-----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, DMz4cPoOxHM7MOx8AZyU1CHo1T8Sbt1dP8BOG1Oafx7upLvXeWurrTwQ+hL5CF6T Hgu7wTzeM0EHRLGvs1q3FQ== 0000073952-01-500025.txt : 20020410 0000073952-01-500025.hdr.sgml : 20020410 ACCESSION NUMBER: 0000073952-01-500025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1934 Act SEC FILE NUMBER: 000-05544 FILM NUMBER: 1786414 BUSINESS ADDRESS: STREET 1: 9450 SEWARD ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014 BUSINESS PHONE: 5136032600 MAIL ADDRESS: STREET 1: 9450 SEWARD ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014 10-Q 1 ocg10q3.txt OHIO CASUALTY CORP FORM 10-Q SEPT. 30, 2001 =============================================================================== 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 September 30, 2001. ------------------ [ ] 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.) 9450 Seward Road, Fairfield, Ohio (Address of principal executive offices) 45014 (Zip Code) (513) 603-2400 (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 November 1, 2001 of the voting stock held by non-affiliates of the registrant was $783,614,700. On November 1, 2001 there were 60,080,185 shares outstanding. Page 1 of 18 =============================================================================== PART I ITEM 1. FINANCIAL STATEMENTS
Ohio Casualty Corporation & Subsidiaries CONSOLIDATED BALANCE SHEET September 30, December 31, (In thousands, except per share data) (Unaudited) 2001 2000 - ----------------------------------------------------------------------------------- Assets Investments: Fixed maturities: Available for sale, at fair value (cost: $2,635,216 and $2,470,375) $2,718,990 $2,513,654 Equity securities, at fair value (cost: $116,349 and $168,779) 521,613 754,919 Short-term investments, at fair value (cost: $121,877 and $59,679) 121,877 59,679 - ----------------------------------------------------------------------------------- Total investments 3,362,480 3,328,252 Cash 19,002 30,365 Premiums and other receivables, net of allowance for bad debts of $9,000 and $10,700, respectively 365,404 357,108 Deferred policy acquisition costs 169,190 175,071 Property and equipment, net of accumulated depreciation of $129,498 and $122,040, respectively 95,285 91,259 Reinsurance recoverable 217,300 148,633 Agent relationships, net of accumulated amortization of $33,532 and $25,013, respectively 246,224 263,379 Other assets 96,382 95,298 - ----------------------------------------------------------------------------------- Total assets $4,571,267 $4,489,365 =================================================================================== Liabilities Insurance reserves: Unearned premiums $ 697,534 $ 696,513 Losses 1,751,526 1,627,568 Loss adjustment expenses 385,251 375,951 Notes payable 210,330 220,798 California Proposition 103 reserve 7,851 17,500 Deferred income taxes 37,762 65,613 Other liabilities 398,824 368,831 - ----------------------------------------------------------------------------------- Total liabilities 3,489,078 3,372,774 Shareholders' Equity Common stock, $.125 par value Authorized: 150,000 shares; issued shares: 94,418 11,802 11,802 Preferred stock, No par value Authorized: 2,000 shares; issued shares: 0 0 0 Additional paid-in capital 4,179 4,180 Common stock purchase warrants 21,138 21,138 Accumulated other comprehensive income: Unrealized gain on investments, net of applicable income taxes 318,658 409,904 Retained earnings 1,179,651 1,122,867 Treasury stock, at cost: (Shares: 34,341; 34,346) (453,239) (453,300) - ----------------------------------------------------------------------------------- Total shareholders' equity 1,082,189 1,116,591 - ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity $4,571,267 $4,489,365 ===================================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 29-40 of the Corporation's 2000 Annual Report to Shareholders. 2 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Three Months Ended September 30, (in thousands, except per share data) (Unaudited) 2001 2000 - ------------------------------------------------------------------------------------ Premiums and finance charges earned $374,327 $394,015 Investment income less expenses 53,068 49,673 Investment gains realized, net 71,033 1,395 - ------------------------------------------------------------------------------------ Total revenues 498,428 445,083 Losses and benefits for policyholders 252,249 276,099 Loss adjustment expenses 51,181 45,042 General operating expenses 27,190 35,286 Amortization of agent relationships 2,792 2,915 Write-off of agent relationships 1,267 1,083 Amortization of deferred policy acquisition costs 93,076 98,941 California Proposition 103 reserve, including interest 0 (34,208) - ------------------------------------------------------------------------------------ Total expenses 427,755 425,158 - ------------------------------------------------------------------------------------ Income from continuing operations before income taxes 70,673 19,925 Income tax (benefit) expense: Current 6,194 (948) Deferred 20,251 6,323 - ------------------------------------------------------------------------------------ Total income tax expense 26,445 5,375 - ------------------------------------------------------------------------------------ Net income $ 44,228 $ 14,550 ==================================================================================== Other comprehensive income (loss), net of taxes: Net increase/(decrease) in unrealized gains, net increase/(decrease) in tax expense of $(25,984) and $31,499, respectively (48,254) 58,499 - ------------------------------------------------------------------------------------ Comprehensive income (loss) $ (4,026) $ 73,049 ==================================================================================== Average shares outstanding - basic* 60,076 60,074 ==================================================================================== Earnings per share - basic:* Net income, per share $ 0.74 $ 0.24 Average shares outstanding - diluted* 60,400 60,074 ==================================================================================== Earnings per share - diluted:* Net income, per share $ 0.73 $ 0.24 Cash dividends, per share $ 0.00 $ 0.12 ====================================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 29-40 of the Corporation's 2000 Annual Report to Shareholders. 3 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Nine Months Ended September 30, (in thousands, except per share data) (Unaudited) 2001 2000 - ----------------------------------------------------------------------------------- Premiums and finance charges earned $1,134,397 $1,151,077 Investment income less expenses 156,468 150,741 Investment gains (losses) realized, net 126,065 (7,300) - ----------------------------------------------------------------------------------- Total revenues 1,416,930 1,294,518 Losses and benefits for policyholders 783,775 847,355 Loss adjustment expenses 141,632 132,771 General operating expenses 92,263 115,734 Amortization of agent relationships 8,520 8,801 Write-off of agent relationships 8,541 43,252 Early retirement charge 9,600 0 Amortization of deferred policy acquisition costs 283,636 296,390 Restructuring charge 0 22 California Proposition 103 reserve, including interest 0 (32,986) - ----------------------------------------------------------------------------------- Total expenses 1,327,967 1,411,339 - ----------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 88,963 (116,821) Income tax (benefit) expense: Current 10,897 (26,032) Deferred 21,282 (22,128) - ----------------------------------------------------------------------------------- Total income tax (benefit) expense 32,179 (48,160) - ----------------------------------------------------------------------------------- Net income (loss) $ 56,784 $ (68,661) =================================================================================== Other comprehensive income (loss), net of taxes: Net increase/(decrease) in unrealized gains, net increase/(decrease) in tax expense of $(49,133) and $15,767, respectively (91,246) 29,281 - ----------------------------------------------------------------------------------- Comprehensive loss $ (34,462) $ (39,380) =================================================================================== Average shares outstanding - basic* 60,074 60,076 =================================================================================== Earnings per share - basic:* Net income (loss), per share $ 0.95 $ (1.14) Average shares outstanding - diluted* 60,146 60,076 =================================================================================== Earnings per share - diluted:* Net income (loss), per share $ 0.94 $ (1.14) Cash dividends, per share $ 0.00 $ 0.47 ===================================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 29-40 of the Corporation's 2000 Annual Report to Shareholders. 4 Ohio Casualty Corporation and Subsidiaries STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
Accumulated Additional Common other Total (in thousands, except per Common paid-in stock purchase comprehensive Retained Treasury shareholders' share data) (Unaudited) Stock capital warrants income earnings stock equity - ---------------------------------------------------------------------------------------------------------------------------- Balance January 1, 2000 $11,802 $4,286 $21,138 $329,354 $1,237,562 $(453,155) $1,150,987 Net change in unrealized gain 45,048 45,048 Deferred income tax on net change in unrealized gain (15,767) (15,767) Net forfeiture of stock under stock award plan (10 shares) (94) (126) (220) Net loss (68,661) (68,661) Cash dividends paid ($.47 per share) (28,237) (28,237) - --------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2000 $11,802 $4,192 $21,138 $358,635 $1,140,664 $(453,281) $1,083,150 =========================================================================================================================== Balance January 1, 2001 $11,802 $4,180 $21,138 $409,904 $1,122,867 $(453,300) $1,116,591 Net change in unrealized gain (140,379) (140,379) Deferred income tax on net change in unrealized gain 49,133 49,133 Net issuance of stock under stock award plan (5 shares) (1) 61 60 Net income 56,784 56,784 - --------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2001 $11,802 $4,179 $21,138 $318,658 $1,179,651 $(453,239) $1,082,189 ===========================================================================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 29-40 of the Corporation's 2000 Annual Report to Shareholders. 5 Ohio Casualty Corporation and Subsidiaries STATEMENT OF CONSOLIDATED CASH FLOWS
Nine Months Ended September 30, (in thousands) (Unaudited) 2001 2000 - ----------------------------------------------------------------------------------------- Cash flows from: Operations Net income (loss) $ 56,784 $ (68,661) Adjustments to reconcile net income to cash from operations: Changes in: Insurance reserves 134,279 79,431 Income taxes 57,235 (36,455) Premiums and other receivables (8,296) (10,335) Deferred policy acquisition costs 5,881 (3,212) Reinsurance recoverable (68,667) (18,231) Other assets 5,440 81,488 Other liabilities 660 22,666 California Proposition 103 reserves (9,649) (32,986) Amortization and write-down of agent relationships 17,061 52,053 Depreciation and amortization 6,095 12,200 Investment (gains) losses (126,065) 7,300 - ----------------------------------------------------------------------------------------- Net cash generated by operating activities 70,758 85,258 - ----------------------------------------------------------------------------------------- Investments Purchase of investments: Fixed income securities - available for sale (1,129,122) (878,846) Equity securities (6,787) (54,188) Proceeds from sales: Fixed income securities - available for sale 897,689 771,715 Equity securities 177,520 44,028 Proceeds from maturities and calls: Fixed income securities - available for sale 66,011 53,658 Equity securities 0 10,200 Property and equipment: Purchases (15,506) (7,560) Sales 674 1,809 - ----------------------------------------------------------------------------------------- Net cash used from investing activities (9,521) (59,184) - ----------------------------------------------------------------------------------------- Financing Notes payable: Repayments (10,468) (20,488) Proceeds from exercise of stock options 66 67 Dividends paid to shareholders 0 (28,237) - ----------------------------------------------------------------------------------------- Net cash used in financing activities (10,402) (48,658) - ----------------------------------------------------------------------------------------- Net change in cash and cash equivalents 50,835 (22,584) Cash and cash equivalents, beginning of period 90,044 149,957 - ----------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 140,879 $ 127,373 =========================================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 45-85 of the Corporation's 2000 Form 10-K, Item 14. 6 Ohio Casualty Corporation & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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). 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 2000 Annual Report to Shareholders. NOTE II - RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 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. In June 1999, the FASB issued SFAS 137 which deferred the effective date of adoption of SFAS 133 for fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001 for the Corporation). The adoption of FAS 133 has had an immaterial impact on the financial results of the Corporation. In June 2001, the FASB issued SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the standards. Other intangible assets will continue to be amortized over their useful lives. The Corporation will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The Corporation's only current intangible asset, agent relationships, is reported on the balance sheet in accordance with the standards and is being amortized over its useful life. The agent relationships intangible asset is also evaluated periodically for possible impairment. NOTE III - EARNINGS PER SHARE Basic and diluted earnings per share are summarized as follows (in thousands, except per share data):
Three months ended Nine months ended September 30 September 30 2001 2000 2001 2000 ---- ---- ---- ---- Income (loss) from continuing operations $44,228 $14,550 $56,784 $(68,661) Weighted average common shares outstanding - basic 60,076 60,074 60,074 60,076 Basic income (loss) from continuing operations - per average share $ 0.74 $ 0.24 $ 0.95 $ (1.14) ============================================================================= Weighted average common shares outstanding 60,076 60,074 60,074 60,076 Effect of dilutive securities 324 0 72 0 - ----------------------------------------------------------------------------- Weighted average common shares outstanding - diluted 60,400 60,074 60,146 60,076 Diluted income (loss) from continuing operations - per average share $ 0.73 $ 0.24 $ 0.94 $ (1.14) =============================================================================
7 NOTE IV -- SEGMENT INFORMATION The Corporation has determined its reportable segments based upon its method of internal reporting in the quarter, which was organized by product line. The Corporation adopted a new Corporate Strategic Plan in the second quarter of 2001 that realigned its method of internal reporting during the quarter to three reportable segments. In accordance with SFAS 131, the Corporation has elected to restate prior period segment information in order to present comparable segment information. The new property and casualty segments are standard commercial lines, specialty commercial lines, and personal lines. Standard commercial lines includes workers' compensation, general liability, CMP, fire, inland marine, and commercial auto. Specialty commercial lines includes umbrella, fidelity and surety. Personal lines includes private passenger auto, homeowners, fire, inland marine, and umbrella. 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 investment income and premium financing. Each segment of the Corporation was managed separately during the quarter. The property and casualty segments are managed by assessing the performance and profitability of the segments through analysis of industry financial measurements including statutory loss and loss adjustment expense ratios, statutory combined ratio, premiums written, premiums earned and statutory underwriting gain/loss. The following tables present this information by segment as it is reported internally to management. Asset information by reportable segment is not reported, since the Corporation does not produce such information internally. 8 New Reportable Segments (Effective Second Quarter of 2001) Nine Months Ended September 30 (in thousands)
Standard Commercial Lines 2001 2000 - -------------------------------------------------------------------- Net premiums written $528,850 $563,690 % Increase (decrease) (6.2)% 8.1% Net premiums earned 533,956 554,983 % Increase (decrease) (3.8)% 8.8% Underwriting gain (loss) (before tax) (103,480) (150,511) Loss ratio 68.9% 75.6% Loss expense ratio 14.8% 13.2% Underwriting expense ratio 36.0% 37.7% Combined ratio 119.7% 126.5%
Specialty Commercial Lines 2001 2000 - -------------------------------------------------------------------- Net premiums written $105,461 $79,849 % Increase (decrease) 32.1% 4.9% Net premiums earned 99,166 75,617 % Increase (decrease) 31.1% 8.4% Underwriting gain (loss)(before tax) 16,638 8,337 Loss ratio 40.3% 37.2% Loss expense ratio 6.3% 4.7% Underwriting expense ratio 34.4% 44.6% Combined ratio 81.0% 86.5%
Personal Lines 2001 2000 - -------------------------------------------------------------------- Net premiums written $494,247 $516,831 % Increase (decrease) (4.4)% (12.9)% Net premiums earned 500,774 519,731 % Increase (decrease) (3.6)% (7.4)% Underwriting gain (loss)(before tax) (65,143) (89,709) Loss ratio 75.1% 76.8% Loss expense ratio 11.2% 10.8% Underwriting expense ratio 27.1% 29.8% Combined ratio 113.4% 117.4%
Total Property & Casualty 2001 2000 - -------------------------------------------------------------------- Net premiums written $1,128,558 $1,160,370 % Increase (decrease) (2.7)% (2.6)% Net premiums earned 1,133,896 1,150,331 % Increase (decrease) (1.4)% 0.8% Underwriting gain (loss)(before tax) (151,985) (231,883) Loss ratio 69.1% 73.7% Loss expense ratio 12.5% 11.5% Underwriting expense ratio 31.9% 34.7% Combined ratio 113.5% 119.9% Impact of catastrophe losses on combined ratio 2.9% 2.9%
All other 2001 2000 - -------------------------------------------------------------------- Revenues $ 6,197 $ 3,297 Expenses 10,107 13,371 - ------------------------------------------------------------------- Net income (loss) $(3,910) $(10,074)
Reconciliation of Revenues 2001 2000 - -------------------------------------------------------------------- Net premiums earned for reportable segments $1,133,896 $1,150,331 Investment income 155,336 148,106 Realized gains (losses) 119,961 7,379 Miscellaneous income 392 357 - -------------------------------------------------------------------- Total property and casualty revenues (Statutory basis) 1,409,585 1,306,173 Property and casualty statutory to GAAP adjustment 1,148 (14,952) - ------------------------------------------------------------------- Total revenues property and casualty (GAAP basis) 1,410,733 1,291,221 Other segment revenues 6,197 3,297 - ------------------------------------------------------------------- Total revenues $1,416,930 $1,294,518 ===================================================================
Reconciliation of Underwriting gain (loss) (before tax) 2001 2000 - -------------------------------------------------------------------- Property and casualty under- writing gain (loss) (before tax) (Statutory basis) $(151,985) $(231,883) Statutory to GAAP adjustment (29,172) (13,231) - -------------------------------------------------------------------- Property and casualty under- writing gain (loss) (before tax) (GAAP basis) (181,157) (245,114) Net investment income 156,468 150,741 Realized gains (losses) 126,065 (7,300) Other income (losses) (12,413) (15,148) - -------------------------------------------------------------------- Income (loss) from continuing operations before income taxes $ 88,963 $(116,821) ====================================================================
9 New Reportable Segments (Effective Second Quarter of 2001) Three months ended September 30 (in thousands)
Standard Commercial Lines 2001 2000 - -------------------------------------------------------------------- Net premiums written $164,709 $179,902 % Increase (decrease) (8.4)% 7.8% Net premiums earned 174,518 193,761 % Increase (decrease) (9.9)% 13.7% Underwriting gain (loss) (before tax) (27,562) (43,061) Loss ratio 66.3% 74.0% Loss expense ratio 15.3% 13.7% Underwriting expense ratio 36.2% 37.2% Combined ratio 117.8% 124.9%
Specialty Commercial Lines 2001 2000 - -------------------------------------------------------------------- Net premiums written $38,492 $26,979 % Increase (decrease) 42.7% (16.1)% Net premiums earned 34,971 26,529 % Increase (decrease) 31.8% (0.3)% Underwriting gain (loss) (before tax) 1,393 3,482 Loss ratio 51.6% 37.7% Loss expense ratio 8.3% 5.9% Underwriting expense ratio 32.8% 42.6% Combined ratio 92.7% 86.2%
Personal Lines 2001 2000 - -------------------------------------------------------------------- Net premiums written $164,625 $176,635 % Increase (decrease) (6.8)% (7.5)% Net premiums earned 164,789 173,579 % Increase (decrease) (5.1)% (6.6)% Underwriting gain (loss) (before tax) (18,456) (16,668) Loss ratio 71.8% 70.7% Loss expense ratio 13.1% 9.8% Underwriting expense ratio 26.3% 28.6% Combined ratio 111.2% 109.1%
Total Property & Casualty 2001 2000 - -------------------------------------------------------------------- Net premiums written $367,826 $383,516 % Increase (decrease) (4.1)% (1.7)% Net premiums earned 374,278 393,869 % Increase (decrease) (5.0)% 2.9% Underwriting gain (loss) (before tax) (44,625) (56,247) Loss ratio 67.4% 70.1% Loss expense ratio 13.7% 11.4% Underwriting expense ratio 31.4% 33.6% Combined ratio 112.5% 115.1% Impact of catastrophe losses on combined ratio 3.2% 1.0%
All other 2001 2000 - -------------------------------------------------------------------- Revenues $2,786 $ 874 Expenses 3,096 5,215 - -------------------------------------------------------------------- Net income (loss) $ (310) $(4,341) ====================================================================
Reconciliation of Revenues 2001 2000 - ------------------------------------------------------------------- Net premiums earned for reportable segments $374,278 $393,869 Investment income 52,765 49,084 Realized gains (losses) 69,293 7,848 Miscellaneous income 40 16 - ------------------------------------------------------------------- Total property and casualty revenues (Statutory basis) 496,376 450,817 Property and casualty statutory to GAAP adjustment (734) (6,608) - ------------------------------------------------------------------- Total revenues property and casualty (GAAP basis) 495,642 444,209 Other segment revenues 2,786 874 - ------------------------------------------------------------------- Total revenues $498,428 $445,083 ===================================================================
Reconciliation of Underwriting gain (loss) (before tax) 2001 2000 - -------------------------------------------------------------------- Property and casualty under- writing gain (loss) (before tax) (Statutory basis) $(44,625) $(56,247) Statutory to GAAP adjustment (5,320) 29,207 - ------------------------------------------------------------------- Property and casualty under- writing gain (loss) (before tax) (GAAP basis) (49,945) (27,040) Net investment income 53,068 49,673 Realized gains (losses) 71,033 1,395 Other income (3,483) (4,103) - ------------------------------------------------------------------- Income (loss) from continuing operations before income taxes $ 70,673 $ 19,925 ===================================================================
NOTE V - AGENT RELATIONSHIPS The agent relationship asset is the identifiable intangible asset acquired in connection with the Great American Insurance Company commercial lines acquisition. Agent relationships are evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. The third quarter of 2001 included a $1.3 million before-tax write-off to the agent relationships asset. Year-to-date 2001 included an $8.5 million before-tax write-off to the agent relationships asset. Included in the write-offs were agents cancelled and certain agents determined to be impaired based on updated estimated future undiscounted cash flows that were insufficient to recover the carrying amount of the asset for the agent. During the first quarter of 2000, the Group made the strategic decision to discontinue its relationship with Managing General Agents. The result was a write-off to the agent relationships asset of $42.2 million. The Group believes the termination of Managing General Agents will give it better control of its underwriting and pricing practices. The remaining portion of the agent relationships asset will be amortized on a straight-line basis over the remaining amortization period. 10 The purchase agreement with the Great American Insurance Company called for an additional payment of up to $40.0 million if annualized revenue production of the transferred agents for the 18 month period ending June 1, 2000 equaled or exceeded production for the twelve months prior to the acquisition. The Company paid an additional $27.4 million for the final payment. Of the $27.4 million payment, $27.1 million was paid in 2000, while the remaining $.3 million was paid in 2001. This amount was added to the agent relationships asset for the acquisition and will be amortized over the remaining life. Additional information related to agent relationships is included in Note 1G, Agent Relationships on page 29 of the Corporation's 2000 Annual Report to Shareholders. 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 the 1998 income statement. These expenses consisted solely of future contractual lease payments related to abandoned facilities. The activities under the plan were completed in 1999, but due to leases still in effect, the balance in the restructuring reserve will continue to remain as leases expire. The Corporation reduced $2.2 million of liability in 2000 due to payments under leases. In the first nine months of 2001, the Corporation further reduced $.7 million of the liability due to payments under leases. The balance in the restructuring reserve was $1.8 million at September 30, 2001. NOTE VII - EARLY RETIREMENT CHARGE During the second quarter of 2001, the Corporation adopted an early retirement plan. The early retirement plan was available to approximately 330 employees. Of the employees eligible to retire under the program, 147 accepted. The early retirement plan resulted in a one-time before-tax charge of $9.6 million, or $.16 per share, to second quarter 2001 results. The after-tax impact of this one-time charge to earnings was $6.2 million, or $.10 per share to second quarter 2001 results. NOTE VIII - INTERNALLY DEVELOPED SOFTWARE In 2001, the Corporation introduced into limited production a new internally developed application for issuing and maintaining insurance policies. The Corporation capitalizes costs incurred to develop software used in the Corporation's operations. The cost associated with this application is then amortized on a straight-line basis over the estimated useful life of 10 years from the date placed into service. Upon full implementation, the new application should impact results by approximately $4 to $5 million per year. Unamortized software costs and accumulated amortization in the consolidated balance sheet were $33.1 million and $0.1 million at September 30, 2001, and $25.3 million and $0.0 million at December 31, 2000, respectively. 11 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). RESULTS OF OPERATIONS Property and casualty before-tax underwriting losses, excluding California Proposition 103 and restructuring charges, for the nine months ended September 30, 2001 were $181.2 million, $3.01 per share, compared with $278.1 million, $4.63 per share for the same period in 2000. The 2001 loss included a one-time early retirement charge of $9.6 million and an $8.5 million write- off of the agent relationships intangible asset. The 2000 loss included a $43.3 million write-off of the agent relationships intangible asset and $17.0 million in additional ceded premiums on experience rated reinsurance contracts. The results for both periods were impacted by poor results in the workers' compensation line of business. For the third quarter of 2001, property and casualty before-tax underwriting losses, excluding California Proposition 103 were $49.9 million, or $.83 per share, compared with $61.2 million, or $1.02 per share, for the third quarter of 2000. The table below summarizes the increase (decrease) in property and casualty premium results compared with same period prior year results:
2001 increase (decrease) from 2000 ($ in millions) Gross Premiums Written Net Premiums Written Third Year Third Year Quarter To Date Quarter To Date ------- ------- ------- ------- Business Units - -------------- Standard Commercial Lines $(15.1) $(54.1) $(15.2) $(34.8) Specialty Commercial Lines 10.2 29.6 11.5 25.6 Personal Lines (13.6) (31.9) (12.0) (22.6) All Lines (18.5) (56.4) (15.7) (31.8)
Agency cancellations and tighter underwriting guidelines combined with strong competition in the personal lines market contributed to the decrease in personal lines premiums for the current year. The year-to-date 2000 personal lines net premiums written results included $5.8 million in additional ceded premiums on experience rated reinsurance contracts. Despite the positive impact of renewal price increases in the standard commercial lines, 2001 premiums written decreased due to the cancellation and elimination of consistently unprofitable business. This decrease in premiums was primarily in the workers' compensation line of business. The year-to-date 2000 standard commercial lines net premiums written results included $11.2 million in additional ceded premiums on experience rated reinsurance contracts. Renewal price increases in the umbrella line of business in the specialty commercial lines contributed to the increase in premiums for the current year. When used in this report, renewal price increase means the average increase in premium for policies renewed by the Group. The average increase in premiums for each renewed policy is calculated by comparing the total expiring premium for the policy with the total renewal premium for the same policy. Renewal price increases include, among other things, the effects of rate increases and changes in the underlying insured exposures of the policy. Only policies issued by the Group in the previous policy term with the same policy identification codes are included. Therefore, renewal price increases do not include changes in premiums for newly issued policies and business assumed through reinsurance agreements, including Great American business not yet issued in the Group's systems. Renewal price increases also do not reflect the cost of any reinsurance purchased on the policies issued. During the first nine months of 2001, 17.4% of the Group's total net premiums written were for policyholders in New Jersey, compared with 15.0% of the Group's total net premiums written for the same period in 2000. For the third quarter 2001, 17.5% of the Group's total net premiums written were for policyholders in New Jersey, compared with 14.5% of the Group's total net premiums written in the same quarter in 2000. New 12 Jersey has historically been a profitable state for the Group. In recent years, however, New Jersey's legislative and regulatory environments have become less favorable. Legislative rules and regulations have adversely impacted the Group's results. Year-to-date consolidated before-tax realized investment gain was $126.1 million, or $2.10 per share, compared with a before-tax realized investment loss of $7.3 million, or $.12 per share, for year-to-date 2000. For the third quarter, consolidated before-tax realized investment gain was $71.0 million, or $1.18 per share, compared with a before-tax realized investment gain of $1.4 million, or $.02 per share, for the same period of 2000. As part of the Corporate Strategic Plan announced in the second quarter of 2001, the Corporation began to reallocate a portion of its equity portfolio holdings to fixed income holdings. Significant appreciation in the equity holdings sold as part of the reallocation contributed to the realized investment gains during 2001. This reallocation should reduce the effect on statutory surplus of future stock market volatility. Year-to-date consolidated before-tax investment income was $156.5 million, or $2.60 per share, increasing from $150.7 million, or $2.51 per share, for the same period last year. The investment income effective tax rate year-to-date 2001 was 33.3%, compared with 31.3% for year-to-date 2000. Third quarter consolidated before-tax investment income was $53.1 million, or $.88 per share, increasing from $49.7 million, or $.83 per share, for the same period last year. The investment income effective tax rate for the third quarter of 2001 was 33.6% compared with 31.8% for the comparable period in 2000. The increase in effective tax rate reflects a reallocation of investments from tax exempt municipal bonds to taxable bonds. STATUTORY RESULTS Management uses statutory results to analyze the property and casualty operating results. Management analyzes statutory results through the use of industry financial measurements including statutory loss and loss adjustment expense ratios, statutory underwriting expense ratio, statutory combined ratio, premiums written, and premiums earned. The statutory combined ratio is a commonly used gauge of statutory underwriting performance measuring the percentage of premium dollars used to pay customer losses and expenses. All Lines Discussion The statutory combined ratio for the first nine months of 2001 was 113.5%, decreasing from 119.9% in the same period of 2000. For the third quarter, the statutory combined ratio was 112.5%, compared with 115.1% in the same quarter of 2000. The decline in the statutory combined ratio is attributable to improvement in the standard commercial lines statutory loss ratio and all lines statutory underwriting expense ratio. Both periods were negatively impacted by high losses in the workers' compensation line of business. The year-to-date September 30, 2001 all lines accident year loss ratio of 67.7% was better than the calendar year-to-date statutory loss ratio of 69.1%. The year-to-date September 30, 2000 all lines accident year loss ratio of 68.9% was better than the calendar year-to-date statutory loss ratio of 73.7%. The year-to-date 2001 catastrophe losses were $32.7 million before tax and accounted for 2.9 points on the statutory combined ratio. This compares with $32.9 million and a 2.9 point catastrophe impact for the same period in 2000. The effect of future catastrophes on the Corporation's results cannot be accurately predicted. Severe weather patterns and other catastrophic results can have a material adverse impact on the Corporation's results. During the third quarter of 2001, there were 4 additional catastrophes with the largest catastrophe generating $7.0 million in losses as compared with 3 additional catastrophes in the third quarter of 2000 with the largest catastrophe generating $.3 million in losses. The third quarter 2001 losses included before-tax net of reinsurance losses of $7.0 million related to the September 11 terrorist attacks. For additional disclosure of catastrophe losses, refer to Note 9, Losses and Loss Reserves in the Notes to the Consolidated Financial Statements on pages 35 and 36 of the Corporation's 2000 Annual Report to Shareholders. 13 The year-to-date statutory underwriting expense ratio through September 30, 2001, was 31.9% compared with 34.7% in the same period of 2000. The third quarter 2001 statutory underwriting expense ratio improved to 31.4% from 33.6% in the same quarter of 2000. Actions to lower commissions and eliminate workers' compensation policyholder dividends on new and renewal policies led to the third quarter 2001 decrease. The third quarter 2001 results included $.3 million of software amortization related to the limited rollout of a new internally developed software application. On a statutory accounting basis, the new application is being amortized over a five-year period in accordance with statutory accounting principles. Upon full implementation, the new application should impact the statutory underwriting expenses by approximately $8 to $10 million per year. Segment Discussion Personal Lines The personal lines statutory combined ratio for the first nine months of 2001 decreased 4.0 points to 113.4% from 117.4% during the same period last year. For the third quarter of 2001, the personal lines statutory combined ratio increased 2.1 points to 111.2% from 109.1% in the same period of 2000. Private passenger auto-agency, the Group's largest line, recorded a 2001 nine- month statutory combined ratio of 108.7%, decreasing from 113.2% in 2000. For the third quarter of 2001, private passenger auto-agency statutory combined ratio was 110.6%, compared with 104.8% in the same quarter of 2000. Although the year-to-date results improved in 2001 from 2000, poor underwriting results in New Jersey business continue to impact this line's performance, adding 3.8 points to the statutory loss ratio in the first nine months of 2001, compared with adding 1.0 point in the first nine months of 2000. The New Jersey results added 3.3 points to the statutory loss ratio in the third quarter 2001, compared with 1.4 points in the same quarter of 2000. The poor New Jersey private passenger automobile results are driven by regulatory restraints in the state which restrict insurers' ability to raise rates. In addition, the New Jersey State Senate passed an auto insurance reform bill effective in early 1999 that mandated a 15% rate reduction for personal auto policies based on legal reform intended to provide a reduction in medical expense benefits, limitations on lawsuits and enhanced fraud prevention. While the rate reduction was immediate, many of the reforms have not yet been implemented, resulting in inadequate rate levels for the Group. Since 1999, New Jersey has also required insurance companies to write a portion of their personal auto premiums in Urban Enterprise Zones (UEZ). These zones are generally higher risk urban areas. The Group is required to write one policy in an UEZ for every seven policies written outside an UEZ. The Group is assigned policies if it does not write the required quota. As of September 30, 2001, the Group has written $6.5 million year to date in UEZ premiums, with $3.5 million in additional assigned premiums, compared with $4.7 million in UEZ premiums and $3.9 million in additional assigned premiums through the first nine months of 2000. For the three months ending September 30, 2001, the Group has written $1.8 million in UEZ premiums and $.1 million in additional assigned premiums, compared with $1.5 million in UEZ premiums and $0.0 million in additional assigned premiums in the same period 2000. The 2001 year-to-date loss ratio on the UEZ premiums was 165.3% and the loss ratio on the assigned business was 234.0%, compared with a loss ratio of 148.5% on UEZ premiums and 193.4% on assigned business for the same period last year. The third quarter 2001 loss ratio on UEZ premiums was 141.9% and the loss ratio on the assigned business was 206.7%, compared with a loss ratio of 131.5% on UEZ premiums and 180.6% on assigned business for the same quarter of last year. New Jersey's private passenger auto net premiums written represented approximately 26.6% of the Group's total private passenger auto-agency book of business in the first nine months of 2001, compared with approximately 21.7% in the first nine months of 2000. For the third quarter 2001, New Jersey's private passenger auto net premiums written represented approximately 27.2% of the Group's total private passenger auto-agency book of business, compared with approximately 19.1% in the third quarter of 2000. New Jersey regulation mandates private passenger automobile insurers in the state to provide insurance to all eligible consumers with limited exceptions. This "take-all- comers" regulation effectively eliminates the Group's ability to control the volume of writings in the state. 14 Given the unfavorable regulatory environment in New Jersey and the continued unprofitability of its private passenger auto business in the state, the Group is evaluating its options for the New Jersey private passenger automobile book of business. Standard Commercial Lines The standard commercial lines statutory combined ratio for the first nine months of 2001 decreased 6.8 points to 119.7% from 126.5% during the same period of 2000. For the third quarter of 2001, the standard commercial lines statutory combined ratio decreased 7.1 points to 117.8% from 124.9% in the same quarter of 2000. The 2001 statutory combined ratio improvement was driven by actions taken to improve loss results. Standard commercial lines reported a statutory loss and loss adjustment expense ratio of 83.7% for the first nine months of 2001, compared with 88.8% in the same period of 2000. Average renewal price increases for standard commercial lines direct premiums written were 14.9% for the first nine months of 2001, compared with an average renewal price increase of 7.7% for the first nine months of 2000. Commercial auto reported a year-to-date statutory combined ratio of 110.2%, a decrease of 10.5 points over the same period of 2000 statutory combined ratio of 120.7%. For the third quarter 2001, commercial auto statutory combined ratio was 111.0%, compared with 114.6% in the same period of 2000. For this line, as well as other commercial lines, the impact of price increases are being realized in earned premiums. The commercial auto average renewal price increase for the nine months ending September 30, 2001 was 14.8% compared with 7.1% for the same period in 2000. Workers' compensation statutory combined ratio for the first nine months of 2001 decreased 8.6 points to 140.1% from 148.7% during the same period last year. The results for the line of business have improved each quarter of 2001. Third quarter 2001 workers' compensation statutory combined ratio improved to 112.7% from 162.8% in the same period of 2000. The improvement is a result of actions taken to eliminate and cancel the most unprofitable workers' compensation business. The results have also been positively impacted by renewal price increases, the decision to eliminate dividends on new and renewal policies and the implementation of more restrictive underwriting guidelines. The statutory combined ratio for CMP, fire and inland marine for the first nine months of 2001 increased .1 points to 109.4% from 109.3% in the same period last year. For the third quarter of 2001, the CMP, fire and inland marine statutory combined ratio was 114.3%, compared with 101.9% in the same quarter last year. The CMP, fire and inland marine line of business year-to-date 2001 statutory loss ratio was impacted by 1.7 points for property losses related to the September 11 terrorists attacks, while the third quarter 2001 statutory loss ratio was impacted by 5.1 points due to this event. Specialty Commercial Lines Specialty commercial lines reported a nine-month statutory combined ratio of 81.0% in 2001, compared with 86.5% in 2000. For the third quarter of 2001, the specialty commercial lines statutory combined ratio was 92.7% compared with 86.2% in the same period of 2000. The umbrella line of business statutory combined ratio for the first nine months of 2001 decreased to 81.9% from 93.0% in 2000. For the third quarter of 2001, the umbrella statutory combined ratio was 92.3%, compared with 97.5% in the same period of 2000. The decrease is largely due to the impact of price increases being realized in earned premiums. Average renewal price increases for the umbrella business in the specialty commercial lines business unit were 19.7% for the first nine months of 2001, compared with an average renewal price increase of 7.7% for the first nine months of 2000. INVESTMENTS At September 30, 2001, the Corporation's fixed income portfolio totaled $2.7 billion, which consisted of 96.2% investment grade and 3.8% below investment grade securities. The Corporation classifies securities as below investment grade based upon ratings provided by Standard & Poor's Ratings Group, Moody's Investors Service or other rating agencies, including the National Association of Insurance Commissioners (NAIC). Below investment grade securities are summarized as follows: 15
September 30, December 31, (in millions) 2001 2000 - ------------------------------------------------------------------------------ Below investment grade securities: Carrying value $103.0 $127.4 Amortized cost 116.7 133.6
Investments in below investment grade securities have greater risks than investments in investment grade securities. The risk of default by borrowers that issue below investment grade securities is significantly greater because these borrowers are often highly leveraged and more sensitive to adverse economic conditions, including a recession or a sharp increase in interest rates. Additionally, investments in below investment grade securities are generally unsecured and subordinate to other debt. Investment grade securities are also subject to significant risks, including additional leveraging or changes in control of the issuer. In most instances, investors are unprotected with respect to these risks, the effects of which can be substantial. The Corporation marks the value of its equity portfolio to fair market value on its balance sheet. As a result, shareholders' equity and statutory surplus fluctuate with changes in the value of the equity portfolio. As of September 30, 2001, the equity portfolio consisted of stock of 46 separate entities in 34 different industries. As of that date, 43.8% of the Corporation's equity portfolio was invested in five companies and the largest single position was 13.2% of the equity portfolio. For further discussion of the Corporation's investments, see Item 1 pages 6 through 9 of the Corporation's Form 10-K for the year ended December 31, 2000. LIQUIDITY AND FINANCIAL STRENGTH Net cash generated by operations was $70.8 million for the first nine months of the year compared with cash generated of $85.3 million for the same period in 2000. Net cash used by investing activities was $9.5 million for the first nine months of the year, compared with net cash used of $59.2 million for the first nine months of 2000. The change in cash used is a result of management's decision to reallocate a portion of its equity portfolio into fixed income securities. Current operational liquidity needs of the Group are expected to be met by scheduled bond maturities, dividend payments, interest payments, and cash balances. The Corporation had no shareholder dividend payments in the first nine months of 2001 compared with payments of $28.2 million for the same period in 2000. On February 8, 2001, the Corporation eliminated its quarterly dividend in order to further strengthen the Corporation's financial position. Ohio Casualty Corporation did not repurchase any of its shares during the first nine months of the year. The Corporation has remaining authorization to repurchase 1,649,824 additional shares. As of September 30, 2001, the Corporation had $210.3 million of outstanding notes payable. Of the $210.3 million, $5.3 million related to a low interest loan outstanding with the state of Ohio used in conjunction with the purchase of a new home office located in Fairfield, Ohio. The remaining $205.0 million is related to a 1997 credit facility that provided a $300.0 million revolving line of credit available to the Corporation. On March 19, 2001, the Corporation elected to reduce the aggregate amount available under the line of credit from $300.0 million to $250.0 million. The credit facility agreement contains financial covenants and provisions customary for such arrangements. The most restrictive covenants include a maximum permissible consolidated funded debt that cannot exceed 30% of consolidated tangible net worth and a minimum statutory surplus required to be at least $750.0 million. As of September 30, 2001, the Corporation is in compliance with these covenants. However, further deterioration of operating results, reductions in the equity portfolio valuation or other changes in surplus, including the effects of adopting new statutory accounting principles (such as the Codification of Statutory Accounting Principles guidance adopted by the NAIC in 1998), could lead to violations and ultimately result in default. The Corporation continues to review its financial covenants in the credit agreement in light of its operating losses. The 1997 credit facility expires in October 2002, with any outstanding loan balance due at that time. The Corporation may be required to obtain additional external funding, either in the form of debt or equity funding, to support its insurance operations in the future. While the Corporation believes that it should be able to obtain such 16 external funding, if needed, the availability of such funding cannot be assured nor can the cost of such funding be evaluated at this time. Additional information related to bank notes payable is included in Note 17 Bank Note Payable on page 39 of the Corporation's 2000 Annual Report to Shareholders. Regularly the Group's financial strength is reviewed by independent rating agencies. These agencies may upgrade, downgrade, or affirm their previous ratings of the Group. On July 25, 2001, A.M. Best announced that their rating of our group of companies is now "A-" (Excellent) from "A" previously. The rating action reflects the sharp deterioration in the Group's earnings and the significant reduction in policyholders' surplus over recent years. A.M. Best stated the "Excellent" rating was due to solid capitalization and strategic initiatives put in place by management to improve earnings. A.M. Best has placed a silent outlook on the Group's rating. On May 7, 2001, Standard & Poor's (S&P) Rating Services downgraded the Group's financial strength rating. The Group's S&P rating moved from "BBB+" to "BBB". S&P cited operating performance, declining capitalization, and limited financial flexibility as reasons for the rating change. S&P recognized the Group's improved strategic focus and re-underwriting actions as positive attributes. S&P has placed a negative outlook on the Group's rating. On May 2, 2001, Moody's Investors Services affirmed the Group's "A2" rating based on new executive leadership, ongoing expense reduction and re- underwriting initiatives, reduction or elimination of its shareholder dividends, and strength of its independent agency relationships. Moody's has revised the outlook for the Group's rating from negative to stable. LEGAL PROCEEDINGS California voters passed Proposition 103 in 1988 in an attempt to legislate premium rates for that state. The proposition required premium rate rollbacks for 1989 California policyholders while allowing for a "fair" return for insurance companies. In 1998, an Administrative Law Judge issued a proposed ruling with a rollback liability for the Group of $24.4 million plus simple interest at 10% per annum from May 8, 1989. This brought the total reserve to $52.3 million at September 30, 2000. On October 25, 2000, the Group announced a settlement agreement for California Proposition 103 that was approved by the California Insurance Commissioner. Under the terms of the settlement, the members of the Group will pay $17.5 million in refunded premiums to eligible 1989 California policyholders. With this development, the total reserve was decreased to $17.5 million as of December 31, 2000. The Corporation began to make payments in the first quarter of 2001. The remaining liability was $7.9 million as of September 30, 2001. FORWARD LOOKING STATEMENTS 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; acts of war and terrorist activities; rating agency actions; ability of Ohio Casualty to integrate and to retain the business acquired from the Great American Insurance Company; ability to achieve targeted expense savings; ability to refinance indebtedness; ability to achieve premium targets and profitability goals; and general economic and market conditions. 17 ITEM 3. Quantitative And Qualitative Disclosures About Market Risk There have been no material changes in the information about market risk set forth in the Corporation's Annual Report on Form 10-K. PART II ITEM 1. Legal Proceedings - Refer to Legal Proceedings as described on Page 17 of this Form 10-Q regarding California Proposition 103. ITEM 2. Changes in Securities - None ITEM 3. Defaults Upon Senior Securities - None ITEM 4. Submission of Matters to a Vote of Security Holders - None ITEM 5. Other Information - None ITEM 6. Exhibits and reports on Form 8-K - (a) Exhibits: 10 Employment Agreement with Donald F. McKee dated September 19, 2001 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) November 13, 2001 /s/ Donald F. McKee --------------------------- Donald F. McKee, CFO (on behalf of Registrant and as Principal Accounting Officer) 18 EX-10 3 exh10.txt EXH 10 TO FORM 10-Q Exhibit 10.1 EMPLOYMENT AGREEMENT FOR DONALD F. MCKEE This employment agreement ("Agreement") by and between the Ohio Casualty Corporation ("Corporation"), an Ohio corporation, and Donald F. McKee ("Executive"), collectively, the "Parties," is effective September 19, 2001 ("Effective Date") and describes the terms and conditions governing Executive's employment with the Corporation. Although it is not a direct Party to this Agreement, The Ohio Casualty Insurance Company ("Company") joins in this Agreement to the extent needed to enable the Corporation to discharge its obligations under this Agreement. ARTICLE 1 TERM OF AGREEMENT This Agreement will remain in effect from the Effective Date until September 18, 2006, unless it terminates at an earlier date as provided below ("Term"). After the end of the Term, Executive will be an employee of the Corporation "at will" unless the Parties agree to [1] extend this Agreement or [2] adopt a new agreement that describes the terms and conditions of Executive's continued employment with the Corporation. ARTICLE 2 EXECUTIVE'S DUTIES 2.01 During the Term of this Agreement, Executive agrees: [1] To serve as Chief Financial Officer of the Corporation and to perform the services that are customarily performed by persons in a similar executive capacity; [2] To discharge any other duties and responsibilities that the Corporation's Chief Executive Officer assigns to him from time to time; [3] To serve, if elected, as an officer and director of any entity that is related through common ownership to the Corporation (all entities related through common ownership to the Corporation are called "Affiliates" and the Corporation and all Affiliates are called "Group"); [4] Except for periods of absence because of illness, vacations of reasonable duration and any leaves of absence authorized by the CEO, to: [a] Devote his full attention and energies to promoting the Group's business; [b] Fulfill the obligations described in this Agreement; [c] Exercise the highest degree of loyalty and the highest standards of conduct in the performance of his duties; and [5] Not to engage in any other business activity, whether or not for gain, profit or other pecuniary advantage. However, Executive may serve as a director of companies other than Group members if that service: [a] Does not violate any term or condition of this Agreement; [b] Does not injure the Group or any Group member; [c] Is not prohibited by law or by rules adopted by any Group member; and [d] Is approved by the CEO. 2.02 The restrictions described in Section 2.01[5] will not be construed to prevent Executive from: [1] Investing his personal assets in [a] businesses that do not compete or do business with any Group member and do not require Executive to perform any services connected with the operation or affairs of the businesses in which the investment is made or [b] stocks or corporate securities described in Section 6.02; or [2] Participating in, or serving as a trustee or director of, civic and charitable organizations or activities, but only if this activity does not interfere with the performance of his duties under this Agreement. 2.03 Executive will have a direct reporting relationship to the CEO. ARTICLE 3 EXECUTIVE'S COMPENSATION 3.01 During the Term of this Agreement and subject to the terms of this section and of Article 5, Corporation will pay the following amounts to Executive: [1] Beginning on the Effective Date, $350,000 for each full calendar year of employment ("Base Salary"), prorated to reflect partial calendar months and years of employment and paid in installments that correspond with the Corporation's normal payroll practices. Base Salary will not be reduced during the Term of this Agreement without Executive's consent and may be increased during the Term of this Agreement upon recommendation of the CEO to the Executive Compensation Committee of the Company's Board of Directors ("Board"). 2 [2] An annual bonus [a] calculated under the terms of (and payable as provided in) the Corporation's annual incentive program ("AIP"), a copy of which Executive acknowledges having received, with a bonus percentage of 50 percent of Base Salary, adjusted as provided in Section 3.01[1], or [b] for the 2001 and 2002 performance cycles only, the larger of the amount determined under Section 3.01[2][a] or $175,000. However, the amount determined under this subsection will be paid only [c] if Executive is actively employed on the date the AIP bonus is payable or [d] if the Executive is not actively employed on the date the AIP bonus is calculated, only as provided in Article 5. [3] An annual long-term award beginning in 2004 under the terms of any long-term award program that the Corporation adopts for its senior executives. [4] Participation, to the full extent of his eligibility, in the employee and retirement benefit programs provided to the Corporation's senior executives (a description of which has been given to Executive), as these programs may from time to time be amended or modified by the Board or the Board's Executive Compensation Committee. [5] The perquisites that are made available to the Corporation's senior executives. 3.02 Subject to the terms of this section and of Article 5 and as an inducement to Executive to enter into this Agreement, Executive will receive the following special payments and benefits in addition to the amounts described in Section 3.01: [1] $100,000 to be paid no later than October 12, 2001, subject to the terms of the Corporation's sign-on bonus program, a copy of which Executive acknowledges having received; [2] Options to purchase 450,000 shares of the Corporation's common shares ("Shares"). These options ("Options"): [a] Will be granted under the following schedule: [i] Options to purchase 200,000 Shares will be issued on the Effective Date; [ii] Options to purchase 150,000 Shares will be issued on the first anniversary of the Effective Date; and [iii] Options to purchase 100,000 Shares will be issued on the second anniversary of the Effective Date. 3 [b] Will be subject to the following terms and conditions: [i] The Options to be issued under Section 3.02[2][a][i] will be issued under a separate stock option agreement to be adopted by the Corporation ("Other Option Grant"), which will include terms that are as similar as possible to those imposed under the Ohio Casualty Corporation 1993 Stock Incentive Program ("1993 Program"). The Options to be issued under Sections 3.02[2][a][ii] and [iii] will be issued under the successor to the 1993 Program or, if there is no successor to the 1993 Program, under the Other Option Grant (collectively, the 1993 Program and the Other Option Grant are referred to as the "Option Programs") ; [ii] The Options to be issued under Section 3.02[2][a][i] will be nonqualified (nonstatutory) stock options. At the discretion of the Board's Executive Compensation Committee and to the extent possible, the Options to be issued under Section 3.02[2][a][ii] and [iii] will be incentive stock options or nonqualified (nonstatutory) stock options; [iii] The number of Options will be adjusted to reflect, as appropriate, the effect of any stock splits, stock dividends and similar events affecting the underlying Shares; [iv] Regardless of the obligation otherwise imposed under this section, the Corporation will not be obligated to issue the Options if: [A] Executive does not meet all terms and conditions imposed under the relevant Option Program on the issue date specified in Section 3.02[2][a], including the requirement that Executive be employed by the Corporation on the scheduled issue date; or [B] The Shares are not publicly traded and registered under the Securities Exchange Act of 1934, as amended; [v] The exercise price for all Options will be the Shares' closing market price on the date the Options are issued; 4 [vi] All Options will be subject to the following vesting schedule: Date Issued Percent Vested Effective Date 33-1/3%, at the end of 12 full calendar months beginning after Effective Date; 66-2/3%, at the end of 24 full calendar months beginning after Effective Date; and 100%, at the end of 36 full calendar months beginning after Effective Date. First anniversary 33-1/3%, at the end of 24 full calendar of Effective Date months beginning after Effective Date; 66-2/3%, at the end of 36 full calendar months beginning after Effective Date; and 100%, at the end of 48 full calendar months beginning after Effective Date. Second anniversary 33-1/3%, at the end of 36 full calendar of Effective Date months beginning after Effective Date; 66-2/3%, at the end of 48 full calendar months beginning after Effective Date; and 100%, at the end of 60 full calendar months beginning after Effective Date. [vii] All Options will expire 10 years after they are issued unless they are terminated earlier under the terms of the Option Program under which they are issued; and 5 [3] Subject to the terms of the Corporation's relocation policy, a copy of which Executive acknowledges having received, relocation benefits made available to the Corporation's newly hired executives, a description of which has been given to Executive. ARTICLE 4 EXPENSES The Corporation will pay or reimburse Executive for all reasonable, ordinary and necessary expenses that he incurs to perform his duties under this Agreement. Reimbursement will be made within 30 days after the date Executive submits appropriate evidence of the expenditure to the Corporation (and all other information required under the Corporation's business expense reimbursement policy). ARTICLE 5 TERMINATION OF EMPLOYMENT DURING TERM OF AGREEMENT 5.01 Termination of Employment Due to Death or Disability. If Executive dies or becomes Disabled during the Term of this Agreement: [1] This Agreement will terminate as of the date Executive dies or becomes Disabled and Corporation will pay to Executive (or to his beneficiary if Executive is deceased) the sum of: [a] Any unpaid installments of his Base Salary, calculated to the end of the payroll period during which he terminates employment because of death or Disability; [b] The value of any accrued but unused vacation, calculated to the end of the payroll period during which he terminates employment because of death or Disability (this value will be calculated by dividing the Base Salary by 365 and multiplying by the number of accrued but unused vacation days); [c] Any amounts Executive is entitled to receive under the terms of any employee benefit plan described in Section 3.01[4]; [d] The unpaid portion (if any) of the amounts described in Sections 3.01[3] and 3.02[1], whether or not those amounts are vested when employment terminates under this section; and [e] A prorata portion of the amount described in Section 3.01[2] based on the number of whole calendar months between the first day of the calendar month during which the Executive dies or becomes Disabled and 6 the first day of the calendar months during which his employment terminates because of death or Disability. [2] Also, all unvested Options that were issued before Executive's employment terminates because of his death or Disability will be exercisable (regardless of the vesting schedule imposed under Section 3.02[2][b][vi]). However, any Options that have not been issued under Section 3.02[2] as of the date Executive terminates employment because of death or Disability will not be issued. [3] For purposes of this section, Executive will be deemed to have terminated employment on the date of his death or the date he is determined to have become Disabled. [4] "Disability" has the same meaning given to the term under the Corporation's long-term disability plan as in effect on the Effective Date, whether or not Executive has elected to participate in that plan and whether or not that plan has been amended or terminated before Executive's Disability arises. [5] All amounts payable under this section will be: [a] Paid in accordance with the Corporation's payroll procedures (in the case of Base Salary) or on the date they would have been paid under the terms of the program on which they are based as if Executive's employment had not been terminated (in the case of all other benefits under this section), unless the Parties agree to accelerate one or more of these payments. If this acceleration election is made, the amount distributed will be discounted to reflect its then present value by applying a discount rate equal to the rate paid on 90-day Treasury Bills issued on or immediately before the date the calculation is made or by applying the early distribution provisions included in any benefit plan described in Section 3.01[4] from which the amount is paid; and [b] If Executive dies before all payments due under this section have been paid, the unpaid amount will be paid to Executive's beneficiary under the procedures described in Section 10.07. 5.02 Voluntary Termination of Employment Without Good Reason. Executive may voluntarily terminate his employment at any time during the Term of this Agreement without Good Reason (as defined in Section 5.05[6]) by giving the CEO written notice of his intention to do so. This notice will be effective 30 days after it is given unless the Parties mutually agree to accelerate this termination date ("Voluntary Termination Date"). If Executive voluntarily terminates his employment without Good Reason: 7 [1] This Agreement will terminate on the Voluntary Termination Date and Corporation will pay to Executive the sum of: [a] Any unpaid installments of his Base Salary, calculated to the end of the payroll period during which his Voluntary Termination Date occurs; [b] The value of any accrued but unused vacation, calculated to the end of the payroll period during which his Voluntary Termination Date occurs (this value will be calculated by dividing the Base Salary by 365 and multiplying by the number of accrued but unused vacation days); [c] Any amounts Executive is entitled to receive under the terms of any employee benefit plan described in Section 3.01[4]; and [d] The unpaid portion (if any) of the amount described in Section 3.01[2] but only to the extent that the amount is payable on or before his Voluntary Termination Date. [2] Also, all [a] unvested Options will be forfeited, [b] any vested Options that were issued before Executive's employment terminates will be exercisable under the terms of the Option Program under which they are issued and [c] any Options that have not been issued under Section 3.02[2] as of Executive's Voluntary Termination Date will not be issued. [3] All amounts payable under this section will be: [a] Paid in accordance with the Corporation's payroll procedures (in the case of Base Salary) or on the date they would have been due under the terms of the program on which they are based as if Executive's employment had not been terminated (in the case of all other benefits under this section), unless the Parties agree to accelerate one or more of these payments. If this acceleration election is made, the amount distributed will be discounted to reflect its then present value by applying a discount rate equal to the rate paid on 90-day Treasury Bills issued on or immediately before the date the calculation is made or by applying the early distribution provisions included in any benefit plan described in Section 3.01[4] from which the amount is being paid; and [b] If Executive dies before all payments due under this section have been paid, the unpaid amount will be paid to Executive's beneficiary under the procedures described in Section 10.07. 5.03 Termination of Employment by Corporation Without Cause. The Corporation may terminate Executive's employment without Cause (as defined in Section 5.04[4]) at any time during the Term of this Agreement by giving Executive written notice of its intention to do so. This notice will be effective 90 days after it is given unless the Parties mutually agree to accelerate this termination date ("Involuntary Termination Date). If this notice is given after a Change in Control (as defined in Section 8 5.06[7]) occurs, Section 5.06 will apply. If this notice is given before a Change in Control occurs (even if the Involuntary Termination Date occurs after a Change in Control): [1] This Agreement will terminate as of the Involuntary Termination Date; [2] Corporation will pay: [a] Any unpaid installments of his Base Salary, calculated to the end of the payroll period during which his Involuntary Termination Date occurs; [b] The value of any accrued but unused vacation, calculated to the end of the payroll period during which his Involuntary Termination Date occurs (this value will be calculated by dividing the Base Salary by 365 and multiplying by the number of accrued but unused vacation days); [c] The Base Salary for 24 months beginning with the first payroll period that begins after his Involuntary Termination Date; and [d] 200 percent of Executive's individual target bonus as defined in the AIP for the year his Involuntary Termination Date occurs. [3] All unvested Options that were issued before Executive's Involuntary Termination Date will vest and be exercisable (regardless of the vesting schedule imposed under Section 3.02[2][b][vi]), but any Option that has not been issued under Section 3.02[2] as of Executive's Involuntary Termination Date will not be issued; and [4] Executive will receive any other benefits he is entitled to receive under the terms of any benefit program described in Section 3.01[4]. [5] All amounts payable under this section will be: [a] Paid in accordance with the Corporation's payroll procedures (in the case of Base Salary) or on the date they would have been due under the terms of the program on which they are based as if Executive's employment had not been terminated (in the case of all other benefits under this section), unless the Parties agree to accelerate one or more of these payments. If this acceleration election is made, the amount distributed will be discounted to reflect its then present value by applying a discount rate equal to the rate paid on 90-day Treasury Bills issued on or immediately before the date the calculation is made or by applying the early distribution provisions included in any benefit plan described in Section 3.01[4] from which the amount is being paid; and 9 [b] If Executive dies before all payments due under this section have been paid, the unpaid amounts will be paid to Executive's beneficiary under the procedures described in Section 10.07. 5.04 Termination of Employment by Corporation for Cause. The Corporation may terminate Executive's employment with Cause at any time during the Term of this Agreement by giving Executive written notice of its intention to do so. This notice will be effective on the date it is given ("For Cause Termination Date"). If this notice is given: [1] This Agreement will terminate as of his For Cause Termination Date; [2] Corporation will pay: [a] Any unpaid installments of his Base Salary, calculated to the end of the payroll period during which his For Cause Termination Date occurs; [b] The value of any accrued but unused vacation, calculated to the end of the payroll period during which his For Cause Termination Date occurs (this value will be calculated by dividing the Base Salary by 365 and multiplying by the number of accrued but unused vacation days); [c] Any amounts Executive is entitled to receive under the terms of any employee benefit plan described in Section 3.01[4]; and [d] The unpaid portion (if any) of the amount described in Section 3.01[2] but only to the extent that the amount is payable on or before his For Cause Termination Date. [3] Also, [a] all unvested Options will be forfeited, [b] any vested Options that were issued before Executive's employment terminates will be exercisable under the terms of the Option Program under which they are issued and [c] any Options that have not been issued under Section 3.02[2] as of Executive's For Cause Termination Date will not be issued. [4] "Cause" includes any act of fraud, intentional misrepresentation, embezzlement, misappropriation or conversion by Executive of the assets or business opportunities of any Group member, conviction of Executive of a felony or intentional or repeated or continuing violations by Executive of the Corporation's written policies or procedures that occurs after the Corporation has given Executive written notice that he has violated these written policies or procedures. [5] All amounts payable under this section will be: [a] Paid in accordance with the Corporation's payroll procedures (in the case of Base Salary) or on the date they would have been due under the terms of the program on which they are based as if Executive's 10 employment had not been terminated (in the case of all other benefits under this section), unless the Parties agree to accelerate one or more of these payments. If this acceleration election is made, the amount distributed will be discounted to reflect its then present value by applying a discount rate equal to the rate paid on 90-day Treasury Bills issued on or immediately before the date the calculation is made or by applying the early distribution provisions included in any benefit plan described in Section 3.01[4] from which the amount is being paid; and [b] If Executive dies before all payments due under this section have been paid, the unpaid amount will be paid to Executive's beneficiary under the procedures described in Section 10.07. 5.05 Termination of Employment by Executive for Good Reason. Executive may terminate his employment at any time during the Term of this Agreement for Good Reason by giving the CEO written notice of his intention to do so. This notice must describe, in reasonable detail, the reasons for which Executive believes he has Good Reason to terminate this Agreement. If, during the ensuing 60 days, the Corporation cures the condition cited by Executive, no termination will occur under this section. However, if the Corporation does not cure the condition cited by Executive during this 60-day period, this Agreement will terminate at the end of the 60-day period ("Good Reason Termination Date"). If that termination is, in fact, for Good Reason and if the notice of termination for Good Reason was given after a Change in Control (as defined in Section 5.06[7]) occurs, Section 5.06 will apply. If that termination is, in fact, for Good Reason and if the notice of termination for Good Reason was given before a Change in Control occurs (even if the Good Reason Termination Date occurs after a Change in Control): [1] This Agreement will terminate as of the Good Reason Termination Date; [2] Corporation will pay: [a] Any unpaid installments of his Base Salary, calculated to the end of the payroll period during which his Good Reason Termination Date occurs; [b] The value of any accrued but unused vacation, calculated to the end of the payroll period during which his Good Reason Termination Date occurs (this value will be calculated by dividing the Base Salary by 365 and multiplying by the number of accrued but unused vacation days); [c] The Base Salary for 24 months beginning with the first payroll period that begins after his Good Reason Termination Date; and [d] 200 percent of Executive's individual target bonus as defined in the AIP for the year his Good Reason Termination Date occurs. 11 [3] All unvested Options that were issued before Executive's Good Reason Termination Date will vest and be exercisable (regardless of the vesting schedule imposed under Section 3.02[2][b][vi]), but any Options that have not been issued under Section 3.02[2] as of Executive's Good Reason Termination Date will not be issued; [4] Executive will receive any other benefits he is entitled to receive under the terms of any benefit program described in Section 3.01[4]. [5] All amounts payable under this section will be: [a] Paid in accordance with the Corporation's payroll procedures (in the case of Base Salary) or on the date they would have been due under the terms of the program on which they are based as if Executive's employment had not been terminated (in the case of all other benefits under this section), unless the Parties agree to accelerate one or more of these payments. If this acceleration election is made, the amount distributed will be discounted to reflect its then present value by applying a discount rate equal to the rate paid on 90-day Treasury Bills issued on or immediately before the date the calculation is made or by applying the early distribution provisions included in any benefit plan described in Section 3.01[4] from which the amount is being paid; and [b] If Executive dies before all payments due under this section have been paid, the unpaid amount will be paid to Executive's beneficiary under the procedures described in Section 10.07. [6] The term "Good Reason" means, without Executive's express prior written consent, the occurrence of any one or more of the following events (Executive will be deemed to have given his written consent to any of these events if he participates, or is entitled to participate, in the decision making process that leads to the occurrence of any of the following events): [a] A material reduction in Executive's duties, responsibilities or status with respect to the Corporation, as compared to those in effect on the Effective Date; [b] Deprivation of Executive of the title of CFO of the Corporation; [c] The permanent assignment to Executive of duties materially inconsistent with Executive's office on the Effective Date; [d] A requirement that Executive relocate his principal office or worksite (or the indefinite assignment of Executive) to a location more than 50 miles distant from [i] the principal office or worksite to which he was permanently assigned as of the Effective Date or [ii] any location to which Executive is permanently assigned, without his consent, after the Effective Date; 12 [e] The failure of the Corporation to maintain Executive's relative level of coverage under the employee benefit or retirement plans, policies, practices or arrangements described in Section 3.01[4] and 3.01[5] as in effect on the Effective Date, both in terms of the amount of benefits provided and the relative level of Executive's participation. However, Good Reason will not arise under this subsection if the Corporation eliminates and/or modifies any of the programs described in Section 3.01[4] and 3.01[5] if (except as required by law or as needed to preserve the tax-character of the plan, policy, practice or arrangement) Executive's level of coverage under all the programs described in Section 3.01[4] and 3.01[5] is at least as great as the coverage provided to other senior executives of the Corporation; or [f] Any material breach of this Agreement by or in behalf of the Corporation that is not cured by the Corporation within 60 days of its receipt of written notice describing the nature of the alleged breach. 5.06 Termination of Employment Following a Change in Control. If a Change in Control occurs during the Term of this Agreement, Executive will receive the following amounts (under the conditions described below): [1] If Executive dies or becomes Disabled during the Term of this Agreement but after a Change in Control, he (or his beneficiary) will receive the amounts described in Section 5.01, as if Executive had died or become Disabled before the Change in Control occurred. [2] If Executive terminates his employment voluntarily during the Term of this Agreement but after a Change in Control, he (or his beneficiary) will receive the amounts described in Section 5.02, as if Executive had voluntarily terminated his employment before the Change in Control occurred, but only if he follows the procedures described in Section 5.02. [3] If the Corporation terminates Executive's employment for Cause (as defined in Section 5.04[4]) during the Term of this Agreement but after a Change in Control, he (or his beneficiary) will receive the amounts described in Section 5.04 as if Executive had been terminated for Cause before the Change in Control occurred. [4] If Executive notifies the Corporation of his intent to terminate his employment for Good Reason (as defined in Section 5.05[6]) during the Term of this Agreement and if that notice is given after a Change in Control occurs or if the Corporation notifies Executive of its intent to terminate Executive without Cause (as defined in Section 5.04[4]) during the Term of this Agreement and if that notice is given after a Change in Control has occurred, Executive will receive the following amounts: 13 [a] The amounts described in Section 5.05 as if the notice of termination for Good Reason had been given before the Change in Control occurred or the amounts described in Section 5.03 as if the notice of termination without Cause had been given before the Change in Control occurred. These amounts will be paid in a lump sum without any discount applied to reflect the value of any acceleration of payment; [b] Reimbursement for the cost of continued participation in all programs subject to the benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1993 ("COBRA") for the period beginning on the last day of Executive's active employment with the Corporation and ending on the earlier of [i] the date Executive acquires replacement coverage or [ii] the maximum coverage period prescribed by COBRA; [c] Reimbursement (or direct payment) for executive outplacement services from an independent executive outplacement organization until the earlier of [i] the date Executive is able to secure employment acceptable to him or [ii] the fees paid to the independent executive outplacement service equal $15,000 but only if [iii] Executive begins to utilize these outplacement services before the end of the 12-calendar-month period beginning after the date the Employee terminates; [d] A lump sum equal to the amounts described in this subsection 5.06[4][d]. This payment will be made no more than 60 days after the occurrence giving rise to the payment obligation. The amount payable under this subsection will be the sum of: [i] $9,400; [ii] An amount equal to the federal, state and local income, wage and employment tax liability Executive will incur as a result of receiving the amounts and property described in Sections 5.06[4][d][i]; and [iii] Any other Change in Control benefit to which Executive is entitled under the terms of any other plan, program or agreement with any Group Member. [5] If the sum of the payments described in this section and those provided under any other plan, program or agreement between Executive and any Group member constitute "excess parachute payments" as defined in Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended ("Code"), the Corporation will either: [a] Reimburse Executive for the amount of any excise tax due under Code Section 4999, if this procedure provides Executive with an after-tax amount that is larger than the after-tax amount produced under Section 5.06[5][b]; or 14 [b] Reduce the amounts paid to Executive under this Agreement so that his total "parachute payment" as defined in Code Section 280G(b)(2)(A) under this and any all other agreements will be $1.00 less than the amount that would be an "excess parachute payment" if this procedure provides Executive with an after- tax amount that is larger than the after-tax amount produced under Section 5.06[5][a]. [6] Payment of the amounts described in this section are expressly conditioned on compliance with the following conditions, in addition to those specified elsewhere in this Agreement: [a] Except as expressly provided in this Agreement, Executive's right to receive the payments described in this section will not decrease the amount of, or otherwise adversely affect, any other benefits payable to Executive under the terms of any of the programs described in Section 3.01[4]; and [b] If any "person" (as used in Section 5.06[7][a]) initiates a tender or exchange offer, distributes proxy materials to the Corporation's or to the Company's shareholders or takes other steps to effect, or that may result in, a Change in Control, Executive agrees he will forfeit all amounts described in this section if he [i] voluntarily terminates his employment with Corporation during the pendency of that activity other than by reason of his retirement [A] at or after his Normal Retirement Date [as defined in the Employees Retirement Plan of The Ohio Casualty Insurance Company ("Retirement Plan")] or [B] after he has attained age 62 and completed 30 or more years of service (as defined in the Retirement Plan) or [ii] is indefinitely absent from active employment other than for an absence covered by the Family and Medical Leave Act before those efforts are abandoned, that activity is terminated or until a Change in Control has occurred (if this happens for other than Good Reason, Executive will receive only those amounts described in Section 5.02). [7] For purposes of this section "Change in Control" means the date on which the earliest of the following events occurs: [a] Any entity or person [including a "group" as defined in Section 13(d)(3) of the Exchange Act but excluding another Group member] becomes the beneficial owner of, or obtains voting control over 20 percent or more of the outstanding common shares of the Corporation or the Company; [b] The Corporation's shareholders approve a definitive agreement [i] to merge or consolidate the Corporation with or into another business entity (other than into the Company or another Group member) in which the Corporation is not the continuing or surviving entity or through which the Corporation's common shares would be converted into cash, securities 15 or other property of another business entity, other than a merger of the Corporation in which holders of its common shares immediately before the merger have the same proportionate ownership of the survivor immediately after the merger as immediately before the merger or [ii] to sell or otherwise dispose of substantially all the assets of the Corporation or the Group to an entity that is not a Group member; [c] The Company's shareholders approve a definitive agreement [i] to merge or consolidate the Company with or into another business entity (other than into another Group member) in which the Company is not the continuing or surviving entity or through which the Company's common shares would be converted into cash, securities or other property of another business entity, other than a merger of the Company in which holders of its common shares immediately before the merger have the same proportionate ownership of the survivor immediately after the merger as immediately before the merger or [ii] to sell or otherwise dispose of substantially all of the assets of the Corporation or the Group to an entity that is not a Group member; [d] Within a 12-month period, there is a change in the majority of the members of the Corporation's Board; provided, however, that any new director whose nomination for election by the Corporation's shareholders was approved, or who was appointed or elected to that Board, by the vote of two-thirds of the directors then still in office who were in office at the beginning of the 12-month period will be disregarded in determining if there has been a change in the majority of the Corporation's Board; and [e] Within a 12-month period, there is a change in the majority of the members of the Company's Board; provided, however, that any new director whose nomination for election by the Company's shareholders was approved, or who was appointed or elected to that Board, by the vote of two-thirds of the directors then still in office who were in office at the beginning of the 12-month period will be disregarded in determining if there has been a change in the majority of the Company's Board. [8] If a Change in Control occurs after the Term of this Agreement, Executive will receive amounts calculated under the change in control agreement provided to the Corporation's other senior executives. 5.07 Regardless of any other provision of this Agreement, all amounts paid under this Article 5 (other than those payable under Section 5.06) will be reduced by any amounts payable to Executive from any other broad based severance or disability program in which Executive participates. 16 ARTICLE 6 NONCOMPETITION 6.01 For a period of 24 full calendar months after Executive's employment terminates for any reason, he will not directly or indirectly engage in, assist or have an active interest in (whether as proprietor, partner, investor, shareholder, officer, director or any type of principal whatsoever) or enter the employment of or act as agent for or adviser or consultant to any person or entity who is (or is about to become) engaged in any business that competes with the Group anywhere within the United States. 6.02 Section 6.01 does not prohibit Executive from purchasing, for investment purposes only, any stock or other corporate security that is listed on a national securities exchange or quoted in any national market system (except as otherwise provided in this Agreement), so long as such stock or other corporate security owned by Executive does not represent more than one percent of the market value or voting power of the total stock or other corporate securities of that class. 6.03 Executive is not obligated to comply with the prohibitions described in this article if the Corporation defaults in the payment of any severance compensation or benefits owed under this Agreement. 6.04 For a period of 24 full calendar months after Executive's employment terminates for any reason, he will not, on his own behalf or on behalf of any other person, partnership, association, corporation or other entity, solicit or in any manner attempt to influence or induce any employee of the Group to leave the Group's employment nor will he use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Corporation concerning the names and addresses of the Group's employees. 6.05 Executive recognizes that he has access to and knowledge of certain confidential and proprietary information of the Group that is essential to the performance of his duties under this Agreement. Executive agrees that he will not, during or after the term of his employment by the Corporation, in whole or in part, disclose this information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall he make use of any such information for his own purposes. 6.06 The Parties recognize that the Group will have no adequate remedy at law for breach by Executive of the restrictions imposed by this article and that the Group could suffer substantial and irreparable damage if Executive breaches any of these restrictions. For this reason, Executive agrees that, if Executive breaches any of the restrictions imposed under this article, the Group, in addition to the right to seek monetary damages, may seek a temporary and/or permanent injunction to restrain any breach or threatened breach of these restrictions or a decree of specific performance, mandamus or other appropriate remedy to enforce compliance with the restrictions imposed under this article. 17 ARTICLE 7 INDEMNIFICATION The Corporation will indemnify Executive (including his heirs, executors and administrators) to the fullest extent permitted under the Corporation's Regulations and Ohio law. ARTICLE 8 ASSIGNMENT OF AGREEMENT 8.01 Except as specifically provided in this section, the Corporation may not assign this Agreement to any person or entity that is not a member of the Group. However, this Agreement may and will be assigned or transferred to, and will be binding upon and inure to the benefit of, any successor of the Corporation, in which case this Agreement will be interpreted and applied by substituting that successor for the "Corporation" under the terms of this Agreement. For these purposes, "successor" means any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise acquires all or substantially all of the assets or the business of the Corporation. 8.02 Because the services to be provided by Executive to the Corporation under this Agreement are personal to him, Executive may not assign the duties allocated to him under this Agreement to any other person or entity. However, this Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, and administrators, successors, heirs, distributees, devisees and legatees to the extent of any amounts payable to Executive that are due to Executive upon his death. ARTICLE 9 DISPUTE RESOLUTION 9.01 The Parties agree that arbitration will be the exclusive means of resolving all disputes or questions arising out of or relating to this Agreement (except that nothing included in this Article 9 prevents the Corporation from seeking injunctive or other equitable relief if there is a breach or threatened breach of any of the restrictions described in Article 6). Any arbitration proceeding will be conducted before a panel of three arbitrators, one appointed by the Corporation, a second appointed by Executive and a third appointed by those two arbitrators. Any arbitration may be initiated by either Party by written notice to the other Party specifying the subject of the requested arbitration and appointing that Party's arbitrator. 9.02 The arbitration will take place in Cincinnati, Ohio and will be conducted in accordance with the rules of the American Arbitration Association in effect when the arbitration begins. Any determination or award made or approved by at least two of the arbitrators will be final and binding on the Parties. Judgment upon any award made in any arbitration may be entered and enforced in any court having competent jurisdiction. 9.03 The costs of arbitration will be borne solely by the Party by which they are incurred. 18 ARTICLE 10 MISCELLANEOUS 10.01 Any notices, consents, requests, demands, approvals or other communications to be given under this Agreement must be given in writing and must be sent by registered or certified mail, return receipt requested, to Executive at the last address he has filed in writing with the Corporation or, in the case of the Corporation, to the CEO at the Corporation's principal offices. 10.02 This Agreement supersedes any prior agreements or understandings, oral or written, between the Parties, or between Executive and the Corporation, with respect to the subject matter described in this Agreement and constitutes the entire agreement of the Parties with respect to any matter covered in this Agreement. 10.03 This Agreement may not be varied, altered, modified, canceled, changed or in any way amended except by written agreement of the Parties. 10.04 If any provision or portion of this Agreement is determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement will remain in full force and effect. 10.05 This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same Agreement. 10.06 The Corporation will withhold from any benefits payable under this Agreement all federal, state, city or other taxes as required by any applicable law or governmental regulation or ruling. 10.07 Executive may designate one or more persons or entities as the primary and/or contingent beneficiaries of any amounts to be received under this Agreement that are unpaid when Executive dies. This designation must be written and presented in a form acceptable to the Corporation or the Corporation's designee, if appropriate, or in the form required by any affected benefit plan or program. Subject to any rules prescribed by the Corporation, its designee or the affected benefit plan or program, Executive may make or change his designation at any time. 10.08 Failure to insist upon strict compliance with any of the terms, covenants or conditions described in this Agreement will not constitute a waiver of that or any other term, covenant or condition nor will any such failure constitute a waiver or relinquishment of the Party's right to insist subsequently on strict compliance of the affected (and all other) terms, covenants or conditions of this Agreement. 10.09 To the extent not preempted by federal law, the provisions of this Agreement will be construed and enforced in accordance with the laws of the state of Ohio. 19 IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective September 19, 2001. THE OHIO CASUALTY INSURANCE COMPANY By: ------------------------------------ Dan R. Carmichael, CEO and President OHIO CASUALTY CORPORATION By: ------------------------------------ Dan R. Carmichael, CEO and President DONALD F. MCKEE ---------------------------------------- 20 -----END PRIVACY-ENHANCED MESSAGE-----