time during the Services Period. The foregoing provisions of this Section 7 are not intended to prohibit, and shall not prohibit, the Executive from purchasing, for investment purposes only, any stock or other corporate security which is listed on a national securities exchange or quoted in any national market system (except as in this Agreement otherwise provided), so long as such stock or other corporate security owned by the Executive does not represent more than one percent (1%) of the market value or voting power of the total stock or other corporate securities of that class. The foregoing provisions of this Section 7 also are not intended to prohibit, and shall not prohibit, the Executive from acting as an independent consultant (but not as an employee, officer, director, agent, broker, marketer, underwriter, reinsurer, manager, actuary, or proprietor, partner, investor, shareholder or any other type of principal whatsoever) for any Person other than Great American Insurance Company (or any Affiliate thereof) upon the retirement of the Executive from the Company at the end of the initial 24-month term hereof or at any time thereafter. Section 8. Other Prohibitions. During the applicable Restricted ------------------ Competition Period described in Section 6 above, the Executive shall not at any time engage in any of the following activities in a manner which is inconsistent with his service as a Senior Vice President of the Company, without the prior written consent of the Company: 5 6 (a) request or advise any customer or client of, or any Person having business dealings with the Company and/or any of its Affiliates to withdraw, curtail or cancel such business or business dealings; (b) disclose to any Person the names of customers or clients of, or other Persons having dealings with, the Company and/or any of its Affiliates; or (c) induce or attempt to influence any other employee of the Company and/or any of its Affiliates to terminate employment. Section 9. Confidential Information. The Executive recognizes and ------------------------ acknowledges that the Company's and its Affiliates' trade secrets and confidential or proprietary information, including without limitation (a) information of the Company and/or its Affiliates concerning its and/or their insurance operations, customers or prospects, terms and conditions of sale and prices, technical knowledge relating to customer requirements and knowledge of markets for the Company's and/or its Affiliates' products, as such trade secrets or information may exist from time to time, and (b) information of third parties similar to that described in the foregoing clause (a) of this sentence which has been made available to the Company and/or its Affiliates pursuant to a business relationship with such third party, are valuable, special and unique assets of the Company's and/or its Affiliates' business, access to which and the knowledge of which are essential to the performance of the duties of the Executive hereunder. The Executive will not, in whole or in part, disclose such trade secrets or confidential or proprietary information to any Person for any reason or purpose whatsoever, nor will the Executive make use of any such trade secrets or confidential or proprietary information for his own purposes or for the benefit of any other Person. Section 10. Scope of Restrictions. If the scope of any restriction --------------------- contained in Sections 6, 7,8 and/or 9 of this Agreement is too broad to permit enforcement of any such restriction to its fullest extent, then such restriction shall be enforced to the maximum extent permitted by law, and the Executive hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restrictions. Section 11. Injunctive Relief. The Executive hereby acknowledges and ----------------- confirms that any restricted activity of the nature referred to in the preceding Sections of this Agreement would cause irreparable injury or damage to the Company and/or its Affiliates, acknowledges and agrees that the remedies at law 6 7 of the Company for any breach of any of the Executive's obligations under this Agreement would be inadequate and agrees that the Company shall be entitled to institute and prosecute proceedings in a court of competent jurisdiction to obtain temporary and/or permanent injunctive relief to enforce any provision hereof, without the necessity of proof of actual injury or damage. Section 12. Termination. (a) The employment of the Executive by the ----------- Company and the Executive's corresponding rights and obligations under Sections 1 through 8, inclusive, may be terminated by the Executive if the duties, responsibilities and/or positions and titles of the Executive are materially altered or materially adversely affected by action of the Company at any time during the Services Period. Upon such termination, the Company shall pay to the Executive (y) the compensation and benefits set forth in Sections 3 and 4 hereof for the greater of (i) one year or (ii) the remaining term of the then current Services Period, and (z) all stock options, if any, then held by Executive shall fully vest. Additionally upon such termination, the provisions of Section 9 shall survive and shall be enforceable fully as to the Executive. (b) The employment of the Executive by the Company and the Executive's corresponding rights and obligations under Sections 1 through 5, inclusive, may be terminated immediately at any time for just cause by the Company by giving written notice to the Executive. "Just Cause", for purposes of this subsection (b), shall mean dishonesty, immoral conduct detrimental to the Company, fraud, criminal activity and/or gross negligent performance of job responsibilities. Upon termination for Just Cause, Executive shall not be entitled to any stock options, severance or other compensation or benefits from and after the date of termination, all unexercised stock options shall terminate on the date of termination, and the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (c) The employment of the Executive by the Company and the Executive's corresponding rights and obligations under Sections 1 through 5, inclusive, may be terminated immediately at any time by the Company for a reason other than for Just Cause by giving fourteen (14) days prior written notice to the Executive. If such termination occurs during the initial 24-month term, then the only severance or other compensation or benefits to which the Executive is entitled from and after the date of 7 8 termination is the compensation payable to him under (i) Section 3(a) hereof for the balance of the remaining 24-month term, payable on the normal bi-weekly schedule and (ii) Section 3(d) hereof. In addition, all of Executive's stock options shall vest as of the date of termination, and he shall also participate in all health insurance, group life insurance, long-term incentive plans and other employee benefit programs provided by the Company at the time of such termination, in the same manner and to the same extent to which the other senior officers of the Company would participate upon their termination. If such termination occurs during the at will employment extension after the initial 24-month term, then his only severance or other compensation or benefits from and after the date of termination will be the compensation payable to him under Section 3(a) hereof for a period of six (6) months, payable on the normal bi-weekly schedule. In addition, all of Executive's stock options shall vest as of the date of termination. Other than as provided above, upon the occurrence of such termination, Executive will be entitled to no other compensation or severance benefits from the Company. Additionally upon such termination, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (d) If the Executive terminates his employment at the end of the initial term, as provided in Section 2, then the Executive shall not be entitled to any severance or other compensation or benefits from and after the date of termination; provided, however, that all stock options provided to him shall vest as of the date of termination. However, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. If the Company terminates the Executive's employment at the end of the initial term, as provided in Section 2, then the only severance or other compensation or benefits to which the Executive is entitled from and after the date of termination will be the compensation payable to him under Section 3(a) hereof for a period of 6 months, payable on the normal bi-weekly schedule, and all stock options provided to him shall vest as of the date of termination. Additionally, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. 8 9 (e) If the termination of Executive's employment occurs as a result of his death or disability (as defined herein), Executive (or his legal representative) shall be entitled to the following severance benefits: (i) If Executive's death or disability occurs during the initial 24-month period, he or his legal representative shall be entitled to those benefits described in subparagraph (c) of this Section 12 (Termination); and (ii) If such termination occurs after the expiration of the initial 24-month period, such compensation and benefits shall be the same as those described in subparagraph (d) of this Section 12 (Termination) in the same manner as if the Company had terminated Executive's employment at the end of the initial term; and (iii) For purposes of this Agreement, Executive shall be deemed to be "disabled" if he for any reason, either by sickness or accident, is unable to perform his duties for Company on a full-time basis for a period of one hundred twenty (120) consecutive calendar days. For purposes hereof, "full-time basis" shall be deemed to be a situation in which Executive must perform at least thirty (30) office hours of service for Company on a weekly basis. (iv) Notwithstanding anything to the contrary in this Section, the compensation payable to the Executive by the Company in the event of disability shall be reduced, on a dollar-for- dollar basis, by the amount of any benefits paid to the Executive under any of the Company's disability programs. (f) If, upon termination of this Agreement for any reason, the Executive is serving as a Director of the Company or any of its Affiliates, the Executive shall resign all such directorships effective at the same time as the termination of his employment. If the appropriate resignation shall not have been executed and delivered by the Executive to the Company and/or its Affiliates within seven (7) days after a request therefor, the President of the Company and the Affiliates is hereby authorized and directed by the Executive to execute such 9 10 resignations for and on behalf of and in the name of the Executive, as his attorney-in-fact for such purpose. (g) Upon termination of this Agreement in accordance with the terms hereof, the Executive shall forthwith deliver to the Company all records, documents, accounts, letters and papers of every type or description whatsoever within his possession or control relating to the affairs and business of the Company and/or its Affiliates, as well as any other property belonging to any of such parties. (h) Notwithstanding anything in this Agreement to the contrary, nothing shall be construed or interpreted to the effect that Executive is surrendering or otherwise forfeiting any benefits that are otherwise vested or given to him under law; including, without limitation, any and all 401(k) benefits or any other benefits from a qualified plan; any health insurance benefits, such as COBRA, any rights to convert life insurance, or any other benefits available to Executive in the employee and retirement benefit programs listed on Exhibit B. It is the intent of the parties, and they do hereby confirm, that severance benefits set forth above do not replace, in any manner whatsoever, the benefits payable or available to Executive (or his beneficiaries or dependents) upon termination, and the Executive is entitled to participate to the same extent that and in the same manner in which other senior officers of the Company are entitled to or participate in such benefits. (i) The parties recognize that certain incentive plan awards may be paid to the Executive in restricted stock of the Company, and that the terms of the restricted stock may include forfeiture if the Executive leaves the Company during the restriction period. Notwithstanding anything contained in this Agreement, any such incentive plan or any such stock restrictions to the contrary, Executive shall not forfeit any incentive plan --- awards which are paid in restricted stock of the Company if the Company terminates Executive's employment during the restriction period; unless ------ Executive's employment is terminated under Section 12 (b), in which case all restricted stock shall be forfeited as of the date of termination. Moreover, if the Employee terminates his employment during the initial 24-month term hereof for any reason, then he shall forfeit all restricted stock as of the date of termination. Section 13. Reimbursement of Expenses. The Company shall reimburse to ------------------------- the Executive all expenses reasonably and properly incurred by the Executive in the performance of the Executive's duties under this Agreement. Such reimbursement shall be made within thirty (30) days of the submission by the Executive to the Company, of appropriate evidence of such expenditure. 10 11 Section 14. Relationship to Prior Employment Arrangements. This --------------------------------------------- Agreement shall supersede and take the place of any and all prior employment agreements, whether oral or written, between the Company and the Executive. Section 15. Notices. Any notice required or permitted to be given ------- under this Agreement shall be sufficient if in writing and if hand-delivered or sent by certified or registered mail to the residence address of the Executive then on file with the Company or to the principal office of the Company. Section 16. Benefit. This Agreement shall inure to the benefit of and ------- be binding upon the Company and its successors and assigns. Obligations of the Executive hereunder may not be delegated, assigned or otherwise transferred without the prior written consent of the Company. Section 17. Waiver. Failure to insist upon strict compliance with any ------ of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any such failure at any one time or times be deemed a waiver or relinquishment at any other time or times of any right under the terms, covenants or conditions hereof. Section 18. Modifications and Amendments. No modification or ---------------------------- amendment hereof shall be effective unless and until the same shall be in a writing, duly executed by both parties hereto. Section 19. Headings. The headings of the various items of this -------- Agreement have been inserted for convenience only, and interpretations hereof shall be based strictly upon the text without reference to such headings. Section 20. Applicable Law and Forum. This Agreement shall be ------------------------ governed by and construed and enforced in accordance with the laws of the State of Ohio. ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE PROSECUTED AS TO ANY ONE OR MORE OF THE PARTIES HERETO AT CINCINNATI, OHIO. EACH PARTY HERETO JOINTLY AND SEVERALLY CONSENTS AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER HIS OR ITS PERSON BY ANY COURT SITUATED AT CINCINNATI, OHIO AND HAVING JURISDICTION OVER THE SUBJECT MATTER OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR IN RESPECT OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. ADEQUATE NOTICE OF SUCH ACTION, SUIT OR PROCEEDING IN ANY SUCH COURT SHALL CONCLUSIVELY BE DEEMED TO HAVE BEEN GIVEN TO ANY ONE OR MORE OF THE PARTIES HERETO AGAINST WHOM THE SAME IS INSTITUTED IF GIVEN TO SUCH PERSON IN ACCORDANCE WITH THE PROVISIONS OF THIS 11 12 AGREEMENT OR BY ANY OTHER MANNER CONSISTENT WITH DUE PROCESS OF LAW. Section 21. Duplicate Originals. This Agreement may be executed in ------------------- one or more counterparts, each of which shall be deemed to be a duplicate original, but all of which taken together, shall be deemed to constitute a single instrument. Section 22. Pronouns. The number and gender of each pronoun used in -------- this Agreement, if any, shall be construed to mean each such number and gender as the context, circumstances or its antecedent may require. Section 23. Entire Agreement. This Agreement (including each Exhibit ---------------- hereto) constitutes the entire agreement between the parties hereto in respect of the subject matter of this Agreement and supersedes all prior and contemporaneous agreements between the parties hereto in connection with the subject matter of this Agreement. Section 24. Effective Date. This Employment Agreement shall be -------------- effective immediately upon the closing of the transactions contemplated by the Asset Purchase Agreement dated September 14, 1998, by and among the Company and Great American Insurance Company, among others (the date of such closing herein referred to as the "Effective Date"). If this closing shall not occur, then this Employment Agreement shall not have become effective for any purposes whatsoever, shall create no rights or liabilities in either party hereto, and shall be deemed to be null and void in all respects. 12 13 IN WITNESS WHEREOF, this Employment Agreement has been duly executed on behalf of the Company and by the Executive, to be effective as of the Effective Date. THE OHIO CASUALTY INSURANCE COMPANY WITNESSES: By - ---------------------------- ---------------------------------- Lauren N. Patch - ---------------------------- President and Chief Executive Officer - ---------------------------- - ---------------------------- ---------------------------------- John J. McGovern 13 14 EXHIBIT A --------- THE OHIO CASUALTY GROUP ----------------------- ADMINISTRATIVE GUIDELINES ------------------------- COMPENSATION PROGRAM FOR THE SENIOR OFFICERS OF THE COMPANY ----------------------------------------------------------- 14 15 EXHIBIT B --------- [Attach booklet entitled "Your Benefits At Ohio Casualty"] 15 16 EXHIBIT C --------- Current benefits provided to the Company's Senior Officers: a. ACCIDENTAL DEATH AND DISMEMBERMENT COVERAGE - $500,000 b. AIR TRAVEL - As a senior officer, you may fly first class. c. MEMBERSHIPS - Company paid memberships to the Hamilton City Club and the Metropolitan Club or the Bankers Club. d. COMPANY CAR PROGRAM - All officers receive a company car. Personal mileage is taxable. As a senior officer, you will be eligible for an upgrade from the basic program to an automobile of your choice with costs excess of the basic program, being payroll deducted over 2, 3 or 4 years. You may trade in your vehicle when either your loan obligation is fulfilled or at 60,000 miles. At the time of trade in, any outstanding loan balance shall be due. e. EXECUTIVE HEALTH PHYSICAL - You are entitled under our 1998 plan to a benefit valued at $710. f. EXECUTIVE FINANCIAL PLANNING - Maximum reimbursable expense is $2,250 per calendar year. Additional $1,000 paid two years prior to retirement, year of retirement, and for two years after retirement. g. OFFICE AND OFFICE FURNITURE - Officers are entitled to an office and appropriate wood furniture. h. PARKING SPACE - Home Office, immediate eligibility for a parking space. i. VACATION - Five weeks. One week may be used as your "Florida Trip". 16 EX-10.3 4 MANAGEMENT CONTRACTS Exhibit 10.3 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made to be effective as of the Effective Date (as that term is defined in Section 24 hereof) by and between The Ohio Casualty Insurance Company (the "Company") and Jerry S. Runnels (the "Executive). WITNESSETH: WHEREAS, the Company has agreed to employ the Executive as a Senior Vice President to act on behalf of the Company, at the compensation hereinafter described; and WHEREAS, as a condition for the employment of the Executive, the Executive has agreed to enter into this Agreement; NOW, THEREFORE, in consideration of the premises and the agreements as hereinafter provided, the parties hereto agree as follows, each intending to be legally bound thereby: Section 1. Employment and Service. The Company hereby employs the ---------------------- Executive as a Senior Vice President, and the Executive hereby accepts employment as such by the Company, upon the terms and conditions hereinafter set forth. Section 2. Term. Subject to the provisions of Section 12 hereof, the ---- initial term of the Executive's employment pursuant to this Agreement shall be for a period of thirty-six (36) months, commencing on the Effective Date. Thereafter, Executive's employment shall have no term and shall be at will (the initial 36-month term and any at will employment extension thereafter being referred to as the "Services Period"). Subject to the provisions of Section 12 hereof, either party may notify the other party in writing of its intention not to continue the employment relationship created hereunder after the end of the initial 36-month term, which written notice shall be sent in accordance with the provisions of Section 15 hereof at least ninety (90) days prior to the last day of the initial 36-month term. Section 3. Compensation. The Executive will be entitled to the ------------ benefits which inure to the senior officers of the Company, as described in the administrative guidelines of the compensation program for the senior officers of the Company (the "Guidelines"), a copy of which is attached hereto as Exhibit A and is incorporated herein by this reference. If, from time to 2 time and at any time during the Services Period, the Guidelines are amended, any and all such amendments shall be binding upon the Executive, as if fully re-written herein. Subject to the terms and conditions of the Guidelines, the compensation package for the Executive shall be as follows: (a) Initial base salary - $240,000 annually. (b) Annual bonus - (i) Maximum - 75% ($180,000 based on initial $240,000 salary). - (ii) Target - 50% ($120,000 based on initial $240,000 salary). - (iii) Minimum - 25% ($60,000 based on initial $240,000 salary). (c) Long term incentive - The Executive will be eligible for an annual long-term incentive grant having an expected value of 80% of the initial base salary ($192,000 initially). The incentive vehicles will be established under the Guidelines, consistent with those provided to other senior officers of the Company. (d) - If the employment of the Executive terminates during the course of an Employment Year (each twelve consecutive calendar month period beginning on the Effective Date) for any reason other than Just Cause termination under Section 12(b) hereof, any Annual bonus or Long term incentive benefits described above shall be prorated for such Employment Year (to the nearest calendar month) and credited to Executive's account or paid as bonus in accordance with the foregoing. Notwithstanding the foregoing, no payments shall be made under this Section if Executive's employment terminates for Just Cause under Section 12(b) hereof. Section 4. Participation in Employee Benefit Programs. In addition to ------------------------------------------ the compensation as provided in Section 3 hereof, the Executive shall be entitled (a) to participate to the full extent of such Executive's eligibility in all of the employee and retirement benefit programs listed on Exhibit B, attached hereto and made a part hereof, as such programs may from time to time be amended or modified as approved by the Board of Directors of the Company, and (b) to such other perquisites as are made available generally to the senior officers of the Company, a current 2 3 listing of which is contained on Exhibit C, attached hereto and made a part hereof. Section 5. Duties. During and throughout the Services Period, the ------ Executive shall devote his full working time and efforts to the business and affairs of the Company and its Affiliates. The Executive shall use his best efforts to promote the interests of the Company and its Affiliates, and shall discharge well and faithfully the duties which may be assigned to him from time to time. During and throughout the Services Period, the Executive shall not be engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage and shall not compete, directly or indirectly, with the Company and its Affiliates; provided, however, that such restrictions shall not be construed as preventing the Executive from investing his personal assets in (a) businesses which do not compete or do business with the Company and its Affiliates in such manner or form as will not require any services on the part of the Executive in the operation or affairs of the businesses in which such investments are made or (b) stock or corporate securities as described in the second paragraph of Section 7 hereof; and provided further, however, that, the foregoing not- withstanding, the Executive may engage in any other business activity with the prior written consent of the Company, which consent the Company shall not be under any obligation to give and shall be given in the Company's sole discretion. The Executive also may participate in, or serve as a trustee or director of, civic and/or charitable entities or activities as he may desire, so long as such activities or service do not interfere with the performance of his duties hereunder. Section 6. Certain Definitions. (a) The term "Restricted Competition ------------------- Period" as used in this Agreement shall have the following meaning or meanings: (i) With respect to the Non-Competition Covenants in Section 7 hereof, the "Restricted Competition Period" for Great American Insurance Company (or any Affiliate thereof) shall mean the period of time during any and all Services Period hereunder and for a period of two (2) years thereafter; and (ii) With respect to the Non-Competition Covenants described in Section 7 hereof, with respect to any property and casualty insurance company (other than Great American Insurance Company or any Affiliates thereof), or any other competitor of Company or its Affiliates, "Restricted Competition 3 4 Period" shall mean the period of time during any and all Services Period hereunder or for a period of three (3) years after the Effective Date, whichever shall be later to occur; (iii) With respect to the Other Prohibitions set forth in Section 8 hereof, "Restricted Competition Period" shall mean the period of time during any and all Services Period hereunder and for a period of one (1) year thereafter; or for a period of three (3) years after the Effective Date, whichever shall be later to occur; and (iv) With respect to Confidential Information set forth in Section 9 hereof, "Restricted Competition Period" means the entire period of time during which such information retains its confidential or proprietary nature. (b) The term "Affiliates" as used in this Agreement shall mean any Person which controls, is controlled by or is under common control with another Person. Control includes the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten per cent or more of the voting securities of any other person. (c) "Person" means any individual, corporation, partnership, association, limited liability company, limited liability partnership, trust, unincorporated organization, Lloyd's company, reciprocal insurer, or any other business organization, or any combination of the foregoing acting in concert. Section 7. Non-Competition Covenants. During the applicable ------------------------- Restricted Competition Period described in Section 6 above, the Executive shall not, without the prior written consent of the Company: (a) directly or indirectly engage in, (b) assist or have an active interest in (whether as proprietor, partner, investor, shareholder, officer, director or any type of principal whatsoever), or 4 5 (c) enter the employment of or act as agent for, or advisor or consultant to, any Person including without limitation enterprises involving Persons related by blood or marriage to the Executive, which is or is about to become, directly or indirectly, engaged in the business of insurance (whether as an agent, broker, marketer, underwriter, reinsurer, manager, actuary, director, officer, employee, consultant or otherwise) in any and/or all of the lines and/or kinds of coverage, and/or any and all of the related businesses and services, provided by, or under development by, the Company and its Affiliates at any time during the Services Period. The foregoing provisions of this Section 7 are not intended to prohibit, and shall not prohibit, the Executive from purchasing, for investment purposes only, any stock or other corporate security which is listed on a national securities exchange or quoted in any national market system (except as in this Agreement otherwise provided), so long as such stock or other corporate security owned by the Executive does not represent more than one percent (1%) of the market value or voting power of the total stock or other corporate securities of that class. Section 8. Other Prohibitions. During the applicable Restricted ------------------ Competition Period described in Section 6 above, the Executive shall not at any time engage in any of the following activities in a manner which is inconsistent with his service as a Senior Vice President of the Company, without the prior written consent of the Company: (a) request or advise any customer or client of, or any Person having business dealings with the Company and/or any of its Affiliates to withdraw, curtail or cancel such business or business dealings; (b) disclose to any Person the names of customers or clients of, or other Persons having dealings with, the Company and/or any of its Affiliates; or (c) induce or attempt to influence any other employee of the Company and/or any of its Affiliates to terminate employment. Section 9. Confidential Information. The Executive recognizes and ------------------------ acknowledges that the Company's and its Affiliates' trade secrets and confidential or proprietary information, including without limitation (a) information of the 5 6 Company and/or its Affiliates concerning its and/or their insurance operations, customers or prospects, terms and conditions of sale and prices, technical knowledge relating to customer requirements and knowledge of markets for the Company's and/or its Affiliates' products, as such trade secrets or information may exist from time to time, and (b) information of third parties similar to that described in the foregoing clause (a) of this sentence which has been made available to the Company and/or its Affiliates pursuant to a business relationship with such third party, are valuable, special and unique assets of the Company's and/or its Affiliates' business, access to which and the knowledge of which are essential to the performance of the duties of the Executive hereunder. The Executive will not, in whole or in part, disclose such trade secrets or confidential or proprietary information to any Person for any reason or purpose whatsoever, nor will the Executive make use of any such trade secrets or confidential or proprietary information for his own purposes or for the benefit of any other Person. Section 10. Scope of Restrictions. If the scope of any restriction --------------------- contained in Sections 6, 7,8 and/or 9 of this Agreement is too broad to permit enforcement of any such restriction to its fullest extent, then such restriction shall be enforced to the maximum extent permitted by law, and the Executive hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restrictions. Section 11. Injunctive Relief. The Executive hereby acknowledges and ----------------- confirms that any restricted activity of the nature referred to in the preceding Sections of this Agreement would cause irreparable injury or damage to the Company and/or its Affiliates, acknowledges and agrees that the remedies at law of the Company for any breach of any of the Executive's obligations under this Agreement would be inadequate and agrees that the Company shall be entitled to institute and prosecute proceedings in a court of competent jurisdiction to obtain temporary and/or permanent injunctive relief to enforce any provision hereof, without the necessity of proof of actual injury or damage. Section 12. Termination. (a) The employment of the Executive by the ----------- Company and the Executive's corresponding rights and obligations under Sections 1 through 8, inclusive, may be terminated by the Executive if the duties, responsibilities and/or positions and titles of the Executive are materially altered or materially adversely affected by action of the Company at any time during the Services Period. 6 7 Upon such termination, the Company shall pay to the Executive (y) the compensation and benefits set forth in Sections 3 and 4 hereof for the greater of (i) one year or (ii) the remaining term of the then current Services Period, and (z) all stock options, if any, then held by Executive shall remain in force and shall vest in accordance with the vesting schedule then in effect. Additionally upon such termination, the provisions of Section 9 shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (b) The employment of the Executive by the Company and the Executive's corresponding rights and obligations under Sections 1 through 5, inclusive, may be terminated immediately at any time for just cause by the Company by giving written notice to the Executive. "Just Cause", for purposes of this subsection (b), shall mean dishonesty, immoral conduct detrimental to the Company, fraud, criminal activity and/or gross negligent performance of job responsibilities. Upon termination for Just Cause, Executive shall not be entitled to any stock options, severance or other compensation or benefits from and after the date of termination, and the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (c) The employment of the Executive by the Company and the Executive's corresponding rights and obligations under Sections 1 through 5, inclusive, may be terminated immediately at any time by the Company for a reason other than for Just Cause by giving fourteen (14) days prior written notice to the Executive. If such termination occurs during the initial 36-month term, then the only severance or other compensation or benefits to which the Executive is entitled from and after the date of termination is the compensation payable to him under (i) Section 3(a) hereof for the balance of the remaining 36-month term, payable on the normal bi-weekly schedule and (ii) Section 3(d) hereof. In addition, all of Executive's stock options shall remain in force and shall vest in accordance with the vesting schedule then in effect, and he shall also participate in all health insurance, group life insurance, long-term incentive plans and other employee benefit programs provided by the Company at the time of such termination, in the same manner and to the same extent to which the other senior officers of the Company would participate upon their termination. 7 8 If such termination occurs during the at will employment extension after the initial 36-month term, then his only severance or other compensation or benefits from and after the date of termination will be the compensation payable to him under Section 3(a) hereof for a period of six (6) months, payable on the normal bi-weekly schedule. Additionally, his stock options shall remain in force and shall vest in accordance with the vesting schedule then in effect. Other than as provided above, upon the occurrence of such termination, Executive will be entitled to no other compensation or severance benefits from the Company. Additionally upon such termination, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. (d) If the Executive terminates his employment at the end of the initial term, as provided in Section 2, then the Executive shall not be entitled to any severance or other compensation or benefits from and after the date of termination. However, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. If the Company terminates the Executive's employment at the end of the initial term, as provided in Section 2, then the only severance or other compensation or benefits to which the Executive is entitled from and after the date of termination will be the compensation payable to him under Section 3(a) hereof for a period of 6 months, payable on the normal bi-weekly schedule. Additionally, the provisions of Sections 6 through 9, inclusive, shall survive and shall be enforceable fully as to the Executive for the applicable Restricted Competition Period. Notwithstanding anything contained in this Section to the contrary, upon termination of employment under this Section 12(d), Executive's stock options shall remain in force and shall vest in accordance with the vesting schedule then in effect. (e) If the termination of Executive's employment occurs as a result of his death or disability (as defined herein), Executive (or his legal representative) shall be entitled to the following severance benefits: (i) If Executive's death or disability occurs during the initial 36-month period, he or his legal representative shall be entitled to 8 9 those benefits described in subparagraph (c) of this Section 12 (Termination); and (ii) If such termination occurs after the expiration of the initial 36-month period, such compensation and benefits shall be the same as those described in subparagraph (d) of this Section 12 (Termination) in the same manner as if the Company had terminated Executive's employment at the end of the initial term; and (iii) For purposes of this Agreement, Executive shall be deemed to be "disabled" if he for any reason, either by sickness or accident, is unable to perform his duties for Company on a full-time basis for a period of one hundred twenty (120) consecutive calendar days. For purposes hereof, "full-time basis" shall be deemed to be a situation in which Executive must perform at least thirty (30) office hours of service for Company on a weekly basis. (iv) Notwithstanding anything to the contrary in this Section, the compensation payable to the Executive by the Company in the event of disability shall be reduced, on a dollar-for- dollar basis, by the amount of any benefits paid to the Executive under any of the Company's disability programs. (f) If, upon termination of this Agreement for any reason, the Executive is serving as a Director of the Company or any of its Affiliates, the Executive shall resign all such directorships effective at the same time as the termination of his employment. If the appropriate resignation shall not have been executed and delivered by the Executive to the Company and/or its Affiliates within seven (7) days after a request therefor, the President of the Company and the Affiliates is hereby authorized and directed by the Executive to execute such resignations for and on behalf of and in the name of the Executive, as his attorney-in-fact for such purpose. (g) Upon termination of this Agreement in accordance with the terms hereof, the Executive shall forthwith deliver to the Company all records, documents, accounts, letters and papers of every type or description whatsoever within his possession or control relating to the affairs and business of the Company 9 10 and/or its Affiliates, as well as any other property belonging to any of such parties. (h) Notwithstanding anything in this Agreement to the contrary, nothing shall be construed or interpreted to the effect that Executive is surrendering or otherwise forfeiting any benefits that are otherwise vested or given to him under law; including, without limitation, any and all 401(k) benefits or any other benefits from a qualified plan; any health insurance benefits, such as COBRA, any rights to convert life insurance, or any other benefits available to Executive in the employee and retirement benefit programs listed on Exhibit B. It is the intent of the parties, and they do hereby confirm, that severance benefits set forth above do not replace, in any manner whatsoever, the benefits payable or available to Executive (or his beneficiaries or dependents) upon termination, and the Executive is entitled to participate to the same extent that and in the same manner in which other senior officers of the Company are entitled to or participate in such benefits. (i) The parties recognize that certain incentive plan awards may be paid to the Executive in restricted stock of the Company, and that the terms of the restricted stock may include forfeiture if the Executive leaves the Company during the restriction period. Notwithstanding anything contained in this Agreement, any such incentive plan or any such stock restrictions to the contrary, Executive shall not forfeit any incentive plan --- awards which are paid in restricted stock of the Company if the Company terminates Executive's employment during the restriction period; unless ------ Executive's employment is terminated under Section 12 (b), in which case all restricted stock shall be forfeited as of the date of termination. Moreover, if the Employee terminates his employment during the initial 36-month term hereof for any reason, then he shall forfeit all restricted stock as of the date of termination. Section 13. Reimbursement of Expenses. The Company shall reimburse to ------------------------- the Executive all expenses reasonably and properly incurred by the Executive in the performance of the Executive's duties under this Agreement. Such reimbursement shall be made within thirty (30) days of the submission by the Executive to the Company, of appropriate evidence of such expenditure. Section 14. Relationship to Prior Employment Arrangements. This --------------------------------------------- Agreement shall supersede and take the place of any and all prior employment agreements, whether oral or written, between the Company and the Executive. Section 15. Notices. Any notice required or permitted to be given ------- under this Agreement shall be sufficient if in writing 10 11 and if hand-delivered or sent by certified or registered mail to the residence address of the Executive then on file with the Company or to the principal office of the Company. Section 16. Benefit. This Agreement shall inure to the benefit of and ------- be binding upon the Company and its successors and assigns. Obligations of the Executive hereunder may not be delegated, assigned or otherwise transferred without the prior written consent of the Company. Section 17. Waiver. Failure to insist upon strict compliance with any ------ of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any such failure at any one time or times be deemed a waiver or relinquishment at any other time or times of any right under the terms, covenants or conditions hereof. Section 18. Modifications and Amendments. No modification or ---------------------------- amendment hereof shall be effective unless and until the same shall be in a writing, duly executed by both parties hereto. Section 19. Headings. The headings of the various items of this -------- Agreement have been inserted for convenience only, and interpretations hereof shall be based strictly upon the text without reference to such headings. Section 20. Applicable Law and Forum. This Agreement shall be ------------------------ governed by and construed and enforced in accordance with the laws of the State of Ohio. ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE PROSECUTED AS TO ANY ONE OR MORE OF THE PARTIES HERETO AT CINCINNATI, OHIO. EACH PARTY HERETO JOINTLY AND SEVERALLY CONSENTS AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER HIS OR ITS PERSON BY ANY COURT SITUATED AT CINCINNATI, OHIO AND HAVING JURISDICTION OVER THE SUBJECT MATTER OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR IN RESPECT OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. ADEQUATE NOTICE OF SUCH ACTION, SUIT OR PROCEEDING IN ANY SUCH COURT SHALL CONCLUSIVELY BE DEEMED TO HAVE BEEN GIVEN TO ANY ONE OR MORE OF THE PARTIES HERETO AGAINST WHOM THE SAME IS INSTITUTED IF GIVEN TO SUCH PERSON IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT OR BY ANY OTHER MANNER CONSISTENT WITH DUE PROCESS OF LAW. Section 21. Duplicate Originals. This Agreement may be executed in ------------------- one or more counterparts, each of which shall be deemed to be a duplicate original, but all of which taken together, shall be deemed to constitute a single instrument. 11 12 Section 22. Pronouns. The number and gender of each pronoun used in -------- this Agreement, if any, shall be construed to mean each such number and gender as the context, circumstances or its antecedent may require. Section 23. Entire Agreement. This Agreement (including each Exhibit ---------------- hereto) constitutes the entire agreement between the parties hereto in respect of the subject matter of this Agreement and supersedes all prior and contemporaneous agreements between the parties hereto in connection with the subject matter of this Agreement. Section 24. Effective Date. This Employment Agreement shall be -------------- effective immediately upon the closing of the transactions contemplated by the Asset Purchase Agreement dated September 14, 1998, by and among the Company and Great American Insurance Company, among others (the date of such closing herein referred to as the "Effective Date"). If this closing shall not occur, then this Employment Agreement shall not have become effective for any purposes whatsoever, shall create no rights or liabilities in either party hereto, and shall be deemed to be null and void in all respects. 12 13 IN WITNESS WHEREOF, this Employment Agreement has been duly executed on behalf of the Company and by the Executive, to be effective as of the Effective Date. THE OHIO CASUALTY INSURANCE COMPANY WITNESSES: By - ------------------------- --------------------------------- Lauren N. Patch President and Chief Executive Officer - ------------------------- - ------------------------- ---------------------------------- Jerry S. Runnels - ------------------------- 13 14 EXHIBIT A --------- THE OHIO CASUALTY GROUP ----------------------- ADMINISTRATIVE GUIDELINES ------------------------- COMPENSATION PROGRAM FOR THE SENIOR OFFICERS OF THE COMPANY ----------------------------------------------------------- 14 15 EXHIBIT B --------- [Attach booklet entitled "Your Benefits At Ohio Casualty"] 15 16 EXHIBIT C --------- Current benefits provided to the Company's Senior Officers: a. ACCIDENTAL DEATH AND DISMEMBERMENT COVERAGE - $500,000 b. AIR TRAVEL - As a senior officer, you may fly first class. c. MEMBERSHIPS - Company paid memberships to the Hamilton City Club and the Metropolitan Club or the Bankers Club. d. COMPANY CAR PROGRAM - All officers receive a company car. Personal mileage is taxable. As a senior officer, you will be eligible for an upgrade from the basic program to an automobile of your choice with costs excess of the basic program, being payroll deducted over 2, 3 or 4 years. You may trade in your vehicle when either your loan obligation is fulfilled or at 60,000 miles. At the time of trade in, any outstanding loan balance shall be due. e. EXECUTIVE HEALTH PHYSICAL - You are entitled under our 1998 plan to a benefit valued at $710. f. EXECUTIVE FINANCIAL PLANNING - Maximum reimbursable expense is $2,250 per calendar year. Additional $1,000 paid two years prior to retirement, year of retirement, and for two years after retirement. g. OFFICE AND OFFICE FURNITURE - Officers are entitled to an office and appropriate wood furniture. h. PARKING SPACE - Home Office, immediate eligibility for a parking space. i. VACATION - Four weeks. One week may be used as your "Florida Trip". 16 EX-27 5 ARTICLE 7 FDS FOR 10-Q
7 3-MOS DEC-31-1999 MAR-31-1999 2528407459 2528407459 2528407459 907346506 0 37758485 3473512450 43577815 170270654 174559353 4688592030 1915744436 693366608 0 20882625 255000000 0 0 5850484 1264123396 4688592030 384544897 41808838 902723 0 265813474 99969406 46691525 14782053 5320381 9461671 1795430 0 2254777 11257101 .36 .36 1865642863 195230043 1642575738 92743212 204382495 1837805781 (18684630)
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