-----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, JL3wUmr46FflNMmyVN2HEXSUGa8PmNXI+cn+1IIN4RStEePYT5G6i4X80dMTJghJ GDS3FqifMySDx5wqPIUcaQ== 0000073952-99-000031.txt : 19990816 0000073952-99-000031.hdr.sgml : 19990816 ACCESSION NUMBER: 0000073952-99-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO CASUALTY CORP CENTRAL INDEX KEY: 0000073952 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310783294 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05544 FILM NUMBER: 99686998 BUSINESS ADDRESS: STREET 1: 136 N THIRD ST CITY: HAMILTON STATE: OH ZIP: 45025 BUSINESS PHONE: 5138673000 MAIL ADDRESS: STREET 1: 136 N THIRD ST CITY: HAMILTON STATE: OH ZIP: 45025 10-Q 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarter ended June 30, 1999. ------------- [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from to ------------- -------------- Commission File Number 0-5544 OHIO CASUALTY CORPORATION (Exact name of registrant as specified in its charter) OHIO (State or other jurisdiction of incorporation or organization) 31-0783294 (I.R.S. Employer Identification No.) 136 North Third Street, Hamilton, Ohio (Address of principal executive offices) 45025 (Zip Code) (513) 867-3000 (Registrant's telephone number) Securities registered pursuant to Section 12(g) of the Act: Common Shares, Par Value $.125 Each (Title of Class) Common Share Purchase Rights (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value as of August 2, 1999 of the voting stock held by non-affiliates of the registrant was $947,098,454. On August 2, 1999 there were 61,083,584 shares outstanding. Page 1 of 18 =============================================================================== PART I ITEM 1. FINANCIAL STATEMENTS OHIO CASUALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands)
June 30, December 31, 1999 1998 (Unaudited) - ---------------------------------------------------------------------------- Assets Investments: Fixed maturities: Available for sale, at fair value (cost: $2,441,661 and $2,307,734) $ 2,459,720 $ 2,415,904 Equity securities, at fair value (cost: $160,668 and $245,129) 712,941 924,906 Short-term investments, at fair value (cost: $216,441 and $262,939) 216,473 262,863 ------------ ------------ Total investments 3,389,134 3,603,673 Cash 40,883 42,139 Premiums and other receivables, net of allowance for bad debts of $9,039 and $8,739, respective 368,471 301,943 Deferred policy acquisition costs 178,020 176,606 Property and equipment, net of accumulated depreciation of $106,346 and $97,991, respectively 92,685 80,065 Reinsurance recoverable 172,642 186,861 Agent relationships, net of accumulated amortization of $6,188 and $1,031, respectively 302,173 308,206 Other assets 129,775 102,771 - ---------------------------------------------------------------------------- Total assets $ 4,673,783 $ 4,802,264 ============================================================================ Liabilities Insurance reserves: Unearned premiums $ 723,957 $ 668,550 Losses 1,560,211 1,580,599 Loss adjustment expenses 367,307 376,340 Future policy benefits 20,883 25,518 Note payable 255,000 265,000 California Proposition 103 reserve 49,264 48,043 Deferred income taxes 67,175 140,730 Other liabilities 398,753 376,503 ------------ ------------ Total liabilities 3,442,550 3,481,283 Shareholders' equity Common stock, $.125 par value 5,850 5,850 Authorized: 300,000,000 shares Issued: 94,418,344 Additional paid-in capital 4,312 4,186 Common stock purchase warrants 21,138 21,138 Accumulated other comprehensive income: Unrealized gain on investments, net of applicable income taxes 371,551 511,816 Retained earnings 1,264,917 1,185,349 Treasury stock, at cost: (Shares: 33,340,760; 31,070,178) (436,535) (407,358) ------------ ------------ Total shareholders' equity 1,231,233 1,320,981 - ---------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 4,673,783 $ 4,802,264 ============================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 48-61 of the Corporation's 1998 Form 10-K, Item 14. All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend. 2 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (In thousands) (Unaudited)
Three Months Ended June 30, 1999 1998 - ---------------------------------------------------------------------------- Premiums and finance charges earned $ 374,309 $ 311,663 Investment income less expenses 41,013 41,300 Investment gains realized, net 167,340 8,151 ------------ ------------ Total revenues 582,662 361,114 Losses and benefits for policyholders 257,724 216,551 Loss adjustment expenses 44,861 30,088 General operating expenses 42,305 29,826 Amortization of agent relationships 3,094 0 California Proposition 103 reserve, including interest 611 896 Amortization of deferred policy acquisition costs 100,074 75,126 ------------ ------------ Total expenses 448,669 352,487 Income from continuing operations before income taxes 133,993 8,627 Income taxes Current 34,981 (194) Deferred 2,339 (1,168) ------------ ------------ Total income taxes 37,320 (1,362) - ----------------------------------------------------------------------------- Income from continuing operations 96,673 9,989 Income from discontinued operations net of taxes of $150 and $158, respectively 104 345 - ----------------------------------------------------------------------------- Net income $ 96,777 $ 10,334 ============================================================================= Other comprehensive income/(loss), net of tax: Net change in unrealized gains (losses), net of income tax expense/(benefit) of $(60,684) and $(5,054), respectively (112,696) (9,387) ------------ ------------ Comprehensive income/(loss) $ (15,919) $ 947 ============================================================================= Average shares outstanding - basic 61,376 66,852 Average shares outstanding - diluted 61,400 66,952 ============================================================================= Earnings per share (basic and diluted): Income from continuing operations, per share $ 1.58 $ 0.15 Income from discontinued operations, per share 0.00 0.00 Effect of change in accounting principle (net of tax) 0.00 0.00 ------------ ------------ Net income, per share $ 1.58 $ 0.15 Cash dividends, per share $ 0.23 $ 0.22 =============================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 48-61 of the Corporation's 1998 Form 10-K, Item 14. All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend. 3 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (In thousands) (Unaudited)
Six Months Ended June 30, 1999 1998 Premiums and finance charges earned $ 758,854 $ 621,290 Investment income less expenses 82,822 85,933 Investment gains realized, net 168,243 12,233 ------------ ------------ Total revenues 1,009,919 719,456 Losses and benefits for policyholders 489,477 404,668 Loss adjustment expenses 78,922 56,468 General operating expenses 85,292 58,178 Amortization of agent relationships 6,188 0 California Proposition 103 reserve, including interest 1,222 1,793 Amortization of deferred policy acquisition costs 200,043 148,857 ------------ ------------ Total expenses 861,144 669,964 Income from continuing operations before income taxes 148,775 49,492 Income taxes Current 37,218 7,263 Deferred 3,167 1,326 ------------ ------------ Total income taxes 40,385 8,589 - ----------------------------------------------------------------------------- Income from continuing operations 108,390 40,903 Income from discontinued operations net of taxes of $(352) and $337, respectively 1,899 625 Cumulative effect of accounting change, net of (2,255) 0 - ----------------------------------------------------------------------------- Net income $ 108,034 $ 41,528 ============================================================================= Other comprehensive income/(loss), net of tax: Net change in unrealized gains (losses), net of income tax expense/(benefit) of $(75,528) and $33,416 (140,265) 62,058 - ----------------------------------------------------------------------------- Comprehensive income/(loss) $ (32,231) $ 103,586 ============================================================================= Average shares outstanding - basic 61,830 67,046 Average shares outstanding - diluted 61,860 67,136 ============================================================================= Earnings per share (basic and diluted): Income from continuing operations, per share $ 1.75 $ 0.61 Income from discontinued operations, per share 0.03 0.01 Effect of change in accounting principle (net of tax) (0.03) 0.00 ------------ ------------ Net income, per share $ 1.75 $ 0.62 Cash dividends, per share $ 0.46 $ 0.44 =============================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 48-61 of the Corporation's 1998 Form 10-K, Item 14. All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend. 4 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (In thousands) (Unaudited)
Accumulated Additional Common other Total Common paid-in stock purchase comprehensive Retained Treasury shareholders' Stock capital warrants income earnings stock equity Balance January 1, 1998 $ 5,850 $ 3,923 $ 0 $ 454,241 $ 1,158,308 $ (307,493) $ 1,314,829 Unrealized gain (loss) 95,474 95,474 Deferred income tax benefit on net unrealized gain (loss) (33,416) (33,416) Net issuance of treasury stock under stock option plan and by charitable donation (20,102 shares) 262 127 389 Repurchase of treasury stock (1,668,000 shares) (39,253) (39,253) Net income 41,528 41,528 Cash dividends paid ($.44 per share) (29,582) (29,582) - -------------------------------------------------------------------------------------------------------------------------------- Balance, June 1, 1998 $ 5,850 $ 4,185 $ 0 $ 516,299 $ 1,170,254 $ (346,619) $ 1,349,969 ================================================================================================================================ Balance January 1, 1999 $ 5,850 $ 4,186 $ 21,138 $ 516,299 $ 1,185,349 $ (407,358) $ 1,320,981 Unrealized gain (loss) (215,793) (215,793) Deferred income tax benefit on net unrealized gain (loss) 75,528 75,528 Net issuance of treasury stock under stock option plan and by charitable donation (18,018 shares) 126 212 338 Repurchase of treasury stock (1,478,000 shares) (29,389) (29,389) Net income 108,034 108,034 Cash dividends paid ($.46 per share) (28,466) (28,466) - -------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1999 $ 5,850 $ 4,312 $ 21,138 $ 371,551 $ 1,264,917 $ (436,535) $ 1,231,233 ================================================================================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 48-61 of the Corporation's 1998 Form 10-K, Item 14. All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend. 5 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In thousands) (Unaudited)
Six Months Ended June 30, 1999 1998 - ----------------------------------------------------------------------------------- Cash flows from: Operations Net income $ 108,034 $ 41,528 Adjustments to reconcile net income to cash from operations: Changes in: Insurance reserves 21,350 11,247 Income taxes 36,820 (13,057) Premiums and other receivables (66,528) (33,426) Deferred policy acquisition costs (1,414) (9,420) Reinsurance recoverable 14,217 (5,085) Other assets (17,204) (5,473) Other liabilities (31,747) 13,384 Amortization of agent relationships 6,188 0 Depreciation and amortization 15,896 7,541 Investment gains and losses (169,443) (12,437) Cumulative effect of an accounting change 2,255 0 California Proposition 103 1,222 1,793 ------------ ------------ Net cash generated (used) by operations (80,354) (3,405) Investments Purchase of investments: Fixed income securities - available for sale (701,362) (115,809) Equity securities (7,881) (8,368) Proceeds from sales: Fixed income securities - available for sale 502,982 95,194 Equity securities 262,836 32,160 Proceeds from maturities and calls: Fixed income securities - available for sale 61,857 66,289 Equity securities 3,000 4,601 Property and equipment Purchases (21,232) (8,442) Sales 257 276 ------------ ------------ Net cash from investments 100,457 65,901 Financing Note payable (10,000) (5,000) Proceeds from exercise of stock options 106 1 Purchase of treasury stock (29,389) (37,891) Dividends paid to shareholders (28,466) (29,582) ------------ ------------ Net cash used in financing activity (67,749) (72,472) Net change in cash and cash equivalents (47,646) (9,976) Cash and cash equivalents, beginning of period 305,002 120,055 - ----------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 257,356 $ 110,079 ===================================================================================
Accompanying notes are an integral part of these financial statements. For complete disclosures see Notes to Consolidated Financial Statements on pages 48-61 of the Corporation's 1998 Form 10-K, Item 14. All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend. 6 OHIO CASUALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS During the first quarter of 1999, the Corporation adopted Statement of Position 97-3 "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments". This statement provides guidance on accounting for insurance related assessments and required disclosure information. In accordance with SOP 97-3, the Corporation has accrued a total liability for insurance assessments of $2.3 million net of tax, as of January 1, 1999. This was recorded as a change in accounting method. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 133 "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for derivative instruments by requiring those items to be recognized as assets or liabilities with changes in fair value reported in earnings or other comprehensive income in the current period. The Corporation expects the adoption of FAS 133 to have an immaterial impact on the financial results due to its limited use of derivative instruments. This statement is effective for fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001 for the Corporation). NOTE II - EARNINGS PER SHARE Basic earnings per share is computed using weighted average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the weighted average number of shares outstanding is increased to include the number of additional common shares that would have been issued if all dilutive outstanding stock options would have been exercised. Basic and diluted earnings per share are summarized as follows:
Three months ended Six months ended June 30 June 30 1999 1998 1999 1998 ---- ---- ---- ---- Income from continuing operations $96,673 $ 9,989 $108,390 $40,903 Weighted average common shares outstanding - basic 61,376 66,852 61,830 67,046 Basic income from continuing operations - per average share $ 1.58 $ 0.15 $ 1.75 $ 0.61 =============================================================================== Weighted average common shares outstanding 61,376 66,852 61,830 67,046 Effect of dilutive securities 24 100 30 90 - ------------------------------------------------------------------------------- Weighted average common shares outstanding - diluted 61,400 66,952 61,860 67,136 Diluted income from continuing operations - per average share $ 1.58 $ 0.15 $ 1.75 $ 0.61 ===============================================================================
NOTE III - INTERIM ADJUSTMENTS It is believed that all material adjustments necessary to present a fair statement of the results of the interim period covered are reflected in this report. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the financial statements and notes thereto in the Corporation's 1998 Form 10-K, Item 14. 7 NOTE IV -- SEGMENT INFORMATION In 1998, the Corporation adopted Statement of Financial Accounting Standard 131, "Disclosures about Segments of an Enterprise and Related Information." This statement supersedes Statement of Financial Accounting Standard 14, "Financial Reporting for Segments of a Business Enterprise" and replaces the industry segment approach with a management segment approach in identifying reportable segments. The management segment approach focuses on financial information that the Corporation's decision makers use to make decisions about the operating segments. The accounting policies of the property and casualty segments are based upon statutory accounting practices. Statutory accounting principles differ from generally accepted accounting principles primarily by deferred policy acquisition costs, required statutory reserves, assets not admitted for statutory reporting, California Proposition 103 reserve and deferred federal income taxes. The Corporation has determined its reportable segments based upon its method of internal reporting which is organized by product line. The property and casualty segments are personal automobile, commercial automobile, homeowners, workers' compensation, fidelity and surety, general liability and commercial property. These segments generate revenues by selling a wide variety of personal, commercial and surety insurance products. The Corporation also has an all other segment which derives its revenues from premium financing, investment income, royalty income and discontinued life insurance operations. The Corporation writes business in over 40 states in conjunction with the independent agency system. Each segment of the Corporation is managed separately. The property and casualty segments are managed by assessing the performance and profitability of the segments through analysis of industry financial measurements including loss and loss adjustment expense ratios, combined ratio, premiums written, underwriting gain/loss and the effect of catastrophe losses on the segment. The following tables present this information by segment as of June 30, 1999 and 1998 as it is reported internally to management. Asset information by reportable segment is not reported, since the Corporation does not produce such information internally. Six months ended June 30 Private Passenger Auto 1999 1998 - ----------------------------------------------------------- Net premiums written $295,055 $254,333 % Increase(decrease) 16.0% 9.6% Net premiums earned 264,945 247,688 % Increase(decrease) 7.0% 7.5% Underwriting gain/(loss) (before tax) (18,710) (7,411) Loss ratio 67.2% 67.9% Loss expense ratio 11.2% 10.3% Underwriting expense ratio 25.7% 24.1% Combined ratio 104.1% 102.3% Impact of catastrophe losses on combined ratio 0.9% 2.0% CMP, Fire, Inland Marine 1999 1998 - ----------------------------------------------------------- Net premiums written $150,896 $180,830 % Increase(decrease) 38.7% 4.0% Net premiums earned 148,306 103,993 % Increase(decrease) 42.6% 5.0% Underwriting gain/(loss) (before tax) (42,991) (10,249) Loss ratio 76.1% 60.8% Loss expense ratio 10.6% 4.4% Underwriting expense ratio 41.6% 42.7% Combined ratio 128.3% 107.9% Impact of catastrophe losses on combined ratio 9.7% 6.2% General Liability 1999 1998 - ------------------------------------------------------------ Net premiums written $72,430 $50,091 % Increase(decrease) 44.6% (7.2%) Net premiums earned 62,175 47,364 % Increase(decrease) 31.3% (6.6%) Underwriting gain/(loss) (before tax) 7,168 (786) Loss ratio 30.9% 35.9% Loss expense ratio 5.8% 14.3% Underwriting expense ratio 44.4% 48.7% Combined ratio 81.1% 98.9% Impact of catastrophe losses on combined ratio N/A N/A Workers' Compensation 1999 1998 - --------------------------------------------------------------- Net premiums written $84,601 $49,523 % Increase(decrease) 70.8% (13.4)% Net premiums earned 87,755 47,925 % Increase(decrease) 83.1% (12.9)% Underwriting gain/(loss) (before tax) (7,179) (8,371) Loss ratio 59.8% 78.1% Loss expense ratio 11.9% 8.2% Underwriting expense ratio 37.8% 30.2% Combined ratio 109.5% 116.5% Impact of catastrophe losses on combined ratio N/A N/A
8 Commercial Auto 1999 1998 - ----------------------------------------------------------- Net premiums written $89,852 $72,099 % Increase(decrease) 24.6% (7.1)% Net premiums earned 85,436 68,359 % Increase(decrease) 25.0% (3.3)% Underwriting gain/(loss) (before tax) (11,557) (8,723) Loss ratio 66.2% 67.6% Loss expense ratio 11.4% 9.0% Underwriting expense ratio 34.2% 34.3% Combined ratio 111.8% 110.9% Impact of catastrophe losses on combined ratio 1.1% 1.1% Homeowners 1999 1998 - ----------------------------------------------------------- Net premiums written $88,600 $87,778 % Increase(decrease) 1.0% 6.3% Net premiums earned 91,528 87,753 % Increase(decrease) 4.3% 6.0% Underwriting gain/(loss) (before tax) (29,897) (24,421) Loss ratio 87.7% 81.4% Loss expense ratio 9.6% 9.7% Underwriting expense ratio 36.5% 36.7% Combined ratio 133.8% 127.8% Impact of catastrophe losses on combined ratio 14.8% 17.2% Fidelity & Surety 1999 1998 - ----------------------------------------------------------- Net premiums written $19,387 $18,627 % Increase(decrease) 4.1% 4.5% Net premiums earned 18,488 17,720 % Increase(decrease) 4.3% 1.4% Underwriting gain/(loss) (before tax) 3,781 1,812 Loss ratio 3.4% 15.8% Loss expense ratio 4.7% 5.9% Underwriting expense ratio 68.1% 64.8% Combined ratio 76.2% 86.5% Impact of catastrophe losses on combined ratio N/A N/A Total Property & Casualty 1999 1998 - ----------------------------------------------------------- Net premiums written $800,821 $641,281 % Increase(decrease) 24.9% 2.4% Net premiums earned 758,633 620,802 % Increase(decrease) 22.2% 2.4% Underwriting gain/(loss) (before tax) (99,387) (58,150) Loss ratio 65.9% 65.5% Loss expense ratio 10.4% 9.1% Underwriting expense ratio 34.9% 33.7% Combined ratio 111.2% 108.3% Impact of catastrophe losses on combined ratio 4.1% 4.3% All other 1999 1998 - ----------------------------------------------------------- Revenues $7,985 $3,096 Expenses 8,649 3,355 - ----------------------------------------------------------- Net income $ (664) $ (259) Reconciliation of Revenues 1999 1998 - ----------------------------------------------------------- Net premiums earned for reportable segments $758,633 $620,802 Investment income 84,730 83,236 Realized gains 158,010 17,539 Miscellaneous income 93 146 - ----------------------------------------------------------- Total property and casualty revenues (Statutory basis) 1,001,466 721,723 Property and casualty statutory to GAAP adjustment 468 (5,363) - ---------------------------------------------------------- Total revenues property and casualty (GAAP basis) 1,001,934 716,360 Other segment revenues 7,985 3,096 - ---------------------------------------------------------- Total revenues $1,009,919 $719,456 ========================================================== Reconciliation of Underwriting gain/(loss) (before tax) 1999 1998 - ---------------------------------------------------------- Property and casualty under- writing gain/(loss) (before tax) (Statutory basis) $(99,387) $(58,150) Statutory to GAAP adjustment 5,734 12,474 - ---------------------------------------------------------- Property and casualty under- writing gain/(loss) (before tax) (GAAP basis) (93,653) (45,676) Net investment income 82,822 85,933 Realized gains 168,243 12,233 Other income (8,637) (2,998) - ---------------------------------------------------------- Income from continuing operations before income taxes $148,775 $49,492 ==========================================================
9 Three months ended June 30 Private Passenger Auto 1999 1998 - ----------------------------------------------------------- Net premiums written $141,907 $128,841 % Increase(decrease) 10.1% 9.6% Net premiums earned 132,957 126,018 % Increase(decrease) 5.5% 5.1% Underwriting gain/(loss) (before tax) (12,698) (4,736) Loss ratio 70.1% 69.2% Loss expense ratio 11.6% 9.8% Underwriting expense ratio 26.1% 24.2% Combined ratio 107.8% 103.2% Impact of catastrophe losses on combined ratio 1.5% 3.7% CMP, Fire, Inland Marine 1999 1998 - ------------------------------------------------------------ Net premiums written $75,971 $56,203 % Increase(decrease) 35.2% 8.5% Net premiums earned 74,513 52,346 % Increase(decrease) 42.4% 5.6% Underwriting gain/(loss) (before tax) (28,796) (8,051) Loss ratio 82.4% 64.6% Loss expense ratio 13.2% 5.1% Underwriting expense ratio 42.2% 42.5% Combined ratio 137.8% 112.2% Impact of catastrophe losses on combined ratio 15.0% 10.7% General Liability 1999 1998 - ------------------------------------------------------------ Net premiums written $40,268 $26,008 % Increase(decrease) 54.8% (5.5)% Net premiums earned 31,292 23,421 % Increase(decrease) 33.6% (8.4)% Underwriting gain/(loss) (before tax) 1,061 (2,871) Loss ratio 31.2% 38.3% Loss expense ratio 11.6% 18.9% Underwriting expense ratio 41.8% 49.6% Combined ratio 84.6% 106.8% Impact of catastrophe losses on combined ratio N/A N/A Workers' Compensation 1999 1998 - ------------------------------------------------------------ Net premiums written $37,475 $24,333 % Increase(decrease) 54.0% (13.3)% Net premiums earned 37,327 23,260 % Increase(decrease) 60.5% (14.1)% Underwriting gain/(loss) (before tax) (12,622) (531) Loss ratio 75.2% 64.8% Loss expense ratio 16.4% 7.6% Underwriting expense ratio 42.0% 28.6% Combined ratio 133.6% 101.0% Impact of catastrophe losses on combined ratio N/A N/A Commercial Auto 1999 1998 - ------------------------------------------------------------- Net premiums written $46,728 $36,529 % Increase(decrease) 27.9% (7.3)% Net premiums earned 42,934 33,903 % Increase(decrease) 26.6% (4.8)% Underwriting gain/(loss) (before tax) (5,567) (7,943) Loss ratio 65.3% 77.1% Loss expense ratio 10.5% 8.3% Underwriting expense ratio 34.1% 35.3% Combined ratio 109.9% 120.7% Impact of catastrophe losses on combined ratio 1.5% 2.0% Homeowners 1999 1998 - ------------------------------------------------------------- Net premiums written $51,122 $47,703 % Increase(decrease) 7.2% 7.7% Net premiums earned 45,874 43,608 % Increase(decrease) 5.2% 6.2% Underwriting gain/(loss) (before tax) (19,294) (23,371) Loss ratio 92.7% 102.7% Loss expense ratio 10.5% 12.5% Underwriting expense ratio 34.9% 35.1% Combined ratio 138.1% 150.3% Impact of catastrophe losses on combined ratio 21.8% 30.3% Fidelity & Surety 1999 1998 - ------------------------------------------------------------- Net premiums written $9,986 $9,863 % Increase(decrease) 1.3% 3.9% Net premiums earned 9,213 8,880 % Increase(decrease) 3.8% 2.5% Underwriting gain/(loss) (before tax) 1,969 621 Loss ratio 4.0% 16.7% Loss expense ratio 4.8% 5.8% Underwriting expense ratio 64.4% 63.5% Combined ratio 73.2% 86.0% Impact of catastrophe losses on combined ratio N/A N/A Total Property & Casualty 1999 1998 - ------------------------------------------------------------- Net premiums written $403,457 $329,480 % Increase(decrease) 22.5% 3.4% Net premiums earned 374,110 311,436 % Increase(decrease) 20.1% 1.3% Underwriting gain/(loss) (before tax) (75,947) (46,883) Loss ratio 70.4% 69.8% Loss expense ratio 12.0% 9.7% Underwriting expense ratio 35.2% 33.6% Combined ratio 117.6% 113.1% Impact of catastrophe losses on combined ratio 6.4% 7.6% All other 1999 1998 - ------------------------------------------------------------ Revenues $8,361 $1,439 Expenses 3,676 1,380 - ------------------------------------------------------------ Net income $4,685 $ 59 Reconciliation of Revenues 1999 1998 - ------------------------------------------------------------ Net premiums earned for reportable segments $374,110 $311,436 Investment income 42,263 40,006 Realized gains 156,932 13,003 Miscellaneous income 50 59 - ------------------------------------------------------------ Total property and casualty revenues (Statutory basis) 573,355 364,504 Property and casualty statutory to GAAP adjustment 946 (4,829) - ------------------------------------------------------------ Total revenues property and casualty (GAAP basis) 574,301 359,675 Other segment revenues 8,361 1,439 - ------------------------------------------------------------ Total revenues $582,662 $361,114 ============================================================
10 Reconciliation of Underwriting gain/(loss) (before tax) 1999 1998 - ----------------------------------------------------------- Property and casualty under- writing gain/(loss) (before tax) (Statutory basis) $(75,947) $(46,883) Statutory to GAAP adjustment 5,657 7,166 - ----------------------------------------------------------- Property and casualty under- writing gain/(loss) (before tax) (GAAP basis) (70,290) (39,717) Net investment income 41,013 41,299 Realized gains 167,340 8,151 Other income (4,070) (1,106) - ---------------------------------------------------------- Income from continuing operations before income taxes $133,993 $8,627 ==========================================================
NOTE V - ACQUISITION OF COMMERCIAL LINES BUSINESS On December 1, 1998, the Corporation acquired substantially all of the Commercial Lines Division of Great American Insurance Company ("GAI"), an insurance subsidiary of the American Financial Group, Inc. As part of the transaction, the Corporation assumed responsibility for 650 employees of GAI's Commercial Lines Division, as well as relationships with 1,700 agents. The major lines of business included in the sale were workers' compensation, commercial multi-peril, umbrella and commercial auto. Four commercial operations as well as all California business and all pre-1987 environmental claims were excluded from the transaction. The transaction was accounted for using the purchase method of accounting. The following table presents the unaudited quarterly proforma results of operations had the acquisition occurred on January 1, 1998.
Three months ended June 30 Six months ended June 30 (Unaudited) 1998 1998 - ------------------------------------------------------------------------------ Revenues $442,310 $894,636 Net income (2,315) 30,327 Diluted earnings per share (.03) 0.45 Average shares outstanding-diluted 67,362 67,445
NOTE VI - RESTRUCTURING CHARGE During December 1998, the Corporation adopted a plan to restructure its branch operations. To continue in the Corporation's efforts to reduce expenses, personal lines business centers will be reduced from five to three locations. Underwriting branch locations will be reduced from seventeen to eight locations and claims branches will be reduced from thirty-eight to six locations. The Corporation recognized $10,000 in expenses in its income statement to reflect one-time charges related to its branch office consolidation plan. These charges consisted solely of future contractual lease payments related to abandoned facilities. During the second quarter of 1999, the Corporation released $663 of liability due to payments under leases. The restructuring activity is expected to be completed by the end of 1999 and the restructuring reserve will continue to be decreased as the leases expire or subleases are obtained. 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and - ------ --------------------------------------------------------------- Results of Operations --------------------- Property and casualty pre-tax underwriting losses for the six months ended June 30, 1999 were $93.7 million, $1.51 per share, compared with $45.7 million, $.68 per share for the same period in 1998. Gross premiums for the first six months of 1999 increased 8.7% for all lines of business excluding the effect of $157.3 million in gross premium written from the GAI acquisition. Commercial lines decreased .7% and personal lines increased 15.6% from the same period last year excluding the effects of the GAI acquisition. Property and casualty net premiums increased 3.8% for the second quarter of 1999 and 5.3% year-to-date from the same period a year ago excluding $59.8 and $123.7 million respectively in net premiums related to the GAI acquisition. Premium from Key Agents grew 6.9% year to date. Key Agents work closely with the Corporation to establish goals to increase profitability, growth and retention. Non-key active agents grew 5.2% over 1998. These together with new appointments brings total active agent premium growth to 9.4% for 1999. New Jersey is our largest state with 18.3% of total net premiums written during the year. Legislation passed in 1992 requires automobile insurers operating in the state to accept all risks that meet underwriting guidelines regardless of risk concentration. This leads to a greater risk concentration in the state than the Corporation would otherwise accept. New Jersey also requires assessments to be paid for the New Jersey Unsatisfied Claim and Judgment Fund (UCJF). This assessment is based upon estimated future direct premium written in that state. The Corporation has paid $3.4 million in 1999 for fiscal year 2000 assessment and has paid $3.2 million in 1998. The Corporation anticipates future assessments will not materially affect the Corporation's results of operations, financial position or liquidity. Recently, the New Jersey State Senate passed an auto insurance reform bill that mandates a 15% rate reduction for personal auto policies for drivers who agree not to sue for "pain and suffering" unless they suffer permanent injury in an accident. The reform bill became effective on March 22, 1999, and all new policies and renewal policies written on or after that date reflect the 15% rate reduction. The anticipated impact on the Corporation is a tradeoff of lower premium rates on personal auto policies for presumably lower losses on these policies but the degree of offset, if any, is uncertain at present. As of June 30, 1999, the Corporation had personal auto net premium written of $81.5 million or 55.6% of total premium that the Corporation writes in New Jersey compared with $114.5 million or 53.1% at year-end 1998. The projected impact of this reform bill on the Corporation would have been a decrease in premium of $17.2 million for the year ended December 31, 1998. The state of New Jersey has also begun to require insurance companies to write a portion of their premiums in Urban Enterprise Zones (UEZ). These zones are urban areas normally having high loss ratios. The Corporation is assigned premiums if it does not write the required amount on its own. As of June 30, 1999, the Corporation has written $3.9 million year-to-date in UEZ premiums, with an approximate $4.0 million in additional assigned premiums. The loss ratio on the UEZ premiums is 127.8% as of June 30, 1999. The combined ratio for the first six months increased 2.9 points to 111.2% from 108.3% for the same period last year. The six-month combined ratio for homeowners increased 6.0 points to 133.8% from 127.8% in the same period last year. This is primarily due to an increase in catastrophe weather related losses in 1999 compared with the same period of 1998. The Corporation is reviewing its exposure to underinsured homeowner properties to maintain adequate replacement cost values on our homeowners book of business. Selected homeowners accounts will be reviewed upon renewal for a replacement cost valuation and any necessary premium increases will be implemented at that time. Personal automobile, the Corporation's largest line, recorded a 1999 six-month combined ratio of 104.1% increasing from 102.3% in 1998. Workers' compensation combined ratio for the first six months of 1999 decreased 7.0 points to 109.5% from 116.5% during the same period last year. The decrease in the workers' compensation ratio is due to a greater benefit derived from an increased use of reinsurance on the new GAI workers' compensation book of business. The gross results, however, appear to be deteriorating due to tremendous competitive pricing pressures. 12 The general liability combined ratio decreased during the first six months of 1999 to 81.1% from 98.9% in 1998. This reduction is a result of the nature of general liability being a volatile segment and having favorable loss developments during the first six months of 1999. The combined ratio for CMP, fire and inland marine increased 20.4 points to 128.3% from 107.9% during the first six months of 1999. This increase is primarily due to large weather related catastrophe losses in the Cincinnati and Oklahoma areas. The second quarter catastrophe losses were $23.8 million and accounted for 6.4 points on the combined ratio. This compares with $23.8 million and 7.6 points for the same period in 1998. Year-to-date catastrophe losses increased $4.4 million from $26.8 in 1998 to $31.3 million in 1999. The effect of catastrophes on the Corporation's future results cannot be accurately predicted. Severe weather patterns can have a material adverse impact on the Corporation's results. During the second quarter of 1999 there were 13 catastrophes compared with 16 catastrophes in the second quarter of 1998. The largest catastrophe in each quarter was $9.6 million and $6.8 million, respectively, in incurred losses. For additional disclosure of catastrophe losses, refer to Item 14, Note 9, Losses and Loss Reserves in the Notes to the Consolidated Financial Statements on pages 54 and 55 of the Corporation's 1998 Form 10-K. During the quarter, the Corporation recognized $3.0 million in non-recurring reorganization expenses that had not been previously reserved. This brings year-to-date non-recurring reorganization expenses to $3.7 million. These expenses along with an increase in advertising expenses over 1998 increased the underwriting expense ratio to 34.9% for the first six months of 1999. For the quarter, property and casualty before tax investment income was $42.3 million, $0.70 per share, increasing slightly from $40.0 million, $0.60 per share, for the same period last year. The effective tax rate on investment income for the second quarter of 1999 was 24.4% compared with 24.8% for the comparable period in 1998. After-tax realized capital gains were $110.0 million against $5.3 million capital gains in the June 1998 period. As previously reported in our 8-K filing on July 13, the Corporation completed a strategic asset reallocation of its investment portfolio in the second quarter. A combination of share repurchases and outstanding growth in the equity portfolio caused the relationship of asset classes to fall outside the Corporation's long standing guidelines. The Corporation responded by selling approximately $200 million in equity securities, recognizing a gain of $145 million before tax or $1.54 per share after tax. The after tax proceeds have been invested in fixed income instruments which we anticipate will increase investment income in subsequent quarters. As a result of this sale, unrealized gains and corresponding deferred taxes thereon were ratably reduced. Net cash used by operations was $80.4 million for the first six months of the year compared with net cash used of $3.4 million for the same period in 1998. This change is largely due to the increase in the underwriting loss which increased $46.6 million from $45.8 million in 1998 to $92.3 million in 1999 before taxes, an increase in agents balances receivable, largely caused by a shift from a six month billing period to a twelve month billing period and payment of $40.0 million for other liabilities assumed from GAI. Shareholder dividend payments were $28.5 million for the six month period of 1999 compared with $29.6 million for the same period in 1998. In 1995, the Ohio Life Insurance Company, a subsidiary of the Corporation, reinsured substantially all of its life insurance and related businesses to Great Southern Life Insurance Company. At December 31, 1998, Great Southern had assumed 95% of the life insurance policies subject to the 1995 agreement. As a result, the Corporation recognized an additional amount of unamortized ceding commission of $1.1 million before tax during the fourth quarter of 1998. There remains approximately $1.0 million in unamortized ceding commission. This will continue to be amortized over the remaining life of the underlying policies or recognized in full at the time of sale. The Corporation has signed a contingent agreement to sell the Ohio Life shell. The closing is anticipated before the end of 1999. The final gain on the sale has not yet been determined by the Corporation. Additional information related to the discontinued life insurance operations is included in Item 14, Note 20 Discontinued Operations on page 60 of the Corporation's 1998 Form 10-K. 13 Investments in below investment grade securities (Standard and Poor's rating below BBB-) and unrated securities are summarized as follows:
June 30, December 31, 1999 1998 - ----------------------------------------------------------------------- Below investment grade securities: Carrying value $211.7 $207.3 Amortized cost 217.1 208.8 Unrated securities: Carrying value $320.0 $281.8 Amortized cost 310.8 264.8
Utilizing ratings provided by other agencies, such as the NAIC, categorizes additional unrated securities into below investment grade ratings. The following summarizes the additional unrated securities that are rated in the below investment grade category by other rating agencies:
June 30, December 31, 1999 1998 - ----------------------------------------------------------------------- Below investment grade securities at carrying value $211.7 $207.3 Other rating agencies categorizing unrated securities as below investment grade 23.7 7.7 ------ ------ Below investment grade securities at carrying value $235.4 $215.0 All of the Corporation's below investment grade securities are performing in accordance with contractual terms and are making principal and interest payments as required. The securities in the Corporation's below investment grade portfolio have been issued by 65 corporate borrowers in approximately 44 industries. Investments in below investment grade securities have greater risks than investments in investment grade securities. The risk of default by borrowers which issue securities rated below investment grade is significantly greater because these securities are generally unsecured and often subordinated to other debt and these borrowers are often highly leveraged and are more sensitive to adverse economic conditions such as a recession or a sharp increase in interest rates. Current liquidity needs are expected to be met by scheduled bond maturities, even if the below investment grade and unrated securities are excluded. Investment grade securities are also subject to significant adverse risks including the risks of re-leveraging and changes in control of the issuer. In most instances, investors are unprotected with respect to such risks, the effects of which can be substantial. For further discussion of the Corporation's investments, see Item 1 of the Corporation's 1998 Form 10-K for the year ended December 31, 1998. In 1994, the National Association of Insurance Commissioners developed a risk-based capital model to establish standards which will compare insurance company statutory surplus to required minimum capital based on risks of operations and assist regulators in determining solvency requirements. The model is based on four risk factors in two categories: asset risk consisting of investment risk and credit risk; and underwriting risk composed of loss reserve and premiums written risks. Based on current calculations, all of the Ohio Casualty Group companies are in excess of the necessary capital to conform with the risk-based capital model. Proposition 103 was passed in the State of California in 1988 in an attempt to legislate premium rates for that state. As construed by the California Supreme Court, the proposition requires premium rate rollbacks for 1989 California policyholders while allowing for a "fair" return for insurance companies. Even after considering investment income, total returns in California were less than what would be considered "fair" by 14 any reasonable standard. During the fourth quarter of 1994, the State of California assessed the Corporation $59.9 million for Proposition 103. In February 1995, California revised this billing to $47.3 million due to California Senate Bill 905 which permitted reduction of the rollback due to actual commissions and premium taxes paid. The assessment was revised again in August 1995 to $42.1 million plus interest. In December 1997, during Administrative Law hearings, the California Department of Insurance filed two revised rollback calculations. These calculations indicated rollback liabilities of either $35.9 million or $39.9 million plus interest. In 1998, the Administrative Law Judge finally issued a proposed ruling with a rollback liability of $24.4 million plus interest. Her ruling was sent to the California Commissioner of Insurance to be accepted, rejected or modified. The Corporation expected the commissioner to rule sometime after the election in November, but he has so far failed to do so. In light of this failure to rule, the Corporation consulted extensively with outside counsel to determine the range of liability asserted by the Department. The asserted rollbacks to date have ranged from $24.4 million to $61.2 million. The Administrative Law Judge indicates clearly in her ruling that by her calculation the Corporation would have lost approximately $1.0 million on 1989 operations if a rollback of $24.4 million were imposed. Given that conclusion, it is clear that any assessment greater than $24.4 million would strengthen the Corporation's Constitutional argument that this rollback is confiscatory. Since the Corporation does not believe it is possible to pinpoint a specific rollback within the California Department of Insurance's asserted range that is the most probable, the Corporation has established a contingent liability for Proposition 103 rollback at $24.4 million plus simple interest at 10% from May 8, 1989. This brings the total reserve to $49.3 million at June 30, 1999. In December 1992, the Corporation stopped writing business in California due to a lack of profitability and a difficult regulatory environment. In April 1995, the California Department of Insurance gave final approval for withdrawal. Currently, subsidiary American Fire and Casualty remains in the state to wind down the affairs of the group. During the first six months of 1999, Ohio Casualty continued its share repurchase program. The total number of shares acquired during the period was 1,478,000, at an average price of $19.88 per share. The Company has remaining authorization to repurchase 2,649,824 additional shares. The Corporation is proceeding on schedule in its phased approach to convert its computer systems to be Year 2000 compliant. The four phases included in this approach are: awareness, planning, execution/testing and compliance. All phases, including awareness, planning, execution/testing and compliance verification are complete; however, we continue testing to ensure utmost preparedness. The Corporation began the awareness phase early in the 1990s, recognizing that its systems and applications would need significant changes. From that time forward all system development and major enhancements to existing systems took Year 2000 processing requirements into consideration. This approach resulted in some of our systems being converted and compliant long before there was any business requirement or exposure to processing problems. During 1995, the Information Systems Department (I/S) began the planning phase. At that time Year 2000 compliance became a priority project with Project Managers assigned specifically for converting our systems to be compliant. A comprehensive inventory of our systems was completed, identifying the critical date that each system must be compliant and an action plan was put together to ensure that the conversion was completed on time. As a result of the planning phase, dedicated staff and resources were assigned to work on the Year 2000 project. This began our execution/testing phase of the project which includes addressing the remediation of Year 2000 problems identified in the planning phase and logical partition (LPAR) compliance testing. LPAR compliance testing requires an isolated partition within the computer that runs independently. Essentially it can be considered an entirely separate computer. The Corporation's LPAR has a dedicated processor, disk and tape storage. In this environment, data can be migrated forward and tested as the internal date in the computer is changed to critical dates in 1999 and 2000. This provides an excellent environment to test applications, system software and hardware. This involves individual and integrated compliance testing. The first step verifies that the systems are compliant when they run independently. The second step 15 verifies compliance when they are integrated with all other systems with which they interface. Testing was performed throughout 1998 focusing initially on systems critical to the daily business operation and followed by all others. The Corporation has six major system areas: commercial lines, claims, auto, personal property, management/financial reporting and human resources. All of these areas have completed LPAR compliance testing. All systems have undergone integrated testing of the production environment. Contingency plans include compliance reverification of this integrated test in the third quarter 1999 and again early in the fourth quarter 1999. As of June 30, 1999, the total amount spent to date for I/S related costs on the Year 2000 project is $2.5 million and the Corporation anticipates minimal additional I/S related expenses. These amounts do not include any costs associated with efforts made to contact third parties or related to contingency planning. As a result of the Corporation's efforts early in the 1990s to begin making changes to systems and existing hardware and software, the Corporation to date has not had to make an expensive effort to identify and remedy its Year 2000 issues and does not anticipate that it will be required to make substantial expenditures to address Year 2000 compliance in the future. During 1997, the Corporation began the compliance phase. The Year 2000 team has identified all significant vendors, suppliers and agents of the Corporation and has completed the initial contact to obtain written statements of their readiness and commitment to a date for their Year 2000 compliance. The Corporation will continue to monitor the Year 2000 status of these entities and develop contingency plans to reduce the possible disruption in business operations that may result from the failure of third parties with which the Corporation has business relationships to address their Year 2000 issues. Should a third-party with whom the Corporation transacts business have a system failure due to not being Year 2000 compliant, the Corporation believes this could result in a delay in processing or reporting transactions of the Corporation, or a potential disruption in service to its customers, notwithstanding the Corporation's intention to develop contingency plans to respond to these potential system failures by such third parties. The Corporation is also addressing non information technology (non-IT) to ensure Year 2000 compliance. The Year 2000 team has completed an assessment of the non-IT assets; and, identified the material items that have a risk involving the safety of individuals, or that may cause damage to property or the environment, or affect revenues. The team reported on the identified non-IT assets in December 1998 to the Corporation's Executive Management Team. Remediation and contingency planning is scheduled throughout 1999 with regular updates required to be given to the Executive Management Team. The Corporation is currently assessing the status of Year 2000 readiness of the business and assets that it acquired in the acquisition of substantially all the Commercial Lines Division of Great American Insurance Company on December 1, 1998. For a period of at least 24 months from the date of the acquisition, GAI will provide computer processing and communication services to the Corporation in connection with the acquired business pursuant to an Information Systems Agreement. Thus, the Corporation will be dependent on GAI to address and remediate Year 2000 issues with respect to the information technology systems utilized for the business being acquired by the Corporation. The failure of GAI to satisfactorily correct a material Year 2000 problem in the computer processing systems being used to provide services to the Corporation in connection with the acquired business could result in a material adverse effect on the ability of the Corporation to integrate the acquired business and to operate it on a profitable basis. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, the normal business operations of the Corporation including the disruption or delay in premium or claim processing and the disruption in service to its customers. Also the inability to be Year 2000 compliant of significant third-party providers of the Corporation could result in an interruption in the normal business operations. Due to the general uncertainty inherent in the Year 2000 problem, such failures could materially and adversely affect the Corporation's financial position, results of operations or liquidity. 16 The Year 2000 issue is also a concern from an underwriting standpoint regarding the extent of liability for coverage under various general liability, property and directors and officers liability products and policies. The Corporation is taking varous steps to manage this concern including providing educational information on Year 2000 to insureds and agents; adding clarification and exclusionary language to certain policies; and by evaluating underwriting practices. The Corporation believes that no coverage exists; however, minimal coverage may be interpreted to exist under some current liability and product policies. The Corporation has historically avoided manufacturing risks which produce computer or computer-dependent products. The Insurance Services Office (ISO) recently developed policy language that clarifies that there is no coverage for certain Year 2000 occurrences. The liability exclusion has been accepted in over 40 states and a companion filing for property has been accepted in at least 20 states at this time. Several states have not adopted or approved the property exclusion form citing specifically that there is no coverage under the current property contracts and therefore, there is no reason to accept a clarifying endorsement. The Corporation is currently addressing the year 2000 issue by attaching the ISO exclusionary language, where approved by regulators, to general liability policies with a rating classification the Corporation believes could potentially have Year 2000 losses. The ISO exclusionary language endorsement is included on all property policies where approved by regulators. These actions should minimize the Corporation's exposure to Year 2000 underwriting losses. Directors and officers could be held liable if a company in their control fails to take necessary actions to address any Year 2000 problems and that failure results in a material financial loss to the Company. The Corporation has written directors' and officers' liability policies since 1995, with approximately $.5 million in premiums written in 1998. The Corporation is managing its D&O Year 2000 exposure through a combination of underwriting guidelines which address Year 2000 issues in the application process and reinsurance policies which provide coverage for any loss in excess of $.3 million. The Corporation's management believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. However, since it is not possible to anticipate all possible future outcomes, especially when third parties are involved, there could be "worst-case scenarios" in which the Corporation could experience interruptions in normal business operations. These "worst-case scenarios" include: disruption or delay in premium and claim processing; disruption in service to customers; litigation for Year 2000 related claims, adverse affects on the Corporation's ability to integrate the acquired business from Great American and loss of electrical, water and other utility services which could result in a disruption in the Corporation's services. The amount of potential liability and lost revenue cannot be reasonably estimated. From time to time, the Company may publish forward looking statements relating to such matters as anticipated financial performance, business prospects and plans, regulatory developments and similar matters. The statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical information, are forward looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of 1933 and The Securities Exchange Act of 1934 for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following: changes in property and casualty reserves; catastrophe losses; premium and investment growth; product pricing environment; availability of credit; changes in government regulation; performance of financial markets; fluctuations in interest rates; availability and pricing of reinsurance; litigation and administrative proceedings, year 2000 issues ; ability of Ohio Casualty to integrate and to retain the acquired insurance business; and general economic and market conditions. 17 PART II Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and reports on Form 8-K - The Corporation filed a Form 8-K on July 2, 1999, to file a Certificate of Adjustment to Rights Agreement. The Corporation filed Form 8-K/A on July 2, 1999, to amend Form 8-K filed on March 5, 1998. The Corporation filed Form 8-K on July 13, 1999, to announce expected 2nd qtr operating loss. Attached hereto as Exhibit No. 27 is the Financial Data Schedule. Attached hereto as Exhibit No. 10.4 is the Commercial Lines Division Incentive Plan. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OHIO CASUALTY CORPORATION (Registrant) August 13, 1999 ------------------------------------- Barry S. Porter, CFO/Treasurer (on behalf of Registrant and as Principal Accounting Officer) 18
EX-10.4 2 MANAGEMENT CONTRACT THE OHIO CASUALTY INSURANCE COMPANY COMMERCIAL LINES DIVISION INCENTIVE PLAN ---------------------------------------- The Ohio Casualty Insurance Company (the "Company") establishes The Ohio Casualty Insurance Company Commercial Lines Division Incentive Plan (the "Plan") as of the day of , 1998 for the benefit of ---------- ---------------- certain of its employees, upon the terms and conditions stated herein. WITNESSETH: WHEREAS, the Company acquired the Commercial Lines Division of Great American Insurance Company ("GAIC") and certain of GAIC's subsidiaries pursuant to an Asset Purchase Agreement dated September 14, 1998 (the "Asset Purchase Agreement"); and WHEREAS, the Asset Purchase Agreement provides, among other things, that the Company shall make a payment to GAIC if certain Commercial Lines business goals are attained, as set forth in Schedule 2.2.1.2 of the Asset Purchase Agreement (the "GAIC Earnout Payment"); and WHEREAS, the Company and GAIC value the efforts, abilities and accomplishments of certain of the employees of the Commercial Lines Division; and WHEREAS, the Company desires to establish the Plan for the benefit of personnel who by their position, ability and diligence are able to make important contributions to the business acquired pursuant to the Asset Purchase Agreement; NOW, THEREFORE, the Company hereby establishes the Plan, the terms and conditions of which shall be as follows: 1. EFFECTIVE DATE. The Plan shall be effective as of the Closing -------------- Date, as that term is defined in the Asset Purchase Agreement. 2. (a) ELIGIBILITY. The persons eligible to participate in ----------- the Plan (which persons shall be hereinafter referred to individually as a "Participating Employee" and collectively as the "Participating Employees") shall be those persons selected from time to time by a committee of the Company's executives; such committee shall initially be composed of Thomas A. Hayes, Barbara Aras, Hank Hunter and John J. McGovern, with Thomas A. Hayes being Chairperson (hereinafter such committee shall be referred to as the "Incentive Plan Committee"). In the event that any member of the Incentive Plan Committee should resign, die, become disabled or otherwise terminate his membership on the committee, the remaining members of the Incentive Plan Committee shall select, by a majority vote, a replacement for such individual. (b) Each Participating Employee shall be an employee of the Company at the time he or she is selected to participate in the Plan. The Plan is intended to cover only employees of the Company who are designated to participate therein by the Incentive Plan Committee by reason of their significant role in the retention of the Business, as that term is defined in the Asset Purchase Agreement. Each Participating Employee shall execute a Participation Agreement substantially in the form attached hereto as Exhibit A. 3. ALLOCATION OF UNITS. No later than the date of the GAIC ------------------- Earnout Payment, the Incentive Plan Committee shall allocate 1,000 units, each unit representing one-tenth of 1% of the Incentive Plan Amount (as hereinafter defined), among Participating Employees. In the discretion of the Incentive Committee, a Participating Employee may be allocated whole and/or fractional units. In the event that a Participating Employee who receives an allocation of units is not employed by the Company on the date that the GAIC Earnout Payment is made, the treatment of units allocated to such Participating Employee shall be determined in the discretion of the Incentive Plan Committee. For purposes of this Plan, the term "Incentive Plan Amount" shall mean a portion of the GAIC Earnout Payment not to exceed 10% of such payment, calculated as follows: (a) If the Commercial Lines insurance business retention goals set forth in Schedule 2.2.1.2 of the Asset Purchase Agreement (the "Retention Goals") are met and if the combined loss ratio of the Commercial Lines insurance business subject to the Retention Goals is one hundred four percent (104%) or lower, calculated on an accident year basis (the "Profitability Goal"), then the Incentive Plan Amount shall equal ten percent (10%) of the GAIC Earnout Payment. (b) If the Retention Goals are met but the Profitability Goal is not met, then the Incentive Plan Amount shall equal six percent (6%) of the GAIC Earnout Payment. (c) If the Retention Goals are not met, the Incentive Plan Amount shall be zero (0), regardless of whether the Profitability Goal is met. The Incentive Plan Committee, in its sole discretion, is authorized to determine whether or not the Retention Goals and Profitability Goal have been met. 4. CALCULATION OF AWARDS. At the time that the GAIC Earnout --------------------- Payment is made, the award under the Plan for each Participating Employee (hereinafter referred to individually as an "Award" and collectively as the "Awards") shall be determined by multiplying (a) the Incentive Plan Amount by (b) a fraction, the numerator of which shall be the number of units credited to such Participating Employee pursuant to Section 3, and the denominator of which shall be the total number of units credited to all Participating Employees under the Plan. Notwithstanding any provision contained herein, a Participating Employee shall not receive an Award unless he or she is employed by the Company on the date that the GAIC Earnout Payment is made. Upon calculation of each Participating Employee's Award, the amount determined pursuant to the preceding sentence shall be credited to a bookkeeping account maintained by the Company for each such Participating Employee. The account of each Participating Employee shall thereafter be credited with any earnings attributed thereto pursuant to Section 5 hereof and debited for any distributions made to such Participating Employee under the Plan. The outstanding balance, if any, of the account for each Participating Employee shall be referred to hereunder as the "Account Balance." 5. (a) PAYMENT OF AWARDS. The Account Balance of each ----------------- Participating Employee shall be paid, in the sole and absolute discretion of the Incentive Plan Committee, (i) in a single lump-sum payment within 30 days following the GAIC Earnout Payment; or (ii) in substantially equal annual installments (not to exceed 5), with the initial payment to be made within 30 days following the GAIC Earnout Payment and each annual installment made on the succeeding anniversaries of such date. Notwithstanding any provision contained herein, in the sole discretion of the Incentive Plan Committee, annual installment payments made to a Participating Employee under this paragraph (a) may be accelerated (including, but not limited to, a situation in which the employment of a Participating Employee with the Company terminates prior to the payment of the last installment due under this paragraph) to the extent that the Incentive Plan Committee deems it appropriate. In the event that the lump-sum payment method is not selected by the Incentive Plan Committee for a Participating Employee, the Account Balance of such Participating Employee shall be credited with interest, compounded semiannually, at a rate equal to the rate earned on a six month Treasury Bill. For this purpose, a rate earned on a six month Treasury Bill shall be the average of the bid and asked rate of interest on six month Treasury Bills as reported in the Wall Street Journal on the first business day of the relevant time period. (b) All payments under the Plan shall be made only to the Participating Employee; however, in the event of the death of a former Participating Employee (either before any payment is made or before the final installment payment is made), any remaining Account Balance under the Plan will be paid, in a single lump-sum payment within 30 days following the former Participating Employee's death, to such former Participating Employee's estate, unless he has named a beneficiary as provided in Exhibit B attached hereto, in which event payment will be made to said beneficiary. If any dispute arises as to the entitlement by any person to all or any portion of the amounts payable upon the death of a former Participating Employee, the obligations of the Company under the Plan will be satisfied by making payment to the personal representative of the former Participating Employee's estate. (c) In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the Incentive Plan Committee shall deduct such amounts from such payments and shall transmit the withheld amounts to the appropriate taxing authority. 6. PARTICIPATING EMPLOYEES AS GENERAL CREDITORS. The Plan shall -------------------------------------------- be unfunded and payments, when due, shall be made from the general corporate assets of the Company. A Participating Employee's interest in the Plan shall be only that of a general creditor of the Company and no greater. Notwithstanding any provision contained herein, it is contemplated that, pursuant to the terms of the Letter of Understanding, dated October 14, 1998, between the Company and GAIC, which is attached hereto as Exhibit C and incorporated by reference into this Agreement, payments to Participating Employees under the Plan shall be made 50% from the general corporate assets of the Company and 50% from a reduction in the GAIC Earnout Payment to be made by the Company to GAIC. As a result, the Incentive Plan Amount, as described in Section 3, shall be determined by doubling the amount by which GAIC agrees to reduce the GAIC Earnout Payment. 7. REPORTS. The Company shall, as soon as practicable following ------- the time that a calculation is made in accordance with Schedule 2.2.1.2 of the Asset Purchase Agreement, provide each Participating Employee with a statement of his Account Balance and, in the event that such Account Balance is to be paid in annual installments, provide such a statement on each anniversary date of the GAIC Earnout Payment during which such installment payments are to be made. 8. AMENDMENT OR TERMINATION. The Plan may from time to time be ------------------------ amended, or may be terminated at any time, in the sole discretion of the Company's Board of Directors, without obtaining the consent of any Participating Employee; provided that Section 5 hereof shall not be amended without the written approval of GAIC, which approval shall not be unreasonably withheld. In addition, the Plan shall automatically terminate as of the date that the final payment is made to the final Participating Employee (or in the event of the death of such Participating Employee, his estate or beneficiary) for whom an Account Balance is retained. 9. NO CONTRACT OF EMPLOYMENT. The Plan shall not be construed as ------------------------- a contract of employment between the Company and a Participating Employee, or as an amendment to an existing employment contract of a Participating Employee, if in fact one exists, nor shall participation in the Plan be construed as affording to a Participating Employee any representation or guarantee regarding his continued employment. 10. TAX CONSIDERATIONS. In the event the Internal Revenue Service ------------------ determines that any Award allocated to a Participating Employee under the Plan, or any amount compounded and paid on a Participating Employee's Award, is income and should be taxed to him, and such amount then still remains in the Participating Employee's Account Balance, the lesser of the value of the amount upon which he is being taxed, or that portion thereof then remaining in the Participating Employee's Account Balance, shall be distributed to the Participating Employee upon his written request. 11. EXCLUSION FROM PENSION COMPUTATION. By agreeing to ---------------------------------- participate in the Plan, each Participating Employee shall be deemed to agree that an Award constitutes special incentive compensation and is not to be taken into account as "wages," "salary" or "covered compensation" in determining the amount of any Company contribution to any pension, retirement or deferred profit sharing plan or any other employee benefit plan of the Company with respect to such Participating Employee. In addition, each beneficiary of a deceased former Participating Employee shall be deemed to agree that an Award allocated to his or her Account Balance will not affect the amount of any life insurance coverage available to such beneficiary under any life insurance plan covering employees of the Company. 12. AUTHORITY OF INCENTIVE PLAN COMMITTEE, ETC. The Incentive ------------------------------------------ Plan Committee, in its sole discretion, is authorized to decide and to resolve any questions of fact regarding a Participating Employee or his or her Account Balance and all such decisions shall be final and binding upon the Participating Employee. The Incentive Plan Committee, in its sole discretion, is authorized to construe the Plan and to resolve any ambiguity in the Plan, provided that all such decisions and interpretations are applied thereafter uniformly to all other Participating Employees until the Plan is subsequently amended or unless the facts and circumstances applicable to a particular Participating Employee are substantially different. Each member of the Incentive Plan Committee and each member of the Board shall be fully justified in relying or acting in good faith upon any report made by employees of the Company, its subsidiaries or affiliates or upon any other information furnished in connection with the Plan by any employee of the Company, its subsidiaries or affiliates. In no event shall any person who is or shall have been a member of the Incentive Plan Committee or of the Board be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information or for any action taken, including the furnishing of information, or failure to act, if in good faith. The Company shall hold the members of the Incentive Plan Committee harmless from, and indemnify the members of the committee against, personal financial loss resulting from liability incurred in the administration of the Plan, unless such liability and loss are caused by such individual's gross negligence or willful misconduct. 13. NONASSIGNABILITY. The Participating Employee shall not have ---------------- any right to commute, sell, assign, encumber, hypothecate, transfer or otherwise convey the right to receive any payments hereunder, which payments and right thereto are expressly declared to be non-assignable and nontransferable, other than as provided elsewhere herein, and any such assignment or transfer shall not be recognized by the Company. 14. GENDER. Whenever used herein, the masculine gender includes ------ the feminine and the singular includes the plural, and vice versa, unless the provisions of the Plan specifically require a different construction. 15. ENTIRE AGREEMENT. The Plan, the Participation Agreement and ---------------- the Designation of Beneficiary attached as Exhibits A and B, respectively, constitute the full and complete understanding and agreement between the Company and each Participating Employee and supersede all prior understandings and agreements (whether written or oral). 16. APPLICABLE LAW. The Plan shall be governed by, and construed -------------- in accordance with, the substantive laws of the State of Ohio without giving effect to principles of conflict of laws. EXHIBIT A --------- PARTICIPATION AGREEMENT ----------------------- The Ohio Casualty Insurance Company 136 North Third Street Hamilton, Ohio Attention: Gentlemen: I am in receipt of The Ohio Casualty Insurance Company Commercial Lines Division Incentive Plan (the "Plan"), as adopted by the Board of Directors of Ohio Casualty. I have read and reviewed the Plan, and I hereby consent and agree to be bound by, and fully comply with, the terms and conditions of the Plan. Ohio Casualty has as of this date agreed to grant an Award to me of units under the Plan to be earned as provided in the Plan to the extent - ------ and only the extent that a GAIC Earnout Payment is made. Ohio Casualty has also agreed to maintain an Account Balance on my behalf. ("Award," "GAIC Earnout Payment" and "Account Balance" are defined in the Plan.) I hereby acknowledge that I am not relying on any tax advice given to me by Ohio Casualty or by any affiliate, employee, contractee, agent, director or officer thereof regarding federal or state income tax consequences arising to me as a result of my participation in the Plan. I further hereby acknowledge that I have been advised to consult with my own advisors regarding any such tax consequences to me. Finally, I hereby agree that I may not seek recovery against the Company, GAIC, any member of the Incentive Plan Committee or any affiliates, controlling persons, employees, directors, contractees or agents of the Company or GAIC, or against any other person having an administrative or investment position relative to the Plan for any loss, if any, sustained by me as a result of the nonperformance by any of the above- named persons of their respective duties, or the negligence or any other misconduct of the above-named persons, except that this provision shall not excuse fraud or a wrongful taking by any person. The terms "Company", "GAIC" and "Incentive Plan Committee" are defined in the Plan. Very truly yours, - ------------------------------------- Date: ------------------------------ EXHIBIT B --------- DESIGNATION OF BENEFICIARY TO THE OHIO CASUALTY INSURANCE COMPANY COMMERCIAL LINES DIVISION INCENTIVE PLAN ---------------------------------------- TO: The Ohio Casualty Insurance Company I hereby direct that upon my death any payments remaining to be paid in accordance with The Ohio Casualty Insurance Company Commercial Lines Division Incentive Plan between the undersigned and Ohio Casualty shall be paid to the following person(s): (A) Primary Beneficiary Name: ------------------- ------------------------- Address: ---------------------- ---------------------- T.I.N.: _ ----------------------- (B) Alternative Beneficiary Name: ----------------------- ------------------------- (in the event of the death or non- existence of the Primary Address: Beneficiary listed above) ---------------------- ---------------------- T.I.N.: ----------------------- The undersigned hereby reserves the right to change the beneficiary or beneficiaries designated herein at any time by filing in writing a new Designation of Beneficiary form with Ohio Casualty. WITNESS: - --------------------------- ------------------------------ EMPLOYEE: Date: ------------------------- EXHIBIT C --------- [Letter of Understanding] ACKNOWLEDGMENT -------------- THE OHIO CASUALTY INSURANCE COMPANY Date: By: -------------------------- ---------------------------- Lauren Patch President and Chief Executive Officer EX-27 3 ARTICLE 7 FDS FOR 10-Q
7 6-MOS DEC-31-1999 JUN-30-1999 2676192851 2676192851 2676192851 712941183 0 40212467 3429346501 40883088 172641822 178019461 4673783021 1927517333 723956822 0 20882625 255000000 0 0 5850484 1225382790 4673783021 758854313 82821593 168242881 0 568398766 200042558 91363765 148774932 40385724 108389208 1899255 0 2254777 108033686 1.75 1.75 1865642861 359673200 1485395745 240461374 349040698 1845068945 (31206418)
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