-----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, C6nyb0gtmPxBQJIajCyZVf9poQPIt/Krfk7Wc9fi3X/yfLDGycPm4u4nIeMbgbRf kIj8gVU4DQG2igfURzzb3g== 0000073952-00-000010.txt : 20000516 0000073952-00-000010.hdr.sgml : 20000516 ACCESSION NUMBER: 0000073952-00-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 631302 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 ============================================================================== 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, 2000. [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-5544 OHIO CASUALTY CORPORATION (Exact name of registrant as specified in its charter) OHIO (State or other jurisdiction of incorporation or organization) 31-0783294 (I.R.S. Employer Identification No.) 136 North Third Street, Hamilton, Ohio (Address of principal executive offices) 45025 (Zip Code) (513) 867-3000 (Registrant's telephone number) Securities registered pursuant to Section 12(g) of the Act: Common Shares, Par Value $.125 Each (Title of Class) Common Share Purchase Rights (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value as of May 1, 2000 of the voting stock held by non-affiliates of the registrant was $885,052,333. On May 1, 2000 there were 60,070,187 shares outstanding. Page 1 of 16 ============================================================================== PART I ITEM 1. FINANCIAL STATEMENTS Ohio Casualty Corporation & Subsidiaries CONSOLIDATED BALANCE SHEET
March 31, December 31, (In thousands, except per share data) (Unaudited) 2000 1999 - ------------------------------------------------------------------------------ Assets Investments: Fixed maturities: Available for sale, at fair value (cost: $2,437,954 and $2,408,201) $2,412,867 $2,376,973 Equity securities, at fair value (cost: $187,834 and $161,498) 671,826 698,129 Short-term investments, at fair value (cost: $57,173 and $104,446) 57,173 104,398 - ------------------------------------------------------------------------------ Total investments 3,141,866 3,179,500 Cash 71,567 45,559 Premiums and other receivables, net of allowance for bad debts of $9,539 and $9,338, respectively 395,993 366,202 Deferred policy acquisition costs 177,202 177,745 Property and equipment, net of accumulated depreciation of $115,722 and $113,541, respectively 96,688 94,670 Reinsurance recoverable 140,976 139,021 Agent relationships, net of accumulated amortization of $16,367 and $13,298, respectively 248,328 293,565 Other assets 124,148 180,182 - ------------------------------------------------------------------------------ Total assets $4,396,768 $4,476,444 ============================================================================== Liabilities Insurance reserves: Unearned premiums $ 732,999 $ 725,399 Losses 1,572,070 1,544,967 Loss adjustment expenses 367,414 363,488 Notes payable 241,283 241,446 California Proposition 103 reserve 51,097 50,486 Deferred income taxes 44,518 62,843 Other liabilities 344,526 336,828 - ------------------------------------------------------------------------------ Total liabilities 3,353,907 3,325,457 Shareholders' Equity Common stock, $.0625 par value 5,901 5,901 Authorized: 150,000 shares Issued: 94,418 Additional paid-in capital 4,201 4,286 Common stock purchase warrants 21,138 21,138 Accumulated other comprehensive income: Unrealized gain on investments, net of applicable income taxes 310,274 329,354 Retained earnings 1,154,634 1,243,463 Treasury stock, at cost: (Shares: 34,345; 34,335) (453,287) (453,155) - ------------------------------------------------------------------------------ Total shareholders' equity 1,042,861 1,150,987 - ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $4,396,768 $4,476,444 ==============================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 45-58 of the Corporation's 1999 Form 10-K, Item 14. 2 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED INCOME
Three Months Ended March 31, (In thousands, except per share data) (Unaudited) 2000 1999 - ------------------------------------------------------------------------------ Premiums and finance charges earned $387,188 $384,545 Investment income less expenses 51,793 41,809 Investment gains(losses) realized, net (6,308) 903 - ------------------------------------------------------------------------------ Total revenues 432,673 427,257 Losses and benefits for policyholders 294,637 231,753 Loss adjustment expenses 47,150 34,061 General operating expenses 42,206 42,789 Amortization of agent relationships 3,069 3,094 Write-down of agent relationships 42,169 0 Amortization of deferred policy acquisition costs 98,859 99,969 Restructuring charge 22 198 California Proposition 103 reserve, including interest 611 611 - ------------------------------------------------------------------------------ Total expenses 528,723 412,475 - ------------------------------------------------------------------------------ Income(loss) from continuing operations before income taxes (96,050) 14,782 Income tax (benefit)expense: Current (12,986) 2,237 Deferred (8,051) 828 - ------------------------------------------------------------------------------ Total income tax (benefit)expense (21,037) 3,065 - ------------------------------------------------------------------------------ Income(loss) before discontinued operations (75,013) 11,717 Income from discontinued operations, net of taxes of $0 and $78, respectively 0 1,795 Cumulative effect of accounting change, net of taxes 0 (2,255) - ------------------------------------------------------------------------------ Net income(loss) $(75,013) $ 11,257 ============================================================================== Other comprehensive income, net of taxes: Net change in unrealized gains, net of income tax (benefit) expense of $(10,274) and $(14,844), respectively (19,080) (27,569) - ------------------------------------------------------------------------------ Comprehensive loss $(94,093) $(16,312) ============================================================================== Average shares outstanding - basic* 60,080 62,290 Average shares outstanding - diluted* 60,102 62,326 ============================================================================== Earnings per share (basic and diluted):* Income(loss) from continuing operations, per share $ (1.25) $ 0.19 Income from discontinued operations, per share 0.00 0.03 Effect of change in accounting principle (net of taxes 0.00 (0.04) - ------------------------------------------------------------------------------ Net income(loss), per share $ (1.25) $ 0.18 Cash dividends, per share $ 0.23 $ 0.23 ==============================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 45-58 of the Corporation's 1999 Form 10-K, Item 14. *1999 adjusted for 2 for 1 stock split effective July 22, 1999 3 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
Common Accumulated Additional stock other Total (In thousands, except per Common paid-in purchase comprehensive Retained Treasury shareholders' share data) (Unaudited) Stock capital warrants income earnings stock equity - ------------------------------------------------------------------------------------------------------------------------------- Balance January 1, 1999 $5,901 $4,135 $21,138 $511,816 $1,185,349 $(407,358) $1,320,981 Unrealized loss (42,413) (42,413) Deferred income tax benefit on net unrealized loss 14,844 14,844 Net issuance of treasury stock under stock option plan (18 shares)* 126 212 338 Repurchase of treasury stock (1,034 shares)* (20,682) (20,682) Net income 11,257 11,257 Cash dividends paid ($.23 per share)* (14,351) (14,351) - ------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1999 $5,901 $4,261 $21,138 $484,247 $1,182,255 $(427,828) $1,269,974 =============================================================================================================================== Balance January 1, 2000 $5,901 $4,286 $21,138 $329,354 $1,243,463 $(453,155) $1,150,987 Unrealized loss (29,354) (29,354) Deferred income tax benefit on net unrealized loss 10,274 10,274 Forfeiture of restricted stock under stock award plan (10 shares) (85) (132) (217) Net loss (75,013) (75,013) Cash dividends paid ($.23 per share) (13,816) (13,816) - ------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2000 $5,901 $4,201 $21,138 $310,274 $1,154,634 $(453,287) $1,042,861 ===============================================================================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 45-58 of the Corporation's 1999 Form 10-K, Item 14. *Adjusted for 2 for 1 stock split effective July 22, 1999 4 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED CASH FLOWS
Three Months Ended March 31, (in thousands) (Unaudited) 2000 1999 - ------------------------------------------------------------------------------ Cash flows from: Operations Net income(loss) $ (75,013) $ 11,257 Adjustments to reconcile net income to cash from operations: Changes in: Insurance reserves 38,629 (21,013) Income taxes (7,054) 1,349 Premiums and other receivables (29,791) (45,979) Deferred policy acquisition costs 543 2,046 Reinsurance recoverable 1,955 16,589 Other assets 50,933 (12,399) Other liabilities 7,698 (25,689) California Proposition 103 reserves 611 611 Amortization and write-down of agent relati 45,237 2,939 Depreciation and amortization 3,721 8,318 Investment (gains)losses 6,308 (2,103) Cumulative effect of an accounting change 0 2,255 - ------------------------------------------------------------------------------ Net cash generated(used) by operating activities 43,777 (61,819) - ------------------------------------------------------------------------------ Investing Purchase of securities: Fixed income securities - available-for-sale (305,537) (255,146) Equity securities (21,836) (6,395) Proceeds from sales: Fixed income securities - available-for-sale 236,201 140,013 Equity securities 22,787 15,146 Proceeds from maturities and calls: Fixed income securities - available-for-sale 21,570 27,998 Equity securities 0 3,000 Property and equipment: Purchases (4,755) (11,612) Sales 555 135 - ------------------------------------------------------------------------------ Net cash used from investing activities (51,015) (86,861) - ------------------------------------------------------------------------------ Financing Notes payable: Borrowings 0 10,000 Repayments (163) (20,000) Proceeds from exercise of stock options 0 103 Purchase of treasury stock 0 (20,682) Dividends paid to shareholders (13,816) (14,351) - ------------------------------------------------------------------------------ Net cash used from financing activities (13,979) (44,930) - ------------------------------------------------------------------------------ Net change in cash and cash equivalents (21,217) (193,610) Cash and cash equivalents, beginning of period 149,957 305,002 - ------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 128,740 $ 111,392 ==============================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 45-58 of the Corporation's 1999 Form 10-K, Item 14. 5 Ohio Casualty Corporation & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE I - 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 1999 Form 10-K, Item 14. NOTE II - RECENTLY ISSUED ACCOUNTING STANDARDS During the first quarter of 1999, the Corporation adopted Statement of Position 97-3 "Accounting by Insurance and Other Enterprises for Insurance- Related Assessments". This statement provides guidance on accounting for insurance related assessments and required disclosure information. In accordance with SOP 97-3, the Corporation accrued a liability for insurance assessments of $2.3 million net of tax, as of January 1, 1999. This was recorded as a change in accounting method. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 133 "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for derivative instruments by requiring those items to be recognized as assets or liabilities with changes in fair value reported in earnings or other comprehensive income in the current period. The Corporation expects the adoption of FAS 133 to have an immaterial impact on the financial results due to its limited use of derivative instruments. This statement is effective for fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001 for the Corporation). NOTE III - EARNINGS PER SHARE Basic and diluted earnings per share are summarized as follows (in thousands, except per share data):
Three months ended March 31 2000 1999 ---- ---- Income(loss) from continuing operations $(75,013) $11,717 Weighted average common shares outstanding - basic 60,080 62,290 Basic income(loss) from continuing operations per weighted average share $ (1.25) $ .19 ============================================================================== Weighted average common shares outstanding 60,080 62,290 Effect of dilutive securities 22 36 - ------------------------------------------------------------------------------ Weighted average common shares outstanding - diluted 60,102 62,326 Diluted income(loss) from continuing operations per weighted average share $ (1.25) $ .19 ==============================================================================
1999 adjusted for July 22, 1999 2 for 1 stock split 6 NOTE IV -- SEGMENT INFORMATION 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 private passenger auto - agency, private passenger auto - - direct, CMP, fire, inland marine, general liability, umbrella, workers' compensation, commercial auto, homeowners, fidelity and surety. 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. Each segment of the Corporation is managed separately. The property and casualty segments are managed by assessing the performance and profitability of the segments through analysis of industry financial measurements including loss and loss adjustment expense ratios, combined ratio, premiums written, underwriting gain/loss and the effect of catastrophe losses on the segment. The following tables present this information by segment as it is reported internally to management. In 1999, the Group began managing the private passenger auto - direct segment separately from private passenger auto - agency and umbrella segment separately from general liability. As a result, prior year results for general liability and private passenger auto - agency have been restated to reflect this change. Asset information by reportable segment is not reported, since the Corporation does not produce such information internally.
Three Months Ended March 31 (in thousands) Private Passenger Auto - Agency 2000 1999 - ----------------------------------------------------------------------- Net premiums written $120,750 $147,905 % Increase(decrease) (18.4)% 17.9% Net premiums earned 121,096 129,894 % Increase(decrease) (6.8)% 6.8% Underwriting gain/(loss) (before tax) (23,505) (138) Loss ratio 81.2% 62.6% Loss expense ratio 14.3% 10.6% Underwriting expense ratio 24.0% 23.6% Combined ratio 119.5% 96.8% Impact of catastrophe losses on combined ratio 0.4% 0.3% Private Passenger Auto - Direct 2000 1999 - ----------------------------------------------------------------------- Net premiums written $4,124 $5,243 % Increase(decrease) (21.4)% N/A Net premiums earned 3,888 2,094 % Increase(decrease) 85.7% N/A Underwriting gain/(loss) (before tax) (5,229) (4,170) Loss ratio 139.4% 164.3% Loss expense ratio 11.3% 21.4% Underwriting expense ratio 79.0% 45.3% Combined ratio 229.7% 231.0% Impact of catastrophe losses on combined ratio 0.1% 0.0% CMP, Fire, Inland Marine 2000 1999 - ----------------------------------------------------------------------- Net premiums written $80,543 $74,925 % Increase(decrease) 7.5% 42.4% Net premiums earned 77,273 73,793 % Increase(decrease) 4.7% 42.9% Underwriting gain/(loss) (before tax) (13,763) (14,743) Loss ratio 63.5% 69.8% Loss expense ratio 12.3% 8.0% Underwriting expense ratio 40.3% 41.5% Combined ratio 116.1% 119.3% Impact of catastrophe losses on combined ratio 2.2% 4.6% General Liability 2000 1999 - ----------------------------------------------------------------------- Net premiums written $20,697 $19,904 % Increase(decrease) 4.0% 3.1% Net premiums earned 21,117 21,852 % Increase(decrease) (3.4)% 12.4% Underwriting gain/(loss) (before tax) (5,594) 2,376 Loss ratio 52.5% 37.9% Loss expense ratio 26.5% 2.4% Underwriting expense ratio 48.5% 53.6% Combined ratio 127.5% 93.9% Umbrella 2000 1999 - ----------------------------------------------------------------------- Net premiums written $16,669 $12,258 % Increase(decrease) 36.0% 156.4% Net premiums earned 15,238 9,031 % Increase(decrease) 68.7% 100.3% Underwriting gain/(loss) (before tax) 1,725 3,504 Loss ratio 52.3% 12.8% Loss expense ratio 1.4% (6.0)% Underwriting expense ratio 32.0% 40.1% Combined ratio 85.7% 46.9% Workers' Compensation 2000 1999 - ----------------------------------------------------------------------- Net premiums written $56,836 $47,126 % Increase(decrease) 20.6% 87.1% Net premiums earned 49,606 50,428 % Increase(decrease) (1.6)% 104.5% Underwriting gain/(loss) (before tax) (25,349) 4,011 Loss ratio 105.5% 48.4% Loss expense ratio 10.1% 8.5% Underwriting expense ratio 31.0% 37.6% Combined ratio 146.6% 94.5%
7
Commercial Auto 2000 1999 - ----------------------------------------------------------------------- Net premiums written $47,827 $43,124 % Increase(decrease) 10.9% 21.2% Net premiums earned 43,770 42,502 % Increase(decrease) 3.0% 23.4% Underwriting gain/(loss) (before tax) (9,147) (7,049) Loss ratio 70.3% 67.1% Loss expense ratio 10.6% 12.4% Underwriting expense ratio 36.5% 36.6% Combined ratio 117.4% 116.1% Impact of catastrophe losses on combined ratio 0.2% 0.2% Homeowners 2000 1999 - ----------------------------------------------------------------------- Net premiums written $38,099 $37,478 % Increase(decrease) 1.7% (6.5)% Net premiums earned 45,509 45,654 % Increase(decrease) (0.3)% 3.4% Underwriting gain/(loss) (before tax) (11,375) (9,703) Loss ratio 83.1% 82.7% Loss expense ratio 8.3% 8.8% Underwriting expense ratio 40.1% 36.2% Combined ratio 131.5% 127.7% Impact of catastrophe losses on combined ratio 10.5% 7.9% Fidelity & Surety 2000 1999 - ---------------------------------------------------------------------- Net premiums written $9,099 $9,401 % Increase(decrease) (3.2)% 7.3% Net premiums earned 9,219 9,275 % Increase(decrease) (0.6)% 4.9% Underwriting gain/(loss) (before tax) 906 2,472 Loss ratio 20.5% 2.7% Loss expense ratio 6.3% 4.6% Underwriting expense ratio 64.2% 65.2% Combined ratio 91.0% 72.5% Total Property & Casualty 2000 1999 - ---------------------------------------------------------------------- Net premiums written $394,644 $397,364 % Increase(decrease) (0.7)% 27.4% Net premiums earned 386,716 384,523 % Increase(decrease) 0.6% 24.3% Underwriting gain/(loss) (before tax) (91,331) (23,440) Loss ratio 76.2% 61.5% Loss expense ratio 12.2% 8.9% Underwriting expense ratio 34.5% 34.5% Combined ratio 122.9% 104.9% Impact of catastrophe losses on combined ratio 1.8% 1.9% All other 2000 1999 - ---------------------------------------------------------------------- Revenues $ 1,159 $ (376) Expenses 4,623 4,973 - ---------------------------------------------------------------------- Net income(loss) $(3,464) $(5,349) Reconciliation of Revenues 2000 1999 - ----------------------------------------------------------------------- Net premiums earned for reportable segments $386,716 $384,523 Investment income 50,773 42,467 Realized gains 232 1,078 Miscellaneous income 344 43 - ----------------------------------------------------------------------- Total property and casualty revenues (Statutory basis) 438,065 428,111 Property and casualty statutory to GAAP adjustment (6,551) (478) - ----------------------------------------------------------------------- Total revenues property and casualty (GAAP basis) 431,514 427,633 Other segment revenues 1,159 (376) - ----------------------------------------------------------------------- Total revenues $432,673 $427,257 ======================================================================= Reconciliation of Underwriting gain/(loss) (before tax) 2000 1999 - ----------------------------------------------------------------------- Property and casualty under- writing gain/(loss) (before tax) (Statutory basis) $ (91,331) $(23,440) Statutory to GAAP adjustment (43,815) 77 - ----------------------------------------------------------------------- Property and casualty under- writing gain/(loss) (before tax) (GAAP basis) (135,146) (23,363) Net investment income 51,793 41,809 Realized gain/(loss) (6,308) 903 Other income(loss) (6,389) (4,567) - ----------------------------------------------------------------------- Income(loss) from continuing operations before income taxes $ (96,050) $ 14,782 =======================================================================
NOTE V - AGENT RELATIONSHIPS WRITE-DOWN During first quarter of 2000, the Group made the strategic decision to discontinue its relationship with Managing General Agents. The result was a write-down of the agent relationships asset by $42.2 million, with an after tax impact of $.55 per share. The agent relationship is the identified intangible asset acquired in connection with the Great American Insurance Company commercial lines acquisition. The Managing General Agents accounted for $48 million in commercial lines premium written, of which $29 million was workers' compensation. This business will be non-renewed as permitted by law and contractual agreements. The Group believes this termination of the Managing General Agents will give it better control of its underwriting and pricing practices. The remaining portion of the agent relationships will be amortized on a straight line basis over the balance of the twenty-five year period. Additional information related to agent relationships is included in Item 14, Note 1G, Accounting Policies on page 45 of the Corporation's 1999 Form 10-K. 8 NOTE VI - RESTRUCTURING CHARGE During December 1998, the Group adopted a plan to restructure its branch operations. To continue in the Corporation's efforts to reduce expenses, personal lines business centers were reduced from five to three locations. Underwriting branch locations were reduced from seventeen to eight locations and claims branches were reduced from thirty-eight to six locations in 1999. As part of this plan, the Corporation established a $10.0 million liability for future expenses related to its branch office consolidation plan, resulting in a one-time charge of $10.0 million being reflected in its 1998 income statement. These expenses consisted solely of future contractual lease payments related to abandoned facilities. During 1999, the Corporation reduced $5.3 million of the liability, of which $2.9 million was due to payments under leases and $2.4 million was due to changes in assumptions used to establish the initial reserve. The activities under the plan were completed in 1999, but due to leases still in effect, the balance in the restructuring reserve, $4.7 million at December 31, 1999, will continue to remain as leases expire in 2000. In the first quarter of 2000, the Corporation further reduced $1.1 million of the liability. Of the $1.1 million, $.02 million related to changes in assumptions used to establish the initial reserve. The balance in the restructuring reserve was $3.6 million at March 31, 2000. 9 ITEM 2. Management's Discussion and Analysis of Financial Condition - ------ and Results of Operations ----------------------------------------------------------------- Ohio Casualty Corporation (the Corporation) is the holding company of The Ohio Casualty Insurance Company (the Company), which is one of six property- casualty companies that make up the Ohio Casualty Group (the Group). Property and casualty pre-tax underwriting losses for the quarter ended March 31, 2000 were $135.1 million, $2.25 per share, compared with $23.4 million, $.38 per share for the same period in 1999. The March 31, 2000 results include the effects of the agent relationships write-down taken in the quarter. The agent relationships write-down amounted to $42.2 million before tax, or $.55 per share after tax. Gross premiums for the first three months of 2000 decreased 4.5% for all lines of business compared with the first quarter of 1999. Commercial lines increased 11.6% and personal lines decreased 19.6% from the same period last year. Property and casualty net premiums dropped 0.7% in the first quarter of 2000 against the same period a year ago. First quarter of 1999 net premiums were higher due to the effects of the New Jersey private passenger automobile annual policy conversion. Additionally, a rate rollback in New Jersey private passenger automobile was mandated in mid 1999 and reduced premiums for first quarter 2000 relative to first quarter 1999. Excluding these effects, first quarter 2000 net premiums increased approximately 4.1% against 1999. Premium from Key Agents grew 2.1% over the same period of 1999. Key Agents work closely with the Group to establish goals to increase profitability, growth and retention. Premiums from non-key active agents fell 3.5% in the first quarter. Together with new appointments the year-to-date growth rate for all active agencies was 1.9%. New Jersey is the Group's largest state with 14.9% 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 Group 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 Group has paid $3.3 million in 2000 for fiscal year 2001 assessment and paid $3.4 million in 1999 for fiscal year 2000 assessments. The Corporation anticipates future assessments will not materially affect the Corporation's results of operations, financial position or liquidity. The New Jersey State Senate passed an auto insurance reform bill effective March 22, 1999, that mandated a 15% rate reduction for personal auto policies based on a reduction in medical expense benefits, limitations on lawsuits and enhanced fraud prevention provisions. All new policies and renewal policies written on or after that date reflect the 15% rate reduction. The anticipated impact on the Group is a tradeoff of lower premium rates on personal auto policies for presumably lower losses but the degree of offset, if any, is uncertain at present. As of March 31, 2000, the Group had personal auto net premium written of $25.7 million or 43.7% of total premium that the Group writes in New Jersey compared with $124.4 million or 49.5% at year-end 1999. In 1999, the state of New Jersey began to require insurance companies to write a portion of their premiums in Urban Enterprise Zones (UEZ). These zones are urban areas frequently having high loss ratios. The Group is assigned premiums if it does not write the required amount on its own. As of March 31, 2000, the Group has written $1.6 million year-to-date in UEZ premiums, with $2.9 million in additional assigned premiums. As of March 31, 2000, the loss ratio on the UEZ premiums is 167.3% and the loss ratio on the assigned business is 188.6%. The combined ratio for the first three months increased 18.0 points to 122.9% from 104.9% from the same period last year. The poor combined ratio is a result of continued price inadequacy and a material deterioration in prior accident year experience. This has been concentrated in the private passenger auto, workers' compensation, umbrella, and general liability lines of business. 10 The three-month combined ratio for homeowners increased 3.8 points to 131.5% from 127.7% in the same period last year. The Group continues to review its exposure to underinsured homeowner properties to maintain adequate replacement cost values on its homeowners book of business. Selected homeowners accounts are reviewed upon renewal for a replacement cost valuation and any necessary premium increases will be implemented at that time. Private passenger automobile-agency, the Group's largest line, recorded a 2000 three-month combined ratio of 119.5% increasing from 96.8% in 1999. Private passenger automobile-agency combined ratio rose in response to higher than anticipated incurred losses in the first quarter for prior accident years and the effects of the New Jersey rate rollback. Private passenger automobile- agency loss ratio increased 18.6 points to 81.2% from 62.6% in 1999. Commercial automobile reported a first quarter combined ratio of 117.4%, increasing 1.3 points over the 1999 combined ratio of 116.1%. Workers' compensation combined ratio for the first three months of 2000 increased 52.1 points to 146.6% from 94.5% during the same period last year. The increase in the workers' compensation ratio is due to inadequate price increases and adverse prior year loss reserve development that has caused incurred loss and loss adjustment expenses to increase significantly. Workers' compensation loss ratio increased 57.1 points to 105.5% from 48.4% in the same quarter last year. The general liability combined ratio increased during the first quarter 2000 to 127.5% from 93.9% in 1999. Umbrella combined ratio for the first quarter of 2000 increased 38.8 points to 85.7% from 46.9% in 1999. These increases are largely due to adverse development of prior accident years. The combined ratio for CMP, fire and inland marine decreased 3.2 points to 116.1% from 119.3% during March 2000. The first quarter catastrophe losses were $7.0 million and accounted for 1.8 points on the combined ratio. This compares with $7.4 million and 1.9 point for the same period in 1999. The effect of future catastrophes on 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 2000 there were 7 catastrophes compared with 5 catastrophes in the first quarter of 1999. The largest catastrophe in each quarter was $5.7 million and $2.4 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 51 and 52 of the Corporation's 1999 Form 10-K. For the quarter, property and casualty after tax investment income was $35.1 million, $.58 per share, increasing slightly from $31.8 million, $.51 per share, for the same period last year. The effective tax rate on investment income for the first quarter of 2000 was 30.9% compared with 25.1% for the comparable period in 1999. The increase in effective tax rate reflects a decreasing tax exempt municipal bond portfolio. For the first quarter, property and casualty after tax realized losses were $4.1 million, compared with an after tax realized gain of $.6 million for the same period of 1999. The capital loss reflects a current period write-down of securities due to permanent declines in market value of $4.7 million. Net cash generated by operations was $43.8 million for the first three months of the year compared with net cash used of $61.8 million for the same period in 1999. This change is due to payment received in 2000 as part of the commutation of a reinsurance treaty in the fourth quarter of 1999. Also, 1999 cash used reflected a large payment for the remaining purchase price of the Great American Insurance Company commercial lines. Shareholder dividend payments were $13.8 million in the first three months of 2000 compared with $14.4 million for the same period of 1999. In 1995, the Company reinsured substantially all of its life insurance and related businesses to Employer's Reassurance Corporation and entered into an administrative and marketing agreement with Great Southern Life Insurance Company. During 1999, Great Southern Life Insurance Company replaced Employers' Reassurance Corporation on the 100% coinsurance treaty. On December 31, 1999, the Company completed the sale of the Ohio Life shell, thereby transferring all remaining assets and liabilities, as well as reinsurance treaty obligations, to the Buyer. Additional information related to the discontinued life insurance operations is included in Item 14, Note 20 Discontinued Operations on page 57 of the Corporation's 1999 Form 10-K. 11 Investments in below investment grade securities (Standard and Poor's rating below BBB-) and unrated securities are summarized as follows:
March 31, December 31, 2000 1999 Below investment grade securities: Carrying value $160.3 $175.2 Amortized cost 177.9 187.1 Unrated securities: Carrying value $326.3 $303.2 Amortized cost 323.5 310.0
Utilizing ratings provided by other agencies, such as the NAIC, the Corporation 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, 2000 1999 Below investment grade securities at carrying value $160.3 $175.2 Other rating agencies categorizing unrated securities as below investment grade 37.2 8.7 Below investment grade securities at carrying value $197.5 $213.9
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 66 corporate borrowers in approximately 45 industries. Investments in below investment grade securities have greater risks than investments in investment grade securities. The risk of default by borrowers which issue securities rated below investment grade is significantly greater because these securities are generally unsecured and often subordinated to other debt and these borrowers are often highly leveraged and are more sensitive to adverse economic conditions such as a recession or a sharp increase in interest rates. Current liquidity needs are expected to be met by scheduled bond maturities, even if the below investment grade and unrated securities are excluded. Investment grade securities are also subject to significant adverse risks including the risks of re-leveraging and changes in control of the issuer. In most instances, investors are unprotected with respect to such risks, the effects of which can be substantial. For further discussion of the Corporation's investments, see Item 1 pages 6 through 9 of the Corporation's 1999 Form 10-K for the year ended December 31, 1999. In 1994, the National Association of Insurance Commissioners (NAIC) 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. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, e.g. deferred income taxes are recorded. The Ohio 12 and Indiana Insurance Departments have adopted the Codification guidance, effective January 1, 2001. The Group has not estimated the potential effect of the Codification guidance. Proposition 103 was passed in the state of California in 1988 in an attempt to legislate premium rates for that state. As construed by the California Supreme Court, the proposition requires premium rate rollbacks for 1989 California policyholders while allowing for a "fair" return for insurance companies. Even after considering investment income, total returns in California have been less than what would be considered "fair" by any reasonable standard. During the fourth quarter of 1994, the state of California assessed the Group $59.9 million for Proposition 103. In February 1995, California revised this billing to $47.3 million. 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 Group expected the commissioner to rule sometime after the election in November 1998, but he has so far failed to do so. 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 Group 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 Group's Constitutional argument that this rollback is confiscatory. The Group does not believe it is possible to pinpoint a specific rollback that may be required that is the most probable. The Group 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 $51.1 million at March 31, 2000. In December 1992, the Group 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. Ohio Casualty Corporation did not repurchase any of its shares during the first quarter. The Corporation has remaining authorization to repurchase 1,649,824 additional shares. The Corporation successfully moved into the Year 2000 without impact or interruption to the business as a result of Year 2000 computer problems. Though no Year 2000 problems have occurred or are anticipated, the Corporation continues to monitor the situation in order to be able to address any future issues in a timely fashion. The total related cost of the Year 2000 project was $2.8 million through March 31, 2000. The Corporation expects that Year 2000 project costs incurred in 2000, if any, will be immaterial. From time to time, the Company may publish forward looking statements relating to such matters as anticipated financial performance, business prospects and plans, regulatory developments and similar matters. The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical information, are forward looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of 1933 and The Securities Exchange Act of 1934 for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward- looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following: changes in property and casualty reserves; catastrophe losses; premium and investment growth; product pricing environment; availability of credit; changes in government regulation; performance of financial markets; fluctuations in interest rates; availability and pricing of reinsurance; litigation and administrative proceedings; Year 2000 issues; ability of Ohio Casualty to integrate and to retain any acquired insurance business; and general economic and market conditions. 13 PART II Item 1. Legal Proceedings - None Item 2. Changes in Securities - On March 23, 2000, Ohio Casualty Corporation ("Ohio Casualty") granted an option to purchase 15,000 common shares, $.125 par value (the "common shares"), to each of ten continuing directors of Ohio Casualty (for an aggregate of 150,000 common shares), in lieu of the payment of any cash annual retainer in respect of serving as a director during the year 2000. The exercise price of each option is $13.125, the closing price of the Company's common shares on The Nasdaq National Market on the grant date. Each option becomes exercisable in two equal annual installments beginning on the first anniversary of the grant date and has a stated term of 10 years. If a director ceases to be a member of the Board of Directors of Ohio Casualty because of his/her death or disability or retirement, his/her option would vest and become fully exercisable and must be exercised within 12 months after the director ceases to serve as such, subject to the stated term of the option and a six-month holding requirement prior to exercise. If a director's status is terminated for any other reason, the director would be able to exercise only the vested portion of his/her option. Such exercise must occur within three months after the director ceases to be such, subject to the stated term of the option. On February 29, 2000, Ohio Casualty also granted an option ( the "Woodall Option") to purchase 20,000 common shares, to William L. Woodall, (the "Optionee") as part of Mr. Woodall's compensation package following his appointment as President and Chief Executive Officer of the Company. The exercise price of the option is $12.375, the closing price of the Company's common shares on The Nasdaq National Market on the grant date. The Woodall Option becomes exercisable in two equal annual installments beginning on the first anniversary of the grant date and has a stated term of 10 years. If the Optionee ceases to be an employee of the Company because of death, disability or retirement, the Woodall Option would vest and become fully exercisable and must be exercised within 3 years following the date the Optionee's termination of employment, subject to the stated terms of the Woodall option and a six-month holding requirement prior to exercise. If the Optionee ceases to be an employee of the Company or any subsidiary of the Company for any other reason, the Woodall Option would be cancelled by the Company without consideration. Ohio Casualty granted the options described above in reliance upon the exemptions from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 based upon the limited number of persons to whom the options were granted and the status of each individual as a director and or executive officer of the Company. 14 Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - At the annual meeting on April 26, 2000, shareholders voted on board of director seats for three year terms. Those elected were: Jack E. Brown: For 53,048,550; against/abstentions 1,453,232 Vaden Fitton: For 53,108,289; against/abstentions 1,393,493 Howard L. Sloneker III: For 49,441,508; against/abstentions 5,060,274 Those directors whose term of office continued after the meeting were: Terrence J. Baehr, Arthur J. Bennert, Catherine Dolan, Wayne R. Embry, Stephen S. Marcum, Stanley N. Pontius and William L. Woodall. At the annual meeting on April 26, 2000, shareholders approved an amendment to the Company's Code of Regulations to permit electronic voting of shareholder proxies. At the annual meeting on April 26, 2000, shareholders approved an amendment to the Amended Articles of Incorporation of the Corporation to change the location of the Corporation's principal office. Item 5. Other Information - None Item 6. Exhibits and reports on Form 8-K - (a) Exhibits 10.1 Stock Option Agreement for Directors' year 2000 grant. 10.2 Stock Option Agreement for Chief Executive Officer year 2000 grant. 27 Financial Data Schedule. (b) Reports on Form 8-K The Corporation filed a Form 8-K on February 24, 2000, announcing the resignation of Lauren N. Patch and appointment of William L. Woodall as President and Chief Executive Officer. The Corporation filed Form 8-K on March 15, 2000, announcing the retirement of Barry S. Porter as Chief Financial Officer. 15 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) /s/ Elizabeth M. Riczko May 15, 2000 ------------------------------------------ Elizabeth M. Riczko, Senior Vice President (on behalf of Registrant and as Principal Accounting Officer) 16 EX-10.1 2 MATERIAL CONTRACT Exhibit 10.1 STOCK OPTION AGREEMENT (Non-Qualified Stock Option) ---------------------------- THIS AGREEMENT is made to be effective as of March 23, 2000, by and between Ohio Casualty Corporation, an Ohio corporation (the "Company"), and the undersigned director of Ohio Casualty Corporation ("Director"). WITNESSETH: ---------- WHEREAS, the Board of Directors (the "Board") has determined that Director should be granted an option to acquire common shares of the Company, upon the terms and conditions set forth in this Agreement, in lieu of being paid any cash annual retainer for the year 2000; NOW, THEREFORE, in consideration of the premises, the parties named above make the following agreement, intending to be legally bound thereby: 1. Grant of Option. Subject to adjustment pursuant to --------------- Section 3 of this Agreement, the Company hereby grants to Director an option (the "Option") to purchase 15,000 common shares, $.125 par value, of the Company (the "Shares"). The Option is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Anything contained in this Agreement to the contrary not withstanding, the Option may not be exercised for a period of six months from the date of this Agreement. 2. Terms and Conditions of the Option. ---------------------------------- (a) Option Price. The purchase price (the ------------ "Option Price") to be paid by Director to the Company upon the exercise of the Option shall be $13.125 per Share, subject to adjustment as provided in Section 3 of this Agreement. (b) Vesting. Except as otherwise provided in ------- this Agreement, the Option shall vest as follows: (i) Subject to Director's continued service on the Board of Directors (the "Board") of the Company, the Option shall vest and become exercisable with respect to (a) fifty percent (50%) of the Shares on the first anniversary of the effective date of this Agreement and (b) fifty percent (50%) of the Shares on the second anniversary of the effective date of this Agreement. The portion of the Option which has become vested and exercisable pursuant to this Section 2(b) is hereinafter referred to as the "Vested Portion" and the remaining portion shall be the "Unvested Portion". (ii) Subject to the six-month holding period requirements of Section 1 of this Agreement, if Director ceases to be a director of the Company because of Director's death, Disability (as defined below) or Retirement (as defined below), any portion of 1 the Option which is then not exercisable shall vest and become exercisable upon such termination of service as a director of the Company for the period specified in Section 2(c) below. For purposes of this Agreement, "Disability" means a mental or physical condition which, in the opinion of the Board, renders Director unable or incompetent to carry out the job responsibilities which Director held or the tasks to which Director was assigned at the time the disability was incurred, and which is expected to be permanent or for an indefinite duration exceeding one year. For purposes of this Agreement, "Retirement" shall mean the retirement from service on the Board after (A) having attained the age of 65 and (B) having served at least 10 years as a member of the Board. (iii) If Director ceases to be a director of the Company for any reason other than because of Director's death, Disability or Retirement, the Vested Portion of the Option will be exercisable upon termination of Director's status as a director of the Company for the period specified in Section 2(c) below and the then Unvested Portion of the Option will terminate. (c) Exercise of the Option. Subject to the ---------------------- provisions of this Agreement, including the six-month holding period provided in Section 1, Director may exercise all or any part of the Vested Portion of the Option at any time prior to the occurrence of the earliest event listed below: (i) the tenth anniversary of the date of this Agreement; (ii) twelve months following the date Director ceases to be a director of the Company because of Director's death, Disability or Retirement; or (iii) three months following the date Director ceases to be a director of the Company for any reason other than because of Director's death, Disability or Retirement. (d) Method of Exercise. The Vested Portion of ------------------ the Option may be exercised by giving written notice of exercise to the Company in care of the Treasurer of the Company stating the number of Shares subject to the Option being purchased. Payment for all such Shares shall be made to the Company at the time the Option is exercised in United States dollars in cash (including check, bank draft or money order). Payment for such Shares also may be made (i) by delivery of common shares of the Company already owned by Director and having a Fair Market Value (as defined in Section 2(f) of this Agreement) on the date of delivery equal to the Option Price for the Shares purchased, or (ii) by delivery of the combination of cash and already-owned common shares of the Company. The Board may, in its discretion, permit payment of the Option Price of the Shares subject to the Option by delivery of a properly executed exercise notice together with a copy of irrevocable instructions to deliver promptly to the Company the amount of sale or loan proceeds to pay the Option Price. After payment in full for the Shares purchased under the Option has been made, the Company shall take all such action as is necessary to deliver appropriate share certificates evidencing the Shares purchased upon exercise of the Option as promptly thereafter as is reasonably practicable. 2 (e) Tax Withholding. Director will pay to the --------------- Company the amount of any taxes the Company is required by law to withhold with respect to the exercise of the Option. Director may instruct the Company to withhold from the Shares issuable upon exercise of the Option that number of Shares having a Fair Market Value (as defined in Section 2(f) of this Agreement) on the date of exercise equal to the amount of any taxes the Company is required by law to withhold with respect to the exercise of the Option. (f) For purposes of this Agreement, "Fair Market Value" means, on any given date, the closing price of the Company's common shares, as reported on The Nasdaq National Market, or on any securities exchange on which the common shares are listed for such date, or if the Company's common shares were not traded on such date, on the next preceding date on which the Company's common shares were traded. 3. Adjustments and Changes in the Shares. ------------------------------------- The following provisions shall apply to the Option: (a) Generally. In the event that the outstanding --------- common shares of the Company shall be changed into or exchanged for a different kind of shares, other securities or other property of the Company or of another corporation or for cash (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, combination of shares or otherwise) or if the number of common shares of the Company shall be increased through the payment of a share dividend, then unless such change results in the termination of the Option, there shall be substituted for or added to each Share subject to the Option, the number and kind of shares, other securities or other property and the amount of cash into which each outstanding common share of the Company shall be changed, or for which each such common share shall be exchanged, or to which the holder of each such common share shall be entitled, as the case may be. The Option shall also be appropriately amended as to the Option Price and other terms as may be necessary to reflect the foregoing events. The number of Shares that will become vested in accordance with Section 2(b) of this Agreement shall be appropriately adjusted to reflect any such change in the outstanding common shares of the Company. In the event there shall be any other change in the number or kind of the outstanding shares of the Company, or of any shares, other securities or other property (including cash) into which such shares shall have been changed, or for which they shall have been exchanged, then if the Board, in its sole discretion, shall determine that such change equitably requires an adjustment in the Option, such adjustment shall be made by the Board in accordance with such determination. Fractional shares resulting from any adjustment in the Option pursuant to this Section 3(a) shall be rounded down to the nearest whole number of shares. (b) Change in Control. In the event there is a ----------------- Change in Control, subject to the six month holding period, the Option shall become immediately exercisable as of the date of the Change in Control, whether or not exercisable under this Agreement. If the Option has been held for less than six months as of the date of the Change in Control, the Option shall be cancelled by the Company without consideration and shall terminate as of the date of the 3 Change in Control. For purposes of this Section 3, a Change in Control shall be deemed to have occurred on the earliest of the following dates: (i) Unless such acquisition shall have been approved in advance by the Board, the date any entity or person (including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) shall have become the beneficial owner of, or shall have obtained voting control over, twenty percent (20%) or more of the outstanding common shares of the Company. (ii) The date the shareholders of the Company approve a definitive agreement (A) to merge or consolidate the Company with or into another corporation, in which the Company is not the continuing or surviving corporation or pursuant to which any common shares would be converted into cash, securities or other property of another corporation, other than a merger of the Company in which holders of common shares immediately prior to the merger have the same proportionate ownership of common shares of the surviving corporation immediately after the merger as immediately before, or (B) to sell or otherwise dispose of substantially all the assets of the Company; or (iii) The date there shall have been a change in a majority of the Board within a twelve (12) month period; provided, however, that any new director whose nomination for election by the Company's shareholders was approved, or who was appointed or elected to the Board, by the vote of two-thirds of the directors then still in office who were in office at the beginning of the twelve (12) month period shall not be counted in determining whether there has been such a change in a majority of the Board. (c) No Restrictions on Company. The grant -------------------------- of this Option shall not affect in any way the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 4. Non-Assignability of Option. Unless otherwise --------------------------- permitted by the Board, the Option shall not be assignable or otherwise transferable by Director except by will or by the laws of descent and distribution. The Option may not be exercised during the lifetime of Director except by Director or Director's guardian or legal representative. 5. Buy Out of Option Grants. At any time after ------------------------ the Option becomes exercisable, the Board shall have the right to elect, in its sole discretion and without the consent of Director, to cancel the Option and pay to Director the excess of the Fair Market Value of the Shares over the Option Price at the date the Board provides written notice (the "Buy Out Notice") of the intention to exercise the right. A buy out pursuant to this Section 5 shall be completed by the Company as promptly as possible after the date of the Buy Out Notice. Payment of the buy out amount may be made in cash, in common shares of the Company, or partly in cash and partly in common shares as the Board deems advisable. To the extent payment is made in common shares, the number of common shares shall be determined by dividing the amount of the payment to be made by the Fair Market Value of a common share at the date of the 4 Buy Out Notice. Payment of any such buy out amount shall be made net of any applicable foreign, federal (including FICA), state and local withholding taxes. 6. Restrictions on Transfers of Shares. Anything ----------------------------------- contained in this Agreement or elsewhere to the contrary notwithstanding, the Company may postpone the issuance and delivery of Shares upon any exercise of the Option until completion of any stock exchange listing or registration or other qualification of such Shares under any state or federal law, rule or regulation as the Company may consider appropriate. The Company may require Director, when exercising the Option, to make such representations and furnish such information as the Company may consider appropriate in connection with the issuance of the Shares in compliance with applicable law. Shares issued and delivered upon exercise of the Option shall be subject to such restrictions on trading, including appropriate legending of certificates to that effect, as the Company, in its discretion, shall determine are necessary to satisfy applicable legal requirements and obligations. 7. Rights of Director as a Shareholder. Director ----------------------------------- shall have no rights as a shareholder of the Company with respect to any Shares of the Company covered by the Option until the date of issuance of a certificate to Director. 8. No Right to Continue as a Director. The grant ---------------------------------- of the Option shall not confer upon Director any right to continue as a director of the Company nor limit in any way the right of the Company's shareholders to terminate Director's status as a director of the Company at any time. 9. Governing Law. This Agreement shall be governed ------------- by and construed in accordance with the laws of the State of Ohio. 10. Rights and Remedies Cumulative. All rights and ------------------------------ remedies of the Company and of Director enumerated in this Agreement shall be cumulative and, except as expressly provided otherwise in this Agreement, none shall exclude any other rights or remedies allowed by law or in equity, and each may be exercised and enforced concurrently. 11. Captions. The captions contained in this -------- Agreement are included only for convenience of reference and do not define, limit, explain or modify this Agreement or its interpretation, construction or meaning and are in no way to be construed as a part of this agreement. 12. Severability. If any provision of this Agreement ------------ or the application of any provision hereof to any person or any circumstance shall be determined to be invalid or unenforceable, then such determination shall not affect any other provision of this Agreement or the application of said provision to any other person or circumstance, all of which other provisions shall remain in full force and effect. It is the intention of each party to this Agreement that if any provision of this Agreement is susceptible of two or more interpretations, one of 5 which would render the provision enforceable and the other or others of which would render the provision unenforceable, then the provision shall have the meaning which renders it enforceable. 13. Number and Gender. When used in this Agreement, the ----------------- number and gender of each pronoun shall be construed to be such number and gender as the context, circumstances or its antecedent may require. 14. Entire Agreement. This Agreement constitutes ---------------- the entire agreement between the Company and Director with respect to this stock option grant, and this Agreement supersedes all prior agreements between the parties related to this stock option grant. No officer, employee or other servant or agent of the Company, and no servant or agent of Director is authorized to make any representation, warranty or other promise not contained in this Agreement. No change, termination or attempted waiver of any of the provisions of this Agreement shall be binding upon any party hereto unless contained in a writing signed by the party to be charged. 15. Successors and Assigns. This Agreement shall ---------------------- inure to the benefit of and be binding upon the successors and assigns (including subsequent, as well as immediate, successors and assigns) of the parties. 6 By signing below, Director accepts this Option subject to all of the terms and provisions set forth in this Agreement. Director hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the date first above written. COMPANY ------- OHIO CASUALTY CORPORATION By: --------------------------------- Title: ----------------------------- DIRECTOR: -------- ------------------------------------- Signature ------------------------------------- Name ------------------------------------- Street Address ------------------------------------- City, State, Zip Code ------------------------------------- Social Security Number 7 EX-10.2 3 MATERIAL CONTRACT Exhibit 10.2 STOCK OPTION AGREEMENT (Non-Qualified Stock Option) ---------------------------- THIS AGREEMENT is made to be effective as of February 29, 2000, by and between Ohio Casualty Corporation, an Ohio corporation (the "Company"), and William L. Woodall ("Employee"). WITNESSETH: ---------- WHEREAS, the Board of Directors of the Company has determined that an option to acquire common shares of the Company should be granted to Employee upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises, the parties named above make the following agreement, intending to be legally bound thereby: 1. Grant of Option. Subject to adjustment pursuant to --------------- Section 3 of this Agreement, the Company hereby grants to Employee an option (the "Option") to purchase 20,000 common shares of the Company (the "Shares"). The Option is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Anything contained in this Agreement to the contrary not withstanding, the Option may not be exercised for a period of six months from the date of this Agreement. (1) 2. Terms and Conditions of the Option. ---------------------------------- (a) Option Price. The purchase price (the "Option ------------ Price") to be paid by Employee to the Company upon the exercise of the Option shall be $12.375 per Share, subject to adjustment as provided in Section 3 of this Agreement. (b) Vesting. Except as otherwise provided in this ------- Agreement, the Option shall vest as follows: (i) Subject to the Employee's continued service with the Company or a Subsidiary of the Company, the Option shall vest and become exercisable with respect to (a) fifty percent (50%) of the Shares on the first anniversary of the effective date of this Agreement and (b) fifty percent (50%) of the Shares on the second anniversary of the effective date of this Agreement. (ii) Subject to the six-month holding period requirements of Section 1 of this Agreement, if Employee's employment with the Company or any subsidiary of the Company is terminated as a result of death, Disability (as defined below) or Retirement (as defined below), any portion of the Option which is then not exercisable shall vest and become exercisable upon such termination of employment for the period specified in Section 2(c) below. For purposes of this Agreement, "Disability" means a mental or physical condition which, in the opinion of the Board, renders Employee unable or incompetent to carry out the job responsibilities which the Employee held or the tasks to which the Employee was assigned at the time the disability was incurred, and which is expected to be permanent or for an indefinite duration exceeding one year. For purposes of this Agreement, "Retirement" shall have the meaning given to such term in the Ohio Casualty Insurance Company Employees Retirement Plan. The portion of the Option which has become vested and exercisable pursuant to this Section 2(b) is hereinafter referred to as the "Vested Portion" and any remaining portion shall be the "Unvested Portion". (2) (c) Option Term. Subject to the provisions of this ----------- Agreement, Employee may exercise all or any part of the Option at any time prior to the occurrence of the earliest event listed below: (i) the tenth anniversary of the date of this Agreement; or (ii) three years following the date of Employee's termination of employment with the Company or any subsidiary of the Company as a result of death, Disability or Retirement. If Employee's employment with the Company or any subsidiary of the Company is terminated for any other reason other than death, Disability or Retirement, the Option shall be cancelled by the Company without consideration and shall thereupon terminate. (d) Method of Exercise. The Vested Portion of ------------------ the Option may be exercised by giving written notice of exercise to the Company, in care of the Treasurer of the Company, stating the number of Shares subject to the Option being purchased. Payment for all such Shares shall be made to the Company at the time the Option is exercised in United States dollars in cash (including check, bank draft or money order). Payment for such Shares also may be made (i) by delivery of common shares of the Company already owned by Employee and having a Fair Market Value (as defined in Section 2(f) of this Agreement) on the date of delivery equal to the Option Price for the Shares purchased, or (ii) by delivery of the combination of cash and already-owned common shares of the Company. The Board may, in its discretion, permit payment of the Option Price of the Shares subject to the Option by delivery of a properly executed exercise notice together with a copy of irrevocable instructions to deliver promptly to the Company the amount of sale or loan proceeds to pay the Option Price. After payment in full for the Shares purchased under the Option has been made, the Company shall take all such action necessary to deliver appropriate share certificates evidencing the Shares purchased upon exercise of the Option as promptly thereafter as is reasonably practicable. (3) (e) Tax Withholding. Employee will pay to the --------------- Company the amount of any taxes the Company is required by law to withhold with respect to the exercise of the Option. Employee may instruct the Company to withhold from the Shares issuable upon exercise of the Option that number of Shares having a Fair Market Value (as defined in Section 2 2(f) of this Agreement) on the date of exercise equal to the amount of any taxes the Company is required by law to withhold with respect to the exercise of the Option. (f) For purposes of this Agreement, "Fair Market Value" means, on any given date, the closing price of the Company's common shares, as reported on The Nasdaq National Market, or on any securities exchange on which the common shares are listed for such date, or if the Company's common shares were not traded on such date, on the next preceding date on which the Company's common shares were traded. (4) 3. Adjustments and Changes in the Shares. ------------------------------------- The following provisions shall apply to the Option: (a) Generally. In the event that the outstanding --------- common shares of the Company shall be changed into or exchanged for a different kind of shares, other securities or other property of the Company or of another corporation or for cash (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, combination of shares or otherwise) or if the number of common shares of the Company shall be increased through the payment of a share dividend, then, unless such change results in the termination of the Option, there shall be substituted for or added to each Share subject to the Option, the number and kind of shares, other securities or other property and the amount of cash into which each outstanding common share of the Company shall be changed, or for which each such common share shall be exchanged, or to which the holder of each such common share shall be entitled, as the case may be. The Option shall also be appropriately amended as to the Option Price and other terms as may be necessary to reflect the foregoing events. The number of Shares that will become vested in accordance with Section 2(b) of this Agreement shall be appropriately adjusted to reflect any such change in the outstanding common shares of the Company. In the event there shall be any other change in the number or kind of the outstanding shares of the Company, or of any shares, other securities or other property (including cash) into which such shares shall have been changed, or for which they shall have been exchanged, then if the Board, in its sole discretion, shall determine that such change equitably requires an adjustment in the Option, such adjustment shall be made by the Board in accordance with such determination. Fractional shares resulting from any adjustment in the Option pursuant to this Section 3(a) shall be rounded down to the nearest whole number of shares. (b) Change in Control. In the event there is a ----------------- Change in Control, subject to the six-month holding period, the Option shall become immediately exercisable as of the date of the Change in Control, whether or not exercisable under this Agreement. If the Option has been held for less than six months as of the date of the Change in Control, the Option shall be cancelled by the Company without consideration and shall terminate as of the date of the Change in Control. For purposes of this Section 3, a Change in Control shall be deemed to have occurred on the earliest of the following dates: (i) Unless such acquisition shall have been approved in advance by the Board, the date any entity or person (including a "group" as defined in Section 3 13(d)(3) of the Securities Exchange Act of 1934, as amended) shall have become the beneficial owner of, or shall have obtained voting control over, twenty percent (20%) or more of the outstanding common shares of the Company. (ii) The date the shareholders of the Company approve a definitive agreement (A) to merge or consolidate the Company with or into another corporation, in which the Company is not the continuing or surviving corporation or pursuant to which any common shares would be converted into cash, securities or other property of another corporation, other than a merger of the Company in which holders of common shares immediately prior to the merger have the same proportionate ownership of common shares of the surviving corporation immediately after the merger as immediately before, or (B) to sell or otherwise dispose of substantially all the assets of the Company; or (iii) The date there shall have been a change in a majority of the Board within a twelve (12) month period; provided, however, that any new director whose nomination for election by the Company's shareholders was approved, or who was appointed or elected to the Board, by the vote of two-thirds of the directors then still in office who were in office at the beginning of the twelve (12) month period shall not be counted in determining whether there has been such a change in a majority of the Board. (A) (B) (c) No Restrictions on Company. The grant of this -------------------------- Option shall not affect in any way the right of the Company to adjust, reclassify, reorganize, or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. (5) 4. Non-Assignability of Option. The Option shall not be --------------------------- assignable or otherwise transferable by Employee except by will or by the laws of descent and distribution. The Option may not be exercised during the lifetime of Employee except by the Employee or Employee's guardian or legal representative. (6) 5. Buy Out of Option Gains. At any time after the Option ----------------------- becomes exercisable, the Board of Directors of the Company shall have the right to elect, in its sole discretion and without the consent of Employee, to cancel the Option and pay to Employee the excess of the fair market value of the Shares (based on the closing price of the Company's common shares on the immediately preceding day) over the Option Price on the date the Board provides written notice (the "Buy Out Notice") of the intention to exercise the right. A buy out pursuant to this section shall be effected by the Company as promptly as possible after the date of the Buy Out Notice. Payment of the buy out amount may be made in cash, in common shares of the Company, or partly in cash and partly in common shares as the Board of Directors deems advisable. To the extent payment is made in common shares, the number of shares shall be determined by dividing the amount of the payment to be made by the fair market value of a common share (based on the prior day's closing price) at the date of the Buy Out Notice. Payment of any such buy out amount shall be made net of any applicable foreign, federal (including FICA), state and local withholding taxes. 4 (7) 6. Restrictions on Transfers of Common Shares. Anything ------------------------------------------ contained in this Agreement or elsewhere to the contrary notwithstanding, the Company may postpone the issuance and delivery of Shares upon any exercise of the Option until completion of any stock exchange listing or registration or other qualification of such Shares under any state or federal law, rule or regulation as the Company may consider appropriate. The Company may require Employee, when exercising the Option, to make such representations and furnish such information as the Company may consider appropriate in connection with the issuance of the Shares in compliance with applicable law. (8) Shares issued and delivered upon exercise of the Option shall be subject to such restrictions on trading, including appropriate legending of certificates to that effect, as the Company, in its discretion, shall determine are necessary to satisfy applicable legal requirements and obligations. (9) 7. Rights of Employee. Employee shall have no rights as a ------------------ shareholder of the Company with respect to any Shares of the Company covered by the Option until the date of issuance of a certificate to him. (10) 8. No Agreement to Employ. The grant of the Option shall ---------------------- not confer upon Employee any right to continue in the employment of the Company or any Subsidiary nor limit in any way the right of the Company or any Subsidiary to terminate the employment of Employee at any time. (11) (12) 9. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Ohio. (13) (14) 10. Rights and Remedies Cumulative. All rights and remedies ------------------------------ of the Company and of Employee enumerated in this Agreement shall be cumulative and, except as expressly provided otherwise in this Agreement, none shall exclude any other rights or remedies allowed by law or in equity, and each may be exercised and enforced concurrently. (15) (16) 11. Captions. The captions contained in this Agreement are -------- included only for convenience of reference and do not define, limit, explain or modify this Agreement or its interpretation, construction or meaning and are in no way to be construed as a part of this Agreement. (17) (18) 12. Severability. If any provision of this Agreement or the ------------ application of any provision hereof to any person or any circumstance shall be determined to be invalid or unenforceable, then such determination shall not affect any other provision of this Agreement or the application of said provision to any other person or circumstance, all of which other provisions shall remain in full force and effect. It is the intention of each party to this Agreement that if any provision of this Agreement is susceptible of two or more interpretations, one of which would render the provision enforceable and the other or others of which would render the provision unenforceable, then the provision shall have the meaning which renders it enforceable. (19) 5 (20) 13. Number and Gender. When used in this Agreement, the ----------------- number and gender of each pronoun shall be construed to be such number and gender as the context, circumstances or its antecedent may require. (21) (22) 14. Entire Agreement. This Agreement constitutes the entire ---------------- agreement between the Company and Employee with respect to this stock option grant, and this Agreement supersedes all prior agreements between the parties related to this option grant. No officer, employee or other servant or agent of the Company, and no servant or agent of Employee is authorized to make any representation, warranty or other promise not contained in this Agreement. No change, termination or attempted waiver of any of the provisions of this Agreement shall be binding upon any party hereto unless contained in a writing signed by the party to be charged. (23) 15. Successors and Assigns. This Agreement shall inure to ---------------------- the benefit of and be binding upon the successors and assigns (including subsequent, as well as immediate, successors and assigns) of the Company. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the date first above written. COMPANY: ------- OHIO CASUALTY CORPORATION By: ------------------------ EMPLOYEE: -------- ---------------------------- William L. Woodall 6 EX-27 4 ARTICLE 7 FDS FOR 10-Q
7 3-MOS DEC-31-2000 MAR-31-2000 2470039501 2470039501 2470039501 671826283 0 42402064 3185267848 71567218 140976450 177201935 4396768008 1939484709 732999418 0 0 241283333 0 0 5901146 1036959550 4396768008 387187812 51792403 (6307810) 0 341786294 98858810 88076891 (96049590) (21036753) (75012838) 0 0 0 (75012838) (1.25) (1.25) 1823328728 211063982 1642595496 94045510 216881384 1853659478 36148152
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