-----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, Po6A9FaW207Merw/T3Vd8BljEWcFth8mDLqmyA7XmrCk68kv0vwBCfS1+1UtbhZ8 u4wiriq36B2vVZkNorxmeg== 0000950152-99-002735.txt : 19990331 0000950152-99-002735.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950152-99-002735 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K SEC ACT: SEC FILE NUMBER: 000-05544 FILM NUMBER: 99578356 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-K 1 OHIO CASUALTY CORPORATION 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-5544 OHIO CASUALTY CORPORATION (Exact name of registrant as specified in its charter) OHIO 31-0783294 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 136 NORTH THIRD STREET, HAMILTON, OHIO 45025 (Address of principal executive offices) (Zip Code) (513) 867-3000 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Shares, Par Value $.125 Each (Title of Class) Common Share Purchase Rights (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value as of March 1, 1999 of the voting stock held by non-affiliates of the registrant was $1,067,342,306. On March 1, 1999 there were 31,221,531 shares outstanding. Page 1 of 111 INDEX TO EXHIBITS ON PAGE 74 ================================================================================ 2 DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement of the Board of Directors for the fiscal year ended December 31, 1998 for the Annual Shareholders meeting to be held April 21, 1999 is incorporated herein by reference for the following items: PART III Item 10. Directors and Executive Officers of the Registrant. Item 11. Executive Compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management. Item 13. Certain Relationships and Related Transactions. 2 3 PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Ohio Casualty Corporation (the Corporation) was incorporated under the laws of Ohio in August, 1969. The Corporation operates primarily as a holding company and is principally engaged, through its direct and indirect subsidiaries, in the business of property and casualty insurance and insurance premium finance. The Corporation has two industry segments: property and casualty insurance and insurance premium finance. The Corporation conducts its property and casualty insurance business through The Ohio Casualty Insurance Company ("Ohio Casualty"), an Ohio corporation organized in 1919, the Ohio Casualty's five operating property and casualty insurance subsidiaries: West American Insurance Company ("West American"), an Indiana corporation (originally incorporated under the laws of the State of California) acquired in 1945; Ohio Security Insurance Company ("Ohio Security"), an Ohio corporation acquired in 1962; American Fire and Casualty Company ("American Fire"), an Ohio corporation (originally incorporated under the laws of the State of Florida) acquired in 1969; Avomark Insurance Company ("Avomark"), an Indiana corporation created in 1997 and Ohio Casualty of New Jersey, Inc. ("OCNJ"), an Ohio corporation created in 1998. This group of companies presently underwrites most forms of property and casualty insurance. The Corporation conducts its premium finance business through Ocasco Budget, Inc. ("Ocasco"), an Ohio corporation (originally incorporated under the laws of the State of California) organized in 1960. Ocasco is a direct subsidiary of Ohio Casualty. On May 31, 1995 the states of domicile of West American and Ocasco changed to Indiana and Ohio, respectively, in connection with the withdrawal from property and casualty insurance operations in California as previously announced and as discussed elsewhere herein. 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. Under the asset purchase agreement, the Corporation assumed $645.8 million of commercial lines insurance liabilities, $62.6 million in other liabilities and acquired $287.9 million of investments, $1.5 million in cash and $119.1 million in other assets. This resulted in an assumption by the Corporation of a net statutory-basis liability of $300.0 million plus warrants to purchase 3 million shares of Ohio Casualty Corporation common stock at a price of $45.01. In addition, if the annualized production from the transferred agents at the end of eighteen months equals or exceeds the production in the twelve months prior to closing, GAI will receive an additional $40.0 million. This bonus payment grades down ratably where if eighteen-month annualized production equals 71% or less of previous production, no bonus payment is required. The bonus payment will be accrued as additional goodwill when minimum contingency is achieved. Additional information related to the accounting treatment of the acquisition as well as proforma results are set forth in Note 14, Acquisition of Commercial Lines Business, in the Notes to the Consolidated Financial Statements in Item 14 on pages 57 and 58 of this Form 10-K. 3 4 ITEM 1. CONTINUED During 1995, the Corporation's life insurance operations were discontinued. We found it increasingly difficult to achieve our targeted 16% rate of return in this segment of our business. After extensive analysis, it was determined that a 16% return could not be achieved without substantial capital contributions and a dramatic overhaul of the life operations. It was decided that this would not be a prudent use of our capital. Therefore, on October 2, 1995, the Corporation signed the final documents to reinsure the existing blocks of business and enter a marketing agreement with Great Southern Life Insurance Company. The existing blocks of business were reinsured through a 100% coinsurance arrangement with Employer's Reassurance Corporation. During the fourth quarter of 1997, Great Southern Life Insurance Company legally replaced Ohio Life as the primary insurer for approximately 76% of the life insurance policies subject to the 1995 agreement. As a result of this assumption, fourth quarter net income was positively impacted by a partial recognition of unamortized ceding commission. The after-tax impact was an increase to net income of $5.3 million. 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 1998. There remains approximately $1.1 million in unamortized ceding commission. This will continue to be amortized over the remaining life of the underlying policies. Net income from discontinued operations amounted to $1.9 million or $.06 per share in 1998 compared with $8.7 million or $.25 per share in 1997 and $5.3 million or $.15 per share in 1996. Additional information related to the discontinued life insurance operations is included in Item 14, Note 20 Discontinued Operations on page 60 of this Form 10-K. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The revenues, operating profit and combined ratios of each industry segment for the three years ended December 31, 1998 are set forth in Item 14, Note 13, Segment Information, in the Notes to the Consolidated Financial Statements on pages 56 and 57 of this Form 10-K. 4 5 ITEM 1. CONTINUED PREMIUMS The following table shows the total net premiums written (gross premiums less premiums ceded pursuant to reinsurance treaties) by line of business by Ohio Casualty, West American, American Fire, Avomark, Ohio Security, OCNJ and Ohio Life as a group (collectively, the "Ohio Casualty Group") for the periods indicated.
Ohio Casualty Group Net Premiums Written By Line of Business (in thousands) 1998 1997 1996 1995 1994 --------------------------------------------------------------------------------- Auto liability $ 403,179 $ 384,358 $ 386,121 $ 403,781 $ 420,031 Auto physical damage 257,170 219,870 208,541 207,534 212,005 Homeowners multiple peril 180,697 168,168 166,457 160,444 160,089 Workers' compensation 100,150 97,176 115,398 140,558 145,641 Commercial multiple peril 157,103 141,931 132,808 131,553 135,595 Other liability 95,144 96,610 101,688 108,483 112,906 All other lines 105,668 98,708 97,059 96,842 98,714 Property and casualty ----------- ----------- ----------- ----------- ----------- premiums $ 1,299,111 $ 1,206,821 $ 1,208,072 $ 1,249,195 $ 1,284,981 ============ =========== =========== =========== ============ Premium finance revenues $ 1,170 $ 1,511 $ 1,981 $ 2,314 $ 2,528 ============ =========== =========== =========== ============ Discontinued operations Statutory premiums: Individual life $ 0 $ 0 $ 0 $ (126,979) $ 22,238 Annuity 0 0 0 (195,870) 18,104 Other 0 6 215 (22,012) 8,606 ----------- ----------- ----------- ----------- ----------- Total 0 6 215 (344,861) 48,948 FAS 97 adjustments 0 0 0 (1,533) (26,173) ----------- ----------- ----------- ----------- ----------- Discontinued operations revenues $ 0 $ 6 $ 215 $ (346,394) $ 22,775 ============ =========== =========== =========== ============
Property and casualty net premiums written increased 7.6% in 1998. This increase includes $31.6 million in net premium written from the acquisition of the Commercial Lines business of GAI. Excluding GAI effects, net premiums written increased 5.5%. This increase is primarily due to the Corporation's successful year in personal auto, homeowners and CMP. Excluding the effects of the GAI acquisition, New Jersey net premiums written decreased 1.4%, primarily due to a decline in the workers' compensation, general liability and commercial auto lines of business. Ohio and Kentucky net premiums written increased 12.8% and 18.8%, respectively. These results are largely due to the successful growth in our auto and homeowners lines of business. 5 6 ITEM 1. CONTINUED (C) NARRATIVE DESCRIPTION OF BUSINESS The Ohio Casualty Group is represented on a commission basis by approximately 5,433 independent insurance agents. In most cases, these agents also represent other unaffiliated companies which may compete with the Ohio Casualty Group. The 34 claim and 12 underwriting and service offices operated by the Ohio Casualty Group assist these independent agents in producing and servicing the Group's business. The following table shows consolidated direct premiums written for the Ohio Casualty Group's ten largest states:
Ohio Casualty Group Ten Largest States Direct Premiums Written From Continuing Operations (in thousands) Percent Percent Percent 1998 of Total 1997 of Total 1996 of Total ---- -------- ---- -------- ---- -------- New Jersey $219,518 17.0 New Jersey $220,588 18.0 New Jersey $218,553 18.0 Ohio 147,285 11.4 Ohio 132,325 10.8 Ohio 125,675 10.3 Kentucky 120,309 9.3 Pennsylvania 101,341 8.3 Pennsylvania 114,998 9.5 Pennsylvania 96,932 7.5 Kentucky 101,074 8.2 Kentucky 87,002 7.2 Illinois 73,794 5.7 Illinois 63,347 5.2 Illinois 60,311 5.0 Indiana 65,681 5.1 Maryland 54,415 4.4 Maryland 52,204 4.3 Maryland 41,526 3.2 Indiana 46,660 3.8 Indiana 50,560 4.2 Texas 40,537 3.1 Texas 42,005 3.4 Texas 37,678 3.1 North Carolina 37,856 2.9 Florida 37,383 3.0 Florida 36,995 3.0 Florida 32,649 2.5 North Carolina 34,570 2.8 North Carolina 34,108 2.8 --------- ----- --------- ----- --------- ------ $876,087 67.7 $833,708 67.9 $818,084 67.4 ======== ==== ======== ==== ======== ====
INVESTMENT OPERATIONS Each of the companies in the Ohio Casualty Group must comply with the insurance laws of its domiciliary state and of the other states in which it is licensed for business. Among other things, these laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages and real estate. The distribution of invested assets of the Ohio Casualty Group is determined by a number of factors, including insurance law requirements, the Corporation's liquidity needs, tax position, and general market conditions. In addition, our business mix and liability payout patterns are considered. Adjustments are made to the asset allocation from time to time. The Corporation has no real estate investments. Assets relating to property and casualty operations are invested to maximize after-tax returns with appropriate diversification of risk. 6 7 ITEM 1. CONTINUED The following table sets forth the carrying values and other data of the consolidated invested assets of the Ohio Casualty Group as of the end of the years indicated:
Ohio Casualty Group Distribution of Invested Assets (in millions) 1998 Average % of % of % of Rating 1998 Total 1997 Total 1996 Total --------- -------------- ----------- ------------- ---------- ------------- --------- U.S. government AAA $ 79.8 2.2 $ 69.8 2.2 $ 82.5 2.7 Tax exempt bonds and notes AA+ 839.6 23.3 875.7 27.8 794.5 25.8 Debt securities issued by foreign governments A+ 3.6 0.1 3.5 0.1 3.3 0.1 Corporate securities BBB+ 1,117.5 31.0 929.9 29.5 983.7 32.0 Mortgage backed securities U.S. government AAA 6.3 0.2 17.6 0.6 176.9 5.8 Other AA+ 369.1 10.2 329.5 10.4 270.0 8.8 -------- ------- --------- ------- -------- ------ Total bonds A+ 2,415.9 67.0 2,226.0 70.6 2,310.9 75.2 Common stocks 919.8 25.5 853.9 27.1 713.4 23.2 Preferred stocks 5.1 0.2 5.6 0.2 7.8 0.2 -------- ------- --------- ------- -------- ------ Total stocks 924.9 25.7 859.5 27.3 721.2 23.4 Short-term 262.9 7.3 65.9 2.1 41.5 1.4 -------- ------- --------- ------- -------- ------ Total investments $3,603.7 100.0 $3,151.4 100.0 $3,073.6 100.0 ======== ======= ========= ======= ======== ====== Total market value of investments $3,603.7 $3,151.4 $3,073.6 ======== ========= ======== Total amortized cost of investments $2,815.8 $2,453.8 $2,564.8 ======== ========= ========
The consolidated fixed income portfolio (identified as "Total Bonds" in the foregoing table) of the Ohio Casualty Group had a weighted average rating of "A+" and an average stated maturity of 10.3 years as of December 31, 1998. Investments in below investment grade securities (Standard and Poor's rating below BBB-) and unrated securities are summarized as follows:
1998 1997 1996 ---- ---- ---- Below investment grade securities: Carrying value $207.3 $141.4 $184.6 Amortized cost 208.8 135.6 180.0 Unrated securities: Carrying value $281.8 $242.8 $315.4 Amortized cost 264.8 228.6 308.3
7 8 ITEM 1. CONTINUED 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:
1998 1997 1996 ---- ---- ---- Below investment grade securities at carrying value $207.3 $141.4 $184.6 Other rating agencies categorizing unrated securities as below investment grade 7.7 8.1 27.3 --------- --------- -------- Below investment grade securities at carrying value $215.0 $149.5 $211.9
All of the Corporation's below investment grade investments (based on carrying value) 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 63 corporate borrowers in approximately 42 industries. At December 31, 1998, the market value of the Corporation's five largest investments in below investment grade securities totaled $35.5 million, and had an approximate amortized cost of $36.1 million. None of these holdings individually exceeded $10.3 million. At December 31, 1998, the fixed income portfolio relating to property and casualty operations totaled $2.4 billion which consisted of 91.1% investment grade securities and 8.9% below investment grade and/or unrated securities. At December 31, 1998, the fixed income portfolio relating to discontinued operations totaled $9.4 million, all of which are classified as investment grade securities. 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. 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. Yield (based on cost of investments) for the taxable fixed income portfolio was 8.9% and 8.6% at December 31, 1998 and 1997, respectively. Below investment grade securities were yielding 8.8% and 9.3% at December 31, 1998 and 1997, respectively, while investment grade securities were yielding 8.9% in 1998 and 8.5% in 1997. Yield for tax exempt securities was 6.0% and 6.2% at December 31, 1998 and 1997, respectively, however, this yield is not directly comparable to taxable yield due to the complexity of federal taxation of insurance companies. The Corporation remains committed to a diversified common stock portfolio. As of December 31, 1998, the portfolio consisted of 58 separate issues, diversified across 42 different industries; and the largest single position was 13.2% of the portfolio. The portfolio strategy with respect to common stocks has been to invest in companies whose stocks have below average valuations, yet above average growth prospects. 8 9 ITEM 1. CONTINUED Investment income is affected by the amount of new investable funds and investable funds arising from maturities, prepayments, calls and exchanges as well as the timing of receipt of such funds. In addition, other factors such as interest rates at time of investment and the maturity, income tax status, credit status and other risks associated with new investments are reflected in investment income. Future changes in the distribution of investments and the factors described above could affect overall investment income in the future; however, the amount of any increase or decrease cannot be predicted. Further details regarding investment distribution and investment income are described in Item 14, Note 2, Investments, in the Notes to Consolidated Financial Statements on pages 49 and 50 of this Form 10-K. Purchases of taxable fixed income securities in 1998 were as follows: $172.5 million of investment grade securities, $119.1 million of high yield securities and $54.4 million of unrated securities. Purchases of tax-exempt and equity securities in 1998 totaled $121.3 million and $32.5 million, respectively. Disposals (including maturities, calls, exchanges and scheduled prepayments) of taxable fixed income securities in 1998 were as follows: $274.9 million of investment grade securities, $58.7 million of high yield securities and $94.0 million of unrated securities. Dispositions of tax-exempt and equity securities in 1998 totaled $133.8 million and $73.1 million, respectively. The Corporation continues to have no exposure to futures, forwards, caps, floors, or similar derivative instruments as defined by Statement of Financial Accounting Standards No. 119. However, as noted in Item 14, Note 17 on pages 58 and 59 of this Form 10-K, we have an interest rate swap with Chase Manhattan Bank covering $15.0 million of the outstanding balance of the revolving line of credit. This swap is not classified as an investment but rather as a hedge against a portion of the variable rate loan. Consolidated net realized investment gains (before taxes) in 1998 totaled $14.4 million, $.44 per share. Included in this amount are approximately $8.1 million in writedowns of the carrying values of certain securities the Corporation determined had an other than temporary decline in value. SHARE REPURCHASES During 1990 the Board of Directors of Ohio Casualty Corporation authorized the additional purchase of as many as 3,000,000 (as adjusted for 1994 stock split) shares of its common stock through open market or privately negotiated transactions. In November 1997, the Board of Directors authorized an additional 1,500,000 shares to be repurchased and again in 1998 an additional authorization of 1,400,000 shares. During 1998, 2,362,900 shares were repurchased for $100 million. This compares with 1,544,688 shares repurchased in 1997 for $64.9 million and 264,600 shares repurchased in 1996 for $9.2 million. This brings the remaining repurchase authorization to 1,063,912 shares as of December 31, 1998. LIABILITIES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES Liabilities for loss and loss adjustment expenses are established for the estimated ultimate costs of settling claims for insured events, both reported claims and incurred but not reported claims, based on information known as of the evaluation date. As more information becomes available and claims are settled, the estimated liabilities are adjusted upward or downward with the effect of 9 10 ITEM 1. CONTINUED increasing or decreasing net income at the time of adjustments. Such estimated liabilities include direct costs of the loss under terms of insurance policies as well as legal fees and general expenses of administering the claims adjustment process. The liabilities for claims incurred in accident years 1997, 1996 and 1995 were reduced in the subsequent year as shown below:
Accident Year Loss and Loss Adjustment Expense Liabilities Subsequent Year Adjustment (in millions) 1997 1996 1995 ---- ---- ---- Property $12 $ 2 $27 Auto 24 12 14 Workers' compensation and other liability 5 6 37 ----- ----- ----- Total reduction $41 $20 $78 ===== ===== =====
The effect of catastrophes on the Corporation's results cannot be accurately predicted. As such, severe weather patterns could have a material adverse impact on the Corporation's results. In 1998, 1997 and 1996 there were 37, 25 and 41 catastrophes, respectively. The largest catastrophe in each year was $7.3 million, $4.6 million and $13.7 million in incurred losses. Additional catastrophes with over $1.0 million in incurred losses number 14, 3 and 10 in 1998, 1997 and 1996, respectively. For additional discussion 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 this Form 10-K. In the normal course of business, the Ohio Casualty Group is involved in disputes and litigation regarding terms of insurance contracts and the amount of liability under such contracts arising from insured events. The liabilities for loss and loss adjustment expenses include estimates of the amounts for which the Ohio Casualty Group may be liable upon settlement or other conclusion of such litigation. Because of the inherent future uncertainties in estimating ultimate costs of settling claims, actual loss and loss adjustment expenses may deviate substantially from the amounts recorded in the Corporation's consolidated financial statements. Furthermore, the timing, frequency and extent of adjustments to the estimated liabilities cannot be accurately predicted since conditions and events which established historical loss and loss adjustment expense development and which serve as the basis for estimating ultimate claims cost may not occur in the future in exactly the same manner, if at all. The anticipated effect of inflation is implicitly considered when estimating the liability for losses and loss adjustment expenses based on historical loss development trends adjusted for anticipated changes in underwriting standards, policy provisions and general economic trends. The following tables present an analysis of losses and loss adjustment expenses and related liabilities for the periods indicated. The accounting policies used to estimate liabilities for losses and loss adjustment expenses are described in Item 14, Notes 1H, Accounting Policies and 9, Losses and Loss Reserves, in the Notes to Consolidated Financial Statements on pages 48 and 54 and 55 of this Form 10-K. 10 11
ITEM 1. CONTINUED Reconciliation of Liabilities for Losses and Loss Adjustment Expense (in thousands) 1998 1997 1996 ---- ---- ---- Net liabilities, beginning of year $1,421,804 $1,486,622 $1,557,065 Addition related to acquisition 483,938 0 0 Provision for current accident year claims 989,114 922,065 1,009,086 Increase (decrease)in provisions for prior accident year claims (66,119) (53,615) (76,920) ----------- ----------- ----------- 922,995 868,450 932,166 Payments for claims occurring during: Current accident year 513,292 448,402 515,025 Prior accident years 449,802 484,866 487,584 ----------- ----------- ----------- 963,094 933,268 1,002,609 Net liabilities, end of year 1,865,643 1,421,804 1,486,622 Reinsurance recoverable 91,296 62,003 70,048 ----------- ----------- ----------- Gross liabilities, end of year $1,956,939 $1,483,807 $1,556,670 =========== =========== ===========
11 12 ITEM 1. CONTINUED
Analysis of Development of Loss and Loss Adjustment Expense Liabilities (In thousands) Year Ended December 31 1988 1989 1990 1991 1992 1993 1994 - ---------------------- ---- ---- ---- ---- ---- ---- ---- Net liability as originally estimated: $ 1,252,404 $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,868 $ 1,693,551 $ 1,606,487 Life Operations Liability 663 656 961 P&C Operations Liability $ 1,252,404 $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,205 $ 1,692,895 $ 1,605,526 Net cumulative payments as of: One year later 440,173 489,562 506,246 526,973 561,133 533,634 510,219 Two years later 695,364 745,766 783,948 822,634 869,620 833,399 803,273 Three years later 845,472 902,081 955,666 1,007,189 1,060,433 1,017,893 997,027 Four years later 937,034 1,000,299 1,063,507 1,123,591 1,176,831 1,147,266 1,106,361 Five years later 996,353 1,061,173 1,131,012 1,201,317 1,264,900 1,218,916 Six years later 1,033,508 1,100,683 1,182,110 1,266,605 1,316,756 Seven years later 1,055,972 1,134,145 1,235,315 1,302,313 Eight years later 1,078,561 1,177,259 1,262,187 Nine years later 1,112,120 1,195,615 Ten years later 1,124,964 Gross cumulative payments as of: One year later 586,869 547,377 522,811 Two years later 904,911 859,142 827,232 Three years later 1,107,980 1,051,915 1,030,701 Four years later 1,231,386 1,190,466 1,158,798 Five years later 1,328,478 1,278,602 Six years later 1,394,890
Year Ended December 31 1995 1996 1997 1998 - ---------------------- ---- ---- ---- ---- Net liability as originally estimated: $ 1,557,065 $ 1,486,622 $ 1,421,804 $ 1,865,643 Life Operations Liability 3,934 3,722 100 98 P&C Operations Liability $ 1,553,131 $ 1,482,900 $ 1,421,704 $ 1,865,545 Net cumulative payments as of: One year later 486,168 483,574 449,802 Two years later 772,670 747,374 Three years later 944,294 Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Gross cumulative payments as of: One year later 500,150 498,274 469,933 Two years later 798,078 781,853 Three years later 988,674 Four years later Five years later Six years later
12 13 ITEM 1. CONTINUED
Analysis of Development of Loss and Loss Adjustment Expense Liabilities (continued) (In thousands) Year Ended December 31 1988 1989 1990 1991 1992 1993 1994 - ---------------------- ---- ---- ---- ---- ---- ---- ---- Net liability re-estimated as of: One year later 1,179,052 1,285,233 1,403,172 1,515,129 1,601,406 1,539,178 1,500,528 Two years later 1,175,861 1,299,428 1,407,197 1,500,890 1,555,452 1,510,943 1,501,530 Three years later 1,193,127 1,296,215 1,388,381 1,467,256 1,524,054 1,515,114 1,486,455 Four years later 1,195,712 1,281,246 1,368,530 1,449,789 1,559,492 1,525,493 1,507,331 Five years later 1,186,680 1,268,193 1,366,676 1,498,881 1,561,763 1,551,024 Six years later 1,178,126 1,270,734 1,423,277 1,499,009 1,588,063 Seven years later 1,184,233 1,327,228 1,420,105 1,526,136 Eight years later 1,233,809 1,325,938 1,444,589 Nine years later 1,230,778 1,342,741 Ten years later 1,242,601 Decrease (increase) in original estimates: $ 9,803 $ 27,313 $ 39,396 $ 40,003 $ 85,142 $ 141,871 $ 98,196 Net liability as originally estimated: $1,673,205 $1,692,895 $1,605,526 Reinsurance recoverable on unpaid losses and LAE 80,114 75,738 65,336 Gross liability as originally estimated: $1,753,982 $1,769,289 $1,671,823 Life Operations Liability 663 656 961 P&C Operations Liability 1,753,319 1,768,633 1,670,862 One year later 1,692,044 1,609,429 1,572,435 Two years later 1,644,586 1,590,205 1,578,905 Three years later 1,622,842 1,600,667 1,565,580 Four years later 1,663,734 1,612,300 1,630,314 Five years later 1,666,556 1,680,806 Six years later 1,722,897 Decrease (increase) in original estimates: 30,422 87,827 40,548
Year Ended December 31 1995 1996 1997 1998 - ---------------------- ---- ---- ---- ---- Net liability re-estimated as of: One year later 1,474,795 1,427,992 1,355,586 Two years later 1,441,081 1,403,059 Three years later 1,445,738 Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Decrease (increase) in original estimates: $ 107,393 $ 79,841 $ 66,119 Net liability as originally estimated: $ 1,553,131 $ 1,482,900 $ 1,421,704 $ 1,865,643 Reinsurance recoverable on unpaid losses and LAE 71,066 64,695 59,952 80,215 Gross liability as originally estimated: $ 1,631,184 $ 1,556,670 $ 1,483,807 $ 1,956,939 Life Operations Liability 6,987 9,075 2,150 11,081 P&C Operations Liability 1,624,197 1,547,595 1,481,657 1,945,858 One year later 1,544,461 1,496,100 1,447,044 Two years later 1,515,032 1,507,365 Three years later 1,561,675 Four years later Five years later Six years later Decrease (increase) in original estimates: 62,522 40,230 34,613
13 14 ITEM 1. CONTINUED REINSURANCE In order to preserve capital and shareholder value, Ohio Casualty Corporation purchases reinsurance to protect the Corporation against large or catastrophic losses. As a result of the Corporation's acquisition of the majority of the commercial lines division of Great American Insurance Company, the Corporation's reinsurance program was expanded to address the additional concentrations of underwriting exposures. The Property Per Risk contract covers Ohio Casualty in the event that an insured sustains a property loss in excess of $1.0 million in a single insured event. Property reinsurance covers $29.0 million in excess of the retention. The Casualty Per Occurrence contract covers the Corporation in the event an insured sustains a liability loss in excess of $1.0 million in a single insured event. Workers' compensation, umbrella and other casualty reinsurance covers $100.0 million, $50.0 million and $24.0 million, respectively, in excess of the retention. The Corporation also carries various facultative reinsurance contracts protecting against certain individual risks. The Catastrophe reinsurance contract protects the Corporation against an accumulation of losses arising from one defined catastrophic occurrence or series of events. The 1999 catastrophe program, similar to 1998, provides $150.0 million coverage in excess of the Corporation's $25.0 million retention. In 1998, a portion of the catastrophe program was again renewed with a multi-year placement. The multi-year placements maintain rates, continuity and each reinsurers' overall share of the program. Over the last twenty years, there were two events that triggered coverage under our catastrophe reinsurance contract. Losses and loss adjustment expenses from the Oakland Fires in 1991 and Hurricane Andrew in 1992 totaled $35.6 million and $29.8 million, respectively. Both of these losses exceeded our prior retention amount of $13.0 million. The Corporation recovered $33.9 million from reinsurers as a result of these events. Our reinsurance limits are designed to cover exposure to a catastrophic event expected to occur once every 300 years. Reinsurance contracts do not relieve the Corporation of its obligation to the policyholders. The collectibility of reinsurance is subject to the solvency of the reinsurers. Since the Corporation's reinsurance protection is an important component in our financial plan, we closely monitor the financial health and claims settlement performance of each of our reinsurers. Annually, financial statements are reviewed and various ratios calculated to identify reinsurers who have ceased to meet our high standards of financial strength. If any reinsurers fail these tests, they are removed from the program at renewal. Currently, all domestic reinsurers have an AM Best rating of A or better, and the financial condition of all international reinsurers meet the Corporation's high standards. Additionally, the Corporation utilizes a large base of reinsurers to mitigate its concentration risk. In 1998 and 1997, no reinsurer accounted for more than 10% of total ceded premiums. In 1996, only three reinsurers exceeded 10% of total ceded premiums: Everest Reinsurance Company, MidOcean Reinsurance Company and Kemper Reinsurance Company accounted for 16.79%, 10.65% and 10.52% of total ceded premiums, respectively. As a result of the Corporation's controls over reinsurance, uncollectible amounts have not been significant. COMPETITION More than 2,400 property and casualty insurance companies compete in the United States and no one company or company group has a market share greater than approximately 12.6%. The Ohio Casualty Group ranked as the forty-fourth largest property and casualty insurance groups in the United States based on net insurance premiums written in 1997, the latest year for which statistics are available. The Ohio Casualty Group competes with other companies on the basis of service, price and coverage. 14 15 ITEM 1. CONTINUED STATE INSURANCE REGULATION GENERAL. The Corporation and the Ohio Casualty Group are subject to regulation under the insurance statutes, including the holding company statutes, of various states. Ohio Casualty, American Fire, Ohio Security and OCNJ are all domiciled in Ohio. West American and Avomark are domiciled in Indiana. Collectively, the Ohio Casualty Group is authorized to transact the business of insurance in the District of Columbia and all states. The Ohio Casualty Group is subject to examination of their affairs by the insurance departments of the jurisdictions in which they are licensed. State laws also require prior notice or regulatory agency approval of changes in control of an insurer or its holding company and of certain material intercorporate transfers of assets within the holding company structure. Under applicable provisions of the Indiana insurance statutes ("Indiana Insurance Law") and the Ohio insurance statutes (the "Ohio Insurance Law"), a person would not be permitted to acquire direct or indirect control of the Corporation or any of the Ohio Casualty Group companies domiciled in such state, unless such person had obtained prior approval of the Indiana Insurance Commissioner and the Ohio Superintendent of Insurance, respectively, for such acquisition. For the purposes of the Indiana Insurance Law and the Ohio Insurance Law, any person acquiring more than 10% of the voting securities of a company is presumed to have acquired " control " of such company. Proposition 103 was passed in the State of California in 1988 in an attempt to legislate premium rates for that state. As construed by the California Supreme Court, the proposition requires premium rate rollbacks for 1989 California policyholders while allowing for a "fair" return for insurance companies. Even after considering investment income, total returns in California have been less than what would be considered "fair" by any reasonable standard. During the fourth quarter of 1994, the State of California assessed the 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 permits reduction of the rollback due to actual commissions and premium taxes paid. The assessment was revised again in August 1995 to $42.1 million plus interest. In December 1997, during Administrative Law hearings, the California Department of Insurance filed two revised rollback calculations. These calculations indicated rollback liabilities of either $35.9 million or $39.9 million plus interest. In 1998, the Administrative Law Judge finally issued a proposed ruling with a rollback liability of $24.4 million plus interest. Her ruling was sent to the California Commissioner of Insurance to be accepted, rejected or modified. The Corporation expected the commissioner to rule sometime after the election in November, but he has so far failed to do so. In light of this failure to rule, the Corporation consulted extensively with outside counsel to determine the range of liability asserted by the Department. The asserted rollbacks to date have ranged from $24.4 million to $61.2 million. The Administrative Law Judge indicates clearly in her ruling that by her calculation the Corporation would have lost approximately $1.0 million on 1989 operations if a rollback of $24.4 million were imposed. Given that conclusion, it is clear that any assessment greater than $24.4 million would strengthen the Corporation's Constitutional argument that this rollback is confiscatory. Since the Corporation does not believe it is possible to pinpoint a specific rollback within the California Department of Insurance's asserted range that is the most probable, the Corporation has established a contingent liability for Proposition 103 rollback at $24.4 million plus simple interest at 10% from May 8, 1989. This brings the total reserve to $48.0 million at December 31, 1998. 15 16 ITEM 1. CONTINUED The Corporation will continue to challenge the validity of any rollback. To date, the Corporation has paid $4.8 million in legal costs related to the withdrawal, Proposition 103, and Fair Plan assessments. 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. The State of New Jersey has historically been a profitable state for the Corporation. In recent years, however, the legislative environment in that state has become more difficult. Due to legislative rules and regulations designed to make insurance less expensive and more easily obtainable for New Jersey residents, our results have been adversely impacted. New Jersey passed the Fair Automobile Insurance Reform Act which was an eight year assessment that began in 1990 and ended in 1997. In order to meet our state imposed assessment obligations under the Fair Automobile Insurance Reform Act the Corporation has incurred expenses of $3.3 million in 1997 and $3.6 million in 1996. The Corporation's future obligations related to this act are minimal as only true-up payments of less than $.1 million were made in 1998 and remaining future true-ups are anticipated to be immaterial to the Corporation's results of operations, financial position and liquidity in future years. The Unsatisfied Claim and Judgment Fund is another assessment made by the State of New Jersey. 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, $4.2 million and $4.4 million in 1998, 1997 and 1996, respectively. The Corporation anticipates the future assessments to be between $3.0 and $4.0 million dollars annually. 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 bill was passed by the Assembly and signed by the governor. The reform bill becomes effective on March 22, 1999. 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 December 31, 1998, the Corporation had personal auto net premium written of $114.5 million or 53.1% of total premium that the Corporation writes in New Jersey. The maximum 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 if all policyholders made this election on their policies. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS. The National Association of Insurance Commissioners (the "NAIC") annually calculates a number of financial ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each ratio is used as a benchmark. Departure from the usual range on four or more of the ratios could lead to inquiries from individual state insurance commissioners as to certain aspects of a company's business. None of the property and casualty companies of the Ohio Casualty Group had more than three NAIC financial ratios that were outside the usual range in the last five calendar years. 16 17 ITEM 1. CONTINUED Beginning in 1994, the NAIC required inclusion of a risk-based capital calculation in the Annual Statements. The risk-based capital model is used to establish standards which relate insurance company statutory surplus to 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 reserves and premiums written risks. Based on current calculations, all of the Ohio Casualty Group companies are in excess of levels that would require regulatory action. The States of Ohio and Indiana have adopted the NAIC model law limiting dividend payments by insurance companies. This law allows dividends to equal the greater of 10% of policyholders' surplus or net income determined as of the preceding year end without prior approval of the Insurance Department. For 1998, $112.1 million of policyholders' surplus is not subject to restrictions or prior dividend approval. EMPLOYEES At December 31, 1998, the Ohio Casualty Group had approximately 4,050 employees of which approximately 1,370 were located in Hamilton, Ohio. YEAR 2000 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. Two of the phases, awareness and planning, are complete and the execution/testing and compliance phases are substantially complete with only one system left to be tested. The Corporation began the awareness phase early in the 1990s, recognizing that its systems and applications would need significant changes. From that time forward all system development and major enhancements to existing systems took Year 2000 processing requirements into consideration. This approach resulted in some of our systems being converted and compliant long before there was any business requirement or exposure to processing problems. During 1995, the Information Systems Department (I/S) began the planning phase. At that time Year 2000 compliance became a priority project with Project Managers assigned specifically for converting our systems to be compliant. A comprehensive inventory of our systems was completed, identifying the critical date that each system must be compliant and an action plan was put together to outline that the conversion was completed on time. The Corporation is currently on schedule with this action plan. As a result of the planning phase, dedicated staff and resources were assigned to work on the Year 2000 project. This began our execution/testing phase of the project which includes addressing the remediation of Year 2000 problems identified in the planning phase and logical partition (LPAR) compliance testing. LPAR compliance testing requires an isolated partition within the computer that runs independently. Essentially it can be considered an entirely separate computer. The Corporation's LPAR has a dedicated processor, disk and tape storage. In this environment, data can be migrated forward and tested as the internal date in the computer is changed to critical dates in 1999 and 2000. This provides an excellent environment to test applications, system software and hardware. This involves individual and integrated compliance testing. The first step verifies that the systems are compliant when they run independently. The 17 18 ITEM 1. CONTINUED second step verifies compliance when they are integrated with all other systems with which they interface. Testing was performed throughout 1998 focusing initially on systems critical to the daily business operation and followed by all others. The Corporation has six major system areas: commercial lines, claims, auto, personal property, management/financial reporting and human resources. All of these areas are required to undergo LPAR compliance testing. At this time, the auto, commercial lines, claims, personal property and human resource systems have completed the LPAR compliance testing. The Corporation's management/financial reporting system area has substantially completed LPAR compliance testing with only one internal management reporting system left to be tested. This is targeted for completion by the end of the first quarter 1999. Following the completion of LPAR compliance testing, all systems will undergo integrated testing of the production environment. Contingency plans include compliance reverification of this integrated test early in the third quarter of 1999 and again early in the fourth quarter of 1999. As of December 31, 1998, the total amount spent to date for I/S related costs on the Year 2000 project is $2.3 million and the Corporation anticipates minimal additional I/S related expenses to complete our efforts. 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 is currently in the process of identifying all significant vendors, suppliers and agents of the Corporation and is completing 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. Identification and initial contact for all significant third-parties is expected to be complete by the first quarter of 1999 with follow-up reviews scheduled throughout 1999. 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. At December 31, 1998, the Year 2000 team had completed a preliminary assessment of the non-IT assets. The team 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 18 19 ITEM 1. CONTINUED from the date of the acquisition, GAI will provide computer processing and communication services to the Corporation in connection with the acquired business pursuant to an Information Systems Agreement. Thus, the Corporation will be dependent on GAI to address and remediate Year 2000 issues with respect to the information technology systems utilized for the business being acquired by the Corporation. The failure of GAI to satisfactorily correct a material Year 2000 problem in the computer processing systems being used to provide services to the Corporation in connection with the acquired business could result in a material adverse effect on the ability of the Corporation to integrate the acquired business and to operate it on a profitable basis. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, the normal business operations of the Corporation including the disruption or delay in premium or claim processing and the disruption in service to its customers. Also the inability to be Year 2000 compliant of significant third-party providers of the Corporation could result in an interruption in the normal business operations. Due to the general uncertainty inherent in the Year 2000 problem, such failures could materially and adversely affect the Corporation's financial position, results of operations or liquidity. The Year 2000 issue is also a concern from an underwriting standpoint regarding the extent of liability for coverage under various general liability, property and directors and officers liability products and policies. The Corporation is managing this concern by directly providing educational information on Year 2000 to insureds and agents; adding clarification and exclusionary language to certain policies; and by adjusting underwriting practices. The Corporation believes that minimal coverage may be interpreted to exist under some current liability and product policies. The Corporation has historically avoided manufacturing risks which produce computer or computer-dependent products. The Insurance Services Office (ISO) recently developed policy language that clarifies that there is no coverage for certain Year 2000 occurrences. The liability exclusion has been accepted in over 40 states and a companion filing for property has been accepted in at least 20 states at this time. Several states have not adopted or approved the property exclusion form citing specifically that there is no coverage under the current property contracts and therefore, there is no reason to accept a clarifying endorsement. The Corporation is currently addressing the year 2000 issue by attaching the ISO exclusionary language, where approved by regulators, to general liability policies with a rating classification the Corporation believes could potentially have Year 2000 losses. The ISO exclusionary language endorsement is included on all property policies where approved by regulators. These actions should minimize the Corporation's exposure to Year 2000 losses. Directors and officers could be held liable if a company in their control fails to take necessary actions to address any Year 2000 problems and that failure results in a material financial loss to the Company. The Corporation has written directors' and officers' liability policies since 1995, with approximately $.5 million in premiums written in 1998. The Corporation is managing its D&O Year 2000 exposure through a combination of underwriting guidelines which address Year 2000 issues in the application process and reinsurance policies which provide coverage for any loss in excess of $.3 million. Management of the Corporation believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. However, since it is not possible to anticipate all possible future outcomes, especially when third parties are involved, there could be "worst-case scenarios" in 19 20 ITEM 1. CONTINUED 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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 1997, the American Institute of Certified Public Accountants issued 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. This statement is effective for fiscal years beginning after December 15, 1998. The Corporation does not believe that this statement will materially affect the Corporation's financial statements or disclosures. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 133 "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for derivative instruments by requiring those items to be recognized as assets or liabilities with changes in fair value reported in earnings or other comprehensive income in the current period. The Corporation expects the adoption of FAS 133 to have an immaterial impact on the financial results due to its limited use of derivative instruments. This statement is effective for fiscal quarters of fiscal years beginning after June 15, 1999 (January 1, 2000 for the Corporation). ITEM 2. PROPERTIES The Ohio Casualty Group owns and leases office space in various parts of the country. The principal office buildings consist of facilities owned in Hamilton, Ohio and Fairfield, Ohio. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings against the Corporation or its subsidiaries other than litigation arising in connection with settlement of insurance claims as described on page 10 and Proposition 103 hearings described on page 15 and 16. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of Shareholders through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF THE REGISTRANT The following information is related to executive officers who are not separately reported in the Corporation's Proxy Statement: 20 21 ITEM 4. CONTINUED
Position with Company and/or Principal Occupation or Employment Name Age (1) During Last Five Years ---- ------- ---------------------- Barry S. Porter 62 Chief Financial Officer and Treasurer of The Ohio Casualty Corporation, The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., The Ohio Life Insurance Company, The Ohio Security Insurance Company and West American Insurance Company since 1993. Chief Financial Officer and Treasurer of Avomark since 1997 and Chief Financial Officer and Treasurer of Ohio Casualty of New Jersey, Inc. since 1998. Thomas A. Hayes 56 Executive Vice President and Chief Operating Officer of The Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, and West American Insurance Company since 1998, prior thereto, Director and Senior Vice President , Divisional President of Commercial Lines Division of Great American Insurance Company Michael L. Evans 55 Senior Vice President of The Ohio Casualty Insurance Company, Ohio Security Insurance Company, The Ohio Life Insurance Company, American Fire and Casualty Company, West American Insurance Company and Ocasco Budget, Inc., Executive Vice President of Avomark Insurance Company and Ohio Casualty of New Jersey, Inc.; prior thereto, Vice President of The Ohio Casualty Corporation and Executive Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., The Ohio Life Insurance Company and Ohio Security Insurance Company since April 1995; prior thereto, Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., The Ohio Life Insurance Company and West American Insurance Company. John S. Busby 53 Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company and West American Insurance Company since May 1991. Vice President of Avomark Insurance Company since 1997. Donald J. Dehne 48 Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company since May 1996 and Avomark since September 1997; prior thereto, Assistant Secretary of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company.
21 22 ITEM 4. CONTINUED
Position with Company and/or Principal Occupation or Employment Name Age (1) During Last Five Years ---- ------- ---------------------- Steven J. Adams 44 Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company since May 1996; Vice President of Avomark Insurance Company since 1997; prior thereto, Assistant Secretary of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company; prior thereto, Commercial Lines Customer Strategist; prior thereto, Imaging Technology Expert. Thomas P. Prentice 46 Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company since May 1996; Senior Vice President of Avomark; prior thereto, Assistant Secretary of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company; prior thereto, Personal Lines Customer Specialist; prior thereto, Claims Manager. Coy Leonard, Jr. 54 Senior Vice President of The Ohio Casualty Insurance Company, Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company, Ocasco Budget, Inc., and Vice President of Avomark Insurance Company; prior thereto, Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company; prior thereto, Assistant Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company; prior thereto, Manager of Strategic Planning and Technology.
22 23 ITEM 4. CONTINUED
Position with Company and/or Principal Occupation or Employment Name Age (1) During Last Five Years ---- ------- ---------------------- Elizabeth M. Riczko 32 Senior Vice President of The Ohio Casualty Insurance Company, Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company and Vice President of Avomark Insurance Company; prior thereto, Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company since May 1996; prior thereto, Assistant Secretary of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance Company and West American Insurance Company; prior thereto, Corporate Actuarial Manager. William E. Minor 43 Senior Vice President of The Ohio Casualty Insurance Company, Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company, and Vice President of Avomark Insurance Company; prior thereto, Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company and West American Insurance Company since September 1996; prior thereto, Account Director for Sire/Young and Rubicam. Susan D. Dillon 43 Assistant Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company and West American Insurance Company since May 1995; prior thereto, Branch Manager; prior thereto, Field Representative. Jerome S. Runnels 59 Senior Vice President of The Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company and West American Insurance Company, prior thereto, Vice President of Claims for Great American Insurance Company John J. McGovern 66 Senior Vice President of The Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company and West American Insurance Company, prior thereto, Senior Vice President of Great American Insurance Company
23 24 ITEM 4. CONTINUED
Position with Company and/or Principal Occupation or Employment Name Age (1) During Last Five Years ---- ------- ---------------------- Ralph G. Goode 53 Senior Vice President of Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, and West American Insurance Company, Vice President of Avomark Insurance Company, prior thereto, Vice President of The Ohio Casualty Insurance Company, Ohio Security Insurance Company, American Fire and Casualty Company and West American Insurance Company, prior thereto, Assistant Vice President of The Ohio Casualty Insurance Company, Ohio Security Insurance Company, American Fire and Casualty Company and West American Insurance Company Barbara F. Aras 43 Vice President of Ohio Casualty Insurance Company, The Ohio Security Insurance Company, The Ohio Life Insurance Company, American Fire and Casualty Company, West American Insurance Company and Ocasco Budget, Inc., prior thereto, President and CEO of Argus Advisors, LTD, prior thereto, Director of Lexis-Nexis Richard B. Kelly 44 Vice President of Ohio Casualty Insurance Company, The Ohio Security Insurance Company, The Ohio Life Insurance Company, American Fire and Casualty Company, West American Insurance Company, Ocasco Budget, Inc. and Avomark Insurance Company, prior thereto, Assistant Vice President of The Ohio Casualty Insurance Company, Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company, Avomark Insurance Company and Ohio Life Insurance Company Michael E. Sullivan 36 Vice President of The Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company and West American Insurance Company, prior thereto, Divisional Senior Vice President, Divisional Vice President, Divisional Assistant Vice President and Product Manager of Great American Insurance Company Larry Les Chander 51 Vice President of The Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company and West American Insurance Company, prior thereto, Division Senior Vice President of Great American Insurance Company
24 25 ITEM 4 CONTINUED
Position with Company and/or Principal Occupation or Employment Name Age (1) During Last Five Years ---- ------- ---------------------- Lloyd E. Geary 44 Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company and West American Insurance Company, Assistant Vice President of Avomark Insurance Company, prior thereto, Assistant Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company and West American Insurance Company, prior thereto, Assistant Secretary of The Ohio Casualty Insurance Company, West American Insurance Company and Avomark Insurance Company William G. Erickson 62 Vice President of The Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company and Avomark Insurance Company Ronald R. Hutchison 66 Vice President of The Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company and Avomark Insurance Company, prior thereto, Branch Manager of Orlando, FL. John E. Bade, Jr. 44 Vice President of the Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company, and Avomark Insurance Company, prior thereto, Assistant Vice President of Ohio Casualty Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company, West American Insurance Company and Avomark Insurance Company, prior thereto, Branch Manager of Greensboro, NC Harry E. Hunter 50 Vice President of the Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company, Avomark Insurance Company and Ohio Casualty of New Jersey, Inc. prior thereto, Assistant Vice President of The Ohio Casualty Insurance Company, American Fire and Casualty Company, and West American Insurance Company, prior thereto, Branch Manager of Grand Rapids, MI Jeffery L. Haniewich 52 Vice President of the Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, and West American Insurance company, prior thereto, Divisional Senior Vice President of Great American Insurance Company
25 26 ITEM 4. CONTINUED
Position with Company and/or Principal Occupation or Employment Name Age (1) During Last Five Years ---- ------- ---------------------- Lisa A. Hays 31 Assistant Vice President of Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, and West American Insurance Company; prior thereto, Divisional Assistant Vice President of Great American Insurance Company Joseph L. Dzigiel 36 Assistant Vice President of Ohio Casualty Insurance Company, The Ohio Security Insurance Company, American Fire and Casualty Company, and West American Insurance Company, prior thereto, Assistant Vice President of Great American Insurance Company, prior thereto, Automation Manager of Great American Insurance Company, prior thereto, Marketing Manager of Great American Insurance Company, prior thereto, Agency of Operations of Great American Insurance Company
- --------------------------------------- (1) Ages listed are as of the annual meeting. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS See Item 14, on pages 29, 30 and 33 of this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA See Item 14, on pages 31 and 32 of this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See Item 14, on pages 33-43 of this Form 10-K. SAFE HARBOR FOR FORWARD LOOKING STATEMENTS The Corporation publishes 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 report 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. The risks and uncertainties that may affect operations, performance, development and results of the Corporation's business and the results of the acquisition described herein, 26 27 ITEM 7. CONTINUED 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 of pricing reinsurance; litigation and administrative proceedings; Year 2000 issues, including the Corporation's ability to successfully identify and remediate Year 2000 system issues with its own IT and non-IT assets, the ability of third parties with which the Corporation has business relationships to address and resolve their Year 2000 issues and the ability of the Corporation to identify these third party issues; Year 2000 issues relating to the commercial lines business acquired from the Great American Insurance Company and the ability of the Corporation to implement appropriate contingency plans to address Year 2000 problems which are not successfully remediated; ability of Ohio Casualty to integrate the acquired business and to retain the acquired insurance business; and general economic and market conditions. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 14, on page 40 of this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements and Schedules. (See Index to Financial Statements attached hereto.) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See pages 5 through 7 of the Proxy Statement of the Board of Directors for the fiscal year ended December 31, 1998 and Executive Officers of the Registrant separately captioned under Part I of this annual report. ITEM 11. EXECUTIVE COMPENSATION See pages 8 through 15 of the Proxy Statement of the Board of Directors for the fiscal year ended December 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See pages 1 through 5 of the Proxy Statement of the Board of Directors for the fiscal year ended December 31, 1998. 27 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See page 7 of the Proxy Statement of the Board of Directors for the fiscal year ended December 31, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES REQUIRED TO BE FILED BY ITEM 8 OF THIS FORM AND REGULATION S-X 28 29 ITEM 14. CONTINUED SHAREHOLDER INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders will be held at 10:30 a.m. on Wednesday, April 21 1999, in the Ohio Casualty University Auditorium of the Ohio Casualty Group Fairfield facility, 9450 Seward Road, Fairfield, OH 45014. Please note this change in location from years past. AUTOMATIC DIVIDEND REINVESTMENT PLAN The Corporation offers an automatic dividend reinvestment plan for all registered holders of common stock. Under the plan, shareholders may reinvest their dividends to buy additional shares of common stock, and may also make voluntary cash payments of up to $60,000 yearly toward the purchase of Ohio Casualty shares. Participation is entirely voluntary. More information on the plan can be obtained by contacting the Transfer Agent listed below. FORM 10-K ANNUAL REPORT The Form 10-K Annual Report for 1998, as filed with the Securities and Exchange Commission, is available without charge upon written request to: Ohio Casualty Corporation Office of the Chief Financial Officer 136 N. Third St. Hamilton, OH 45025 TRANSFER AGENT AND REGISTRAR First Chicago Trust Company of New York, a division of EquiServe P. O. Box 2500 Jersey City, NJ 07303-2500 1-800-317-4445 VISIT THE OHIO CASUALTY GROUP INTERNET WEB SITE www.ocas.com The site includes current financial data about Ohio Casualty Group as well as other Corporate and product information.
1999 ANTICIPATED DIVIDEND SCHEDULE DIVIDENDS PER SHARE (in thousands) Declaration Date Record Date Payable Date - ------------------------------------------------------------------------------------------------- 1998 $1.76 February 18, 1999 March 1, 1999 March 10, 1999 1997 $1.68 May 20, 1999 June 1, 1999 June 10, 1999 1996 $1.60 August 19, 1999 September 1, 1999 September 10, 1999 1995 $1.52 November 18, 1999 December 1, 1999 December 10, 1999 1994 $1.46
29 30 ITEM 14. CONTINUED
Ohio Casualty Corporation & Subsidiaries FINANCIAL HIGHLIGHTS (IN THOUSANDS) 1998 1997 1996 ====================================================================================================== Premiums and finance charges earned $ 1,268,824 $ 1,208,974 $ 1,226,651 Investment income, less expenses 169,024 177,700 183,308 Income before investment gains 73,644 97,406 64,941 Realized investment gains, after taxes 9,367 32,986 32,287 Income from discontinued operations 1,916 8,655 5,229 Net income 84,927 139,047 102,457 Property and casualty combined ratio 107.2% 105.3% 109.5% BASIC AND DILUTED EARNINGS PER COMMON SHARE Income before investment gains $ 2.24 $ 2.85 $ 1.85 Realized investment gains, after taxes 0.28 0.96 0.91 Income from discontinued operations 0.06 0.25 0.15 Net income 2.58 4.06 2.91 Book value 42.25 39.11 33.44 Dividends 1.76 1.68 1.60 FINANCIAL CONDITION Assets $ 4,802,264 $ 3,778,782 $ 3,889,981 Shareholders' equity 1,320,981 1,314,829 1,175,100 Average shares outstanding - basic 32,904 34,228 35,247 Average shares outstanding - diluted 32,935 34,257 35,254 Shares outstanding on December 31 31,269 33,622 35,141 Number of shareholders 6,100 6,200 6,500
30 31
ITEM 14. CONTINUED OHIO CASUALTY CORPORATION & SUBSIDIARIES TEN-YEAR SUMMARY OF OPERATIONS (IN MILLIONS) 1998 1997 1996 1995 ==================================================================================================================================== CONSOLIDATED OPERATIONS Income after taxes Operating income $ 73.6 $ 97.4 $ 64.9 $ 91.4 Realized investment gains (losses) 9.4 33.0 32.3 4.0 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations 83.0 130.4 97.2 95.4 Discontinued operations 1.9 8.7 5.3 4.3 Cumulative effect of accounting changes 0.0 0.0 0.0 0.0 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 84.9 139.1 102.5 99.7 ==================================================================================================================================== Income after taxes per average share outstanding - BASIC Operating income 2.24 2.85 1.85 2.56 Realized investment gains (losses) 0.28 0.96 0.91 0.11 Discontinued operations 0.06 0.25 0.15 0.12 Cumulative effect of accounting changes 0.00 0.00 0.00 0.00 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 2.58 4.06 2.91 2.79 ==================================================================================================================================== Average shares outstanding - BASIC 32.9 34.2 35.2 35.8 Income after taxes per average share outstanding - DILUTED Operating income 2.24 2.85 1.85 2.56 Realized investment gains (losses) 0.28 0.96 0.91 0.11 Discontinued operations 0.06 0.25 0.15 0.12 Cumulative effect of accounting changes 0.00 0.00 0.00 0.00 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 2.58 4.06 2.91 2.79 ==================================================================================================================================== Average shares outstanding -DILUTED 32.9 34.3 35.3 35.8 Total assets 4,802.3 3,778.8 3,890.0 3,980.1 Shareholders' equity 1,321.0 1,314.8 1,175.1 1,111.0 Book value per share 42.25 39.11 33.44 31.39 Dividends paid per share 1.76 1.68 1.60 1.52 Percent increase over previous year 4.8% 5.0% 5.3% 4.1% PROPERTY AND CASUALTY OPERATIONS Net premiums written 1,299.6 1,207.6 1,209.0 1,250.6 Net premiums earned 1,267.8 1,204.3 1,223.4 1,264.6 GAAP underwriting gain (loss) before taxes (74.1) (49.6) (112.2) (68.8) Loss ratio 63.7% 62.7% 66.5% 61.2% Loss expense ratio 9.1% 9.4% 9.7% 10.2% Underwriting expense ratio 34.4% 33.2% 33.3% 32.6% Combined ratio 107.2% 105.3% 109.5% 104.0% Investment income before taxes 164.8 172.4 179.4 184.6 Per average share outstanding 5.01 5.04 5.09 5.16 Property and casualty reserves Unearned premiums 668.6 494.9 491.4 505.8 Losses 1,580.6 1,174.5 1,215.8 1,268.1 Loss adjustment expense 376.3 307.2 331.8 356.1 Statutory policyholders' surplus 1,027.1 1,109.5 984.9 876.9
31 32
10-Year Compound 1994 1993 1992 1991 1990 1989 Annual Growth ============================================================================================================================= $ 77.1 $ 51.5 $ 57.8 $ 99.1 $ 94.6 $ 109.3 (5.9)% 14.2 28.7 35.1 9.8 (8.7) (10.5) 0.0 % - ----------------------------------------------------------------------------------------------------------------------------- 91.3 80.2 92.9 108.9 85.9 98.8 (3.7)% 5.9 6.8 4.1 (1.0) (1.8) 2.7 (12.2)% (0.3) 0.0 1.5 0.0 0.0 0.0 0.0 % - ----------------------------------------------------------------------------------------------------------------------------- 96.9 87.0 98.5 107.9 84.1 101.5 (4.0)% ============================================================================================================================= 2.14 1.43 1.60 2.77 2.47 2.56 (3.2)% 0.40 0.80 0.98 0.27 (0.23) (0.25) 0.0 % 0.16 0.19 0.12 (0.03) (0.05) 0.06 (9.3)% (0.01) 0.00 0.04 0.00 0.00 0.00 0.0 % - ----------------------------------------------------------------------------------------------------------------------------- 2.69 2.42 2.74 3.01 2.19 2.37 (1.3)% ============================================================================================================================= 36.0 36.0 36.0 35.8 38.4 42.8 (2.8)% 2.14 1.43 1.60 2.76 2.47 2.55 (3.2)% 0.40 0.79 0.98 0.27 (0.23) (0.25) 0.0 % 0.16 0.19 0.12 (0.03) (0.05) 0.06 (9.3)% (0.01) 0.00 0.04 0.00 0.00 0.00 0.0 % - ----------------------------------------------------------------------------------------------------------------------------- 2.69 2.41 2.74 3.00 2.19 2.36 (1.3)% ============================================================================================================================= 36.0 36.0 36.0 35.9 38.5 42.9 (2.8)% 3,739.0 3,816.8 3,760.7 3,531.3 3,252.9 3,145.7 5.1 % 850.8 862.3 825.2 774.5 651.2 775.0 6.3 % 23.64 23.93 23.43 21.58 18.19 18.46 9.8 % 1.46 1.42 1.34 1.24 1.16 1.04 6.5 % 2.8% 6.0% 8.1% 6.9% 11.5% 10.6% (8.7)% 1,286.4 1,306.0 1,508.5 1,492.3 1,468.4 1,377.6 (0.4)% 1,297.7 1,379.4 1,517.6 1,469.1 1,438.0 1,364.2 (0.5)% (92.9) (147.3) (130.8) (74.5) (79.4) (62.6) 16.3 % 61.6% 64.9% 63.7% 60.4% 61.4% 58.4% 10.0% 11.8% 10.8% 10.6% 10.9% 12.1% 32.2% 33.6% 33.5% 33.9% 33.0% 33.2% 103.8% 110.3% 108.0% 104.9% 105.3% 103.7% 183.8 190.4 194.6 191.6 176.7 187.7 (0.3)% 5.10 5.29 5.41 5.34 4.59 4.38 2.6 % 517.8 529.6 596.1 605.2 582.0 551.6 2.2 % 1,303.6 1,378.0 1,309.2 1,216.1 1,148.9 1,061.5 4.9 % 367.3 390.6 364.0 350.0 335.1 308.5 3.3 % 660.0 713.6 674.2 643.4 465.8 531.6 8.6 %
32 33 ITEM 14. CONTINUED MANAGEMENT'S DISCUSSION & ANALYSIS RESULTS OF OPERATIONS Net income decreased 38.9% for 1998 to $84.9 million or $2.58 per share while the combined ratio increased by 1.9 points to 107.2%. Losses were negatively impacted by catastrophes with $44.6 million of catastrophe losses in 1998 versus $21.4 million in 1997 and $62.2 million in 1996. Underwriting expenses, as a percentage of earned premium, increased by 2.0% in 1998 compared with increases of under 1% for both 1997 and 1996. General operating expenses, a component of underwriting expenses, have increased over the period of 1996 to 1998. The increase in operating expense is primarily due to expenditures for advertising as a part of the Corporation's efforts to increase name recognition of its property and casualty companies. Statutory net premiums written increased $229.7 million for 1998 to $1.4 billion. $169.2 million of this increase is attributable to the acquisition of substantially all of Great American Insurance Company's Commercial Lines Division. The acquisition added $31.6 million in net written premium for the month of December as well as $137.6 million in net written premium related to the transfer of the unearned premium reserve. In addition, the Corporation's premium growth continued to be led by our key agents with an 8% increase in written premium for the year. The Corporation has established a very successful key producer program for agencies who are willing to set and achieve goals in production and other key areas. Excluding Great American, the largest increase in premium occurred in the personal auto line of business with a 12.3% increase and the largest premium increase by individual state came in Kentucky with an $18.7 million increase or 18.8% over 1997. Net cash produced from operations was $24.6 million compared with cash produced of $26.4 million in 1997 and cash used of $14.0 million in 1996. Investing activities produced net cash of $93.5 million in 1998, compared with $164.0 million in 1997 and $112.7 million in 1996. Total cash produced from financing activities was $66.9 million in 1998 compared with total cash used of $131.9 million in 1997 and $75.4 million in 1996. The increase in 1998 compared to 1997 primarily resulted from borrowing $225 million from the Corporation's line of credit offset by dividends paid to shareholders and repurchases of treasury stock. Dividend payments were $57.9 million in 1998 compared with $57.5 million in 1997 and $56.4 million in 1996. Overall, total cash generated in 1998 was $184.9 million, compared with $58.4 million in 1997 and $23.3 million in 1996. In order to evaluate corporate performance relative to shareholders' expectations, the Corporation calculates a five-year average return on equity. Net income and unrealized gains and losses on investments are included in the calculation to derive a total return. A five-year average is used to correspond to our planning horizon and emphasize consistent long-term returns, not intermediate fluctuations. At December 31, 1998, our five-year average return on equity was 14.3% compared with 15.5% calculated at December 31, 1997 and 13.4% at December 31, 1996. HIGH/LOW MARKET PRICE PER SHARE (IN DOLLARS) High Low 1998 51 1/8 34 1/8 1997 50 3/4 34 3/8 1996 39 1/4 30 3/8 1995 39 28 1/4 1994 33 3/4 26 1/2 1993 35 7/8 28 13/16 1992 33 5/16 24 1/2 1991 25 1/8 20 1990 25 3/8 13 3/8 1989 26 1/4 17 3/4 PROPERTY AND CASUALTY As described in more detail in Note 14, the Corporation purchased substantially all of the Commercial Lines Division of Great American Insurance Company on December 1, 1998. The acquisition has been treated as a purchase for accounting purposes. The revenue and profit reported include the division from the December 1, 1998 acquisition date forward. 33 34 ITEM 14. CONTINUED The Corporation's strategy in purchasing substantially all of the Commercial Lines Division of Great American includes broadening its product mix and adding approximately 1,400 agents to the Corporation's existing agency plant. From a geographic point of view, the Corporation will increase its presence in areas where it already does business and add a presence in the Northeast, a region in which the Corporation had hoped to expand. Finally, the Corporation anticipates that it will achieve financial benefits through cross-selling of products, economies of scale and reductions in expenses through improved processes. Property and casualty operating income was $74.9 million, $2.27 per share, in 1998 compared with $97.4 million, $2.84 per share, in 1997 and $66.1 million, $1.88 per share in 1996. Catastrophe losses in 1998 totaled $44.6 million compared with $21.4 million in 1997 and $62.2 million in 1996. There were 37 separate catastrophes in 1998 compared with 25 catastrophes in 1997 and 39 in 1996. Catastrophe losses added 3.6 points to the combined ratio in 1998 compared with 1.8 points in 1997 and 5.1 points in 1996. 1998 losses were heavily impacted by wind and hail related losses in Kentucky, Minnesota and Iowa. 1996 losses were largely due to winter and spring storms in the Midwest. PERSONAL AUTO The performance of our personal auto segment was one of the Corporation's major successes of 1998. Written premiums increased 12.3% to $521.8 million in 1998 compared to $464.7 million in 1997 and $456.4 million in 1996. The increase is attributable to aggressive advertising efforts aimed at increasing brand recognition. In addition, the Corporation's key producer program continues to generate impressive results. Key producers generated a 12.8% increase in written premiums in 1998 compared to 1997. Lastly, the Corporation offers a number of unique service advantages including "quick quotes" from our Website, monthly payment option, youthful drivers program, direct claims reporting and a number of enhanced policy endorsements. The combined ratio improved to 103.8% in 1998 from 105.4% in 1997 and 110.3% in 1996. This success comes in spite of a slightly higher impact from catastrophe losses of 1.2% in 1998 compared to .5% in 1997 and .9% in 1996. COMMERCIAL MULTI PERIL, FIRE & INLAND MARINE Written premiums increased 9.5% to $225.7 million in 1998 compared to $206.1 million in 1997 and $195.3 million in 1996. In 1998, $9 million or 4.3% is attributable to the acquired business from Great American's Commercial Division. The remaining increase is largely attributable to production from our key agents, which increased approximately $7.3 million from 1997. Competition in the commercial segment remains formidable. Consequently, rates have remained flat while the combined ratio increased in 1998 to 113.5% from 107.7% in 1997. The combined ratio in 1996 was 115.0%. The combined ratio was impacted by catastrophe losses which were 4.9% in 1998, 2.5% in 1997 and 8.3% in 1996. Additionally, losses from our auto services products were higher than anticipated in 1998. The Corporation continues to be selective in the writing of new business and to reinforce the sound relationships with customers who appreciate the stability, expertise and added value the Corporation provides. GENERAL LIABILITY Excluding the impact of $2.0 million in written premiums from the Great American acquisition, written premiums have decreased for the third consecutive year to $93.1 million in 1998 from $96.7 million in 1997 and $101.8 million in 1996. While premiums have declined, the combined ratio improved in 1998 to 101.6% compared to 103.0% in 1997. Market conditions remain intensely competitive, making profitable premium growth difficult to achieve. During this period of soft pricing the Corporation has maintained its rates, focusing on a quality book of business. Consequently, the number of policies in force are down 4.2% in 1998 from 1997 while underwriting results have improved. 34 35 ITEM 14. CONTINUED COMMERCIAL AUTO In a market that continues to be exceptionally competitive, the Corporation's written premium decreased in 1998 by $4.4 million when excluding $3.2 million in premiums from the Great American acquisition. Although premiums declined, excluding Great American, the number of insured vehicles increased during the year and our business shifted from higher premium states to lower premium states. The majority of the premium decline came in the states of Pennsylvania and New Jersey. While the Corporation's combined ratio improved 7.5 points, it was higher than anticipated at 105.4%. Liability coverage accounted for 66% of the Corporation's written premium and liability results were satisfactory. Uninsured motorists and comprehensive claims, however, were $3.8 million above average of the proceeding two years, accounting for almost 3 points of the combined ratio. WORKERS' COMPENSATION Excluding the impact of $8.3 million in written premiums from the Great American acquisition, written premiums decreased in 1998 by 5.4% to $91.8 million compared to $97.2 million in 1997 and $115.4 million in 1996. The 1998 decrease primarily resulted from bureau-driven rate decreases, extremely competitive market conditions. The combined ratio increased 16.6 points in 1998 to 109.6% compared to 93.0% in 1997 and 94.3% in 1996. The increase primarily resulted from adverse development in case reserves on older large claims. HOMEOWNERS Written premiums grew 7.5% to $180.7 million in 1998 compared to $168.2 million in 1997 and $166.5 million in 1996. This increase is led by our key agents and corresponds with our increase in personal auto insurance. The Corporation offers a "Fam-Pak" discount for customers combining automobile and homeowners coverages. The combined ratio increased to 118.4% from 111.2% in 1997. The increase is primarily attributable to increased catastrophe losses of 15.2% in 1998 compared to 8.1% in 1997. In general, our homeowners products are offered as ancillary to our personal auto products. FIDELITY & SURETY Written premiums increased 7.6% in 1998 to $37.0 million compared to $34.4 million in 1997 and 34.5 million in 1996. The increase in 1998 is primarily driven by contract surety products for construction contractors and is fueled by a strong economy. The combined ratio increased to 81.4% in 1998 from 76.5% in 1997 and 73.4% in 1996. Two large losses in 1998 contributed to the increase; however, the Corporation's combined ratio remains below the industry average of approximately 87.4%. STATUTORY SURPLUS Statutory surplus, a traditional insurance industry measure of strength and underwriting capacity, was $1,027.1 million at December 31, 1998 compared with $1,109.5 million at December 31, 1997 and $984.9 million at December 31, 1996. The decrease in 1998 was due to the statutory treatment of goodwill. Increases in 1997 and 1996 were due primarily to the unrealized gains in our investment portfolio and net income less dividends paid. The ratio of premiums written to statutory surplus has not exceeded 1.7 to 1 for any property and casualty company in The Ohio Casualty Group in any of the last three years. This ratio is one of the measures used by insurance regulators to gauge the financial strength of an insurance company and indicates the ability of the Corporation to grow by writing additional business. Currently, the Corporation's ratio is 1.4 to 1. Ratios below 3 to 1 generally indicate additional capacity and financial strength. The National Association of Insurance Commissioners has developed a "Risk Based Capital" formula for property and casualty insurers and life insurers. The formulas are intended to measure the adequacy of an insurer's capital given the asset structure and product mix of the company. Under the current formulas, all insurance companies in The Ohio Casualty Group comfortably exceed the necessary capital. 35 36 ITEM 14. CONTINUED PREMIUM DISTRIBUTIONS BY TOP STATES 1998 1997 1996 - ------------------------------------------------ New Jersey 16.6% 17.9% 18.3% Ohio 11.3% 10.7% 10.2% Kentucky 9.1% 8.2% 7.2% Pennsylvania 7.4% 8.3% 9.4% Illinois 6.0% 5.2% 5.0% - ------------------------------------------------ Premiums written increased in both Ohio and Kentucky for the third consecutive year. This growth has primarily come from the auto and CMP lines of business. Net written premiums in Ohio totaled $147.1 million in 1998, $129.8 million in 1997 and $123.8 million in 1996. Net written premiums in Kentucky totaled $118.4 million in 1998, $99.1 million in 1997 and $86.5 million in 1996. New Jersey has experienced a small decline in premiums written in each of the last three years. Net premiums written were $215.8 million compared with $216.0 million in 1997 and $221.2 million in 1996. The reduction in premium growth is primarily due to a decline in the workers compensation, general liability and commercial auto lines of business. Premiums written in Pennsylvania declined during 1998 to $96.5 million compared with $99.8 million in 1997 and $113.5 million in 1996. This decline has primarily been driven by competitive pricing conditions in commercial lines.
COMBINED RATIOS 1998 1997 1996 1995 1994 =================================================================================================== Private Passenger Auto 103.8% 105.4% 110.0% 100.3% 100.2% Commercial Multiple Peril, Fire and Inland Marine 113.5% 107.7% 115.0% 105.7% 108.6% General Liability 101.6% 103.0% 89.1% 105.3% 90.3% Workers' Compensation 109.6% 93.0% 94.3% 93.7% 87.8% Homeowners 118.4% 111.2% 135.9% 113.7% 135.7% Fidelity and Surety 81.4% 76.5% 73.4% 84.5% 72.8% - ---------------------------------- -------------- ------------ ------------ ----------- ----------- Total 107.2% 105.3% 109.5% 104.0% 103.8% ===================================================================================================
RESTRUCTURING In December 1998, the Corporation finalized a restructuring and reorganization plan. Under the plan, the Corporation will consolidate many of its branch locations for underwriting and claims over the course of 1999. Personal lines business centers will be reduced from five to three locations. Commercial underwriting branches will be reduced from 17 to eight locations and claims branches will be reduced from 38 to six locations. Workforce reductions are anticipated to amount to approximately 250 positions. The plan is expected to generate approximately $14 million in annual pretax savings upon full implementation in late 1999. Restructuring charges recorded in 1998 were comprised of expenses associated with abandoned lease space totaling $10 million or $.30 per share before-tax and $6.5 million or $.20 per share after-tax. DISCONTINUED OPERATIONS During 1995, the Corporation's life operations were discontinued. The Corporation found it increasingly difficult to achieve our targeted 16% rate of return in this segment of our business. After extensive analysis, it was determined that a 16% return could not be achieved without substantial capital contributions and a dramatic overhaul of the life operations. Since this was a small segment of our overall business, it was decided that this would not be a prudent use of our capital. Therefore, on October 2, 1995, the Corporation signed the final documents to reinsure the existing blocks of business with Great Southern Life Insurance Company. The existing blocks of business were reinsured through a 100% coinsurance arrangement. Great Southern Life Insurance Company legally replaced Ohio Life as the primary insurer, subject to the 1995 reinsurance agreement with Ohio Life, on approximately 36 37 ITEM 14. CONTINUED 95% of the life insurance business as of the fourth quarter of 1998 and approximately 76% as of the fourth quarter of 1997. As a result of the increased assumption, the Corporation recognized additional amounts of unamortized ceding commission of $1.1 million before tax in 1998 and $10.7 million in 1997. There remains approximately $1.1 million in unamortized ceding commission. This will continue to be amortized over the remaining life of the policies which have yet to be assumed by Great Southern Life Insurance Company. Net income from discontinued operations amounted to $1.9 million or $.06 per share in 1998 compared with $8.7 million or $.25 per share in 1997 and $5.2 million or $.15 per share in 1996. REINSURANCE In order to preserve capital and shareholder value, Ohio Casualty Corporation purchases reinsurance to protect the Corporation against large or catastrophic losses. As a result of the Corporation's acquisition of the majority of the Commercial Lines Division of Great American Insurance Company, the Corporation's reinsurance program was expanded to address the additional concentrations of underwriting exposures. The Property Per Risk contract covers Ohio Casualty in the event that an insured sustains a property loss in excess of $1.0 million in a single insured event. Property reinsurance covers $29.0 million in excess of the retention. The Casualty Per Occurrence contract covers the Corporation in the event an insured sustains a liability loss in excess of $1.0 million in a single insured event. Workers' compensation, umbrella and other casualty reinsurance covers $100.0 million, $50.0 million and $24.0 million respectively in excess of the retention. The Corporation also carries various facultative reinsurance contracts protecting certain individual risks. The catastrophe reinsurance contract protects the Corporation against an accumulation of losses arising from one defined catastrophic occurrence or series of events. The 1999 catastrophe program, similar to 1998, provides $150.0 million coverage in excess of the Corporation's $25.0 million retention. In 1998, a portion of the catastrophe program was again renewed with a multi-year placement. The multi-year placements maintain rates, continuity, and each reinsurers' overall share on the program. Over the last 20 years, there were two events that triggered coverage under our catastrophe reinsurance contract. Losses and loss adjustment expenses from the Oakland Fires in 1991 and Hurricane Andrew in 1992 totaled $35.6 million and $29.8 million, respectively. Both of these losses exceeded our prior retention amount of $13.0 million. The Corporation recovered $33.9 million from reinsurers as a result of these events. Our reinsurance limits are designed to cover exposure to a catastrophic event expected to occur once every 300 years. Reinsurance contracts do not relieve the Corporation of its obligation to the policyholders. The collectibility of reinsurance is subject to the solvency of the reinsurers. Since the Corporation's reinsurance protection is an important component in our financial plan, we closely monitor the financial health and claims settlement performance of each of our reinsurers. Annually, financial statements are reviewed and various ratios calculated to identify reinsurers who have ceased to meet our high standards of financial strength. If any reinsurers fail these tests, they are removed from the program at renewal. Currently, all domestic reinsurers have an AM Best rating of A or better and the financial condition of all international reinsurers meet the Corporation's high standards. Additionally, the Corporation utilizes a large base of reinsurers to mitigate its concentration risk. In 1998 and 1997 no reinsurer accounted for more than 10% of total ceded premiums. In 1996, only three reinsurers exceeded 10% of total ceded premiums. Everest Reinsurance Company, MidOcean Reinsurance Company and Kemper Reinsurance Company accounted for 16.79%, 10.65% and 10.52% of total ceded premiums respectively. As a result of the Corporation's controls over reinsurance, uncollectible amounts have not been significant. CATASTROPHE LOSSES (IN MILLIONS) 1998 $45 1997 $21 1996 $62 1995 $27 1994 $37 37 38 ITEM 14. CONTINUED LOSS AND LOSS ADJUSTMENT EXPENSES The Corporation's largest liabilities are the reserves for losses and loss adjustment expenses. Loss and loss adjustment expense reserves are established for all incurred claims and are carried on an undiscounted basis before any credits for reinsurance recoverable. These reserves amounted to $2.0 billion at December 31, 1998, $1.5 billion at December 31, 1997 and $1.6 billion at December 31, 1996. In recent years, environmental liability claims have expanded greatly in the insurance industry. Fortunately, Ohio Casualty has a substantially different mix of business than the industry. We have historically written small commercial accounts, and have not attracted significant manufacturing liability coverage. As a result, our environmental liability claims are substantially below the industry average. Our liability business reflected our current mix of approximately 66% contractors, 16% building/premises, 12% mercantile and only 6% manufacturers. Within the manufacturing category, we have concentrated on the light manufacturers which further limits our exposure to environmental claims. Estimated asbestos and environmental reserves are composed of case reserves, incurred but not reported reserves and reserves for loss adjustment expense. For 1998, 1997 and 1996, respectively, those reserves were $41.9 million, $40.1 million and $41.0 million. Asbestos reserves were $10.3 million, $7.0 million and $5.2 million and environmental reserves were $31.5 million, $33.2 million and $35.7 million for those respective years. These loss estimates are based on currently available information. However, given the expansion of coverage and liability by the courts and legislatures, there is some uncertainty as to the ultimate liability. The Corporation's insurance subsidiaries changed their pollution exclusion policy language between 1985 and 1987 to effectively eliminate these coverages. CALIFORNIA WITHDRAWAL On June 15, 1992, the Corporation announced its intention to withdraw its business operations from California due to the lack of profitability and the difficult regulatory environment. In December 1992, the Corporation stopped writing business in California and filed a withdrawal plan with the California Department of Insurance. Under the terms of the plan, The Ohio Casualty Insurance Company, Ohio Security Insurance Company, and West American Insurance Company would withdraw from California, leaving American Fire and Casualty Company licensed to wind down the affairs of the Group. Also, the plan required the withdrawing companies to transfer their California liabilities to American Fire and Casualty Company along with assets to secure those liabilities. In April 1995, the California Department of Insurance gave final approval for withdrawal and the Corporation implemented the withdrawal plan. Proposition 103 was passed in the State of California in 1988 in an attempt to legislate premium rates for that state. As construed by the California Supreme Court, the proposition requires premium rate rollbacks for 1989 California policyholders while allowing for a "fair" return for insurance companies. Even after considering investment income, total returns in California have been less than would be considered "fair" by any reasonable standard. During the fourth quarter of 1994, the State of California assessed the Corporation $59.9 million for Proposition 103. In February 1995, California revised this billing to $47.3 million due to California Senate Bill 905 which permits 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 roll back liabilities of either $35.9 million or $39.9 million plus interest. In 1998, the Administrative Law Judge 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 general 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 $61.1 million. The Administrative Law Judge indicates clearly in 38 39 ITEM 14. CONTINUED her ruling that by her calculation the Corporation would have lost approximately $1.0 million on 1989 operations if a rollback of $24.4 million were imposed. Given that conclusion, it is clear that any assessment greater than $24.4 million would strengthen the Corporation's Constitutional argument that this rollback is confiscatory. Since the Corporation does not believe it is possible to pinpoint a specific rollback within the California Department of Insurance's asserted range that is the most probable, the Corporation has established a contingent liability for Proposition 103 rollback at $24.4 million plus simple interest at 10% from May 8, 1989. This brings the total reserve to $48.0 million at December 31, 1998. The Corporation will continue to challenge the validity of any rollback. To date, the Corporation has paid $4.8 million in legal costs related to the withdrawal, Proposition 103 and fair plan assessments. INVESTMENTS Consolidated pre-tax investment income from continuing operations decreased 4.9% to $169.0 million in 1998 compared with $177.7 million in 1997 and $183.3 million in 1996. After-tax investment income totaled $125.8 million in 1998 compared with $133.6 million in 1997 and $138.6 million in 1996. Pre-tax and after-tax investment income comparisons are impacted by investments in municipal bonds, which provide tax free investment income. Cash flow from investment income has been impacted by our continued share repurchase program. During 1998, Ohio Casualty Corporation purchased 2,362,900 shares of its common stock at a cost of $100.0 million compared with 1,544,688 shares for $64.9 million in 1997 and 264,600 shares for $9.2 million in 1996. The Corporation is currently authorized to repurchase 1.1 million additional shares of its common stock to be held as treasury shares for stock options or other general corporate purposes. Since the beginning of 1987, we have repurchased 14.6 million shares at an average cost of $27.43 per share. We believe that when the market value of our stock fails to reflect the prospects of our operations, repurchasing shares is a prudent use of our capital. In the future, we intend to continue repurchasing shares when doing so makes economic sense for the Corporation and its shareholders. At year end 1998, consolidated investments had a carrying value of $3.6 billion. The excess of market value over cost was $787.9 million, compared with a $697.6 million excess at year end 1997 and $508.8 million at year end 1996. The increase in unrealized gains in 1998 and in 1997 was attributable to the strong performance of our equity and fixed income portfolios. After-tax realized investment gains from continuing operations amounted to $9.4 million in 1998 compared with $33.0 million in 1997 and $32.3 million in 1996. The Corporation continues to have no exposure to futures, forwards, caps, floors, or similar derivative instruments as defined by Statement of Financial Accounting Standards No. 119. However, as noted in footnote number 17, the Corporation has an interest rate swap with Chase Manhattan Bank covering a portion of the outstanding balance of our line of credit. At year-end 1998 the amount covered by the swap was $15.0 million. This swap is not classified as an investment but rather as a hedge against a portion of the variable rate loan. As of December 31, 1998, Ohio Casualty maintained a $375.4 million mortgage-backed securities portfolio compared with $347.1 million at December 31, 1997 and $446.9 million at December 31, 1996. The majority of our mortgage-backed securities holdings are less volatile planned amortization class, sequential structures and agency pass-through securities. $9.6, $5.8, $27.0 million of this portfolio was invested in more volatile bond classes (e.g. interest-only, super-floaters, inverses) in 1998, 1997 and 1996, respectively. Ohio Casualty's fixed income strategy has been to maintain a portfolio with a laddered maturity structure and an intermediate duration. We believe that our portfolio composition and duration continue to be appropriate for our insurance business. Further, we do not try to time the financial markets. Instead, we believe it is prudent to remain fully invested at all times, subject only to our liquidity needs. Tax exempt bonds were 34.8% of the fixed income portfolio at year-end 1998 versus 39.4% at December 31, 1997 and 34.4% at December 31, 1996. This high average exposure to municipals reflects our internal tax planning strategy as well as our belief that municipals are attractive relative to taxable bond alternatives. 39 40 ITEM 14. CONTINUED Our commitment to a diversified, growth-oriented equity portfolio remains unchanged. Equity investments have increased as a percentage of our consolidated portfolio from 23.5% in 1996 to 25.7% at year end 1998. This increase is largely attributable to market appreciation of existing investments as opposed to commitment of new funds. MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS Market risk is the risk of loss resulting from adverse changes in interest rates and market prices. In addition to market risk, the Corporation is exposed to other risks, including the credit risk related to its financial instruments and the underlying insurance risk relating to its core business. The sensitivity analysis below summarizes only the exposure to market risk. The Corporation's investments are held for purposes other than trading with an objective of earning relative competitive returns by investing in a diverse portfolio of high-quality, liquid securities. As a result, the Corporation minimizes its credit risk. Interest Rate Risk - The Corporation has exposure to losses resulting from interest rate risk arising from potential volatility in interest rates. The Corporation attempts to mitigate its exposure to interest rate risk through active portfolio management including periodic reviews of our asset and liability positions. Estimates of cash flows, as well as the impact of interest rate fluctuations relating to the Corporation's investment portfolio and revolving line of credit are modeled and reviewed quarterly. Equity Price Risk - The Corporation's portfolio of marketable equity securities has exposure to losses resulting from equity price risk arising from potential volatility in equity market values. The Corporation attempts to mitigate its exposure to equity price risk by maintaining a portfolio of investments which are diversified across industries, and concentrations in any one company or industry are limited by parameters established by senior management. Market risk is actively managed by analysis of various portfolio characteristics on a routine basis. The following table illustrates the hypothetical effect of an increase in interest rates of 100 basis points (1%) and a 10% decrease in equity values at December 31, 1998. Prior period disclosures are not required in the initial year of disclosure. The changes in market rates selected reflect the Corporation's view of changes which are reasonably possible over a one-year period. These rates should not be considered a prediction by the Corporation of future events. This analysis is not intended to provide a precise forecast of the effect of changes in interest rates and equity prices on the Corporation's income, cash flow and shareholders' equity. In addition, the analysis does not take into account any actions the Corporation may take to reduce its exposure in response to market fluctuations. Estimated Adjusted Market Value December 31, 1998 Fair Value as indicated above - ---------------------------------------------------------------- Interest Rate Risk: Fixed maturities $2,416 $2,312 Short-term investments 263 183 Equity Price Risk: Equity securities 925 832 - ---------------------------------------------------------------- Totals $3,604 $3,327 ================================================================ In addition to the above scheduled investments, the Corporation has a revolving line of credit. An increase in interest rates of one basis point would result in additional annual interest expense of $2.5 million. Certain assumptions are inherent in the above analysis. The Corporation assumes an instantaneous shift in interest rates and equity prices at December 31, 1998 and that the composition of its investment portfolio remains relatively constant. Also, the Corporation assumes a change in interest rates is reflected uniformly across all financial instruments even though interest rates on certain types of instruments may fluctuate or lag behind other instruments. YEAR 2000 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. Two of the phases, awareness and planning, are complete and the execution/testing and compliance phases are substantially complete with only one system left to be tested. 40 41 ITEM 14. CONTINUED The Corporation began the awareness phase early in the 1990s, recognizing that its systems and applications would need significant changes. From that time forward all system development and major enhancements to existing systems took Year 2000 processing requirements into consideration. This approach resulted in some of our systems being converted and compliant long before there was any business requirement or exposure to processing problems. During 1995, the Information Systems Department (I/S) began the planning phase. At that time Year 2000 compliance became a priority project with Project Managers assigned specifically for converting our systems to be compliant. A comprehensive inventory of our systems was completed, identifying the critical date that each system must be compliant and an action plan was put together to outline that the conversion was completed on time. The Corporation is currently on schedule with this action plan. As a result of the planning phase, dedicated staff and resources were assigned to work on the Year 2000 project. This began our execution/testing phase of the project which includes addressing the remediation of Year 2000 problems identified in the planning phase and logical partition (LPAR) compliance testing. LPAR compliance testing requires an isolated partition within the computer that runs independently. Essentially it can be considered an entirely separate computer. The Corporation's LPAR has a dedicated processor, disk and tape storage. In this environment, data can be migrated forward and tested as the internal date in the computer is changed to critical dates in 1999 and 2000. This provides an excellent environment to test applications, system software and hardware. This involves individual and integrated compliance testing. The first step verifies that the systems are compliant when they run independently. The second step verifies compliance when they are integrated with all other systems with which they interface. Testing was performed throughout 1998 focusing initially on systems critical to the daily business operation and followed by all others. The Corporation has six major system areas: commercial lines, claims, auto, personal property, management/financial reporting and human resources. All of these areas are required to undergo LPAR compliance testing. At this time, the auto, commercial lines, claims, personal property and human resource systems have completed the LPAR compliance testing. The Corporation's management/ financial reporting system area has substantially completed LPAR compliance testing with only one internal management reporting system left to be tested. This is targeted for completion by the end of the first quarter 1999. Following the completion of LPAR compliance testing, all systems will undergo integrated testing of the production environment. Contingency plans include compliance reverification of this integrated test early in the third quarter of 1999 and again early in the fourth quarter of 1999. As of December 31, 1998, the total amount spent to date for I/S related costs on the Year 2000 project is $2.3 million and the Corporation anticipates minimal additional I/S related expenses to complete our efforts. 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 is currently in the process of identifying all significant vendors, suppliers and agents of the Corporation and is completing 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. Identification and initial contact for all significant third-parties is expected to be complete by the first quarter of 1999 with follow-up reviews scheduled throughout 1999. 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 41 42 ITEM 14. CONTINUED 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. At December 31, 1998, the Year 2000 team had completed a preliminary assessment of the non-IT assets. The team identified the material items that have a risk involving the safety of individuals, or that may cause damage to property or the environment, or affect revenues. The team reported on the identified non-IT assets in December 1998 to the Corporation's Executive Management Team. Remediation and contingency planning is scheduled throughout 1999 with regular updates required to be given to the Executive Management Team. The Corporation is currently assessing the status of Year 2000 readiness of the business and assets that it acquired in the acquisition of substantially all the Commercial Lines Division of Great American Insurance Company on December 1, 1998. For a period of at least 24 months from the date of the acquisition, GAI will provide computer processing and communication services to the Corporation in connection with the acquired business pursuant to an Information Systems Agreement. Thus, the Corporation will be dependent on GAI to address and remediate Year 2000 issues with respect to the information technology systems utilized for the business being acquired by the Corporation. The failure of GAI to satisfactorily correct a material Year 2000 problem in the computer processing systems being used to provide services to the Corporation in connection with the acquired business could result in a material adverse effect on the ability of the Corporation to integrate the acquired business and to operate it on a profitable basis. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, the normal business operations of the Corporation including the disruption or delay in premium or claim processing and the disruption in service to its customers. Also the inability to be Year 2000 compliant of significant third-party providers of the Corporation could result in an interruption in the normal business operations. Due to the general uncertainty inherent in the Year 2000 problem, such failures could materially and adversely affect the Corporation's financial position, results of operations or liquidity. The Year 2000 issue is also a concern from an underwriting standpoint regarding the extent of liability for coverage under various general liability, property and directors and officers liability products and policies. The Corporation is managing this concern by directly providing educational information on Year 2000 to insureds and agents; adding clarification and exclusionary language to certain policies; and by adjusting underwriting practices. The Corporation believes that minimal coverage may be interpreted to exist under some current liability and product policies. The Corporation has historically avoided manufacturing risks which produce computer or computer-dependent products. The Insurance Services Office (ISO) recently developed policy language that clarifies that there is no coverage for certain Year 2000 occurrences. The liability exclusion has been accepted in over 40 states and a companion filing for property has been accepted in at least 20 states at this time. Several states have not adopted or approved the property exclusion form citing specifically that there is no coverage under the current property contracts and therefore, there is no reason to accept a clarifying endorsement. The Corporation is currently addressing the year 2000 issue by attaching the ISO exclusionary language, where approved by regulators, to general liability policies with a rating classification the Corporation believes could potentially have Year 2000 losses. The ISO exclusionary language endorsement is included on all property policies where approved by regulators. These actions should minimize the Corporation's exposure to Year 2000 losses. Directors and officers could be held liable if a company in their control fails to take necessary actions to address any Year 2000 problems and that failure results in a material financial loss to the Company. The Corporation has written directors' and officers' liability policies since 1995, with approximately $.5 million in premiums written in 1998. The Corporation is managing its D&O Year 2000 exposure through a combination of underwriting guidelines which address Year 2000 issues in the application process and reinsurance policies which provide coverage for any loss in excess of $.3 million. 42 43 ITEM 14. CONTINUED Management of the Corporation believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. However, since it is not possible to anticipate all possible future outcomes, especially when third parties are involved, there could be "worst-case scenarios" in which the Corporation could experience interruptions in normal business operations. These "worst-case scenarios" include: disruption or delay in premium and claim processing; disruption in service to customers; litigation for Year 2000 related claims and adverse affects on the Corporations ability to integrate the acquired business from Great American. The amount of potential liability and lost revenue cannot be reasonably estimated. NEW ACCOUNTING STANDARDS See discussion of new accounting standards in Note 21. FORWARD-LOOKING STATEMENTS The Corporation publishes 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 report 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. The risks and uncertainties that may affect operations, performance, development and results of the Corporation's business and the results of the acquisition described herein, 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 of pricing reinsurance; litigation and administrative proceedings; Year 2000 issues, including the Corporation's ability to successfully identify and remediate Year 2000 system issues with its own IT and non-IT assets, the ability of third parties with which the Corporation has business relationships to address and resolve their Year 2000 issues and the ability of the Corporation to identify these third party issues; Year 2000 issues relating to the commercial lines business acquired from the Great American Insurance Company and the ability of the Corporation to implement appropriate contingency plans to address Year 2000 problems which are not successfully remediated; ability of Ohio Casualty to integrate the acquired business and to retain the acquired insurance business; and general economic and market conditions. 43 44 ITEM 14. CONTINUED OHIO CASUALTY CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 ============================================================================================================= ASSETS Investments: Fixed maturities: Available for sale, at fair value $ 2,415,904 $ 2,226,030 $ 2,310,938 (Cost: $2,307,734; $2,112,291; $2,225,517) Equity securities, at fair value 924,906 859,475 721,152 (Cost: $245,129; $275,637; $297,727) Short-term investments, at fair value 262,863 65,849 41,546 (Cost: $262,939; $65,849; $41,546) - ------------------------------------------------------------------------------------------------------------- Total investments 3,603,673 3,151,354 3,073,636 Cash 42,139 54,206 20,078 Premiums and other receivables, net of allowance for bad debts of $8,739, $4,200 and $3,700, respectively 301,943 193,615 186,676 Deferred policy acquisition costs 176,606 126,063 116,684 Property and equipment, net of accumulated depreciation of $97,991, $87,232 and $77,427, respectively 80,065 50,699 42,239 Reinsurance recoverable 186,861 108,962 362,683 Goodwill, net of accumulated amortization of $1,031, $0 and $0, respectively 308,206 0 0 Other assets 102,771 93,883 87,985 - ------------------------------------------------------------------------------------------------------------- Total assets $ 4,802,264 $ 3,778,782 $ 3,889,981 ============================================================================================================= LIABILITIES Insurance reserves: Unearned premiums $ 668,550 $ 495,076 $ 491,613 Losses 1,580,599 1,176,614 1,224,873 Loss adjustment expenses 376,340 307,193 331,797 Future policy benefits 25,518 34,148 280,002 Note payable 265,000 40,000 50,000 California Proposition 103 reserve 48,043 66,908 74,376 Deferred income taxes 140,730 95,389 27,993 Other liabilities 376,503 248,625 234,227 - ------------------------------------------------------------------------------------------------------------- Total liabilities (See Notes 1 and 8) 3,481,283 2,463,953 2,714,881 - ------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, $.125 par value 5,850 5,850 5,850 Authorized: 150,000,000 shares Issued shares: 46,803,872 Additional paid-in capital 4,186 3,923 3,603 Common stock purchase warrants 21,138 0 0 Accumulated other comprehensive income: Unrealized gain on investments, net of applicable income taxes 511,816 454,241 332,042 Retained earnings 1,185,349 1,158,308 1,076,545 Treasury stock, at cost (Shares: 15,535,089; 13,182,240; 11,662,559) (407,358) (307,493) (242,940) - ------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,320,981 1,314,829 1,175,100 - ------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 4,802,264 $ 3,778,782 $ 3,889,981 =============================================================================================================
See notes to consolidated financial statements 44 45 ITEM 14. CONTINUED OHIO CASUALTY CORPORATION & SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 ============================================================================================================ Premiums and finance charges earned $ 1,268,824 $ 1,208,974 $ 1,226,651 Investment income less expenses 169,024 177,700 183,308 Investment gains realized, net 14,411 50,749 49,672 - ------------------------------------------------------------------------------------------------------------ Total revenues 1,452,259 1,437,423 1,459,631 Losses and benefits for policyholders 805,020 751,207 812,234 Loss adjustment expenses 115,253 113,435 118,354 General operating expenses 120,304 103,299 100,939 Amortization of goodwill 1,031 0 0 Amortization of deferred policy acquisition costs 316,516 303,494 308,856 Restructuring charge 10,000 0 0 California Proposition 103 reserve, including interest (18,865) (7,469) 4,210 - ------------------------------------------------------------------------------------------------------------ Total expenses 1,349,259 1,263,966 1,344,593 - ------------------------------------------------------------------------------------------------------------ Income from continuing operations before income taxes 103,000 173,457 115,038 Income taxes Current 6,258 44,263 10,173 Deferred 13,731 (1,198) 7,637 - ------------------------------------------------------------------------------------------------------------ Total income taxes 19,989 43,065 17,810 - ------------------------------------------------------------------------------------------------------------ Income before discontinued operations 83,011 130,392 97,228 Income from discontinued operations net of taxes of $1,028, $4,661 and $2,633, respectively (See Note 20) 1,916 8,655 5,229 - ------------------------------------------------------------------------------------------------------------ Net income $ 84,927 $ 139,047 $ 102,457 ============================================================================================================ Other comprehensive income, net of tax: Net change in unrealized gains (losses), net of income tax expense of $31,002, $65,882 and $13,304, respectively 57,575 122,199 26,993 - ------------------------------------------------------------------------------------------------------------ Comprehensive income (See Note 12) $ 142,502 $ 261,246 $ 129,450 ============================================================================================================ Average shares outstanding - basic 32,904 34,228 35,247 Average shares outstanding - diluted 32,935 34,257 35,254 ============================================================================================================ Earnings per share (basic and diluted): Income from continuing operations, per share $ 2.52 $ 3.81 $ 2.76 Income from discontinued operations, per share 0.06 0.25 0.15 - ------------------------------------------------------------------------------------------------------------ Net income, per share $ 2.58 $ 4.06 $ 2.91 ============================================================================================================
See notes to consolidated financial statements 45 46 ITEM 14. CONTINUED OHIO CASUALTY CORPORATION & SUBSIDIARIES STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
COMMON ACCUMULATED ADDITIONAL STOCK OTHER TOTAL COMMON PAID-IN PURCHASE COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS' (IN THOUSANDS) STOCK CAPITAL WARRANTS INCOME EARNINGS STOCK EQUITY ==================================================================================================================================== Balance, January 1, 1996 $ 5,850 $ 3,422 $ 0 $ 305,049 $ 1,030,468 $ (233,775) $ 1,111,014 Unrealized gain 40,297 40,297 Deferred income tax on net unrealized gain (13,304) (13,304) Net issuance of treasury stock under stock option plan and by charitable donation (9,786 shares) 181 3 184 Repurchase of treasury stock (264,600 shares) (9,168) (9,168) Net income 102,457 102,457 Cash dividends paid ($1.60 per share) (56,380) (56,380) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 $ 5,850 $ 3,603 $ 0 $ 332,042 $ 1,076,545 $ (242,940) $ 1,175,100 Unrealized gain 188,081 188,081 Deferred income tax on net unrealized gain (65,882) (65,882) Net issuance of treasury stock under stock option plan and by charitable donation (25,007 shares) 320 172 305 797 Repurchase of treasury stock (1,544,688 shares) (64,858) (64,858) Net income 139,047 139,047 Cash dividends paid ($1.68 per share) (57,456) (57,456) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 $ 5,850 $ 3,923 $ 0 $ 454,241 $ 1,158,308 $ (307,493) $ 1,314,829 Unrealized gain 88,577 88,577 Deferred income tax on net unrealized gain (31,002) (31,002) Net issuance of treasury stock under stock option plan and by charitable donation (10,051 shares) 263 126 389 Repurchase of treasury stock (2,362,900 shares) (99,991) (99,991) Issuance of warrants 21,138 21,138 Net income 84,927 84,927 Cash dividends paid ($1.76 per share) (57,886) (57,886) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1998 $ 5,850 $ 4,186 $ 21,138 $ 511,816 $ 1,185,349 $ (407,358) $ 1,320,981 ====================================================================================================================================
See notes to consolidated financial statements 46 47 ITEM 14. CONTINUED OHIO CASUALTY CORPORATION & SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 ============================================================================================================ CASH FLOWS FROM: Operations Net income $ 84,927 $ 139,047 $ 102,457 Adjustments to reconcile net income to cash from operations: Changes, net of affect from acquisition: Insurance reserves (8,051) (315,255) (169,006) Income taxes (978) 10,691 8,238 Premiums and other receivables 9,983 (6,939) 9,500 Deferred policy acquisition costs (13,171) (9,379) 3,111 Reinsurance recoverable (77,899) 253,720 83,484 Other assets (6,418) (22,339) 775 Other liabilities 52,440 20,677 (18,442) California Proposition 103 reserves (18,865) (7,469) 4,209 Amortization of goodwill 1,031 0 0 Depreciation and amortization 15,902 16,035 12,388 Investment (gains) losses (14,339) (52,382) (50,674) - ------------------------------------------------------------------------------------------------------------ Net cash from operations 24,562 26,407 (13,960) - ------------------------------------------------------------------------------------------------------------ INVESTING Purchase of securities: Fixed income securities - available for sale (467,295) (351,393) (539,690) Equity securities (32,502) (66,433) (74,243) Proceeds from sales: Fixed income securities - available for sale 425,355 342,193 501,394 Equity securities 51,217 144,688 122,970 Proceeds from maturities and calls: Fixed income securities - available for sale 136,066 103,165 101,970 Equity securities 21,848 10,013 6,702 Property and equipment: Purchases (40,642) (18,968) (7,340) Sales 517 702 952 Cash paid in acquisition of business, net of cash acquired (1,082) 0 0 - ------------------------------------------------------------------------------------------------------------ Net cash from investments 93,482 163,967 112,715 - ------------------------------------------------------------------------------------------------------------ FINANCING Note payable: Borrowing 230,000 0 0 Repayment (5,000) (10,000) (10,000) Proceeds from exercise of stock options 1 371 135 Purchase of treasury stock (100,212) (64,858) (9,168) Dividends paid to shareholders (57,886) (57,456) (56,380) - ------------------------------------------------------------------------------------------------------------ Net cash from financing 66,903 (131,943) (75,413) - ------------------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents 184,947 58,431 23,342 Cash and cash equivalents, beginning of year 120,055 61,624 38,282 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $ 305,002 $ 120,055 $ 61,624 ============================================================================================================ Additional disclosures: Interest paid $ 3,547 $ 3,147 $ 3,769 Income taxes paid 21,805 37,035 16,336
See notes to consolidated financial statements 47 48 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) NOTE 1 -- ACCOUNTING POLICIES A. NATURE OF BUSINESS Ohio Casualty Corporation is a property and casualty insurer whose primary products consist of insurance for personal auto, commercial property, homeowners, workers' compensation and other miscellaneous lines. The Corporation operates through the independent agency system in over 40 states. Of net premium written, approximately 16.6% was generated in the State of New Jersey, 11.3% in Ohio and 9.1% in Kentucky. B. PRINCIPLES OF CONSOLIDATION The consolidated financial statements have been prepared on the basis of generally accepted accounting principles and include the accounts of Ohio Casualty Corporation and its subsidiaries. The results of operations of the acquisition of certain assets and liabilities of the Great American Insurance Company Commercial Lines Division ("GAI") have been included in the consolidated financial statements of the Corporation since the date of acquisition, December 1, 1998 (See Note 14). All significant inter-company transactions have been eliminated. All dollar amounts except share and per share data are in thousands of dollars. C. INVESTMENTS Investment securities are classified upon acquisition into one of the following categories: (1) held to maturity securities (2) trading securities (3) available for sale securities Available for sale securities are those securities that would be available to be sold in the future in response to liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available for sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of deferred tax. Equity securities are carried at quoted market values and include non-redeemable preferred stocks and common stocks. Fair values of fixed maturities and equity securities are determined on the basis of dealer or market quotations or comparable securities on which quotations are available. Short-term investments include commercial paper and notes with original maturities of 90 days or less and are stated at fair value. Short-term investments are deemed to be cash equivalents. Realized gains or losses on disposition of investments are determined on the basis of specific cost of investments. D. PREMIUMS Property and casualty insurance premiums are earned principally on a monthly pro rata basis over the term of the policy; the premiums applicable to the unexpired terms of the policies are included in unearned premium reserve. E. ACQUISITION COSTS Acquisition costs incurred at policy issuance net of applicable ceding commissions are deferred and amortized over the term of the policy. Acquisition costs deferred are commissions, brokerage fees, salaries and benefits, and other underwriting expenses to include allocations for inspections, taxes, rent and other expenses as deemed appropriate. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts, including anticipated investment income. F. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method over the estimated lives of the assets. As of January 1, 1998, the Corporation adopted Statement of Position (SOP) 98-1 and began capitalizing costs incurred to internally develop software products used in the Corporation's operations. The Corporation amortizes these costs on a straight-line basis over the estimated useful life of the product, generally not to exceed five years. Unamortized software costs and accumulated amortization in the consolidated balance sheet at December 31, 1998 were $8,013 and $184. G. GOODWILL The Corporation records goodwill for the excess of cost over the fair value of net assets acquired. Goodwill is amortized on a straight-line basis over a twenty-five year period. Goodwill will be evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation will be based on various analyses, including cash flow and profitability projections that incorporate, as applicable, the impact on existing company businesses. The analyses will necessarily involve significant management judgments to evaluate the capacity of an acquired business to perform within projections. If future undiscounted cash flows are insufficient to recover the carrying amount of the asset, an impairment loss will be recognized. H. LOSS RESERVES The reserves for unpaid losses and loss adjustment expenses are based on estimates of ultimate claim costs, including claims incurred but not reported, salvage and subrogation and inflation without discounting. The methods of making such estimates are continually reviewed and updated, and any resulting adjustments are reflected in earnings currently. Liabilities for future policy benefits are computed based on contract terms and issue dates using interest rates ranging from 3 1/2% to 8 3/4%, select and ultimate mortality experience and industry withdrawal experience. Interest rates on $14,884 of such liabilities in 1998, $24,611 in 1997 and $230,843 in 1996 are periodically adjusted based on market conditions. Fair value is determined by discounting cash flows at current market interest rates. 48 49 Item 14. Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) I. DEFERRED INCOME TAXES The Corporation records deferred tax assets and liabilities based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the year in which the differences are expected to reverse. J. STOCK OPTIONS The Corporation accounts for stock options issued to employees in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees". Under APB 25, the Corporation recognizes expense based on the intrinsic value of options. K. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The insurance industry is subject to heavy regulation that differs by state. A dramatic change in regulation in a given state may have a material adverse impact on the Corporation. NOTE 2 -- INVESTMENTS Investment income is summarized as follows:
1998 1997 1996 - --------------------------------------------------------------- Investment income from: Fixed maturities $155,153 $166,554 $173,664 Equity securities 15,533 13,776 14,135 Short-term securities 5,332 3,477 2,129 - --------------------------------------------------------------- Total investment income 176,018 183,807 189,928 Investment expenses 6,994 6,107 6,620 - --------------------------------------------------------------- Net investment income $169,024 $177,700 $183,308 ===============================================================
The proceeds, gross realized gains and gross realized losses from sales of available-for-sale securities were as follows:
Gross Gross Net Realized Realized Realized December 31 Proceeds Gains Losses Gains - -------------------------------------------------------------- 1998 $476,571 $22,531 $8,120 $14,411 1997 486,881 57,751 7,002 50,749 1996 624,364 56,214 6,542 49,672
Unrealized gains (losses) on investment in securities are summarized as follows:
1998 1997 1996 - --------------------------------------------------------------- Unrealized gains (losses): Securities $ 88,577 $188,081 $ 40,297 Deferred tax (31,002) (65,882) (13,304) - --------------------------------------------------------------- $ 57,575 $122,199 $ 26,993 ===============================================================
The amortized cost and estimated market values of investments in debt and equity securities are as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 1998 COST GAINS LOSSES VALUE - ------------------------------------------------------------------------- Securities available for sale: U.S. Government $ 74,534 $ 5,340 $ (20) $ 79,854 States, municipalities and political subdivisions 800,945 38,668 (40) 839,573 Debt securities issued by foreign governments 3,000 636 0 3,636 Corporate securities 1,062,165 62,275 (6,965) 1,117,475 Mortgage-backed securities: U.S. Government Agency 6,130 145 0 6,275 Other 360,960 9,226 (1,095) 369,091 - ------------------------------------------------------------------------- Total fixed maturities 2,307,734 116,290 (8,120) 2,415,904 Equity securities 245,129 686,715 (6,938) 924,906 Short-term investments 262,939 5 (81) 262,863 - ------------------------------------------------------------------------- Total securities, available for sale $ 2,815,802 $ 803,010 $(15,139) $3,603,673 =========================================================================
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 1997 COST GAINS LOSSES VALUE - --------------------------------------------------------------------------- Securities available for sale: U.S. Government $ 66,244 $ 3,601 $ (1) $ 69,844 States, municipalities and political subdivisions 835,355 40,405 (19) 875,741 Debt securities issued by foreign governments 3,000 458 0 3,458 Corporate securities 872,904 58,046 (1,026) 929,924 Mortgage-backed securities: U.S. Government Agency 16,876 678 (1) 17,553 Other 317,912 12,838 (1,240) 329,510 - ------------------------------------------------------------------------- Total fixed maturities 2,112,291 116,026 (2,287) 2,226,030 Equity securities 275,637 597,803 (13,965) 859,475 Short-term investments 65,849 0 0 65,849 - ------------------------------------------------------------------------- Total securities, available for sale $ 2,453,777 $713,829 $(16,252) $3,151,354 =========================================================================
49 50 Item 14. Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated)
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 1996 COST GAINS LOSSES VALUE - --------------------------------------------------------------------------- Securities available for sale: U.S. Government $ 80,822 $ 2,101 $ (382) $ 82,541 States, municipalities and political subdivisions 760,602 34,966 (1,029) 794,539 Debt securities issued by foreign governments 3,000 296 0 3,296 Corporate securities 940,540 50,126 (7,008) 983,658 Mortgage-backed securities: U.S. Government Agency 171,291 12,992 (7,377) 176,906 Other 269,262 14,274 (13,538) 269,998 - --------------------------------------------------------------------------- Total fixed maturities 2,225,517 114,755 (29,334) 2,310,938 Equity securities 297,727 434,160 (10,735) 721,152 Short-term investments 41,546 0 0 41,546 - --------------------------------------------------------------------------- Total securities, available for sale $ 2,564,790 $ 548,915 $ (40,069) $ 3,073,636 ===========================================================================
The amortized cost and estimated fair value of debt securities at December 31, 1998, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
ESTIMATED AMORTIZED FAIR COST VALUE - ----------------------------------------------------------------- Due in one year or less $34,249 $ 34,324 Due after one year through five years 434,964 449,556 Due after five years through ten years 757,440 803,594 Due after ten years 713,991 753,064 Mortgage-backed securities: U.S. Government Agency 6,130 6,275 Other 360,960 369,091 - ----------------------------------------------------------------- Total fixed maturities $2,307,734 $2,415,904 =================================================================
Certain securities were determined to have other than temporary declines in book value and were written down through realized investment losses. Total write-downs were $12,709, $14,433 and $19,456 during 1998, 1997 and 1996, respectively, representing a reduction in value of $4,469, $0 and $7,055 on fixed maturities and $8,240, $14,433 and $12,401 on equity securities. Proceeds from maturities and sales of investments in debt securities during 1998, 1997 and 1996 were $561,420, $445,358 and $603,364, respectively. Gross gains of $23,108, $12,665 and $14,257 and gross losses of $6,778, $4,311 and $10,388 were realized on those maturities and sales in 1998, 1997 and 1996, respectively. NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the Corporation's financial instruments:
CARRYING FAIR 1998 AMOUNT VALUE - ---------------------------------------------------------- Assets Cash and short-term investments $ 305,078 $ 305,002 Securities - available for sale 3,340,810 3,340,810 Liabilities Future policy benefits $ 25,518 $ 25,518 Long-term debt 265,000 265,000 Carrying Fair 1997 Amount Value - ----------------------------------------------------------- Assets Cash and short-term investments $ 120,055 $ 120,055 Securities - available for sale 3,085,505 3,085,505 Liabilities Future policy benefits $ 34,148 $ 34,148 Long-term debt 40,000 40,000 Carrying Fair 1996 Amount Value - ----------------------------------------------------------- Assets Cash and short-term investments $ 61,624 $ 61,624 Securities - available for sale 3,032,090 3,032,090 Liabilities Future policy benefits $ 280,002 $ 280,002 Long-term debt 50,000 50,000
The Corporation believes that the fair value of long-term debt is approximately equal to its carrying value due to the market-based variable interest rates associated with the debt. NOTE 4 -- DEFERRED POLICY ACQUISITION COSTS Changes in deferred policy acquisition costs are summarized as follows: 50 51 Item 14. Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated)
1998 1997 1996 - -------------------------------------------------------------- Deferred, January 1 $126,063 $116,684 $119,795 - -------------------------------------------------------------- Additions: Addition due to acquisition 37,371 0 0 Commissions and brokerage 207,747 190,029 190,461 Salaries and employee 50,194 46,241 47,092 benefits Other 70,654 67,301 66,143 - -------------------------------------------------------------- Deferral of expense 365,966 303,571 303,696 - -------------------------------------------------------------- Amortization to expense Discontinued operations (1,093) (9,302) (2,049) Continuing operations 316,516 303,494 308,856 - -------------------------------------------------------------- Deferred, December 31 $176,606 $126,063 $116,684 ==============================================================
The above schedule includes deferred policy acquisition costs (net of unamortized ceding commission) for discontinued life insurance operations of $(1,093), $(2,185) and $(11,486) as of 1998, 1997 and 1996, respectively. See Note 20 for additional information regarding discontinued operations. NOTE 5 -- INCOME TAX The effective income tax rate is less than the statutory corporate tax rate of 35% for 1998, 1997 and 1996 for the following reasons:
1998 1997 1996 - -------------------------------------------------------------- Tax at statutory rate $ 36,050 $ 60,710 $ 40,263 Tax exempt interest (16,433) (16,522) (18,367) Dividends received deduction (DRD) (3,247) (3,239) (4,056) Proration of DRD and tax exempt interest 2,826 2,796 3,017 Reduction in provision for audit issues 0 0 (3,000) Miscellaneous 793 (679) (47) - -------------------------------------------------------------- Actual tax $ 19,989 $ 43,065 $ 17,810 ==============================================================
Tax years 1993 through 1995 are being examined by The Internal Revenue Service. Management believes there will not be a significant impact on the financial position or results of operations of the Corporation as a result of this audit. The components of the net deferred tax asset (liability) were as follows:
1998 1997 1996 - --------------------------------------------------------------- Unearned premium proration $ 35,209 $ 34,065 $ 33,833 Accrued expenses 48,549 52,520 59,217 Postretirement benefits 29,768 28,522 27,355 Discounted loss and loss expense reserves 70,663 78,217 81,350 - -------------------------------------------------------------- Total deferred tax assets 184,189 183,968 201,755 - -------------------------------------------------------------- Deferred policy acquisition costs (49,765) (44,122) (51,129) Unrealized gains on investments (275,154) (244,591) (178,619) - -------------------------------------------------------------- Total deferred tax liabilities (324,919) (279,357) (229,748) - -------------------------------------------------------------- Net deferred tax asset (liability) $(140,730) $ (95,389) (27,993) ==============================================================
NOTE 6 -- EMPLOYEE BENEFITS The Corporation has a non-contributory defined benefit retirement plan, a contributory health care, life and disability insurance plan and a savings plan covering substantially all employees. Benefit expenses are as follows:
1998 1997 1996 - --------------------------------------------------------- Employee benefit costs: Pension plan $(1,610) $ (252) $ (136) Health care 13,215 12,555 14,415 Life and disability insurance 502 463 555 Savings plan 2,404 2,321 2,489 - --------------------------------------------------------- $14,511 $15,087 $17,323 =========================================================
The pension benefit is determined as follows: 1998 1997 1996 - ----------------------------------------------------------- Service cost/(benefit) earned during the year $ 6,011 $ 6,354 $ 6,256 Interest cost on projected benefit obligation 15,068 15,003 13,927 Expected return on plan assets (19,871) (18,650) (17,360) Amortization of unrecognized net obligation (asset) (3,017) (3,017) (3,017) Amortization of unrecognized prior service cost 199 58 58 - ----------------------------------------------------------- Net pension benefit $ (1,610) $ (252) $ (136) ===========================================================
Changes in the benefit obligation during the year: 1998 1997 1996 - --------------------------------------------------------- Benefit obligation at beginning of year $213,720 $197,538 $191,008 - --------------------------------------------------------- Service cost 6,011 6,354 6,256 Interest cost 15,068 15,003 13,927 Amendments 0 2,000 0 Actuarial loss (gain) 17,132 4,142 (2,990) Benefits paid (12,638) (11,317) (10,663) - --------------------------------------------------------- Benefit obligation at end of year $239,293 $213,720 $197,538 =========================================================
Changes in pension plan assets during the year: 1998 1997 1996 - ----------------------------------------------------------- Fair value of plan assets at beginning of year $276,477 $225,681 $217,274 - ----------------------------------------------------------- Actual return on plan assets (12,038) 62,113 19,070 Benefits paid (12,215) (11,317) (10,663) - ----------------------------------------------------------- Fair value of plan assets at end of year $252,224 $276,477 $225,681 ===========================================================
Pension Plan funding at December 31: 51 52 Item 14. Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated)
1998 1997 1996 - -------------------------------------------------------------------- Funded status $ 12,931 $62,757 $28,143 Unrecognized net gain (loss) (6,697) 42,443 1,617 Unrecognized net assets 12,068 15,085 18,102 Unrecognized prior service cost (2,308) (2,508) (566) - -------------------------------------------------------------------- Accrued pension liability $ 9,868 $ 7,737 $ 8,990 ===================================================================== Expected long-term return on plan assets 7.75% 8.25% 8.75% Discount rate on plan benefit obligations 6.75% 7.25% 7.75% Expected future rate of salary increases 5.25% 5.25% 5.25%
Pension benefits are based on service years and average compensation using the five highest consecutive years of earnings in the last decade of employment. The pension plan measurement date is October 1, 1998, 1997 and 1996. The maximum pension expense deductible for income tax purposes has been funded. Plan assets at December 31, 1998 include $34,637 of the Corporation's common stock at market value compared to $37,585 and $29,899 at December 31, 1997 and 1996, respectively.
Postretirement benefit cost at December 31: 1998 1997 1996 - ------------------------------------------------------------------------ Service cost $ 2,061 $ 1,739 $ 1,967 Interest cost 5,753 5,588 5,412 - ------------------------------------------------------------------------ Net periodic postretirement benefit cost $ 7,814 $ 7,327 $ 7,379 ======================================================================== Changes in the postretirement benefit obligation during the year: 1998 1997 1996 - ------------------------------------------------------------ Benefit obligation at beginning of year $81,694 $71,797 $71,519 - ------------------------------------------------------------ Service cost 2,061 1,739 1,967 Interest cost 5,753 5,588 5,412 Plan participants' contributions (4,676) (3,912) (3,655) Increase due to change in discount rate or other assumptions 5,731 8,467 (2,353) Actuarial loss (gain) 1,368 (2,141) (1,177) Prior service cost unrecognized at year end 6,416 0 0 - ------------------------------------------------------------ Benefit obligation at end of year $98,347 $81,694 $71,797 ============================================================
Accrued postretirement benefit liability at December 31:
1998 1997 1996 - ------------------------------------------------------------- Accumulated postretirement benefit obligation $98,347 $81,694 $71,797 Unrecognized net gain (loss) (6,642) (203) 6,203 Unrecognized prior service cost (6,416) 0 0 ============================================================= Accrued postretirement benefit liability $85,289 $81,491 $78,000 ============================================================= Postretirement benefit weighted average rate assumptions at October 1: 1998 1997 1996 - ---------------------------------------------------------- Medical trend rate 7% 8% 9% Dental trend rate 5% 6% 7% Ultimate health care trend rate 5% 5% 5% Discount rate 6.75% 8.00% 7.75%
The above medical trend rates assumed for 1998, 1997 and 1996 were assumed to decrease to the ultimate rate of 5% in 2, 3 and 4 years respectively. The postretirement plan measurement date is October 1 for 1998, 1997 and 1996. Increasing the assumed health care cost trend by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1998 by approximately $ 19,669 and increase the postretirement benefit cost for 1998 by $2,032. Likewise, decreasing the assumed health care cost trend by 1 percentage point in each year would decrease the accumulated postretirement benefit obligation as of December 31, 1998 by approximately $12,785 and decrease the postretirement benefit cost for 1998 by $1,250. The Corporation's health care plan is a predominately managed care plan. Retired employees continue to be eligible to participate in the health care and life insurance plans. Employee contributions to the health care plan have been established as a flat dollar amount with periodic adjustments as determined by the Corporation. The health care plan is unfunded. Benefit costs are accrued based on actuarial projections of future payments. There are currently 3,261 active employees and 1,416 retired employees covered by these plans. Employees may contribute a percentage of their compensation to a savings plan. A portion of employee contributions is matched by the Corporation and invested in Corporation stock purchased on the open market by trustees of the plan. 52 53 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) NOTE 7 - STOCK OPTIONS The Corporation is authorized under provisions of the 1993 Stock Incentive Programs to grant options to purchase 1,293,500 shares of the Corporation's common stock to key executive employees, directors, and other full time salaried employees at a price not less than the fair market value of the shares on dates the options are granted. The options granted may be either "Incentive Stock Options" or "Nonqualified Stock Options" as defined by the Internal Revenue Code; the difference in the option plans affects treatment of the options for income tax purposes by the individual employee and the Corporation. The options are non-transferable and exercisable at any time after the vesting requirements are met. Option expiration dates are five and ten years from the grant date. Options vest either at 100% six months from the grant date or at 33% per year for three consecutive years from the date of the grant. At December 31, 1998, 868,289 remaining options may be granted. In addition, the 1993 Stock Incentive Program provides for the grant of Stock Appreciation Rights in tandem with the stock options. Stock Appreciation Rights provide the recipient with the right to receive payment in cash or stock equal to appreciation in value of the optioned stock from the date of grant in lieu of exercise of the stock options held. At December 31, 1998, there were no outstanding stock appreciation rights. Restricted stock awards are occasionally issued by the Corporation. The common shares covered by a restricted stock award may be sold or otherwise disposed of only after a minimum of six months from the grant date of the award. The difference between issue price and the fair market value on the date of issuance is recorded as compensation expense. The amount of compensation expense recognized in 1998 related to restricted stock awards was $387 and $345 in 1997 before tax. There were no restricted stock awards in 1996. Currently there are 15,312 shares of restricted stock outstanding. The Corporation also issues, at its discretion, dividend payment rights in connection with the grant of stock options. These rights entitle the holder to receive, for each dividend payment right, an amount in cash equal to the aggregate amount of dividends that the Corporation has paid on each common share from the date on which such right becomes effective through the payout date. One third of these rights becomes vested on each anniversary after the grant. Dividends accrue and payments are made when the rights are fully vested by the rightholder. The Corporation recognizes compensation expense accordingly. The amount of compensation expense related to dividend payment rights recognized in 1998 was $551 and $517 in 1997 before tax. As of December 31, 1998, 313,684 dividend payment rights were outstanding. The Corporation continues to elect APB 25 for recognition of stock-based compensation expense. Under APB 25, expense is recognized based on the intrinsic value of the options. However, under the provision of FAS 123 the Corporation is required to estimate on the date of grant the fair value of each option using an option-pricing model. Accordingly, the Black-Scholes option pricing model is used with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: dividend yield of 4.5% for 1998, 1997 and 1996, expected volatility of 26.7% for 1998, 26.1% for 1997 and 25.3% for 1996, risk free interest rate of 5.63%, 6.87% and 6.34%, and expected life of 8 years. The following table summarizes information about the stock-based compensation plan as of December 31, 1998, 1997 and 1996, and changes that occurred during the year:
1998 1997 1996 - -------------------------------------------------------------------------- Weighted- Weighted- Weighted- Avg Avg Avg Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price --------------- ---------------- ---------------- Outstanding beginning of year 262 $37.38 173 $33.84 74 $30.02 Granted 123 46.97 120 41.44 127 34.93 Exercised (6) 35.00 (27) 33.33 (28) 28.75 Canceled 0 (4) 32.38 0 ----- ------ ----- Outstanding end of year 380 $40.53 262 $37.38 173 $33.84 ===== ====== ====== Options exercisable at year-end 160 81 52 Weighted-Avg fair value of options granted during the year $10.60 $10.18 $8.14
At year end 1998, 379,684 options were outstanding with an average remaining contractual life of 7.94 years and weighted exercise price of $40.53. Of the amount outstanding, 159,681 were exercisable with a weighted average exercise price of $36.90. At year end 1997, 262,494 options were outstanding with an average remaining contractual life of 8.35 years and a weighted exercise price of $37.38. Of the amount outstanding, 81,493 were exercisable with a weighted average exercise price of $34.05. At year end 1996, 172,500 options were outstanding with an average remaining contractual life of 8.49 years and a weighted exercise price of $33.84. Of the amount outstanding, 51,500 were exercisable with a weighted average exercise price of $31.23. Had the Corporation adopted FAS 123, the amount of compensation expense that would have been recognized in 1998, 1997 and 1996 respectively, would be $1,164, $755 and $350. The Corporation's net income and earnings per share would have been reduced to the pro forma amounts disclosed below: 53 54 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated)
1998 1997 1996 - -------------------------------- --------- ----------- ---------- Net Income As Reported: $84,927 $139,047 $102,457 Pro Forma: $83,994 $138,411 $102,146 Basic/diluted earnings per share $ 2.58 $ 4.06 $ 2.91 As Reported: Pro Forma: $ 2.55 $ 4.04 $ 2.90
NOTE 8 -- REINSURANCE AND OTHER CONTINGENCIES In the normal course of business, the Corporation seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurers or reinsurers. In the event that such reinsuring companies might be unable at some future date to meet their obligations under the reinsurance agreements in force, the Corporation would continue to have primary liability to policyholders for losses incurred. The Corporation evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. The following amounts are reflected in the financial statements as a result of reinsurance ceded:
1998 1997 1996 - --------------------------------------------------------------- Ceded premiums earned, presented net $ 35,334 $ 32,169 $ 30,534 Ceded losses incurred, presented net 41,477 13,387 11,846 Reserve for unearned premiums 12,290 8,242 8,062 Reserve for losses 82,589 54,209 61,205 Reserve for future policy benefits Reserve for loss adjustment 25,518 34,148 280,002 expenses 8,707 7,794 8,833
Annuities are purchased from other insurers to pay certain claim settlements. These payments are made directly to the claimants; should such insurers be unable to meet their obligations under the annuity contracts, the Corporation would be liable to claimants for the remaining amount of annuities. The claim reserves are presented net of the related annuities on the Corporation's balance sheet. The total amount of unpaid annuities was $24,155, $25,123 and $25,139 at December 31, 1998, 1997 and 1996, respectively. On October 2, 1995, as part of the transaction involving the reinsurance of the Ohio Life business to Employers' Reassurance Corporation, Ohio Casualty Insurance Company agreed to manage a $163,615 fixed income portfolio for Employers' Reassurance. The term of the agreement is seven years, terminating on October 2, 2002. There is no separate fee to Ohio Casualty for this investment management service. The assets of the fixed income portfolio are not carried on the Corporation's balance sheet as these are assets of Employers' Reassurance Corporation. The agreement requires that Ohio Casualty pay an annual rate of 7.25% interest to Employers' Reassurance and maintain the market value of the account at $163,615. As the market value fluctuates from this amount, Ohio Casualty is required to make up any deficiency and is entitled to receive any excess. Accordingly, the Corporation accrues any deficiency or excess in market value over the guaranteed amount of $163,615. This results in either investment income or loss and is recorded in earnings of the current period. At December 31, 1998, the market value of the account exceeded the $163,615 required balance by $1,356 compared with excesses of $2,080 in 1997 and $699 in 1996. The annual interest obligation of 7.25% was also being adequately serviced by the portfolio assets. NOTE 9 -- LOSSES AND LOSS RESERVES The following table presents a reconciliation of liabilities for losses and loss adjustment expenses:
1998 1997 1996 - ------------------------------------------------------------- Balance as of January 1, net of reinsurance recoverables of $62,003, $70,048 and $1,421,804 $1,486,622 $1,557,065 $74,119 Addition related to acquisition 483,938 0 0 Incurred related to: Current year 989,114 922,065 1,009,086 Prior years (66,119) (53,615) (76,920) - ------------------------------------------------------------- 922,995 868,450 932,166 Paid related to: Current year 513,292 448,402 515,025 Prior years 449,802 484,866 487,584 - ------------------------------------------------------------- Total paid 963,094 933,268 1,002,609 Balance as of December 31, net of reinsurance recoverables of $91,296, $62,003 and $70,048 $1,865,643 $1,421,804 $1,486,622 =============================================================
As a result of favorable development in estimates for insured events of prior years, the incurred related to prior years shows a favorable development. The following table presents catastrophe losses incurred and the respective impact on the loss ratio:
1998 1997 1996 - ----------------------------------------------------------- Incurred losses $44,595 $21,389 $62,189 Loss ratio effect 3.6% 1.8% 5.1%
In 1998, 1997 and 1996 there were 37, 25 and 41 catastrophes respectively. The largest catastrophe in each year was $7,300, $4,600 and $13,700 in incurred losses. Additional catastrophes with over $1,000 in incurred losses numbered 14, 3 and 10 in 1998, 1997 and 1996. The effect of catastrophes on the Corporation's results cannot be accurately predicted. As such, severe weather patterns could have a material adverse impact on the Corporation's results. 54 55 Inflation has historically affected operating costs, premium revenues and investment yields as business expenses have increased over time. The long term effects of inflation are considered when estimating the ultimate liability for losses and loss adjustment expenses. The liability is based on historical loss development trends which are adjusted for anticipated changes in underwriting standards, policy provisions and general economic trends. It is not adjusted to reflect the effect of discounting. Reserves for asbestos-related illnesses and toxic waste cleanup claims cannot be estimated with traditional loss reserving techniques. In establishing liabilities for claims for asbestos-related illnesses and for toxic waste cleanup claims, management considers facts currently known and the current state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, there is uncertainty regarding the extent of remediation. Accordingly, additional liability could develop. Estimated asbestos and environmental reserves are composed of case reserves, incurred but not reported reserves and reserves for loss adjustment expense. For 1998, 1997 and 1996, respectively, total case, incurred but not reported and loss adjustment expense reserves were $41,898, $40,121 and $40,956. Asbestos reserves were $10,364, $6,966 and $5,215 and environmental reserves were $31,534, $33,155 and $35,741 for those respective years. NOTE 10 -- EARNINGS PER SHARE During 1997, the Corporation adopted Statement of Financial Accounting Standard 128 "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. All prior periods were recalculated under the new definition of basic and diluted earnings per share. Basic and diluted earnings per share are summarized as follows:
1998 1997 1996 - --------------------------------------------------------------- Income from continuing operations $83,011 $130,392 $97,228 Average common shares outstanding - basic 32,904 34,228 35,247 Basic income from continuing operations per average share $2.52 $3.81 $2.76 ============================================================== Average common shares outstanding 32,904 34,228 35,247 Effect of dilutive securities 31 29 7 - -------------------------------------------------------------- Average common shares outstanding - diluted 32,935 34,257 35,254 Diluted income from continuing operations per average share $2.52 $3.81 $2.76 ==============================================================
At December 31, 1998, 3,000 purchase warrants and 103 stock options were not included in earnings per share calculations for 1998 as they were antidilutive.
NOTE 11 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) 1998 FIRST SECOND THIRD FOURTH - -------------------------------------------------------------- Premiums and finance charges earned $309,627 $311,663 $314,956 $332,406 Net investment income 44,634 41,299 42,231 40,860 Investment gains (losses) realized 4,082 8,151 3,537 (1,359) Income from continuing operations 30,914 9,989 22,903 19,205 Income from discontinued operations 280 345 278 1,013 Net income 31,194 10,334 23,181 20,218 Basic and diluted net income per share .93 .31 .71 .64
1997 First Second Third Fourth - -------------------------------------------------------------- Premiums and finance charges earned $302,479 $307,788 $300,252 $298,455 Net investment income 43,717 45,153 45,365 43,465 Investment gains (losses) realized 13,340 8,498 20,806 8,105 Income from continuing operations 31,257 32,962 25,324 40,849 Income from discontinued operations 1,458 1,143 (85) 6,139 Net income 32,715 34,105 25,239 46,988 Basic and diluted net income per share .94 1.00 .74 1.39
The fourth quarter adjustments for 1998 included income of $12,262 after tax for the reduction in Proposition 103 liability and an expense of $6,500 after tax for a restructuring charge. 55 56 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) NOTE 12 -- COMPREHENSIVE INCOME Changes in accumulated other comprehensive income related to changes in unrealized gains(losses) on securities were as follows:
1998 1997 1996 - ------------------------------------------------------------ Unrealized holding gains (losses) arising during the period, net of tax $71,207 $143,794 $56,019 Less: Reclassification adjustment for gains included in net income, net of taxes 13,632 21,595 29,026 - ------------------------------------------------------------ Net unrealized gains(losses) on securities, net of taxes $57,575 $122,199 $26,993 ============================================================
NOTE 13 -- 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 it is reported internally to management. Asset information by reportable segment is not reported, since the Corporation does not produce such information internally.
Private Passenger Auto 1998 1997 1996 - ---------------------------------------------------------- Net premiums written $521,794 $464,693 $456,371 % Increase(decrease) 12.3% 1.8% -2.3% Net premiums earned 500,785 460,029 457,121 % Increase(decrease) 8.8% 0.6% -3.6% Underwriting gain/(loss) (before tax) (24,220) (25,926) (46,951) Loss ratio 68.8% 72.0% 75.7% Loss expense ratio 10.3% 9.6% 10.6% Underwriting expense ratio 24.7% 23.8% 24.0% Combined ratio 103.8% 105.4% 110.3% Impact of catastrophe losses on combined ratio 1.2% 0.5% 0.9% CMP, Fire, Inland Marine 1998 1997 1996 - ---------------------------------------------------------- Net premiums written $225,749 $206,133 $195,290 % Increase(decrease) 9.5% 5.6% 0.8% Net premiums earned 217,236 200,330 195,437 % Increase(decrease) 8.4% 2.5% 0.2% Underwriting gain/(loss) (before tax) (33,008) (17,812) (29,311) Loss ratio 64.5% 58.7% 63.5% Loss expense ratio 6.2% 7.0% 8.9% Underwriting expense ratio 42.8% 42.0% 42.7% Combined ratio 113.5% 107.7% 115.0% Impact of catastrophe losses on combined 4.9% 2.5% 8.3% ratio General Liability 1998 1997 1996 - ---------------------------------------------------------- Net premiums written $ 95,144 $ 96,698 $101,793 % Increase(decrease) -1.6% -5.0% -6.0% Net premiums earned 96,535 98,971 104,428 % Increase(decrease) -2.5% -5.2% -5.5% Underwriting gain/(loss) (before tax) (819) (1,892) 12,622 Loss ratio 35.8% 36.6% 26.2% Loss expense ratio 13.8% 19.3% 15.7% Underwriting expense ratio 52.0% 47.1% 47.2% Combined ratio 101.6% 103.0% 89.1% Impact of catastrophe losses on combined ratio N/A N/A N/A Workers' Compensation 1998 1997 1996 - ---------------------------------------------------------- Net premiums written $100,150 $ 97,176 $115,398 % Increase(decrease) 3.1% -15.8% -17.9% Net premiums earned 100,336 103,484 124,157 % Increase(decrease) -3.0% -16.7% -12.6% Underwriting gain/(loss) (before tax) (9,606) 9,130 9,613 Loss ratio 69.1% 57.2% 59.3% Loss expense ratio 8.2% 6.4% 5.9% Underwriting expense ratio 32.3% 29.4% 29.1% Combined ratio 109.6% 93.0% 94.3% Impact of catastrophe losses on combined ratio N/A N/A N/A
56 57 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated)
Commercial Auto 1998 1997 1996 - ---------------------------------------------------------- Net premiums written $139,087 $140,295 $139,420 % Increase(decrease) -0.9% 0.6% -4.8% Net premiums earned 139,114 139,933 142,446 % Increase(decrease) -0.5% -1.8% -4.5% Underwriting gain/(loss) (before tax) (7,453) (18,146) (6,507) Loss ratio 61.2% 69.3% 64.5% Loss expense ratio 8.6% 10.2% 7.0% Underwriting expense ratio 35.6% 33.3% 33.8% Combined ratio 105.4% 112.9% 105.3% Impact of catastrophe losses on combined ratio 0.7% 0.3% 0.8% Homeowners 1998 1997 1996 - ---------------------------------------------------------- Net premiums written $180,697 $168,168 $166,457 % Increase(decrease) 7.5% 1.0% 3.7% Net premiums earned 177,419 166,474 165,630 % Increase(decrease) 6.6% 0.5% 2.8% Underwriting gain/(loss) (before tax) (33,824) (19,254) (59,806) Loss ratio 73.8% 66.5% 89.5% Loss expense ratio 8.2% 8.7% 11.5% Underwriting expense ratio 36.4% 36.0% 34.9% Combined ratio 118.4% 111.2% 135.9% Impact of catastrophe losses on combined ratio 15.2% 8.1% 24.4% Fidelity & Surety 1998 1997 1996 - ------------------------------------------------------------ Net premiums written $ 37,022 $ 34,418 $ 34,473 % Increase(decrease) 7.6% -0.2% 0.9% Net premiums earned 36,403 35,045 34,135 % Increase(decrease) 3.9% 2.7% 4.3% Underwriting gain/(loss) (before tax) 6,351 8,663 8,866 Loss ratio 10.3% 7.9% 5.8% Loss expense ratio 5.2% 2.8% -0.3% Underwriting expense ratio 65.9% 65.8% 67.8% Combined ratio 81.4% 76.5% 73.4% Impact of catastrophe losses on combined ratio N/A N/A N/A Total Property & Casualty 1998 1997 1996 - --------------------------------------------------------------- Net premiums written $1,299,643 $1,207,581 $1,209,202 % Increase(decrease) 7.6% -0.1% -3.3% Net premiums earned 1,267,828 1,204,265 1,223,353 % Increase(decrease) 5.3% -1.56% -3.3% Underwriting gain/(loss) (before tax) (102,579) (65,237) (111,474) Loss ratio 63.7% 62.7% 66.5% Loss expense ratio 9.1% 9.4% 9.7% Underwriting expense ratio 34.4% 33.2% 33.4% Combined ratio 107.2% 105.3% 109.5% Impact of catastrophe losses on combined ratio 3.6% 1.8% 5.1% All other 1998 1997 1996 - --------------------------------------------------------------- Revenues $ 5,391 $ 6,833 $ 6,009 Expenses 6,663 6,880 7,223 - --------------------------------------------------------------- Net income $ (1,272) $ (47) $ (1,214) Reconciliation of Revenues 1998 1997 1996 - --------------------------------------------------------------- Net premiums earned for reportable segments $1,267,828 $1,204,265 $1,223,353 Investment income 164,812 172,372 181,904 Realized gains 26,516 58,912 49,401 Miscellaneous income 162 453 647 - --------------------------------------------------------------- Total property and casualty revenues (Statutory basis) 1,459,318 1,436,002 1,455,305 Property and casualty statutory to GAAP adjustment (12,450) (5,412) (1,683) - --------------------------------------------------------------- Total revenues property and casualty (GAAP basis) 1,446,868 1,430,590 1,453,622 Other segment revenues 5,391 6,833 6,009 - --------------------------------------------------------------- Total revenues $1,452,259 $1,437,423 $1,459,631 =============================================================== Reconciliation of Underwriting gain/(loss) (before tax) 1998 1997 1996 - --------------------------------------------------------------- Property and casualty underwriting gain/(loss) (before tax) (Statutory basis) $ (102,579) $ (65,237) $ (111,474) Statutory to GAAP adjustment 28,528 15,597 (706) - --------------------------------------------------------------- Property and casualty underwriting gain/(loss) (before tax) (GAAP basis) (74,051) (49,640) (112,180) Net investment income 169,024 177,700 183,308 Realized gains 14,411 50,749 49,672 Other income (6,384) (5,352) (5,762) - --------------------------------------------------------------- Income from continuing operations before income taxes $ 103,000 $ 173,457 $ 115,038 ===============================================================
NOTE 14 -- 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 are 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. Under the asset purchase agreement, the Corporation assumed $645,813 of commercial lines insurance liabilities, $62,639 in other liabilities and acquired $287,900 of investments, $1,500 in cash and $119,052 in other assets. This resulted in an assumption by the Corporation of a net statutory-basis liability of $300,000 plus warrants to purchase 3 million shares of Ohio Casualty Corporation common stock at a price of $45.01. In addition, if the annualized production from the transferred agents at the end of eighteen months equals or exceeds the production in the twelve months prior to closing, GAI will receive an additional $40,000. This bonus payment grades down ratably where if eighteen-month annualized production equals 71% or less of previous production, no bonus payment is 57 58 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) required. The bonus payment will be accrued as additional goodwill when minimum contingency is achieved. The transaction was accounted for using the purchase method of accounting. The Corporation has recorded goodwill of $309,237 relating to this transaction, consisting of $285,517 of net liabilities assumed under generally accepted accounting principles, $21,138 in warrants given and $2,582 in acquisition expenses. Deferred policy acquisition costs of $37,371 were also recorded as a result of the transaction. The Corporation follows the practice of allocating purchase price to specifically identifiable intangible assets based on their estimated values as determined by appropriate valuation methods. In the GAI acquisition, no allocation of purchase price was made to specifically identifiable intangible assets other than goodwill and deferred policy acquisition costs as the Corporation believes it did not acquire any other significant specifically identifiable intangible assets. The warrants which were issued in connection with the transaction provide for the purchase of the Corporation's common stock at $45.01 per share and expire in December 2003. The warrants may be settled through physical or net share settlement and thus have been recorded as equity in the financial statements at their estimated fair value. Estimated fair value was determined based on a third party appraisal of the warrants.
The following table presents the unaudited proforma results of operations had the acquisition occurred at the beginning of each year. (Unaudited) 1998 1997 - ------------------------------------------------------ Revenues $1,750,528 $1,775,556 Net income 58,866 130,206 Diluted earnings per share 1.79 3.80
NOTE 15 -- RESTRUCTURE 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 expense in its income statement to reflect one-time charges related to its branch office consolidation plan. These charges consisted solely of future contractual lease payments related to abandoned facilities. The activities under the plan are expected to be completed in 1999. NOTE 16 -- STATUTORY ACCOUNTING INFORMATION The following information has been prepared on the basis of statutory accounting principles which differ from generally accepted accounting principles. The principal differences relate to deferred acquisition costs, required statutory reserves, assets not admitted for statutory reporting, California Proposition 103 reserve, goodwill and deferred federal income taxes.
1998 1997 1996 - ------------------------------------------------------------------ Property and Casualty Insurance Statutory net income $ 82,044 $ 142,457 $ 104,137 Statutory policyholders' surplus 1,027,105 1,109,517 984,859 Life Insurance Statutory net income 6,675 29,794 4,885 Statutory policyholders' surplus 14,943 29,971 58,511
The Ohio Casualty Insurance Company, domiciled in Ohio, prepares its statutory financial statements in accordance with the accounting practices prescribed or permitted by the Ohio Insurance Department. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company received written approval from the Ohio Insurance Department to have the California Proposition 103 liability reported as a direct charge to surplus and not included as a charge in the 1995 statutory statement of operations. Following this same treatment, during 1997 and 1998 the principal reduction in the Proposition 103 liability was taken as an increase to statutory surplus and not included in the 1997 or 1998 statutory statements of operations. For statutory purposes, goodwill related to the GAI acquisition was taken as a direct charge to surplus. The Corporation is dependent on dividend payments from its insurance subsidiaries in order to meet operating expenses and to pay dividends. Insurance regulatory authorities impose various restrictions and prior approval requirements on the payment of dividends by insurance companies and holding companies. At December 31, 1998, approximately $112,129 of retained earnings are not subject to restriction or prior dividend approval requirements. NOTE 17 -- BANK NOTE PAYABLE During 1997, the Corporation signed a credit facility that makes available a $300,000 revolving line of credit. This line of credit was accessed in 1997 to refinance the outstanding term loan balance the Corporation had at that time. In 1998, the line of credit was used for capital 58 59 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) infusion of $200,000 into the property and casualty subsidiaries due to the acquisition. The line of credit was again accessed during 1998 for the purchase of a building and to purchase treasury shares. The credit agreement contains financial covenants and provisions customary for such arrangements. The agreement expires in October 2002, with any outstanding loan balance due at that time. The revolving line of credit maintains an interest rate swap that existed on the previous term loan. The effect of the swap agreement was to establish a fixed rate of 6.34% on $20,000 of the outstanding balance converted to the revolving line of credit. The remaining balance and any additional borrowings under the line of credit bear interest at a periodically adjustable rate (5.82% at December 31, 1998). The interest rate is determined on various bases including prime rates, certificate of deposit rates and the London Interbank Offered Rate. Interest incurred on borrowings amounted to $3,547, $3,147 and $3,769 in 1998, 1997 and 1996, respectively. Under the loan agreement, the maximum permissible consolidated funded debt cannot exceed 30% of consolidated tangible net worth. NOTE 18 -- CALIFORNIA WITHDRAWAL Proposition 103 was passed in the State of California in 1988 in an attempt to legislate premium rates for that state. As construed by the California Supreme Court, the proposition requires premium rate rollbacks for 1989 California policyholders while allowing for a "fair" return for insurance companies. Even after considering investment income, total returns in California have been less than what would be considered "fair" by any reasonable standard. During the fourth quarter of 1994, the State of California assessed the Corporation $59,867 for Proposition 103. In February 1995, California revised this billing to $47,278 due to California Senate Bill 905 which permits reduction of the rollback due to actual commissions and premium taxes paid. The assessment was revised again in August 1995 to $42,100 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 $35,900 or $39,900 plus interest. In 1998, the Administrative Law Judge finally issued a proposed ruling with a rollback liability of $24,428 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 $24,428 to $61,197. The Administrative Law Judge indicates clearly in her ruling that by her calculation the Corporation would have lost approximately $1,000 on 1989 operations if a rollback of $24,428 were imposed. Given that conclusion, it is clear that any assessment greater than $24,428 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 $24,428 plus simple interest at 10% from May 8, 1989. This brings the total reserve to $48,043 at December 31, 1998. The Corporation will continue to challenge the validity of any rollback. To date, the Corporation has paid $4,755 in legal costs related to the withdrawal, Proposition 103, and Fair Plan assessments. 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. NOTE 19 -- SHAREHOLDER RIGHTS PLAN In December 1989, the Board of Directors adopted a Shareholder Rights Plan (the Plan) declaring a dividend of one-half of one Common Share Purchase Right, expiring in 2009, for each outstanding share of common stock. The Plan is designed to deter coercive or unfair takeover tactics and to prevent a person or persons from gaining control of the Corporation without offering a fair price to all shareholders. Under the terms of the Plan, each whole right entitles the registered holder (except the acquirer) to purchase from the Corporation one share of common stock at a price of $250 per share, subject to adjustment. Each right entitles its holder to purchase at the right's then current exercise price, a number of the Corporation's common shares having a market value of twice such price. The rights become exercisable for a 60 day period commencing 11 business days after a public announcement that a person or group has acquired shares representing 20 percent or more of the outstanding shares of common stock, without the prior approval of the board of directors; or 11 business days following commencement of a tender or exchange of 20 percent or more of such outstanding shares of common stock. If after the rights become exercisable, the Corporation is involved in a merger, other business consolidation or 50 percent or more of the assets or earning power of the Corporation is sold, the rights will then entitle the rightholders, upon exercise of the rights, to receive shares of common stock of the acquiring company with a market value equal to twice the exercise price of each right. 59 60 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) The Corporation can redeem the rights for $0.01 per right at any time prior to becoming exercisable. NOTE 20 -- DISCONTINUED OPERATIONS (LIFE INSURANCE) Discontinued operations include the operations of Ohio Life, a subsidiary of the Ohio Casualty Insurance Company. During 1995, the Corporation committed to a plan to exit the life insurance business. On October 2, 1995, the Corporation transferred its life insurance and related businesses through a 100% coinsurance arrangement to Employers' Reassurance Corporation and entered into an administrative and marketing agreement with Great Southern Life Insurance Company ("Great Southern"). In connection with the reinsurance agreement, $144,469 in cash and $161,401 of securities were transferred to Employers' Reassurance to cover the liabilities of $348,479. Ohio Life received an adjusted ceding commission of $37,641 as payment. After deduction of deferred acquisition costs, the net ceding commission from the transaction was $17,284. During the fourth quarter of 1997, Great Southern legally replaced Ohio Life as the primary insurer for approximately 76% of the life insurance policies subject to the 1995 agreement. As a result of this assumption, fourth quarter of 1997 net income was positively impacted by a partial recognition of unamortized ceding commission. The after-tax impact was an increase to net income of $5,300. 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 $1,093 before tax during the fourth quarter 1998. There remains approximately $1,093 in unamortized ceding commission. This will continue to be amortized over the remaining life of the underlying policies. Great Southern Life Insurance Company and Employers' Reassurance Corporation have entered into a modified coinsurance arrangement whereby all Ohio Life policies that were assumed by Employers' Reassurance are, in turn, retroceded to Great Southern Life Insurance Company. This gives the Corporation additional protection since the Corporation would first look for recovery from Employers' Reassurance which is rated A++ by A.M. Best. As part of the agreement, Americo Life Inc., the parent of Great Southern Life, acts as the third party administrator for Ohio Life for all unassumed policies. This arrangement lasts until the policies are assumed or lapse. Under the marketing agreement, Great Southern was permitted to market life insurance products through the Corporation's independent agency distribution system. This agreement was terminated in 1996 by mutual consent of the parties. Results of the discontinued life insurance operations for the years ended December 31 were as follows:
1998 1997 1996 - ----------------------------------------------------------- Gross premiums written $ 0 $ 1,267 $ 1,428 Net premiums earned 3,708 23,865 4,582 Net investment income 2,288 3,954 4,812 Realized investment gains (72) 1,633 1,002 - ----------------------------------------------------------- Total income 5,924 29,452 10,396 Income before income taxes 2,944 13,316 7,892 - ----------------------------------------------------------- Provision for income taxes 1,029 4,661 2,663 - ----------------------------------------------------------- Net income $ 1,916 $ 8,655 $ 5,229 ===========================================================
Assets and liabilities of the discontinued life insurance operations as of the years ended December 31 were as follows:
1998 1997 1996 - ------------------------------------------------------------- Cash $ 24 $ 9,214 $ 1,150 Investments 13,917 21,320 71,313 Deferred policy acquisition costs, net of unamortized ceding commission (1,093) (2,185) (11,486) Reinsurance receivable 36,599 36,198 285,354 Other assets 3,191 4,219 7,376 - ------------------------------------------------------------- Total assets $52,638 $68,766 $353,707 ============================================================= Future policy benefits $25,518 $34,148 $280,002 Deferred income tax (1,215) (1,357) 1,728 Other liabilities 46,822 35,512 17,505 - ------------------------------------------------------------- Total liabilities $71,125 $68,303 $299,235 =============================================================
NOTE 21 -- NEW ACCOUNTING STANDARDS In December 1997, the American Institute of Certified Public Accountants issued 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. This statement is effective for fiscal years beginning after December 15, 1998. The Corporation does not believe that this statement will materially affect the Corporation's financial statements or disclosures. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 133 "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for derivative instruments by requiring those items to be recognized as assets or liabilities with changes in fair value reported in earnings or other comprehensive income in the current period. The Corporation expects the adoption of FAS 133 to have an immaterial impact on the financial results due to its limited use of derivative instruments. This statement is effective for fiscal quarters of fiscal years beginning after June 15, 1999 (January 1, 2000 for the Corporation). 60 61 ITEM 14. CONTINUED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) Report of Independent Accountants To the Board of Directors and Shareholders of Ohio Casualty Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of Ohio Casualty Corporation and its subsidiaries at December 31, 1998, 1997 and 1996, and the results of their operations and their cash flows for each of the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Cincinnati, Ohio February 4 , 1999 61 62 ITEM 14. CONTINUED (b) REPORTS ON FORM 8-K OR 8-K/A SINCE OCTOBER 1, 1998. On December 15, 1998, the Corporation filed Form 8-K announcing the acquisition of substantially all the Commercial Lines Division of Great American Insurance Company. On February 16, 1999, the Corporation filed Form 8-K filing the Corporation's Consolidated Financial Statements for the year ended December 31, 1998 together with the Notes to the Consolidated Financial Statements. On February 16, 1999, the Corporation filed Form 8-K/A to amend the 8-K dated December 15, 1998 to include the Financial Statements and Pro Forma Information pursuant to Items 7(a)(4) and 7(b)(2). On March 26, 1999, the Corporation filed Form 8-K/A to amend Form 8-K filed on February 16, 1999. On March 26, 1999, the Corporation filed Form 8-K/A to amend Form 8-K originally filed on December 15, 1998. (c) EXHIBITS. (SEE INDEX TO EXHIBITS ATTACHED HERETO.) 62 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) March 30, 1999 By: /s/ Lauren N. Patch ------------------- Lauren N. Patch, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 30, 1999 /s/ Joseph L. Marcum --------------------------------------------------------- Joseph L. Marcum, Chairman of the Board March 30, 1999 /s/ William L. Woodall --------------------------------------------------------- William L. Woodall, Vice Chairman of the Board March 30, 1999 /s/ Lauren N. Patch --------------------------------------------------------- Lauren N. Patch, President and Chief Executive Officer March 30, 1999 /s/ Arthur J. Bennert --------------------------------------------------------- Arthur J. Bennert, Director March 30, 1999 /s/ Jack E. Brown --------------------------------------------------------- Jack E. Brown, Director March 30, 1999 /s/ Catherine E. Dolan --------------------------------------------------------- Catherine E. Dolan, Director March 30, 1999 /s/ Wayne R. Embry --------------------------------------------------------- Wayne R. Embry, Director March 30, 1999 /s/ Vaden Fitton --------------------------------------------------------- Vaden Fitton, Director March 30, 1999 /s/ Jeffery D. Lowe --------------------------------------------------------- Jeffery D. Lowe, Director March 30, 1999 /s/ Stephen S. Marcum --------------------------------------------------------- Stephen S. Marcum, Director March 30, 1999 /s/ Stanley N. Pontius --------------------------------------------------------- Stanley N. Pontius, Director March 30, 1999 /s/ Howard L. Sloneker III --------------------------------------------------------- Howard L. Sloneker III, Director March 30, 1999 /s/ Barry S. Porter --------------------------------------------------------- Barry S. Porter, Chief Financial Officer and Treasurer March 30, 1999 /s/ Michael L. Evans --------------------------------------------------------- Michael L. Evans, Vice President 63 64 FORM 10-K, ITEM 14 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES OHIO CASUALTY CORPORATION The following statements are included herein as Item 14:
Page Number in this Report -------------- Consolidated Balance Sheet at December 31, 1998, 1997, 1996 44 Statement of Consolidated Income for the years ended December 31, 1998, 1997 and 1996 45 Statement of Consolidated Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 46 Statement of Consolidated Cash Flow for the years ended December 31, 1998, 1997 and 1996 47 Notes to Consolidated Financial Statements 48-60 Report of Independent Accountants 61
Page Number in this Report -------------- The following financial statement schedules are included herein: Schedule I - Consolidated Summary of Investments Other Than Investments in Related Parties at December 31, 1998 66 Schedule II - Condensed Financial Information of Registrant for the years ended December 31, 1998, 1997 and 1996 67 Schedule III - Consolidated Supplementary Insurance Information for the years ended December 31, 1998, 1997 and 1996 68-70 Schedule IV - Consolidated Reinsurance for the years ended December 31, 1998, 1997 and 1996 71 Schedule V - Valuation and Qualifying Accounts for the years ended December 31, 1998, 1997 and 1996 72 Schedule VI - Consolidated Supplemental Information Concerning Property and Casualty Insurance Operations for the years ended December 31, 1998, 1997 and 1996 73
64 65 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Ohio Casualty Corporation Our audits of the consolidated financial statements referred to in our report dated February 4, 1999 appearing on page 61 of the 1998 Annual Report to Shareholders of Ohio Casualty Corporation (which report and consolidated financial statements are included herein) also included an audit of the Financial Statement Schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP February 4, 1999 Cincinnati, Ohio 65 66 Schedule I Ohio Casualty Corporation and Subsidiaries Consolidated Summary of Investments Other than Investments in Related Parties (In thousands)
December 31, 1998 Amount shown Type of investment Cost Value in balance sheet - ------------------ ---- ----- ---------------- Fixed maturities Bonds: United States govt. and govt. agencies with auth. $ 74,534 $ 79,854 $ 79,854 States, municipalities and political subdivisions 800,945 839,573 839,573 Debt securities issued by foreign governments 3,000 3,636 3,636 Corporate securities 1,062,165 1,117,475 1,117,475 Mortgage-backed securities: U.S. government guaranteed 6,130 6,275 6,275 Other 360,960 369,091 369,091 ---------- ---------- ---------- Total fixed maturities 2,307,734 2,415,904 2,415,904 Equity securities: Common stocks: Banks, trust and insurance companies 60,320 284,796 284,796 Industrial, miscellaneous and all other 180,204 634,959 634,959 Preferred stocks: Non-redeemable 105 133 133 Convertible 4,500 5,018 5,018 ---------- ---------- ---------- Total equity securities 245,129 924,906 924,906 Short-term investments 262,939 262,863 262,863 ---------- ---------- ---------- Total investments $2,815,802 $3,603,673 $3,603,673 ========== ========== ==========
66 67 Schedule II Ohio Casualty Corporation Condensed Financial Information of Registrant (In thousands)
1998 1997 1996 ---- ---- ---- Condensed Balance Sheet: Investment in wholly-owned subsidiaries, at equity $ 1,482,064 $ 1,258,432 $ 1,167,237 Investment in bonds/stocks 76,687 85,742 57,233 Cash and other assets 31,066 13,000 5,706 ----------- ----------- ----------- Total assets 1,589,817 1,357,174 1,230,176 Bank note payable 265,000 40,000 50,000 Other liabilities 3,836 2,345 5,076 ----------- ----------- ----------- Total liabilities 268,836 42,345 55,076 Shareholders' equity $ 1,320,981 $ 1,314,829 $ 1,175,100 =========== =========== =========== Condensed Statement of Income: Dividends from subsidiaries $ 119,988 $ 169,988 $ 100,000 Equity in subsidiaries (33,929) (30,867) 3,957 Operating (expenses) (1,132) (74) (1,500) ----------- ----------- ----------- Net income $ 84,927 $ 139,047 $ 102,457 =========== =========== =========== Condensed Statement of Cash Flows: Cash flows from operations Net distributed income $ 118,856 $ 169,914 $ 98,500 Other (2,562) (805) 4,879 ----------- ----------- ----------- Net cash from operations 116,294 169,109 103,379 Investing Purchase of bonds/stocks (200,740) (57,031) (34,458) Sales of bonds/stocks 14,440 28,147 7,190 ----------- ----------- ----------- Net cash from investing (186,300) (28,884) (27,268) Financing Note payable Borrowing 230,000 (10,000) (10,000) Repayment (5,000) 0 0 Exercise of stock options 1 371 135 Purchase of treasury stock (100,212) (64,858) (9,168) Dividends paid to shareholders (57,886) (57,456) (56,380) ----------- ----------- ----------- Net cash from financing 66,903 (131,943) (75,413) Net change in cash (3,103) 8,282 698 Cash, beginning of year 11,657 3,375 2,677 ----------- ----------- ----------- Cash, end of year $ 8,554 $ 11,657 $ 3,375 =========== =========== ===========
67 68 Schedule III Ohio Casualty Corporation and Subsidiaries Consolidated Supplementary Insurance Information (In thousands) December 31, 1998
Deferred Future policy policy benefits Net acquisition losses and Unearned Premium investment costs loss expenses premiums revenue income ------------ ------------- ----------- ------------ ------------ Segment - ------- Property and casualty insurance: Underwriting Commercial auto $ 9,890 $ 189,817 $ 83,448 $ 139,114 $ Personal auto 35,562 418,570 143,543 500,227 Workers' compensation 7,627 591,527 95,839 100,336 Gen. liability, A&H 14,954 320,169 65,493 96,535 Homeowners 28,379 63,230 98,807 177,419 CMP, fire and allied lines, inland marine 38,542 348,013 154,233 217,236 Fidelity, surety, burglary 11,342 14,532 27,019 36,403 Miscellaneous Income 334 Investment 164,812 Addition due to acquisition 31,402 Retro reinsurance assumed from acquisition ------------ ------------- ----------- ------------ ------------ Total property and casualty insurance 177,698 1,945,858 668,382 1,267,604 164,812 Life ins. (discontinued operations) (1,092) 36,599 3,709 2,288 Premium finance 168 1,219 94 Corporation 4,118 ------------ ------------- ----------- ------------ ------------ Total $ 176,606 $ 1,982,457 $ 668,550 $ 1,272,532 $ 171,312 ============ ============= =========== ============ ============ Benefits, Amortization losses and of deferred General loss acquisition operating Premiums expenses costs expenses written ----------- ------------ ------------ -------------- Segment - ------- Property and casualty insurance: Underwriting Commercial auto $ 97,077 $ 26,833 $ 18,309 $ 139,087 Personal auto 396,312 100,561 11,830 521,262 Workers' compensation 77,632 18,060 11,912 100,150 Gen. liability, A&H 47,908 33,875 14,653 95,144 Homeowners 145,500 46,448 17,497 180,697 CMP, fire and allied lines, inland marine 153,575 67,125 24,541 225,749 Fidelity, surety, burglary 5,662 17,646 6,124 37,021 Miscellaneous Income Investment Addition due to acquisition 5,968 Retro reinsurance assumed from acquisition 137,636 ----------- ------------ ------------ -------------- Total property and casualty insurance 923,666 316,516 104,866 1,436,746 Life ins. (discontinued operations) (1) 2,524 456 Premium finance 1,529 1,170 Corporation 6,075 ----------- ------------ ------------ -------------- Total $ 923,665 $ 319,040 $ 112,926 $ 1,437,916 =========== ============ ============ ==============
1. Net investment income has been allocated to principal business segments on the basis of separately identifiable assets. 2. The principal portion of general operating expenses has been directly attributed to business segment classifications incurring such expenses with the remainder allocated based on premium volume. 68 69 Schedule III Ohio Casualty Corporation and Subsidiaries Consolidated Supplementary Insurance Information (In thousands) December 31, 1997
Deferred Future policy policy benefits Net acquisition losses and Unearned Premium investment costs loss expenses premiums revenue income ------------ -------------- ------------ ------------- ------------ Segment Property and casualty insurance: Underwriting Commercial auto $ 8,835 $ 167,558 $ 64,350 $ 139,932 Personal auto 29,247 421,276 122,536 459,180 Workers' compensation 5,290 367,802 40,705 103,484 Gen. liability, A&H 14,036 254,159 43,030 98,971 Homeowners 26,582 64,681 94,752 166,474 CMP, fire and allied lines, inland marine 33,537 193,885 103,751 200,330 Fidelity, surety, burglary 10,721 12,296 25,759 35,045 Miscellaneous Income 3,925 Investment $ 172,372 ------------ -------------- ------------ ------------- ------------ Total property and casualty insurance 128,248 1,481,657 494,883 1,207,341 172,372 Life ins. (discontinued operations) (2,185) 36,298 23,865 3,954 Premium finance 193 1,632 65 Corporation 5,264 ------------ -------------- ------------ ------------- ------------ Total $ 126,063 $ 1,517,955 $ 495,076 $ 1,232,838 $ 181,655 ============ ============== ============ ============= ============ Benefits, Amortization losses and of deferred General loss acquisition operating Premiums expenses costs expenses written ------------ ------------- ------------ ------------- Segment Property and casualty insurance: Underwriting Commercial auto $ 107,740 $ 28,242 $ 15,886 $ 140,295 Personal auto 375,431 93,488 9,047 463,933 Workers' compensation 65,762 21,313 9,979 97,176 Gen. liability, A&H 55,331 33,731 11,597 96,698 Homeowners 125,136 44,666 15,897 168,168 CMP, fire and allied lines, inland marine 131,499 64,520 21,220 206,133 Fidelity, surety, burglary 3,743 17,534 5,220 34,418 Miscellaneous Income Investment ------------ ------------- ------------ ------------- Total property and casualty insurance 864,642 303,494 88,846 1,206,821 Life ins. (discontinued operations) 268 15,049 819 6 Premium finance 1,655 1,511 Corporation 5,329 ------------ ------------- ------------ ------------- Total $ 864,910 $ 318,543 $ 96,649 $ 1,208,338 ============ ============= ============ =============
1. Net investment income has been allocated to principal business segments on the basis of separately identifiable assets. 2. The principal portion of general operating expenses has been directly attributed to business segment classifications incurring such expenses with the remainder allocated based on policy counts. 69 70 Schedule III Ohio Casualty Corporation and Subsidiaries Consolidated Supplementary Insurance Information (In thousands) December 31, 1996
Deferred Future policy policy benefits Net acquisition losses and Unearned Premium investment costs loss expenses premiums revenue income ------------- -------------- ------------ ------------- ------------ Segment Property and casualty insurance: Underwriting Commercial auto $ 8,536 $ 167,288 $ 63,800 $ 142,445 Personal auto 27,789 428,843 118,034 455,894 Workers' compensation 7,990 387,951 47,012 124,157 Gen. liability, A&H 13,833 265,399 45,337 104,428 Homeowners 26,553 70,969 92,950 165,630 CMP, fire and allied lines, inland marine 32,634 213,270 97,943 195,437 Fidelity, surety, burglary 10,835 13,867 26,312 34,135 Miscellaneous Income 2,410 Investment $ 179,407 ------------- -------------- ------------ ------------- ------------ Total property and casualty insurance 128,170 1,547,587 491,388 1,224,536 179,407 Life ins. (discontinued operations) (11,486) 289,086 4,582 4,812 Premium finance 225 2,115 293 Corporation 3,608 ------------- -------------- ------------ ------------- ------------ Total $ 116,684 $ 1,836,673 $ 491,613 $ 1,231,233 $ 188,120 ============= ============== ============ ============= ============ Benefits, Amortization losses and of deferred General loss acquisition operating Premiums expenses costs expenses written ------------ ------------- ------------ -------------- Segment Property and casualty insurance: Underwriting Commercial auto $ 100,944 $ 28,285 $ 18,440 $ 139,421 Personal auto 394,334 92,589 15,828 455,240 Workers' compensation 80,975 26,221 10,124 115,398 Gen. liability, A&H 43,799 34,829 14,081 101,793 Homeowners 167,302 46,149 12,641 166,457 CMP, fire and allied lines, inland marine 141,331 62,688 20,364 195,290 Fidelity, surety, burglary 1,904 18,095 5,794 34,473 Miscellaneous Income Investment ------------ ------------- ------------ -------------- Total property and casualty insurance 930,589 308,856 97,272 1,208,072 Life ins. (discontinued operations) 693 2,004 (193) 215 Premium finance 1,969 1,981 Corporation 5,907 ------------ ------------- ------------ -------------- Total $ 931,282 $ 310,860 $ 104,955 $ 1,210,268 ============ ============= ============ ==============
1. Net investment income has been allocated to principal business segments on the basis of separately identifiable assets. 2. The principal portion of general operating expenses has been directly attributed to business segment classifications incurring such expenses with the remainder allocated based on policy counts. 70 71 Schedule IV Ohio Casualty Corporation and Subsidiaries Consolidated Reinsurance (In thousands) December, 1998, 1997 and 1996
Percent of amount Ceded to Assumed assumed Gross other from other Net to net amount companies companies amount amount ----------- ----------- ----------- ----------- ------------ Year Ended December 31, 1998 Life insurance in force $ 329 $ 329 $ 0 $ 0 0.0% Premiums Property and casualty insurance $ 1,289,837 $ 79,268 $ 226,177 $ 1,436,746 15.7% Life insurance (Discontinued operations) 3,187 3,187 0 0 0.0% Accident and health insurance 567 567 0 0 0.0% ----------- ----------- ----------- ----------- Total premiums 1,293,591 83,022 226,177 1,436,746 15.7% Premium finance charges 1,170 Life insurance - FAS 97 adjustment 0 ----------- Total premiums and finance charges written 1,437,916 Change in unearned premiums and finance charges (31,790) Retro reinsurance assumed from acquisition (137,636) ----------- Total premiums and finance charges earned 1,268,490 Miscellaneous income 334 Discontinued operations - life insurance 0 ----------- Total premiums & finance charges earned - continuing operations $ 1,268,824 =========== Year Ended December 31, 1997 Life insurance in force $ 547 $ 547 $ 0 $ 0 0.0% =========== =========== =========== =========== Premiums Property and casualty insurance $ 1,225,813 $ 31,298 $ 12,306 $ 1,206,821 1.0% Life insurance (Discontinued operations) 18,359 18,359 0 0 0.0% Accident and health insurance 1,392 1,575 189 6 3150.0% ----------- ----------- ----------- ----------- Total premiums 1,245,564 51,232 12,495 1,206,827 1.0% Premium finance charges 1,511 Life insurance - FAS 97 adjustment 0 ----------- Total premiums and finance charges written 1,208,338 Change in unearned premiums and finance charges (3,283) ----------- Total premiums and finance charges earned 1,205,055 Miscellaneous income 3,925 Discontinued operations - life insurance (6) ----------- Total premiums & finance charges earned - continuing operations $ 1,208,974 =========== Year Ended December 31, 1996 Life insurance in force $ 4,623,435 $ 4,623,435 $ 0 $ 0 0.0% =========== =========== =========== =========== Premiums Property and casualty insurance $ 1,211,695 $ 29,039 $ 25,416 $ 1,208,072 2.1% Life insurance (Discontinued operations) 29,822 29,822 0 0 0.0% Accident and health insurance 2,204 3,502 1,513 215 703.7% ----------- ----------- ----------- ----------- Total premiums 1,243,721 62,363 26,929 1,208,287 2.2% Premium finance charges 1,981 ----------- Total premiums and finance charges written 1,210,268 Change in unearned premiums and finance charges 14,182 ----------- Total premiums and finance charges earned 1,224,450 Miscellaneous income 2,416 Discontinued operations - life insurance (215) ----------- Total premiums & finance charges earned - continuing operations $ 1,226,651 ===========
71 72 Schedule V Ohio Casualty Corporation and Subsidiaries Valuation and Qualifying Accounts (In thousands)
Balance at Addition Balance at beginning Charged to due to end of of period expenses Acquisition Deductions period Year ended December 31, 1998 Reserve for bad debt 4,200 100 4,439 0 8,739 Year ended December 31, 1997 Reserve for bad debt 3,700 500 0 0 4,200 Year ended December 31, 1996 Reserve for bad debt 3,500 200 0 0 3,700
72 73 Schedule VI Ohio Casualty Corporation and Subsidiaries Consolidated Supplemental Information Concerning Property and Casualty Insurance Operations (IN THOUSANDS)
Reserves for Deferred unpaid claims policy and claim Discount Net Affiliation with acquisition adjustment of Unearned Earned investment registrant costs expenses reserves premiums premiums income ---------- ----------- ---------- ----------- ----------- ---------- Property and casualty subsidiaries Year ended December 31, 1998 $ 177,698 $ 1,945,858 $ 0 $ 668,382 $1,267,604 $ 164,812 ========== =========== ========== =========== =========== ========== Year ended December 31, 1997 $ 128,248 $ 1,481,657 $ 0 $ 494,883 $1,207,341 $ 172,372 ========== =========== ========== =========== =========== ========== Year ended December 31, 1996 $ 128,170 $ 1,547,587 $ 0 $ 491,388 $1,224,536 $ 179,407 ========== =========== ========== =========== =========== ========== Claims and claim adjustment expenses Amortization Paid incurred related to of deferred claims --------------------- policy and claim Affiliation with Current Prior acquisition adjustment Premiums registrant year years costs expenses written ----------- ----------- ------------ ----------- ----------- Property and casualty subsidiaries Year ended December 31, 1998 $ 989,115 $ (66,119) $ 316,516 $ 963,094 $ 1,436,746 =========== =========== ============ =========== =========== Year ended December 31, 1997 $ 921,818 $ (53,615) $ 303,494 $ 929,399 $ 1,206,821 =========== =========== ============ =========== =========== Year ended December 31, 1996 $1,008,395 $ (76,920) $ 308,856 $1,001,706 $ 1,208,072 =========== =========== ============ =========== ===========
73 74 FORM 10-K OHIO CASUALTY CORPORATION INDEX TO EXHIBITS
Page Number ------ Exhibit 21 Subsidiaries of Registrant 75 Exhibit 22 Proxy Statement of the Board of Directors for the fiscal year ended December 31, 1998 76-95 Exhibit 23 Consent of Independent Accountants to incorporation of their opinion by reference in Registration Statement on Form S-3 and Form S-8 96 Exhibit 27 Financial Data Schedule 97 Exhibit 28 Information from Reports Furnished to State Insurance Regulation Authorities 98-111 Exhibits incorporated by reference to previous filings: Exhibit 2 Asset Purchase Agreement between Ohio Casualty Corporation and Great American Insurance Company filed with Form 10Q on November 13, 1998 Exhibit 3 Articles of Incorporation and By Laws amended 1986 and filed with Form 8-K on January 15, 1987 Exhibit 3a Amendment to Amended Articles of Incorporation increasing authorized number of shares to 150,000,000 common shares and authorized 2,000,000 preferred shares, dated April 17, 1996 Exhibit 4 Amended and Restated Rights Agreement dated as of February 19, 1998 between Ohio Casualty Corporation and First Chicago Trust Company of New York, as Rights Agent. Exhibit 10 Credit Agreement dated as of October 25, 1994 between Ohio Casualty Corporation and Chase Manhattan Bank, N.A., as agent, filed with Form 10-Q on November 1, 1994 Exhibit 10a Ohio Casualty Corporation 1993 Stock Incentive Program filed with Form 10-Q as Exhibit 10d on May 31, 1993 Exhibit 10a1 Ohio Casualty Corporation amended 1993 Stock Incentive Program filed with Form 10-Q dated May 14, 1997 Exhibit 10b Coinsurance Life, Annuity and Disability Income Reinsurance Agreement between Employer's Reassurance Corporation and The Ohio Life Insurance Company dated as of October 2, 1995 Exhibit 10c Credit Agreement dated October 27, 1997 with Chase Manhattan Bank, N.A. as agent, filed with Form 10-Q on November 13, 1997
74 EX-21 2 EXHIBIT 21 1 Exhibit 21 Ohio Casualty Corporation Subsidiaries of Registrant December 31, 1998 Name of Subsidiary State of Incorporation The Ohio Casualty Insurance Company Ohio West American Insurance Company Indiana Ohio Casualty of New Jersey, Inc. Ohio Ohio Security Insurance Company Ohio American Fire and Casualty Company Ohio Avomark Insurance Company Indiana The Ohio Life Insurance Company Ohio Ocasco Budget, Inc. Ohio Hamilton Intermediaries Ohio 75 EX-22 3 EXHIBIT 22 1 Exhibit 22 OHIO CASUALTY CORPORATION 136 NORTH THIRD STREET HAMILTON, OHIO 45025 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 21, 1999 Hamilton, Ohio March 18, 1999 To the Shareholders: The Annual Meeting of Shareholders (the "Annual Meeting") of Ohio Casualty Corporation (the "Company") will be held in the Ohio Casualty University Auditorium of Ohio Casualty Corporation, 9450 Seward Road, Fairfield, Ohio, 45014, on Wednesday, April 21, 1999, at 10:30 a.m., local time, for the following purposes: (1) To elect the following three Directors for terms expiring in 2002 (Class III): Arthur J. Bennert, Catherine E. Dolan and Lauren N. Patch. (2) In their discretion, to consider and vote upon such other matters as may properly come before the Annual Meeting or any adjournment thereof. Holders of record of common shares of the Company as of the close of business on March 1, 1999 are entitled to notice of and to vote at the Annual Meeting and at any adjournment thereof. As of March 1, 1999, there were 31,221,531 common shares outstanding. Each common share is entitled to one vote on all matters properly brought before the Annual Meeting. By Order of the Board of Directors, Howard L. Sloneker III, Secretary EVERY SHAREHOLDER'S VOTE IS IMPORTANT. IF YOU ARE UNABLE TO BE PRESENT AT THE ANNUAL MEETING, YOU ARE REQUESTED TO COMPLETE AND RETURN PROMPTLY THE ENCLOSED PROXY SO THAT YOUR COMMON SHARES WILL BE REPRESENTED. A POSTAGE PAID, ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. 76 2 OHIO CASUALTY CORPORATION 136 NORTH THIRD STREET HAMILTON, OHIO 45025 PROXY STATEMENT --------------- ANNUAL MEETING OF SHAREHOLDERS APPROXIMATE DATE TO MAIL -- MARCH 18, 1999 On behalf of the Board of Directors of Ohio Casualty Corporation (the "Company"), a proxy is solicited from you to be used at the Company's 1999 Annual Meeting of Shareholders (the "Annual Meeting") scheduled for Wednesday, April 21, 1999 at 10:30 a.m., local time, in the Ohio Casualty University Auditorium of Ohio Casualty Corporation, 9450 Seward Road, Fairfield, Ohio 45014, or at any adjournment thereof. Proxies in the form enclosed herewith are being solicited on behalf of the Company's Board of Directors. The common shares represented by proxies which are properly executed and returned will be voted at the Annual Meeting, or any adjournment thereof, as directed. Common shares represented by proxies properly executed and returned which indicate no direction will be voted in favor of the nominees of the Board of Directors identified in the Notice of Annual Meeting accompanying this Proxy Statement. Any shareholder giving the enclosed proxy has the power to revoke the same prior to its exercise by filing with the Secretary of the Company a written revocation or duly executed proxy bearing a later date, or by giving notice of revocation in open meeting. ATTENDANCE AT THE ANNUAL MEETING WILL NOT, IN AND OF ITSELF, CONSTITUTE REVOCATION OF A PROXY. VOTING AT ANNUAL MEETING As of March 1, 1999, the record date fixed for the determination of shareholders entitled to notice of and to vote at the Annual Meeting, there were outstanding 31,221,531 common shares, which is the only outstanding class of capital stock of the Company. Each such common share is entitled to one vote on all matters properly coming before the Annual Meeting. A quorum for the Annual Meeting is a majority of the outstanding common shares. Common shares represented by signed proxies that are returned to the Company will be counted toward the quorum in all matters even though they are marked "Abstain", "Against" or " Withhold Authority" on one or more or all matters or they are not marked at all. Broker non-votes are also counted for purposes of determining the presence or absence of a quorum. Broker non-votes occur when brokers, who hold their customers' shares in street name, sign and submit proxies for such shares on some matters, but not others. Typically, this would occur when brokers have not received any instructions from their customers, in which case the brokers, as the holders of record, are permitted to vote on "routine" matters, which typically include the election of directors, but not on non-routine matters. 77 3 PRINCIPAL SHAREHOLDERS The table below identifies the only persons known to the Company to own beneficially (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) more than 5% of the Company's outstanding common shares.
COMMON SHARES PERCENT NAME AND ADDRESS BENEFICIALLY OF COMMON OF BENEFICIAL OWNER OWNED SHARES DATE ------------------- ----- ------ ---- FIRST NATIONAL BANK OF 3,130,957(1) 10.01% 12-31-98 SOUTHWESTERN OHIO Third and High Streets Hamilton, Ohio 45011 CAPITAL RESEARCH AND 2,997,500(2) 9.59% 12-31-98 MANAGEMENT COMPANY 333 South Hope Street Los Angeles, California 90071 THE INCOME FUND OF AMERICA, INC. 2,280,000(2) 7.29% 12-31-98 333 South Hope Street Los Angeles, California 90071 THE CHASE MANHATTAN BANK, N.A., 2,240,792(3) 7.17% 12-31-98 Trustee 1211 Avenue of the Americas New York, New York 10036 JOSEPH L. MARCUM 2,190,816(4) 7.02% 03-01-99 136 North Third Street Hamilton, Ohio 45025 AMVESCAP PLC 1,641,800(5) 5.25% 12-31-98 11 Devonshire Square London EC2M 4YR England
- -------------------- (1) Based upon information provided to the Company by First National Bank of Southwestern Ohio (the "Bank"). The Bank holds the reported shares as trustee under various trust agreements and arrangements. The Bank has advised the Company that it has sole voting power for 2,448,889 shares, shared voting power for 0 shares, sole investment power for 1,346,495 shares, and shared investment power for 1,295,864 shares. 399,019 shares are held under trust arrangements for certain directors of the Company and their respective spouses, which shares are also reported in the following table showing share ownership by directors and executive officers of the Company. The share information reflects beneficial ownership as of December 31, 1998. 78 4 (2) Based upon information contained in a Schedule 13G (Amendment No. 1) dated February 8, 1999, filed with the Securities and Exchange Commission by Capital Research and Management Company and The Income Fund of America, Inc. According to the Schedule 13G filing, The Income Fund of America, Inc. is advised by Capital Research and Management Company. Capital Research and Management Company reported sole voting power for 0 shares, shared voting power for 0 shares and sole investment power for 2,997,500. The Income Fund of America, Inc. reported sole voting power for 2,280,000 shares, shared voting power for 0 shares and sole investment power for 0 shares. The Company has been advised by Capital Research and Management Company that the same 2,280,000 shares reported to be beneficially owned by The Income Fund of America, Inc. are also reported to be beneficially owned by Capital Research and Management Company in the Schedule 13G. Beneficial ownership information is reported as of December 31, 1998. (3) 1,398,560 shares are held as trustee for the Company's Employee Savings Plan and 842,232 shares are held as trustee for the Company's Employees Retirement Plan. Voting power with respect to shares held in the Employee Savings Plan is exercised by the plan participants; investment power with respect to these shares is held by plan participants subject to limitations in the Plan. Voting and investment power with respect to shares held in the Employees Retirement Plan is exercised by the committee which administers the Employees Retirement Plan (the "Retirement Committee"). The Retirement Committee consists of Joseph L. Marcum, Lauren N. Patch and Barry S. Porter. (4) See share ownership information for Mr. Marcum in the following table. (5) Based upon information contained in a Schedule 13G dated February 8, 1999, filed with the Securities and Exchange Commission by AMVESCAP PLC, the parent holding company for the following subsidiaries which acquired shares reported by the parent holding company: AVZ, Inc.; AIM Management Group, Inc.; AMVESCAP Group Services, Inc.; INVESCO, Inc.; INVESCO North American Holdings, Inc.; INVESCO Capital Management, Inc.; INVESCO Funds Group, Inc. AMVESCAP PLC reported sole voting power for 0 shares, shared voting power for 1,641,800 shares, sole dispositive power for 0 shares and shared dispositive power for 1,641,800 shares as of December 31, 1998. SHAREHOLDINGS OF DIRECTORS, EXECUTIVE OFFICERS AND NOMINEES FOR ELECTION AS DIRECTOR As of March 1, 1999, the directors of the Company, including the three persons intended by the Board of Directors to be nominated for election as directors, the executive officers of the Company named in the Summary Compensation Table, and all executive officers and directors of the Company as a group, beneficially owned common shares of the Company as set forth below. 79 5
SHARED INVESTMENT/ NUMBER OF OPTIONS VOTING POWER COMMON SHARES EXERCISABLE OVER EMPLOYEES NAME OF BENEFICIALLY WITHIN RETIREMENT PERCENT INDIVIDUAL OR GROUP OWNED(1) 60 DAYS PLAN SHARES(2) TOTAL OF CLASS(3) - ------------------- -------- ------- -------------- ----- ----------- Arthur J. Bennert 16,178 6,000 22,178 Jack E. Brown 1,100 6,000 7,100 Catherine E. Dolan 100 6,000 6,100 Wayne Embry 200 9,000 9,200 Vaden Fitton 227,779(4) 6,000 233,779 Jeffery D. Lowe 169,068(4) 0 169,068 Joseph L. Marcum 1,345,584(4)(5)(6) 3,000 842,232 2,190,816 7.02% Stephen S. Marcum 215,744(4) 9,000 224,744 Lauren N. Patch 252,605(4)(7) 60,000 842,232 1,154,837 3.69% Stanley N. Pontius 1,163 9,000 10,163 Howard L. Sloneker III 221,438(7) 16,666 238,104 William L. Woodall 20,700 9,000 29,700 Michael L. Evans 6,131(7) 19,999 26,130 Coy Leonard, Jr 1,196(7) 6,000 7,196 Barry S. Porter 28,667(7) 19,999 842,232 890,898 2.85% All Executive Officers and Directors as a 2,757,235 245,664 842,232 3,845,131 12.31% Group (38 Persons)
- --------------- (1) Unless otherwise indicated, each named person has voting and investment power over the listed shares and such voting and investment power is exercised solely by the named person or shared with a spouse. (2) Includes 842,232 shares held in the Company's Employees Retirement Plan as to which the named individuals share voting and investment power solely by reason of being a member of the Retirement Committee which administers such Plan. See Note (3) of the preceding table. Messrs. Marcum, Patch and Porter disclaim beneficial ownership of these shares. (3) Percentages are listed only for those individuals who are the beneficial owners of more than 1% of the outstanding shares. (4) Includes the following number of shares owned by family members as to which beneficial ownership is disclaimed: Mr. Fitton, 102,857; Mr. Lowe, 143,750; Mr. Joseph L. Marcum, 611,354; Mr. Stephen S. Marcum, 84,090; and Mr. Patch, 211,847. (5) Includes 213,852 shares held by Mr. Marcum's wife in her capacity as a co-trustee of the estate of Howard Sloneker as to which shares Mr. Marcum has no voting or investment power. (6) Includes 97,806 shares held as co-trustee of the Joseph L. and Sarah S. Marcum Foundation as to which voting and investment power is shared by Joseph L. and Stephen S. Marcum. 80 6 (7) The share ownership for Messrs. Patch, Sloneker, Evans, Leonard and Porter includes 4,951; 2,592; 1,447; 183, and 10,259 shares, respectively, held for the accounts of these individuals by the trustee of the Company's Employee Savings Plan. Such persons have sole voting power with respect to these shares and also hold investment power subject to limitations in the Plan. ELECTION OF DIRECTORS The Board of Directors intends that the three persons named under Class III in the following table (the "Nominees") will be nominated for election at the Annual Meeting for three-year terms expiring in 2002. The terms of the remaining directors in Classes I and II will continue after the Annual Meeting. It is intended that the common shares represented by the accompanying Proxy will be voted for the election as directors of the Nominees, unless otherwise instructed on the Proxy. In the event that any one or more of the Nominees unexpectedly becomes unavailable for election, the common shares represented by the accompanying Proxy will be voted in accordance with the best judgment of the proxy holders for the election of the remaining Nominees and for the election of any substitute nominee or nominees designated by the Board of Directors. The proxies cannot be voted for more than three nominees designated by the Board of Directors. Under Ohio law and the Company's Code of Regulations, the nominees receiving the greatest number of votes will be elected as directors. Shares as to which the authority to vote is withheld will be counted for quorum purposes but will not be counted toward the election of the Nominees.
POSITION WITH COMPANY AND/OR PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR NAME AND AGE(1) DURING LAST FIVE YEARS(2) SINCE - --------------- ---------------------------------------------------------------------------- -------- NOMINEES: CLASS III --TERMS EXPIRING IN 2002: (3) Arthur J. Bennert, Director of the Company, The Ohio Casualty Insurance Company, West 1989 72 American Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company, Ohio Casualty of New Jersey, Inc. and The Ohio Life Insurance Company; retired executive officer of the Company and its subsidiaries. Catherine E. Dolan, Managing Director of the Financial Institutions Group, First Union 1994 41 National Bank, Charlotte, North Carolina. Lauren N. Patch, President, Chief Executive Officer and Director of the Company, The Ohio 1987 48 Casualty Insurance Company, West American Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company, Avomark Insurance Company, Ohio Casualty of New Jersey, Inc. and OCASCO Budget, Inc.; Vice Chairman and Director of The Ohio Life Insurance Company.
81 7
POSITION WITH COMPANY AND/OR PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR NAME AND AGE(1) DURING LAST FIVE YEARS(2) SINCE - ---------------- ---------------------------------------------------------------------------- -------- DIRECTORS WHOSE TERMS CONTINUE BEYOND THE ANNUAL MEETING: CLASS I -- TERMS EXPIRING IN 2000 Jack E. Brown, Chairman of the Board, BBI Marketing Services, Inc., Cincinnati, Ohio 1994 55 (professional marketing consulting firm). Vaden Fitton, Director and Retired First Vice President of First National Bank of 1967 70 Southwestern Ohio, Hamilton, Ohio. Joseph L. Marcum, Chairman of the Board and Director of the Company, The Ohio Casualty 1949 75 Insurance Company, West American Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company, Avomark Insurance Company, Ohio Casualty of New Jersey, Inc., OCASCO Budget, Inc. and The Ohio Life Insurance Company. Howard L. Sloneker III, Senior Vice President, Secretary and Director of the Company, The Ohio 1983 42 Casualty Insurance Company, West American Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company, Avomark Insurance Company, Ohio Casualty of New Jersey, Inc. and OCASCO Budget, Inc.; Secretary and Director of The Ohio Life Insurance Company. CLASS II: TERMS EXPIRING IN 2001 Wayne Embry, Executive Vice President and General Manager of the Cleveland Cavaliers 62 (professional basketball franchise). 1991 Stephen S. Marcum, Member of the law firm of Parrish, Beimford, Fryman, Smith & Marcum Co., 1989 41 L.P.A., Hamilton, Ohio; such firm has provided legal services to the Company and its subsidiaries during the last fiscal year and continues to do so. Stanley N. Pontius, President and Chief Executive Officer of First Financial Bancorp and its 1994 52 principal subsidiary, First National Bank of Southwestern Ohio, Hamilton, Ohio. William L. Woodall, Director of the Company, The Ohio Casualty Insurance Company, West 1986 75 American Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company, OCASCO Budget, Inc. and The Ohio Life Insurance Company; retired executive officer of the Company and its subsidiaries. - ----------------------------
(1) Ages are listed as of the date of the Annual Meeting. (2) The Ohio Casualty Insurance Company, Ohio Security Insurance Company, American Fire and Casualty Company, West American Insurance Company, OCASCO Budget, Inc. and The Ohio Life Insurance Company are subsidiaries of the Company. (3) Jeffery D. Lowe, who is currently a Class III director whose term expires in 1999, has decided not to run for re-election at the Annual Meeting and will resign from the Board effective as of the date of the Annual Meeting. Because the Board of Directors is still in the process of identifying and interviewing potential candidates to fill the vacancy to be created by Mr. Lowe's resignation, the 82 8 Board has not nominated a successor to Mr. Lowe for election at the Annual Meeting. The Board intends to fill the vacancy following the Annual Meeting when an appropriate replacement for Mr. Lowe has been selected. Mr. Lowe, 53, is a director of The Ohio Casualty Insurance Company, West American Insurance Company, American Fire and Casualty Company, Ohio Security Insurance Company, Avomark Insurance Company and The Ohio Life Insurance Company. Mr. Lowe also served as an executive officer of the Company and its Subsidiaries until December 31, 1996. OTHER DIRECTORSHIPS AND RELATED TRANSACTIONS AND RELATIONSHIPS Wayne Embry is also a director of M. A. Hanna Company and Key Bank, Commercial Line of Business; Vaden Fitton, Stephen S. Marcum and Stanley N. Pontius are also directors of First Financial Bancorp. Joseph L. Marcum, the Chairman of the Board of the Company, retired as the Chief Executive Officer of the Company on December 31, 1993. Mr. Marcum receives annual benefits from the Company of $146,309 pursuant to the Company's Employees Retirement Plan. See "Pension Plans." Jeffery D. Lowe is the son-in-law of Joseph L. Marcum; Lauren N. Patch and Howard L. Sloneker III are brothers-in-law; and Stephen S. Marcum is the son of Joseph L. Marcum. MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD During 1998, the Board of Directors held nine meetings. No director attended less than 75% of the aggregate number of meetings of the Board of Directors and the committees on which he or she served. The Board of Directors has standing Executive, Audit, Executive Compensation and Nominating Committees. The Executive Committee did not meet during 1998. The members of the Executive Committee are Joseph L. Marcum, Lauren N. Patch, and Howard L. Sloneker III. The Executive Committee is empowered to exercise all the powers of the Board of Directors in the management of the Company between meetings of the Board of Directors, other than filling vacancies on the Board or any other committee of the Board. The Audit Committee held four meetings during 1998. The members of the Audit Committee are Arthur J. Bennert, Jack E. Brown, Catherine E. Dolan, Wayne Embry, Vaden Fitton, Joseph L. Marcum, Stephen S. Marcum, Stanley N. Pontius and William L. Woodall. Each Audit Committee member attended all of the meetings in 1998 except Mr. Brown, who attended two meetings. The Audit Committee's primary function is to meet with the independent auditors for the Company and to review the Company's internal and independent auditing and financial controls. The Executive Compensation Committee held one meeting during 1998. The members of the Executive Compensation Committee are Jack E. Brown, Vaden Fitton, Stephen S. Marcum and Stanley N. Pontius. All members of the Executive Compensation Committee attended the meeting in 1998. 83 9 The Executive Compensation Committee administers the Company stock option plans and carries out the responsibilities described in the Executive Compensation Committee Report in this Proxy Statement. The Nominating Committee did not meet during 1998. The members of the Nominating Committee are Jack E. Brown, Wayne Embry, Vaden Fitton, Joseph L. Marcum, Stephen S. Marcum, Stanley N. Pontius and Howard L. Sloneker III. The Nominating Committee's responsibilities include the selection of potential candidates for director and the recommendation of candidates to the Board. The Nominating Committee will consider nominees for director recommended by shareholders for the 2000 Annual Meeting of Shareholders provided that the names of such nominees are submitted not later than November 18, 1999, to Howard L. Sloneker III, Secretary, 136 North Third Street, Hamilton, Ohio 45025. DIRECTORS' FEES AND COMPENSATION Each director receives $25,000 for services as a director of the Company. Each non-employee director of the Company also receives $1,500 per meeting for attending meetings of the Board of Directors. Members of the Audit Committee also receive $5,000 each for serving on that committee. In addition, members of the Executive Compensation Committee receive $300 per meeting for each meeting attended. Joseph L. Marcum was paid an additional $65,000 during 1998 as compensation for serving as the Chairman of the Board. On May 27, 1998, Wayne Embry, Stephen S. Marcum, Stanley N. Pontius and William L. Woodall, each of whom is a non-employee director of the Company, were granted a non-qualified stock option (an "NQSO") to purchase 3,000 common shares of the Company at an exercise price of $42.25 per share, the closing market price of the common shares on the date of grant. Any individual who becomes or is re-elected a non-employee director is automatically granted an NQSO to purchase 3,000 common shares effective on the third business day following the first meeting of the Board of Directors after his/her election or appointment to the Board. The exercise price of each NQSO granted to a non-employee director is equal to the fair market value of the common shares on the date of grant. NQSOs granted to non-employee directors have terms of ten years (subject to earlier termination in certain cases) and may not be exercised during the six months following their date of grant. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table presents information concerning compensation provided by the Company to its Chief Executive Officer and to each of the Company's four most highly compensated executive officers, other than the Chief Executive Officer, for services rendered in all capacities for each of the Company's last three completed fiscal years: 84 10
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ------------------------------------------------------------- ------------------------- OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING DIVIDEND NAME AND SALARY BONUS COMPENSATION STOCK OPTIONS/ PAYMENT PRINCIPAL POSITION YEAR ($)(1) ($) ($)(2)(3) AWARDS($)(4) SARS(#) RIGHTS(#)(5) ------------------ ---- ------ --- --------- ------------ ------- ------------ Lauren N. Patch 1998 530,000 32,124 60,601 60,722 30,000 30,000 President and Chief 1997 530,000 0 70,898 98,025 30,000 30,000 Executive Officer 1996 529,560 0 47,881 57,709 30,000 30,000 Barry S. Porter 1998 267,528 13,700 29,051 25,798 10,000 10,000 Chief Financial 1997 258,000 0 32,463 40,165 10,000 10,000 Officer and Treasurer 1996 248,604 0 22,484 24,956 10,000 10,000 Michael L. Evans 1998 220,224 6,867 17,390 11,965 10,000 10,000 Senior Vice President 1997 213,750 0 11,083 6,694 10,000 10,000 1996 199,500 0 19,051 18,686 10,000 10,000 Howard L. Sloneker III 1998 216,838 10,756 22,563 19,186 10,000 10,000 Senior Vice President 1997 209,500 0 23,488 27,760 10,000 10,000 1996 197,698 0 16,603 16,335 10,000 10,000 Coy Leonard, Jr. 1998 170,994 8,722 15,714 15,170 3,000 3,000 Senior Vice President 1997 158,821 0 14,312 18,163 3,000 3,000 1996 132,352 0 7,952 9,446 3,000 3,000
(1) Includes annual directors' fees for Messrs. Patch and Sloneker. (2) Includes for Messrs. Patch, Porter, Evans, Sloneker and Leonard for 1998 the amounts of $4,800, $4,800, $4,800, $4,800 and $1,600, respectively, contributed by the Company under the Company's Employee Savings Plan. Also includes for Messrs. Patch, Porter, Evans, Sloneker and Leonard for 1998 the amounts of $10,350, $3,226, $1,549, $955 and $110, respectively, contributed by the Company under the Company's Supplemental Executive Savings Plan. (3) Includes for Messrs. Patch, Porter, Evans, Sloneker and Leonard for 1998, the amounts of $45,451, $21,025, $11,041, $16,808 and $14,004, respectively, for income taxes incurred as a result of the grant of restricted shares described in note (4) below. These amounts were paid in 1999. (4) The aggregate values of all outstanding restricted stock awards at the end of the fiscal year 1998 were $143,866, $60,256, $24,547, $40,322 and $25,412 for Messrs. Patch, Porter, Evans, Sloneker and Leonard, respectively. The number of the restricted stock awards held by Messrs. Patch, Porter, Evans, Sloneker and Leonard at the end of the fiscal year 1998 was 3,493, 1,463, 596, 979 and 617, respectively. Such restricted common shares vest on the third anniversary of the date of the grant so long as the executive officer is an employee on such date (with earlier vesting occurring on retirement, death or disability or termination of employment following a change of control). During the restriction period, the executive officer will receive all dividends paid on the shares. (5) Dividend payment rights were granted to the named executive officers in 1997, 1998 and 1999. These rights entitle the executive officer on the April 15th following the third anniversary of the grant date to receive, for each dividend payment right, an amount in cash equal to the aggregate amount of dividends that the Company has paid on each common share from the date on which such right becomes effective through the payout date subject to certain restrictions. 85 11 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning the grant of stock options during the last fiscal year to each of the executive officers of the Company named in the Summary Compensation Table. No stock appreciation rights were granted during the last fiscal year.
POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED OPTIONS ANNUAL RATES OF STOCK NUMBER OF GRANTED PRICE APPRECIATION FOR SHARES TO OPTION TERM(2) UNDERLYING EMPLOYEES EXERCISE ---------------------- OPTIONS IN FISCAL PRICE EXPIRATION ($) ($) NAME GRANTED # (1) YEAR ($/SH) DATE 5% 10% ---- ------------- --------- -------- ---------- -- --- Lauren N. Patch 30,000 24.39 46.9375 02-19-08 885,562 2,244,189 Barry S. Porter 10,000 8.13 46.9375 02-19-08 295,187 748,063 Michael L. Evans 10,000 8.13 46.9375 02-19-08 295,187 748,063 Howard L. Sloneker III 10,000 8.13 46.9375 02-19-08 295,187 748,063 Coy Leonard, Jr. 3,000 2.43 46.9375 02-19-08 88,556 224,419
(1) All reported stock options were granted pursuant to the Ohio Casualty Corporation 1993 Stock Incentive Program at the fair market value of the underlying option shares on the date of grant, become exercisable as to one-third of the option shares on each of the first three anniversaries of the date of grant and have a term of ten years. In the event of a change in control of the Company, the stock options would become exercisable in full. Stock options reported consist of incentive stock options and non-qualified stock options. (2) The dollar amounts under these columns are the result of calculations at the 5% and 10% annual appreciation rates set by the Securities and Exchange Commission for illustrative purposes, and, therefore, are not intended to forecast future financial performance or possible future appreciation in the price of the Company's common shares. Shareholders are therefore cautioned against drawing any conclusions from the appreciation data shown, aside from the fact that optionees will only realize value from the option grants shown when the price of the Company's common shares appreciates, which benefits all shareholders commensurately. OPTION EXERCISES IN LAST FISCAL YEAR The following table sets forth information concerning the exercise of stock options during the last fiscal year by each of the executive officers of the Company named in the Summary Compensation Table and the fiscal year-end value of unexercised stock options and SARs held by such executive officers: 86 12
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE ------------------------------------------------- NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS SHARES FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1) ACQUIRED ON VALUE --------------------------- ------------------------- NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ ----------- ----------- ------------- ------------------------- Lauren N. Patch 0 0 30,000 60,000 121,860 0 Barry S. Porter 0 0 9,999 20,001 40,616 0 Michael L. Evans 0 0 9,999 20,001 40,616 0 Howard L. Sloneker III 0 0 6,666 20,001 19,994 0 Coy Leonard, Jr. 0 0 3,000 6,000 12,186 0
(1) "Value of Unexercised In-the-Money Options at Fiscal Year-End" is based upon the fair market value of the Company's common shares on December 31, 1998 ($41.187), less the exercise price of in-the-money options on December 31, 1998. PENSION PLANS The following table sets forth the estimated annual benefits payable under the Employees Retirement Plan and The Ohio Casualty Insurance Company Benefit Equalization Plan (the "Benefit Equalization Plan") to participants in such plans, including the executive officers named in the Summary Compensation Table, upon retirement in specified compensation and years of service classifications: PENSION PLANS TABLE
15 20 25 30 35 40 45 ANNUAL EARNINGS YEARS YEARS YEARS YEARS YEARS YEARS YEARS --------------- ----- ----- ----- ----- ----- ----- ----- $125,000 $27,802 $37,070 $46,337 $55,604 $64,872 $74,139 $83,407 175,000 39,802 53,070 66,337 79,604 92,872 106,139 119,407 225,000 51,802 69,070 86,337 103,604 120,872 138,139 155,407 275,000 63,802 85,070 106,337 127,604 148,872 170,139 191,407 325,000 75,802 101,070 126,337 151,604 176.872 202,139 227,407 375,000 87,802 117,070 146,337 175,604 204,872 234,139 263,407 400,000 93,802 125,070 156,337 187,604 218,872 250,139 281,407 425,000 99,802 133,070 166,337 199,604 232,872 266,139 299,407 450,000 105,802 141,070 176,337 211,604 246,872 282,139 317,407 475,000 111,802 149,070 186,337 223,604 260,872 298,139 335,407 500,000 117,802 157,070 196,337 235,604 274,872 314,139 353,407 525,000 123,802 165,070 206,337 247,604 288,872 330,139 371,407 550,000 129,802 173,070 216,337 259,604 302,872 346,139 389,407 600,000 141,802 189,070 236,337 283,604 330,872 378,139 425,407
Retirement benefits under the Company's Employees Retirement Plan, a defined benefit plan qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), are generally payable to full-time and regular part-time salaried employees whose participation in the plan has vested (currently requiring the completion of five years of service) upon retirement at age 65 or in reduced amounts upon retirement prior to age 65 if the participant has ten years of vested service. A 87 13 retiree's benefit amount is based upon his or her credited years of service and average annual compensation (salary) for the five consecutive calendar years of highest salary during the last ten years of service immediately prior to age 65 or, if greater, the average annual compensation paid during the 60 consecutive month period immediately preceding retirement or other termination of employment. Such retirement benefits are calculated considering the retiree's Social Security-covered compensation. Benefits figures shown in the table above are computed on the assumption that participants retire at age 65 and are entitled to a single life annuity. Section 401(a)(17) of the Code limits compensation in excess of $160,000 from being taken into account in determining benefits payable under a qualified pension plan. As a result, the Benefit Equalization Plan was adopted for those employees who are adversely affected by these provisions of the Code. The Benefit Equalization Plan provides for payment of benefits that would have been payable under the Employees Retirement Plan but for the limitation on compensation imposed by the Code. Upon retirement, participants receive the actuarial equivalent present value of the benefit payable under the Benefit Equalization Plan in a lump sum. At December 31, 1998, credited years of service and average annual earnings for purposes of the Employees Retirement Plan and the Benefit Equalization Plan for the executive officers named in the Summary Compensation Table were: Lauren N. Patch, 22.5 years ($462,681); Barry S. Porter, 24.5 years ($244,525); Michael L. Evans, 23.5 years ($192,894); Howard L. Sloneker III, 16.75 years ($168,628); and Coy Leonard, Jr., 5.4 years ($138,398). The compensation covered by the Employees Retirement Plan and the Benefit Equalization Plan is the amount shown in the Summary Compensation Table as salary, less any directors' fees. REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE EXECUTIVE COMPENSATION POLICIES The Company's executive compensation programs are designed to attract and retain quality talent, and to motivate the Company's key employees to maximize shareholder returns by achieving both the short-term and long-term goals of the Company. The Executive Compensation Committee of the Board of Directors (the "Committee"), consisting entirely of non-employee directors, approves all of the policies under which compensation is paid or awarded to the Company's executive officers. The Committee believes that the Company's executive compensation opportunities, including those for the Company's Chief Executive Officer ("CEO"), should create incentives for superior performance and consequences for below-target performance. In 1996, the Company's executive compensation program was re-designed to link each executive officer's compensation directly to individual and Company performance. A significant portion of each executive officer's total compensation is now variable and dependent upon the attainment of annual objectives and long-term shareholder returns. The compensation structure provides a portion of each executive officer's compensation in stock thereby creating a mutuality of interest between executive officers and shareholders. 88 14 The Committee annually reviews the short-term and long-term compensation levels for the CEO and other senior executives to consider and implement any changes necessary to achieve its on-going objectives. In determining the comparable compensation levels discussed further below, the Committee considers information from surveys of compensation practices within the property and casualty industry which surveys may include some or all of the companies included in the Performance Graph on page 15. SPECIFIC COMPENSATION PROGRAMS There are three components to the Company's "pay for performance" system established for its officers named in the Summary Compensation Table on page 8 and 23 additional key executives (collectively called the "executive officers"): (i) base salary established on an annual basis, (ii) awards under the Annual Incentive Plan and (iii) awards under the Long-Term Incentive Plan. Each component of the Company's executive compensation program aims to accomplish a different purpose. BASE SALARY. Base salary levels for the CEO and the other executive officers of the Company are based on individual performance, the responsibilities associated with an individual's position in the Company, skill level and experience and potential future contribution, all of which are reviewed annually and benchmarked against similar positions within the survey companies. The base salary of the CEO is established by the Committee. The base salaries of the other executive officers are established by the CEO on an annual basis. Salary adjustments are based on individual performance, as determined in accordance with the Company's executive performance evaluation system, and reflective of competitive conditions existing at the time. ANNUAL INCENTIVE PLAN AWARDS: The potential award opportunities for each of the executive officers who participates in the Annual Incentive Plan are determined at the beginning of each fiscal year. Potential award opportunities for a fiscal year, which are expressed as a percentage of a participant's salary for that fiscal year, are based on the participant's level within the organization, with higher percentages being assigned to executive officers who hold more senior positions. Actual awards are based on a combination of individual and team performance. This balance supports the accomplishment of overall objectives and rewards individual contributions by the executives. Team performance, which accounts for up to 50% of the total award potential, is based on the Company's actual performance against pre-determined targets for return on equity and growth in premiums for the year. A performance threshold for each measure ensures that no awards are made for substandard accomplishments. If the performance threshold is achieved, each of the eligible executive officers receives a team award, the amount of which depends on the extent to which the Company's performance exceeds the threshold level and the potential award opportunity assigned to that participant, as described above. The Executive Compensation Committee determines, based on a recommendation from the CEO, the level of funding for the individual award pool based on the performance achieved by the management team on a number of criteria such as the achievement of pre-established Company and individual goals. The pool is allocated among the participants on the basis of their performance evaluations as determined by the CEO (the CEO's performance evaluation is conducted by the Committee). 89 15 Currently, awards under the Annual Incentive Plan are paid in cash (25%) and restricted shares of Company stock (75%). Such restricted shares may not be transferred by the participant for a three-year period following the date of the grant, unless the participant dies or his employment is terminated as a result of disability or retirement or following a change in control of the Company. If the employment of the participant terminates for any other reason during such three year period, the restricted shares will be forfeited to the Company. Awards under the Annual Incentive Plan for the 1998 fiscal year were paid in the form of cash (25%) and restricted common shares (75%) issued in February of 1999. LONG-TERM INCENTIVE PLAN Awards under the Long-Term Incentive Plan consist of incentive stock options, non-qualified stock options, or a combination of both, and dividend payment rights, as described below. Stock options are granted at market value on the date of grant and increase in value only to the extent of appreciation in the Company's common shares. Stock options expire at the end of ten years from the date of grant. Stock option grants are generally made at the beginning of the fiscal year, although grants may be made at different times to participants who are promoted or newly hired. The number of stock options to be granted is based on the participant's salary level and position. While it is the intention of the Committee to make stock option grants annually, the Committee has reserved the right to eliminate stock option awards or make other modifications in the Long-Term Incentive Plan. DIVIDEND PAYMENT RIGHTS In addition to stock options, the participants in the Long-Term Incentive Plan may be granted dividend payment rights. One-third of these rights become effective on each anniversary of the grant date. These rights entitle the holder on the April 15th following the third anniversary of the grant date (or earlier if the holder dies, becomes disabled or retires or is terminated from employment after a change in control of the Company) to receive, for each dividend payment right, an amount in cash equal to the aggregate amount of dividends that the Company has paid on each common share from the date on which the dividend payment right becomes effective through the payout date. Unless the employment of the holder of a dividend payment right terminates as a result of death, disability, retirement at normal retirement age, or following a change in control, the holder forfeits the right if his or her employment terminates prior to the scheduled payout date. The employees to whom stock options and dividend payment rights are to be awarded are determined annually by the Committee for the executive officers, including the CEO, and by the CEO for all other officers. The Company's Annual Incentive Plan and its Long-Term Incentive Plan are designed to provide participants with the opportunity to receive total compensation targeted at the 75th percentile of salaries for similar positions among the survey companies. Section 162(m) of the Code generally limits the corporate tax deduction for the compensation paid to executive officers named in the Summary Compensation Table in the proxy statement to $1 million, unless certain requirements for qualifying compensation as "performance based" are met. The compensation paid to each of the executive officers of the Company in 1998 was less than the threshold for deductibility under Section 162(m). 90 16 BASES FOR CHIEF EXECUTIVE OFFICER COMPENSATION The Committee evaluates the performance of the CEO at least annually. In 1998, Mr. Patch received a base salary of $505,000. Mr. Patch also received an award under the Annual Incentive Plan for service in 1998 of a total of 1,497 restricted common shares of the Company, which were issued to him in February of 1999 and which will be forfeited to the Company if he leaves the Company during the three-year period following the date of issue. As described in detail above, the Committee's determination of the number of restricted common shares awarded to Mr. Patch (and to all of the other executive officers) under the Annual Incentive Plan was based on the Company's 1998 total return performance as measured against established return on equity and growth in premium targets. The Company also granted to Mr. Patch in early 1998, pursuant to the Long-Term Incentive Plan, a non-qualified stock option for 30,000 shares. The number of stock options granted to Mr. Patch was based on his salary level and position with the Company. As previously indicated, in establishing the compensation of Mr. Patch and the other executive officers, the goal of the Committee has been to create a total compensation opportunity through base salary and awards under the Annual Incentive Plan and the Long-Term Incentive Plan which, if realized as a result of the Company's performance, would result in total compensation being at the 75th percentile for similar positions at the survey companies. The foregoing report on executive compensation is provided by the following directors, who constituted the Executive Compensation Committee during 1998: Jack E. Brown Vaden Fitton Stephen S. Marcum Stanley N. Pontius EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The directors of the Company who served as members of the Company's Executive Compensation Committee during 1998 were Jack E. Brown, Vaden Fitton, Stephen S. Marcum and Stanley N. Pontius. Mr. Fitton, Mr. Marcum and Mr. Porter, the Company's Chief Financial Officer and Treasurer, also served as members of the Executive Compensation Committee of First Financial Bancorp during 1998, whose Chief Executive Officer, Stanley N. Pontius, is a member of the Executive Compensation Committee of the Company. As indicated in the Executive Compensation Committee Report on Executive Compensation, Lauren N. Patch, the Company's President and Chief Executive Officer, participates in decision-making regarding the compensation of certain executive officers named in the Summary Compensation Table. Mr. Patch is not a member of the Executive Compensation Committee. 91 17 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN The following graph compares the five-year cumulative total shareholder return, including reinvested dividends, of the Company with the Dow Jones Equity Market Index and the Dow Jones Insurance Index for Property and Casualty Companies(1):
1993 1994 1995 1996 1997 1998 ------------- ------------- ------------- ------------- ------------- ------------- DJ EQUITY MARKET INDEX 100.00 100.73 138.69 170.63 228.57 294.05 DJ INSURANCE P&C 100.00 105.21 147.38 177.23 261.10 281.94 OHIO CASUALTY CORP 100.00 93.11 133.54 128.02 167.12 160.39
(1) The Dow Jones Insurance Index for Property and Casualty Companies is comprised of 11 companies that are traditionally considered as a peer group of property and casualty insurance companies within the United States. The companies making up the 1998 Index are Allstate Corp.; American International Group Inc.; Chubb Corp.; Cincinnati Financial Corp.; Loews Corp.; MBIA Inc.; Mercury General Corp.; Old Republic International Corp.; Progressive Corp.; SAFECO Corp.; and The St. Paul Cos. ANNUAL REPORT The Company's Annual Report for the fiscal year ended December 31, 1998, accompanies this Proxy Statement. 92 18 INDEPENDENT PUBLIC ACCOUNTANTS PricewaterhouseCoopers, LLP served as independent public accountants of the Company for the fiscal year ended December 31, 1998, and the Board of Directors, based on the recommendation of the Audit Committee, has selected that firm to serve as independent public accountants for the Company for the fiscal year ending December 31, 1999. A representative of PricewaterhouseCoopers will be present at the Annual Meeting with the opportunity to make a statement and/or respond to appropriate questions from the shareholders. SHAREHOLDER PROPOSALS AND NOMINATIONS Proposals of shareholders intended to be presented at the 2000 Annual Meeting of Shareholders scheduled to be held on April 19, 2000, must be received by the Company no later than November 18, 1999 for inclusion in the Company's proxy statement and proxy relating to that meeting. Upon receipt of any such proposal, the Company will determine whether or not to include such proposal in the proxy statement and proxy in accordance with applicable rules and regulations promulgated by the Securities and Exchange Commission. In order for a shareholder to nominate a candidate for director at a meeting of shareholders, under the Company's Code of Regulations, timely notice of the nomination must be received by the Company in advance of the meeting. Ordinarily, in the case of an annual meeting, such notice of a proposed nomination must be received by the Company on or before the later of (1) the first day of February immediately preceding such annual meeting or (2) the sixtieth day prior to the first anniversary of the most recent annual meeting of shareholders. The shareholder filing the notice of nomination must describe various matters regarding the proposed nominee, including such information as name, address, occupation and shares of the Company held. These requirements are separate from the requirements a shareholder must meet in order to have a proposed nominee considered by the Nominating Committee of the Company's Board of Directors for nomination by the Board of Directors and inclusion as a nominee in the Company's proxy statement. The Securities and Exchange Commission has promulgated rules relating to the exercise of discretionary voting authority pursuant to proxies solicited by the Company's Board of Directors. If a shareholder intends to present a proposal at the 2000 Annual Meeting of Shareholders and does not notify the Company of such proposal by February 3, 2000, or if a shareholder intends to nominate a director at the 2000 Annual Meeting and does not comply with the notification requirements described in the preceding paragraph, the proxies solicited by the Company's Board of Directors for use at the Annual Meeting may be voted on such proposal or such nominee, as the case may be, without discussion of the proposal or nominee in the Proxy Statement for that Annual Meeting. In each case, written notice must be given to the Secretary of the Company, whose name and address are: Howard L. Sloneker III, Secretary, Ohio Casualty Corporation, 136 North Third Street, Hamilton, Ohio 45025. 93 19 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (SEC). Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Forms 3, 4 and 5 they file. Based on the Company's review of the copies of such forms it has received, the Company believes that all its officers, directors, and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to transactions during fiscal 1998. OTHER MATTERS The Company files annually with the Securities and Exchange Commission an Annual Report on Form 10-K. This report includes financial statements and financial statement schedules. A SHAREHOLDER OF THE COMPANY MAY OBTAIN A COPY OF THE ANNUAL REPORT ON FORM 10-K, INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, WITHOUT CHARGE BY SUBMITTING A WRITTEN REQUEST TO THE FOLLOWING ADDRESS: OHIO CASUALTY CORPORATION Attention: Barry S. Porter Chief Financial Officer/Treasurer 136 North Third Street Hamilton, Ohio 45025 Management and the Board of Directors of the Company know of no business to be brought before the Annual Meeting other than as set forth in this Proxy Statement. However, if any matters other than those referred to in this Proxy Statement should properly come before the Annual Meeting, it is the intention of the persons named in the enclosed proxy to vote the common shares represented by such proxy on such matters in accordance with their best judgment. 94 20 EXPENSES OF SOLICITATION The expense of proxy solicitation will be borne by the Company. Proxies will be solicited by mail and may be solicited, for no additional compensation, by officers, directors or employees of the Company or its subsidiaries, by telephone, telegraph or in person. Brokerage houses and other custodians, nominees and fiduciaries may be requested to forward soliciting material to the beneficial owners of common shares of the Company, and will be reimbursed for their related expenses. In addition, the Company has retained Morrow & Co., Inc., a professional soliciting organization, to assist in soliciting proxies from brokerage houses, custodians and nominees. The fees and expenses of that firm in connection with such solicitation are not expected to exceed $12,000. By Order of the Board of Directors, Howard L. Sloneker III, Secretary March 18, 1999 95 EX-23 4 EXHIBIT 23 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Ohio Casualty Corporation on Form S-3 (File Nos. 333-70761 and 333-29483) and Form S-8 (File Nos. 333-69895 and 33-67962) of our reports dated February 4, 1999, on our audits of the consolidated financial statements and financial statement schedules of Ohio Casualty Corporation as of December 31, 1998, 1997 and 1996 and for the year then ended, which reports are included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Cincinnati, Ohio March 29, 1999 EX-27 5 EXHIBIT 27
7 12-MOS DEC-31-1998 DEC-31-1998 2,678,767,455 2,678,767,455 2,678,767,455 924,906,199 0 37,937,905 3,641,611,559 45,138,943 186,859,940 176,605,664 4,802,263,877 196,938,901 668,550,288 0 25,517,528 265,000,000 5,850,484 0 0 1,315,128,975 4,802,263,877 1,268,824,036 169,024,082 14,410,881 0 920,274,080 316,515,539 112,470,045 102,999,336 19,988,907 83,010,428 1,916,517 0 0 84,926,945 2.25 2.58 1,421,704,210 475,823,162 1,389,799,425 513,292,073 449,802,296 1,865,622,587 417,897,511
EX-28 6 EXHIBIT 28 1 OHIO CASUALTY GROUP Exhibit 28 SCHEDULE P-PART 1 - SUMMARY
PREMIUMS EARNED LOSS PAYMENTS (1) (2) (3) (4) (5) (6) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 16,173,485 9,119,653 1989 1,393,527,230 29,350,534 1,364,176,696 797,552,297 15,424,545 1990 1,462,962,148 24,961,247 1,438,000,901 859,124,775 10,921,310 1991 1,495,615,389 26,560,767 1,469,054,622 897,763,987 36,621,720 1992 1,550,273,214 32,683,713 1,517,589,501 917,421,951 24,834,805 1993 1,423,123,140 43,696,082 1,379,427,058 820,224,976 8,123,780 1994 1,342,790,625 45,133,158 1,297,657,467 784,813,020 4,550,440 1995 1,305,588,605 41,012,065 1,264,576,540 685,672,605 -1,589,973 1996 1,253,886,669 30,533,833 1,223,352,836 687,458,390 -11,868,310 1997 1,236,434,526 32,169,380 1,204,265,146 528,629,625 -25,942,202 1998 1,321,641,601 53,814,016 1,267,827,585 418,206,780 -37,472,766 TOTAL XXXX XXXX XXXX 7,413,041,893 32,723,003
SALVAGE & SUBROGATION ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED (1) (7) (8) (9) (10) (11) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 6,151,342 1,098,023 549,054 -188,404 836,102 1989 68,534,419 731,016 65,165,741 -15,222 34,888,751 1990 77,652,581 766,464 67,441,224 -11,775 34,870,878 1991 74,759,936 2,032,553 67,373,610 -37,105 34,311,791 1992 73,668,813 1,085,561 73,166,000 -35,041 35,334,605 1993 63,347,188 425,123 66,315,395 -114,426 28,635,507 1994 53,255,826 -779,490 70,194,665 -326,974 28,555,095 1995 39,977,558 -1,662,729 64,210,501 -700,728 27,022,759 1996 30,617,305 -3,088,478 69,584,998 -1,610,736 25,347,505 1997 12,130,316 -3,969,417 57,587,707 -2,883,083 23,053,561 1998 -1,304,515 -2,794,878 52,698,047 -3,424,117 11,596,967 TOTAL 498,790,770 -6,156,252 654,286,942 -9,347,611 284,453,523
NUMBER OF CLAIMS TOTAL NET PAID REPORTED (1) (12) (13) ACC/YR DIR & ASSUMED PRIOR 12,844,609 XXXX 1989 915,112,118 XXXX 1990 992,542,582 XXXX 1991 1,001,280,365 XXXX 1992 1,038,371,438 XXXX 1993 941,453,082 XXXX 1994 904,819,535 XXXX 1995 793,814,096 XXXX 1996 804,228,217 XXXX 1997 631,142,350 XXXX 1998 513,292,073 XXXX TOTAL 8,548,900,465 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS (1) (14) (15) (16) (17) (18) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 104,691,883 37,787,926 22,232,210 418,943 4,550,154 1989 22,660,564 4,256,391 5,147,714 175,050 1,483,205 1990 25,660,455 6,821,926 8,778,309 260,533 1,906,004 1991 20,876,086 690,148 10,825,731 253,179 2,680,352 1992 26,123,905 1,620,418 12,234,273 241,979 3,396,467 1993 45,230,670 14,058,243 16,474,200 566,800 4,812,773 1994 45,003,647 5,095,389 16,208,560 1,002,561 6,594,755 1995 67,078,121 9,199,601 22,174,963 1,747,849 10,903,151 1996 97,303,597 14,437,904 39,065,207 4,025,418 17,388,194 1997 131,586,376 17,791,523 97,445,732 13,724,488 24,415,975 1998 218,120,132 21,303,087 236,062,308 34,443,446 30,672,478 TOTAL 804,335,438 133,062,556 486,649,207 56,860,245 108,803,509
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES CASE BASIS BULK + IBNR UNPAID (1) (19) (20) (21) (22) (23) ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 561,994 20,615,651 114,368 8,445,636 4,016,000 1989 166,967 3,764,691 35,094 1,193,668 126,596 1990 204,996 4,677,183 38,671 1,810,703 229,910 1991 262,117 6,689,724 72,297 1,673,740 46,914 1992 380,523 6,139,423 126,223 2,201,212 242,318 1993 515,949 6,883,200 231,674 2,939,038 166,382 1994 718,898 5,348,740 477,721 3,111,040 110,564 1995 1,218,488 8,707,648 910,330 4,945,841 259,600 1996 1,916,938 14,544,345 1,577,936 8,538,522 640,281 1997 2,859,966 19,816,248 2,272,733 15,274,091 1,791,471 1998 3,311,227 22,517,310 2,476,795 33,795,334 3,809,844 TOTAL 12,118,063 119,704,164 8,333,842 83,928,825 11,439,880
SALVAGE & TOTAL NET NUMBER OF (1) SUBROGATION LOSSES & CLAIMS ACC/YR ANTICIPATED EXPENSES UNPAID OUTSTANDING (24) (25) (26) DIR & ASSUMED PRIOR 0 117,636,303 XXXX 1989 0 29,489,745 XXXX 1990 0 35,276,620 XXXX 1991 0 41,420,979 XXXX 1992 0 47,483,820 XXXX 1993 0 60,800,833 XXXX 1994 0 68,861,609 XXXX 1995 0 100,473,856 XXXX 1996 0 154,241,388 XXXX 1997 0 250,098,241 XXXX 1998 0 475,823,162 XXXX TOTAL 0 1,381,606,557 XXXX
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE (1) (27) (28) (29) (30) (31) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX XXXX XXXX 1989 965,502,300 20,900,437 944,601,863 69.3 71.2 1990 1,047,051,236 19,232,034 1,027,819,202 71.6 77.0 1991 1,082,643,167 39,941,823 1,042,701,344 72.4 150.4 1992 1,114,352,044 28,496,786 1,085,855,258 71.9 87.2 1993 1,026,227,440 23,973,525 1,002,253,916 72.1 54.9 1994 984,530,253 10,849,109 973,681,143 73.3 24.0 1995 903,670,389 9,382,436 894,287,952 69.2 22.9 1996 964,500,558 6,030,952 958,469,606 76.9 19.8 1997 886,886,071 5,645,480 881,240,592 71.7 17.5 1998 1,010,767,873 21,652,638 989,115,235 76.5 40.2 TOTAL XXXX XXXX XXXX XXXX XXXX
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT (1) (32) (33) (34) (35) (36) ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID PRIOR XXXX 0 0 XXXX 88,717,224 1989 69.2 0 0 0.0 23,376,837 1990 71.5 0 0 0.0 27,356,306 1991 71.0 0 0 0.0 30,758,490 1992 71.6 0 0 0.0 36,495,782 1993 72.7 0 0 0.0 47,079,828 1994 75.0 0 0 0.0 55,114,257 1995 70.7 0 0 0.0 78,305,635 1996 78.3 0 0 0.0 117,905,482 1997 73.2 0 0 0.0 197,516,096 1998 78.0 0 0 0.0 398,435,907 TOTAL XXXX 0 0 XXXX 1,101,061,844
NET BALANCE SHEET RESERVES AFTER DISCOUNT (1) (37) ACC/YR LOSS EXPENSES UNPAID PRIOR 28,919,079 1989 6,112,908 1990 7,920,314 1991 10,662,489 1992 10,988,038 1993 13,721,006 1994 13,747,352 1995 22,168,222 1996 36,335,906 1997 52,582,145 1998 77,387,255 TOTAL 280,544,713
98 2 OHIO CASUALTY GROUP SCHEDULE P-PART 1A - HOMEOWNERS
PREMIUMS EARNED LOSS PAYMENTS (1) (2) (3) (4) (5) (6) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 67,468 0 1989 167,250,533 2,262,236 164,988,297 103,364,639 0 1990 172,691,271 2,320,885 170,370,386 114,504,433 378,204 1991 180,475,310 3,102,136 177,373,174 145,961,190 19,995,461 1992 187,626,381 3,099,967 184,526,414 138,453,118 6,593,491 1993 176,137,420 8,407,961 167,729,459 127,072,206 494,000 1994 167,093,737 9,016,379 158,077,358 136,082,199 91,905 1995 169,545,732 8,427,980 161,117,752 108,890,701 0 1996 170,607,856 4,977,843 165,630,013 153,126,180 31,267 1997 172,710,473 6,175,490 166,534,984 103,209,689 0 1998 184,421,391 6,621,418 177,799,973 100,930,521 0 TOTAL XXXX XXXX XXXX 1,231,662,344 27,584,327
SALVAGE & SUBROGATION ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED (1) (7) (8) (9) (10) (11) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 50,383 0 1,990 0 6,108 1989 5,837,566 13 4,061,915 0 1,563,079 1990 5,787,343 179 4,578,527 0 1,893,434 1991 6,111,848 287,977 5,505,837 0 1,349,127 1992 7,119,820 618,218 9,469,920 0 1,738,895 1993 7,213,620 4,165 9,078,270 0 1,315,968 1994 7,322,545 595 10,846,833 0 1,709,812 1995 5,292,919 0 8,359,084 0 1,030,529 1996 6,448,538 0 12,193,490 0 996,372 1997 2,660,839 0 9,347,999 0 597,734 1998 62,866 0 10,062,660 0 242,411 TOTAL 53,908,288 911,148 83,506,526 0 12,443,469
NUMBER OF CLAIMS TOTAL NET PAID REPORTED (1) (12) (13) ACC/YR DIR & ASSUMED PRIOR 119,841 XXXX 1989 113,264,106 65,762 1990 124,491,920 65,037 1991 137,295,437 66,256 1992 147,831,150 67,902 1993 142,865,932 67,895 1994 154,159,077 72,556 1995 122,542,705 54,989 1996 171,736,941 73,234 1997 115,218,527 48,176 1998 111,056,046 51,494 TOTAL 1,340,581,682 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS (1) (14) (15) (16) (17) (18) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 477,872 2,000 0 0 41,717 1989 154,164 0 0 0 38,674 1990 162,295 0 4,085 0 39,435 1991 138,744 11,632 0 0 39,302 1992 469,183 1 10,705 391 84,197 1993 1,184,020 5,000 545,389 783 170,269 1994 1,299,464 0 52,122 783 285,648 1995 2,007,989 3 194,210 4,698 596,687 1996 2,816,643 0 340,228 8,613 1,015,637 1997 7,105,124 5,000 1,392,833 47,370 1,650,410 1998 24,436,501 134,300 9,024,376 328,848 2,507,353 TOTAL 40,251,999 157,936 11,563,948 391,486 6,469,329
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES CASE BASIS BULK + IBNR UNPAID (1) (19) (20) (21) (22) (23) ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 140 12,019 358 6,092 39 1989 64 5,508 164 5,813 0 1990 87 10,847 224 6,554 0 1991 145 12,519 373 4,233 225 1992 262 22,535 670 14,624 14 1993 640 482,987 1,640 175,987 125 1994 1,308 137,755 3,355 46,512 28 1995 2,732 289,061 7,008 79,821 170 1996 4,650 486,142 11,928 117,056 312 1997 7,557 730,681 19,383 271,667 1,814 1998 11,481 1,015,512 29,448 992,365 14,518 TOTAL 29,066 3,205,566 74,551 1,720,723 17,246
SALVAGE & TOTAL NET NUMBER OF SUBROGATION LOSSES & CLAIMS ANTICIPATED EXPENSES UNPAID OUTSTANDING (1) (24) (25) (26) ACC/YR DIR & ASSUMED PRIOR 0 535,163 11 1989 0 203,931 8 1990 0 222,906 11 1991 0 182,423 13 1992 0 599,905 16 1993 0 2,550,464 34 1994 0 1,816,028 70 1995 0 3,153,156 104 1996 0 4,750,203 235 1997 0 11,069,591 620 1998 0 37,457,511 5,881 TOTAL 0 62,541,280 7,003
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE (1) (27) (28) (29) (30) (31) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX XXXX XXXX 1989 113,468,279 241 113,468,038 67.8 0.0 1990 125,093,520 378,694 124,714,825 72.4 16.3 1991 157,773,674 20,295,813 137,477,861 87.4 654.3 1992 155,644,102 7,213,047 148,431,054 83.0 232.7 1993 145,922,748 506,353 145,416,395 82.8 6.0 1994 156,073,079 97,974 155,975,104 93.4 1.1 1995 125,710,472 14,611 125,695,861 74.1 0.2 1996 176,543,914 56,771 176,487,143 103.5 1.1 1997 126,369,243 81,124 126,288,119 73.2 1.3 1998 149,032,153 518,595 148,513,558 80.8 7.8 TOTAL XXXX XXXX XXXX XXXX XXXX
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT (1) (32) (33) (34) (35) (36) ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID PRIOR XXXX 0 0 XXXX 475,872 1989 68.8 0 0 0.0 154,164 1990 73.2 0 0 0.0 166,380 1991 77.5 0 0 0.0 127,112 1992 80.4 0 0 0.0 479,495 1993 86.7 0 0 0.0 1,723,626 1994 98.7 0 0 0.0 1,350,803 1995 78.0 0 0 0.0 2,197,498 1996 106.6 0 0 0.0 3,148,259 1997 75.8 0 0 0.0 8,445,587 1998 83.5 0 0 0.0 32,997,728 TOTAL XXXX 0 0 XXXX 51,266,525
NET BALANCE SHEET RESERVES AFTER DISCOUNT (1) (37) ACC/YR LOSS EXPENSES UNPAID PRIOR 59,291 1989 49,767 1990 56,526 1991 55,311 1992 120,409 1993 826,837 1994 465,224 1995 955,658 1996 1,601,944 1997 2,624,004 1998 4,459,783 TOTAL 11,274,755
99 3 OHIO CASUALTY GROUP SCHEDULE P-PART 1B - PRIVATE PASSENGER AUTO
PREMIUMS EARNED LOSS PAYMENTS (1) (2) (3) (4) (5) (6) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 1,883,433 1,729,080 1989 318,461,609 7,648,858 310,812,750 239,774,149 3,138,448 1990 333,396,443 6,675,812 326,720,631 255,431,866 2,283,257 1991 339,450,775 6,390,994 333,059,781 245,162,411 2,096,752 1992 362,947,213 7,108,258 355,838,955 262,640,280 2,299,626 1993 334,285,756 12,196,407 322,089,349 247,830,720 3,418,530 1994 320,149,419 12,617,186 307,532,233 229,202,180 -594,389 1995 305,098,094 7,698,429 297,399,665 206,334,129 -6,087,691 1996 290,090,509 7,674,484 282,416,025 166,903,090 -17,008,639 1997 286,421,257 9,267,645 277,153,612 116,746,799 -28,483,962 1998 312,015,418 19,374,078 292,641,340 51,126,525 -33,730,800 TOTAL XXXX XXXX XXXX 2,023,035,582 -70,939,788 SALVAGE & SUBROGATION ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED (1) (7) (8) (9) (10) (11) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 89,924 16,944 -30,514 -188,404 109,845 1989 12,725,299 -88,045 24,200,959 -15,222 5,812,547 1990 13,906,394 -27,545 24,773,067 -11,775 5,884,787 1991 14,358,647 -93,309 22,909,716 -37,105 4,878,591 1992 16,522,577 -116,396 22,770,834 -35,041 4,914,989 1993 15,496,887 -292,329 21,249,766 -114,426 5,557,753 1994 13,455,490 -899,654 21,817,646 -326,974 4,548,201 1995 10,335,866 -1,747,531 20,627,918 -700,728 4,398,141 1996 5,254,937 -3,076,218 20,960,938 -1,610,736 3,300,086 1997 -119,712 -4,046,988 15,460,709 -2,883,083 2,560,412 1998 -2,200,973 -2,724,212 10,572,830 -3,444,913 1,273,060 TOTAL 99,825,337 -13,095,285 205,313,870 -9,368,406 43,238,413 NUMBER OF CLAIMS TOTAL NET PAID REPORTED (1) (12) (13) ACC/YR DIR & ASSUMED PRIOR 385,222 XXXX 1989 273,665,226 64,144 1990 291,867,391 61,389 1991 280,464,437 57,898 1992 299,785,502 60,080 1993 281,565,598 54,982 1994 266,296,332 53,275 1995 245,833,865 49,218 1996 214,814,557 48,013 1997 167,501,830 46,848 1998 99,398,307 48,344 TOTAL 2,421,578,268 XXXX LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS (1) (14) (15) (16) (17) (18) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 15,088,996 11,734,451 1,475,491 401,667 547,828 1989 1,095,472 348,251 618,754 168,441 142,592 1990 849,879 268,458 880,535 239,705 154,642 1991 2,043,045 655,204 793,358 223,973 260,061 1992 4,054,424 1,129,332 705,685 198,059 494,873 1993 5,897,334 1,622,357 1,746,761 502,695 818,063 1994 14,111,817 5,038,496 3,015,153 918,649 1,488,289 1995 25,331,078 7,978,935 4,951,459 1,603,300 2,913,809 1996 46,904,292 14,033,134 11,009,402 3,730,583 5,020,500 1997 63,157,304 15,448,250 41,338,445 13,048,475 7,517,883 1998 96,615,649 18,162,545 104,397,282 31,648,370 8,032,861 TOTAL 275,149,290 76,419,413 170,932,326 52,683,917 27,391,401 ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES CASE BASIS BULK + IBNR UNPAID (1) (19) (20) (21) (22) (23) ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 195,823 373,916 104,520 1,207,964 3,267,317 1989 47,612 101,848 30,737 109,726 12,883 1990 50,684 108,591 32,639 112,176 18,334 1991 79,865 193,874 62,707 182,140 45,965 1992 161,266 356,039 109,353 378,153 228,296 1993 248,042 614,813 200,961 504,109 50,800 1994 399,325 1,194,498 423,478 937,326 106,796 1995 793,274 2,323,174 817,037 1,843,207 218,640 1996 1,350,792 4,024,411 1,424,606 3,785,592 613,251 1997 2,097,990 5,924,937 2,054,103 7,970,216 1,711,286 1998 2,254,648 6,313,364 2,181,241 16,381,950 3,708,153 TOTAL 7,679,320 21,529,465 7,441,382 33,412,560 9,981,721 SALVAGE & TOTAL NET NUMBER OF SUBROGATION LOSSES & CLAIMS (1) ANTICIPATED EXPENSES UNPAID OUTSTANDING ACC/YR (24) (25) (26) DIR & ASSUMED PRIOR 0 2,990,416 150 1989 0 1,460,468 23 1990 0 1,496,003 31 1991 0 2,404,765 42 1992 0 4,162,867 95 1993 0 6,956,226 181 1994 0 13,860,339 364 1995 0 25,951,542 763 1996 0 49,591,833 1,641 1997 0 91,548,682 3,545 1998 0 173,786,148 14,654 TOTAL 0 374,209,288 21,489 TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE (1) (27) (28) (29) (30) (31) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX XXXX XXXX 1989 278,768,799 3,643,105 275,125,695 87.5 47.6 1990 296,217,150 2,853,756 293,363,394 88.8 42.7 1991 285,903,253 3,034,051 282,869,202 84.2 47.5 1992 307,922,865 3,974,496 303,948,369 84.8 55.9 1993 294,158,454 5,636,630 288,521,824 88.0 46.2 1994 285,222,399 5,065,727 280,156,671 89.1 40.1 1995 274,660,641 2,875,235 271,785,406 90.0 37.3 1996 263,863,163 -543,227 264,406,390 91.0 -7.1 1997 257,996,582 -1,053,930 259,050,512 90.1 -11.4 1998 291,239,488 18,055,033 273,184,454 93.3 93.2 TOTAL XXXX XXXX XXXX XXXX XXXX INTER-COMPANY POOLING NET BALANCE SHEET RESERVES LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT (1) (32) (33) (34) (35) (36) ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID PRIOR XXXX 0 0 XXXX 4,428,369 1989 88.5 0 0 0.0 1,197,534 1990 89.8 0 0 0.0 1,222,251 1991 84.9 0 0 0.0 1,957,226 1992 85.4 0 0 0.0 3,432,718 1993 89.6 0 0 0.0 5,519,044 1994 91.1 0 0 0.0 11,169,824 1995 91.4 0 0 0.0 20,700,302 1996 93.6 0 0 0.0 40,149,978 1997 93.5 0 0 0.0 75,999,023 1998 93.4 0 0 0.0 151,202,016 TOTAL XXXX 0 0 XXXX 316,978,286 NET BALANCE SHEET RESERVES AFTER DISCOUNT (37) (1) LOSS EXPENSES ACC/YR UNPAID PRIOR -1,437,953 1989 262,934 1990 273,752 1991 447,539 1992 730,149 1993 1,437,182 1994 2,690,515 1995 5,251,240 1996 9,441,855 1997 15,549,658 1998 22,584,132 TOTAL 57,231,002
100 4 OHIO CASUALTY GROUP SCHEDULE P-PART 1C - COMMERCIAL AUTO
PREMIUMS EARNED LOSS PAYMENTS (1) (2) (3) (4) (5) (6) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 575,838 244,357 1989 115,498,723 3,154,328 112,344,396 65,394,253 1,194,192 1990 123,518,477 3,020,941 120,497,536 77,078,704 889,524 1991 130,823,468 3,059,789 127,763,679 80,384,660 706,087 1992 135,772,129 3,261,305 132,510,824 79,469,920 1,933,769 1993 129,920,600 4,227,838 125,692,762 75,211,479 1,023,625 1994 124,061,161 4,326,619 119,734,542 84,449,257 1,563,365 1995 118,167,750 3,897,033 114,270,717 65,224,377 1,776,786 1996 111,494,112 3,041,823 108,452,289 53,317,867 2,144,842 1997 108,150,971 2,584,990 105,565,981 39,461,255 928,548 1998 107,482,733 2,436,283 105,046,450 20,261,760 742,269 TOTAL XXXX XXXX XXXX 640,829,370 13,147,365 SALVAGE & SUBROGATION ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED (1) (7) (8) (9) (10) (11) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 82,870 21,964 39,331 0 8,310 1989 5,600,639 16,253 6,032,892 0 755,970 1990 6,451,310 15,302 6,224,801 0 768,360 1991 6,603,333 8,280 6,203,507 0 704,345 1992 7,049,681 17,459 5,625,981 0 1,120,266 1993 7,099,178 251,005 5,436,767 0 709,924 1994 6,740,856 10,790 6,278,472 0 763,640 1995 4,692,426 25,861 5,802,285 0 695,645 1996 2,988,758 42,544 5,470,920 0 474,935 1997 1,369,307 0 4,261,754 0 595,048 1998 72,476 0 3,427,211 0 215,897 TOTAL 48,750,834 409,457 54,803,922 0 6,812,340 ACC/YR TOTAL NET PAID NUMBER OF CLAIMS REPORTED (1) (12) (13) DIR & ASSUMED PRIOR 431,717 XXXX 1989 75,817,340 13,362 1990 88,849,989 13,344 1991 92,477,134 13,263 1992 90,194,355 13,837 1993 86,472,794 13,771 1994 95,894,429 13,930 1995 73,916,441 12,342 1996 59,590,160 12,429 1997 44,163,767 11,620 1998 23,019,177 10,449 TOTAL 730,827,304 XXXX LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS (1) (14) (15) (16) (17) (18) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 1,457,450 992,977 1,159,139 1,389 39,937 1989 480,118 70,103 266,793 548 26,624 1990 1,128,686 567,547 112,647 548 41,601 1991 1,076,707 0 319,485 914 83,201 1992 1,169,123 0 225,563 950 99,842 1993 2,697,080 74,001 542,578 1,571 200,742 1994 5,341,057 5,000 530,460 3,472 383,079 1995 9,036,278 122,771 363,423 2,193 815,725 1996 12,791,145 279,500 4,598,633 33,985 1,555,863 1997 19,529,357 500,372 14,001,809 103,525 2,246,434 1998 19,447,570 414,666 30,641,781 216,332 2,928,843 TOTAL 74,154,571 3,026,937 52,762,311 365,426 8,421,890 ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES CASE BASIS BULK + IBNR UNPAID (1) (19) (20) (21) (22) (23) ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 1,652 821,011 239 364,027 45,122 1989 1,102 175,853 159 85,978 3,223 1990 1,721 60,387 249 82,250 25,768 1991 3,443 217,875 497 125,338 65 1992 4,131 148,712 597 104,470 68 1993 8,262 162,230 1,193 182,036 3,461 1994 15,836 233,910 2,287 337,571 482 1995 33,737 539,664 4,871 546,246 5,728 1996 64,375 1,084,195 9,296 1,067,250 15,100 1997 92,948 1,563,270 13,422 2,096,672 30,097 1998 117,045 1,967,477 16,901 3,211,919 34,279 TOTAL 344,251 6,974,585 49,709 8,203,757 163,394 TOTAL NET SALVAGE & LOSSES & NUMBER OF SUBROGATION EXPENSES CLAIMS ANTICIPATED UNPAID OUTSTANDING (1) (24) (25) (26) ACC/YR DIR & ASSUMED PRIOR 0 2,800,185 23 1989 0 960,233 6 1990 0 829,737 6 1991 0 1,817,687 19 1992 0 1,741,963 26 1993 0 3,696,178 44 1994 0 6,799,002 105 1995 0 11,132,036 187 1996 0 20,694,833 394 1997 0 38,697,178 845 1998 0 57,398,365 2,723 TOTAL 0 146,567,397 4,378 TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE (1) (27) (28) (29) (30) (31) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX XXXX XXXX 1989 78,063,152 1,285,579 76,777,572 67.6 40.8 1990 91,180,386 1,500,660 89,679,726 73.8 49.7 1991 95,014,106 719,286 94,294,821 72.6 23.5 1992 93,893,291 1,956,973 91,936,318 69.2 60.0 1993 91,532,090 1,363,118 90,168,972 70.5 32.2 1994 104,294,662 1,601,231 102,693,431 84.1 37.0 1995 87,020,424 1,971,947 85,048,477 73.6 50.6 1996 82,874,634 2,589,641 80,284,993 74.3 85.1 1997 84,529,857 1,668,912 82,860,945 78.2 64.6 1998 81,959,035 1,541,493 80,417,542 76.3 63.3 TOTAL XXXX XXXX XXXX XXXX XXXX INTER-COMPANY POOLING NET BALANCE SHEET RESERVES LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT (1) (32) (33) (34) (35) (36) ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID PRIOR XXXX 0 0 XXXX 1,622,223 1989 68.3 0 0 0.0 676,260 1990 74.4 0 0 0.0 673,238 1991 73.8 0 0 0.0 1,395,279 1992 69.4 0 0 0.0 1,393,736 1993 71.7 0 0 0.0 3,164,086 1994 85.8 0 0 0.0 5,863,046 1995 74.4 0 0 0.0 9,274,737 1996 74.0 0 0 0.0 17,076,294 1997 78.5 0 0 0.0 32,927,269 1998 76.6 0 0 0.0 49,458,352 TOTAL XXXX 0 0 XXXX 123,524,519 (1) (37) ACC/YR LOSS EXPENSES UNPAID PRIOR 1,177,962 1989 283,973 1990 156,500 1991 422,408 1992 348,227 1993 532,092 1994 935,956 1995 1,857,299 1996 3,618,539 1997 5,769,909 1998 7,940,013 TOTAL 23,042,878
101 5 OHIO CASUALTY GROUP SCHEDULE P-PART 1D - WORKERS COMPENSATION
PREMIUMS EARNED LOSS PAYMENTS (1) (2) (3) (4) (5) (6) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX 0 0 8,172,432 7,026,983 1989 201,801,876 4,147,639 197,654,237 134,124,067 1,530,842 1990 220,036,820 3,333,416 216,703,404 153,544,228 1,258,878 1991 219,109,861 3,143,510 215,966,351 141,796,984 1,017,016 1992 213,577,106 2,909,054 210,668,052 120,830,232 1,500,669 1993 185,737,510 2,443,331 183,294,179 91,873,520 1,809,179 1994 153,211,860 1,955,046 151,256,814 63,499,739 1,136,002 1995 143,658,352 1,654,337 142,004,015 54,678,702 463,187 1996 124,749,682 592,288 124,157,394 41,883,106 545,684 1997 103,906,558 422,962 103,483,596 31,578,462 -650,038 1998 101,505,174 1,169,564 100,335,609 13,142,274 -5,237,171 TOTAL XXXX XXXX XXXX 855,123,746 10,401,231
SALVAGE & SUBROGATION ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED (1) (7) (8) (9) (10) (11) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 511,397 258,795 296,235 0 472,394 1989 11,716,186 86,120 5,187,650 0 3,290,646 1990 13,641,914 3,716 5,758,225 0 4,766,277 1991 12,801,378 21,905 5,890,242 0 3,663,948 1992 9,326,184 1,771 6,675,126 0 3,434,243 1993 6,255,901 0 5,132,490 0 1,469,962 1994 4,316,897 1,696 4,094,793 0 1,306,299 1995 3,426,783 0 4,448,276 0 809,704 1996 2,881,636 1,650 3,654,616 0 473,029 1997 2,008,200 0 3,271,320 0 241,699 1998 519,658 0 2,217,650 0 23,562 TOTAL 67,406,136 375,653 46,626,622 0 19,951,763
NUMBER OF CLAIMS TOTAL NET PAID REPORTED (1) (12) (13) ACC/YR DIR & ASSUMED PRIOR 1,694,286 XXXX 1989 149,410,941 33,420 1990 171,681,774 32,853 1991 159,449,683 28,101 1992 135,329,102 24,650 1993 101,452,732 17,627 1994 70,773,731 13,957 1995 62,090,574 11,815 1996 47,872,023 10,820 1997 37,508,020 9,957 1998 21,116,754 8,780 TOTAL 958,379,620 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS (1) (14) (15) (16) (17) (18) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 75,315,253 24,807,678 8,798,660 4,923 1,742,839 1989 18,726,219 3,838,027 3,137,403 1,919 573,911 1990 18,934,285 5,473,254 4,687,068 2,837 747,563 1991 12,969,571 0 5,957,353 4,089 917,556 1992 17,124,581 459,158 6,751,613 5,424 1,146,028 1993 14,549,824 1,071,632 9,499,925 8,094 1,361,571 1994 13,240,314 0 9,567,393 8,261 1,513,768 1995 16,524,452 1,040,526 10,243,875 8,845 1,768,897 1996 12,994,788 15,899 10,823,717 9,345 1,981,505 1997 15,874,069 35,135 13,529,646 11,682 2,551,294 1998 17,268,439 102,302 24,936,311 18,023 3,879,812 TOTAL 233,521,794 36,843,611 107,932,963 83,441 18,184,745
ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES CASE BASIS BULK + IBNR UNPAID (1) (19) (20) (21) (22) (23) ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 345,098 1,454,652 510 2,123,625 700,022 1989 110,436 453,521 173 575,399 110,333 1990 140,611 564,958 231 599,518 155,453 1991 161,605 606,052 302 441,161 145 1992 185,077 623,525 404 535,071 13,163 1993 207,589 642,946 500 556,596 30,644 1994 221,892 643,978 571 543,724 293 1995 259,289 752,514 667 711,804 29,751 1996 290,454 842,960 747 695,548 791 1997 373,975 1,085,357 962 963,188 1,426 1998 523,565 1,519,499 1,347 4,449,356 1,283 TOTAL 2,819,593 9,189,963 6,415 12,194,990 1,043,305
SALVAGE & TOTAL NET NUMBER OF SUBROGATION LOSSES & CLAIMS ANTICIPATED EXPENSES UNPAID OUTSTANDING (1) (24) (25) (26) ACC/YR DIR & ASSUMED PRIOR 0 63,576,798 783 1989 0 19,405,564 165 1990 0 19,761,006 165 1991 0 20,725,554 178 1992 0 25,517,591 202 1993 0 25,292,404 196 1994 0 25,278,160 197 1995 0 28,662,463 256 1996 0 27,021,281 416 1997 0 33,580,373 900 1998 0 51,406,897 3,290 TOTAL 0 340,228,090 6,748
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE (1) (27) (28) (29) (30) (31) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX XXXX XXXX 1989 174,494,356 5,677,851 168,816,505 86.5 136.9 1990 198,477,759 7,034,980 191,442,779 90.2 211.0 1991 181,380,298 1,205,061 180,175,237 82.8 38.3 1992 163,012,359 2,165,666 160,846,693 76.3 74.4 1993 129,872,774 3,127,639 126,745,135 69.9 128.0 1994 97,420,605 1,368,714 96,051,891 63.6 70.0 1995 92,555,302 1,802,265 90,753,037 64.4 108.9 1996 75,757,876 864,572 74,893,304 60.7 146.0 1997 70,861,535 -226,858 71,088,393 68.2 -53.6 1998 67,933,000 -4,590,650 72,523,651 66.9 -392.5 TOTAL XXXX XXXX XXXX XXXX XXXX
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT (1) (32) (33) (34) (35) (36) ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID PRIOR XXXX 0 0 XXXX 59,301,312 1989 85.4 0 0 0.0 18,023,676 1990 88.3 0 0 0.0 18,145,262 1991 83.4 0 0 0.0 18,922,836 1992 76.4 0 0 0.0 23,411,612 1993 69.1 0 0 0.0 22,970,023 1994 63.5 0 0 0.0 22,799,446 1995 63.9 0 0 0.0 25,718,956 1996 60.3 0 0 0.0 23,793,260 1997 68.7 0 0 0.0 29,356,898 1998 72.3 0 0 0.0 42,084,425 TOTAL XXXX 0 0 XXXX 304,527,705
NET BALANCE SHEET RESERVES AFTER DISCOUNT (1) (37) ACC/YR LOSS EXPENSES UNPAID PRIOR 4,275,486 1989 1,381,888 1990 1,615,744 1991 1,802,718 1992 2,105,979 1993 2,322,380 1994 2,478,715 1995 2,943,508 1996 3,228,020 1997 4,223,475 1998 9,322,472 TOTAL 35,700,385
102 6 OHIO CASUALTY GROUP SCHEDULE P-PART 1E - COMMERCIAL MULTI-PERIL
PREMIUMS EARNED LOSS PAYMENTS (1) (2) (3) (4) (5) (6) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 1,534,733 0 1989 98,708,427 2,400,642 96,307,785 41,090,570 591,005 1990 109,609,476 2,062,177 107,547,299 50,102,925 1,783,294 1991 125,345,866 2,460,164 122,885,702 64,697,201 4,939,604 1992 147,343,234 4,565,315 142,777,919 96,613,603 8,778,709 1993 146,366,198 5,672,668 140,693,530 80,057,000 135,217 1994 143,239,939 6,537,857 136,702,082 80,376,149 790,434 1995 139,601,917 6,742,565 132,859,352 68,175,941 189,151 1996 136,835,193 4,550,420 132,284,773 76,919,933 667,493 1997 142,019,235 4,984,286 137,034,949 61,234,614 1,216,705 1998 156,599,795 5,866,941 150,732,854 53,880,629 346,515 TOTAL XXXX XXXX XXXX 674,683,299 19,438,127 SALVAGE & SUBROGATION ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED (1) (7) (8) (9) (10) (11) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 1,633,774 0 51,682 0 7,236 1989 6,914,822 58,206 2,560,439 0 1,795,064 1990 9,349,995 18,100 3,358,024 0 1,656,154 1991 10,031,651 107,587 4,263,484 0 5,034,515 1992 11,557,232 56,139 5,446,452 0 2,437,496 1993 10,473,481 89,650 5,111,254 0 1,543,776 1994 8,794,055 226,653 5,378,363 0 1,932,879 1995 6,913,054 0 5,154,305 0 1,589,618 1996 5,543,825 0 5,228,167 0 1,494,395 1997 2,552,859 2,332 4,129,950 0 925,106 1998 140,988 0 5,329,610 0 459,278 TOTAL 73,905,735 558,666 46,011,729 0 18,875,517 NUMBER OF CLAIMS TOTAL NET PAID REPORTED (1) (12) (13) ACC/YR DIR & ASSUMED PRIOR 3,220,189 XXXX 1989 49,916,620 12,541 1990 61,009,550 13,472 1991 73,945,145 15,817 1992 104,782,440 19,226 1993 95,416,868 19,601 1994 93,531,480 19,647 1995 80,054,148 17,068 1996 87,024,432 17,982 1997 66,698,386 15,332 1998 59,004,712 15,404 TOTAL 774,603,970 XXXX LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS (1) (14) (15) (16) (17) (18) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 4,710,918 118,310 3,522,185 7,189 826,793 1989 239,040 5 76,184 2,875 152,875 1990 1,086,796 0 211,319 5,751 195,674 1991 1,033,898 5,000 895,787 5,751 473,015 1992 1,135,097 5,750 393,859 11,502 471,245 1993 3,581,386 18,000 878,322 15,815 849,540 1994 4,483,499 0 778,945 23,003 1,419,939 1995 4,089,555 3 2,068,657 61,821 2,418,200 1996 9,342,733 0 5,414,799 158,148 4,025,896 1997 13,246,204 385,083 12,033,740 359,427 5,464,615 1998 22,588,275 61,022 30,656,075 786,426 7,218,942 TOTAL 65,537,401 593,173 56,929,873 1,437,707 23,516,734 ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES CASE BASIS BULK + IBNR UNPAID (1) (19) (20) (21) (22) (23) ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 1,061 6,003,477 4,347 1,551,319 3,381 1989 433 169,970 1,774 33,732 121 1990 487 293,081 1,996 113,841 242 1991 975 1,383,943 3,992 81,069 372 1992 1,841 538,190 7,540 101,954 634 1993 3,606 1,133,307 14,770 254,876 1,133 1994 7,147 1,145,977 29,273 309,817 968 1995 12,171 1,942,719 49,853 338,663 2,603 1996 20,249 3,347,883 82,940 832,466 6,658 1997 27,504 4,612,120 112,657 1,386,137 25,150 1998 32,810 5,228,788 134,390 2,749,484 34,694 TOTAL 108,284 25,799,456 443,531 7,753,358 75,956 SALVAGE & TOTAL NET NUMBER OF SUBROGATION LOSSES & CLAIMS ANTICIPATED EXPENSES UNPAID OUTSTANDING (1) (24) (25) (26) ACC/YR DIR & ASSUMED PRIOR 0 16,480,405 358 1989 0 666,593 20 1990 0 1,892,235 19 1991 0 3,851,623 24 1992 0 2,613,079 48 1993 0 6,644,107 67 1994 0 8,077,786 133 1995 0 10,731,343 212 1996 0 22,695,783 398 1997 0 35,832,996 881 1998 0 67,392,222 3,085 TOTAL 0 176,878,171 5,245 TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE (1) (27) (28) (29) (30) (31) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX XXXX XXXX 1989 51,237,633 654,420 50,583,213 51.9 27.3 1990 64,711,654 1,809,869 62,901,785 59.0 87.8 1991 82,860,048 5,063,280 77,796,768 66.1 205.8 1992 116,257,633 8,862,114 107,395,519 78.9 194.1 1993 102,339,166 278,191 102,060,975 69.9 4.9 1994 102,686,744 1,077,478 101,609,266 71.7 16.5 1995 91,101,094 315,602 90,785,491 65.3 4.7 1996 110,655,703 935,487 109,720,215 80.9 20.6 1997 104,660,239 2,128,857 102,531,382 73.7 42.7 1998 127,792,791 1,395,857 126,396,934 81.6 23.8 TOTAL XXXX XXXX XXXX XXXX XXXX INTER-COMPANY POOLING NET BALANCE SHEET RESERVES LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT (1) (32) (33) (34) (35) (36) ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID PRIOR XXXX 0 0 XXXX 8,107,605 1989 52.5 0 0 0.0 312,343 1990 58.5 0 0 0.0 1,292,365 1991 63.3 0 0 0.0 1,918,934 1992 75.2 0 0 0.0 1,511,704 1993 72.5 0 0 0.0 4,425,893 1994 74.3 0 0 0.0 5,239,441 1995 68.3 0 0 0.0 6,096,388 1996 82.9 0 0 0.0 14,599,384 1997 74.8 0 0 0.0 24,535,434 1998 83.9 0 0 0.0 52,396,902 TOTAL XXXX 0 0 XXXX 120,436,394 NET BALANCE SHEET RESERVES AFTER DISCOUNT (1) (37) ACC/YR LOSS EXPENSES UNPAID PRIOR 8,372,800 1989 354,249 1990 599,870 1991 1,932,689 1992 1,101,375 1993 2,218,214 1994 2,838,345 1995 4,634,955 1996 8,096,399 1997 11,297,561 1998 14,995,319 TOTAL 56,441,777
103 7 OHIO CASUALTY GROUP SCHEDULE P-PART 1G - BOILER & MACHINERY
PREMIUMS EARNED LOSS PAYMENTS (1) (2) (3) (4) (5) (6) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX 0 0 1989 0 0 0 0 1990 143,036 57,628 85,408 94,811 62,034 1991 271,065 213,756 57,309 82,738 70,799 1992 225,513 183,902 41,611 326,539 260,881 1993 36,594 43,445 -6,851 0 0 1994 18,241 16,879 1,362 9,366 2,238 1995 32,924 30,389 2,535 0 0 1996 49,025 48,882 143 5,068 5,068 1997 59,177 59,177 0 0 0 1998 158,676 100,924 57,752 3,988 0 TOTAL XXXX XXXX XXXX 522,510 401,019 SALVAGE & SUBROGATION ALLOCATED LOSS EXPENSE PAYMENTS UNALLOCATED LOSS EXPENSE PAYMENTS RECEIVED (1) (7) (8) (9) (10) (11) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 0 0 0 0 0 1989 0 0 0 0 0 1990 669 0 0 0 0 1991 12,530 0 0 0 0 1992 0 0 0 0 0 1993 0 0 0 0 0 1994 209 0 0 0 0 1995 0 0 0 0 0 1996 0 0 0 0 0 1997 0 0 0 0 0 1998 0 0 10 0 0 TOTAL 13,409 0 10 0 0 NUMBER OF CLAIMS TOTAL NET PAID REPORTED (1) (12) (13) ACC/YR DIR & ASSUMED PRIOR 0 XXXX 1989 0 XXXX 1990 33,447 XXXX 1991 24,470 XXXX 1992 65,659 XXXX 1993 0 XXXX 1994 7,338 XXXX 1995 0 XXXX 1996 0 XXXX 1997 0 XXXX 1998 3,998 XXXX TOTAL 134,910 XXXX LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS (1) (14) (15) (16) (17) (18) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 0 0 0 0 0 1989 0 0 0 0 0 1990 0 0 0 0 0 1991 0 0 0 0 0 1992 0 0 0 0 0 1993 0 0 0 0 0 1994 0 0 0 0 0 1995 0 0 0 0 0 1996 0 0 0 0 0 1997 0 0 0 0 0 1998 7,000 0 0 0 0 TOTAL 7,000 0 0 0 0 ALLOCATED LOSS EXPENSES UNPAID UNALLOCATED LOSS EXPENSES CASE BASIS BULK + IBNR UNPAID (1) (19) (20) (21) (22) (23) ACC/YR CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 0 0 0 0 0 1989 0 0 0 0 0 1990 0 0 0 0 0 1991 0 0 0 0 0 1992 0 0 0 0 0 1993 0 0 0 0 0 1994 0 0 0 0 0 1995 0 0 0 0 0 1996 0 0 0 0 0 1997 0 0 0 0 0 1998 0 0 0 0 0 TOTAL 0 0 0 0 0 SALVAGE & TOTAL NET NUMBER OF SUBROGATION LOSSES & CLAIMS ANTICIPATED EXPENSES UNPAID OUTSTANDING (1) (24) (25) (26) ACC/YR DIR & ASSUMED PRIOR 0 0 0 1989 0 0 0 1990 0 0 0 1991 0 0 0 1992 0 0 0 1993 0 0 0 1994 0 0 0 1995 0 0 0 1996 0 0 0 1997 0 0 0 1998 0 7,000 1 TOTAL 0 7,000 1 TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE (1) (27) (28) (29) (30) (31) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX XXXX XXXX 1989 0 0 0 0.0 0.0 1990 95,480 62,034 33,447 66.8 107.6 1991 95,268 70,799 24,470 35.1 33.1 1992 326,539 260,881 65,659 144.8 141.9 1993 0 0 0 0.0 0.0 1994 9,576 2,238 7,338 52.5 13.3 1995 0 0 0 0.0 0.0 1996 5,068 5,068 0 10.3 10.4 1997 0 0 0 0.0 0.0 1998 10,998 0 10,998 6.9 0.0 TOTAL XXXX XXXX XXXX XXXX XXXX INTER-COMPANY POOLING NET BALANCE SHEET RESERVES LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT (1) (32) (33) (34) (35) (36) ACC/YR NET LOSS LOSS EXPENSE LOSSES UNPAID PRIOR XXXX 0 0 XXXX 0 1989 0.0 0 0 0.0 0 1990 39.2 0 0 0.0 0 1991 42.7 0 0 0.0 0 1992 157.8 0 0 0.0 0 1993 0.0 0 0 0.0 0 1994 538.7 0 0 0.0 0 1995 0.0 0 0 0.0 0 1996 0.0 0 0 0.0 0 1997 0.0 0 0 0.0 0 1998 19.0 0 0 0.0 7,000 TOTAL XXXX 0.00 0.00 XXXX 7,000 NET BALANCE SHEET RESERVES AFTER DISCOUNT (1) (37) ACC/YR LOSS EXPENSES UNPAID PRIOR 0 1989 0 1990 0 1991 0 1992 0 1993 0 1994 0 1995 0 1996 0 1997 0 1998 0 TOTAL 0
104 8 OHIO CASUALTY GROUP SCHEDULE P-PART 1H(1) - GENERAL LIABILITY (OCCURENCE)
ALLOCATED LOSS EXPENSE PREMIUMS EARNED LOSS PAYMENTS PAYMENTS (1) (2) (3) (4) (5) (6) (7) (8) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 2,152,680 0 1,132,059 0 1989 138,825,255 2,811,203 136,014,052 47,151,940 3,244,810 15,119,845 87,049 1990 140,819,473 2,495,606 138,323,867 50,218,151 2,866,669 18,853,360 692,428 1991 128,769,170 2,252,476 126,516,694 47,057,109 1,685,068 14,705,319 138,853 1992 120,598,579 2,154,696 118,443,883 43,256,170 2,251,930 13,510,266 3,072 1993 111,023,544 1,962,492 109,061,052 34,439,418 615,683 10,572,609 29,690 1994 112,505,526 1,992,713 110,512,813 31,158,551 1,710,290 7,731,433 61,645 1995 111,545,266 1,892,511 109,652,755 20,469,817 0 4,883,951 0 1996 104,751,105 1,051,089 103,700,016 17,219,448 500,000 3,681,084 0 1997 98,938,574 726,289 98,212,286 10,328,546 200,000 1,494,523 128,270 1998 97,295,206 2,244,509 95,050,697 4,491,242 0 101,372 0 TOTAL XXXX XXXX XXXX 307,943,072 13,074,449 91,785,820 1,141,009
SALVAGE & NUMBER OF UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS PAYMENTS RECEIVED TOTAL NET PAID REPORTED (1) (9) (10) (11) (12) (13) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 94,860 0 48,868 3,379,599 XXXX 1989 7,796,012 0 1,208,217 66,735,938 7,488 1990 8,460,478 0 720,315 73,972,892 7,978 1991 8,201,468 0 675,527 68,139,975 7,425 1992 5,978,032 0 1,145,937 60,489,465 7,083 1993 4,600,991 0 623,182 48,967,645 6,721 1994 5,409,080 0 464,121 42,527,129 6,562 1995 3,260,322 0 375,420 28,614,090 5,654 1996 4,564,257 0 427,747 24,964,789 5,460 1997 2,342,789 0 293,776 13,837,588 4,841 1998 1,977,326 0 136,198 6,569,940 3,675 TOTAL 52,685,615 0 6,119,307 438,199,049 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR (1) (14) (15) (16) (17) (18) (19) (20) (21) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 4,668,206 10 7,096,885 1,052 807,130 10,301 11,850,448 2,243 1989 507,540 5 1,003,382 319 316,778 3,863 2,817,747 841 1990 2,897,119 500,000 2,767,282 956 431,726 5,794 3,582,669 1,261 1991 2,448,817 0 2,705,548 1,275 572,021 9,979 4,211,793 2,173 1992 1,782,720 1 3,903,082 1,275 756,663 18,026 4,372,408 3,925 1993 16,769,535 11,230,665 3,010,600 3,411 1,075,427 32,188 3,746,984 7,008 1994 6,215,319 13,000 2,030,845 10,840 1,294,044 48,925 1,872,362 10,653 1995 8,526,322 3 4,030,497 24,230 2,034,608 76,929 2,659,637 16,750 1996 11,084,509 0 6,472,329 37,301 3,234,649 122,314 4,441,715 26,632 1997 7,528,545 200,000 14,413,579 86,717 4,085,873 154,502 5,390,401 33,640 1998 8,460,955 0 26,026,566 151,441 4,481,301 160,939 5,565,351 35,044 TOTAL 70,889,587 11,943,684 73,460,595 318,818 19,090,220 643,760 50,511,515 140,169
TOTAL NET SALVAGE & LOSSES & NUMBER OF UNALLOCATED LOSS EXPENSES SUBROGATION EXPENSES CLAIMS UNPAID ANTICIPATED UNPAID OUTSTANDING (1) (22) (23) (24) (25) (26) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 3,008,889 118 0 27,417,834 130 1989 272,065 35 0 4,912,449 34 1990 865,494 30,112 0 10,006,166 57 1991 786,481 142 0 10,711,092 63 1992 1,047,844 142 0 11,839,350 92 1993 1,247,845 80,218 0 14,496,901 116 1994 902,652 1,992 0 12,229,812 183 1995 1,315,595 2,698 0 18,446,049 252 1996 1,883,828 4,154 0 26,926,629 389 1997 2,294,479 21,661 0 33,216,357 521 1998 3,566,193 16,852 0 47,736,091 1,044 TOTAL 17,191,366 158,123 0 217,938,729 2,881
(1) TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT ACC/YR (27) (28) (29) (30) (31) (32) (33) (34) DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0 1989 74,985,309 3,336,923 71,648,386 54.0 118.7 52.7 0 0 1990 88,076,279 4,097,221 83,979,058 62.5 164.2 60.7 0 0 1991 80,688,557 1,837,489 78,851,067 62.7 81.6 62.3 0 0 1992 74,607,185 2,278,371 72,328,815 61.9 105.7 61.1 0 0 1993 75,463,409 11,998,864 63,464,546 68.0 611.4 58.2 0 0 1994 56,614,286 1,857,345 54,756,941 50.3 93.2 49.5 0 0 1995 47,180,749 120,610 47,060,139 42.3 6.4 42.9 0 0 1996 52,581,818 690,400 51,891,418 50.2 65.7 50.0 0 0 1997 47,878,735 824,790 47,053,945 48.4 113.6 47.9 0 0 1998 54,670,306 364,275 54,306,031 56.2 16.2 57.1 0 0 TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES PARTICIPATION % AFTER DISCOUNT (1) (35) (36) (37) ACC/YR LOSS EXPENSES LOSSES UNPAID UNPAID PRIOR XXXX 11,764,029 15,653,806 1989 0.0 1,510,598 3,401,851 1990 0.0 5,163,444 4,842,722 1991 0.0 5,153,090 5,558,002 1992 0.0 5,684,526 6,154,824 1993 0.0 8,546,059 5,950,842 1994 0.0 8,222,325 4,007,487 1995 0.0 12,532,586 5,913,463 1996 0.0 17,519,537 9,407,092 1997 0.0 21,655,407 11,560,950 1998 0.0 34,336,080 13,400,011 TOTAL XXXX 132,087,680 85,851,049
105 9 OHIO CASUALTY GROUP SCHEDULE P-PART 1H2 - GENERAL LIABILITY (CLAIMS MADE)
ALLOCATED LOSS EXPENSE PREMIUMS EARNED LOSS PAYMENTS PAYMENTS (1) (2) (3) (4) (5) (6) (7) (8) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 0 0 0 0 1989 0 0 0 0 0 0 0 1990 15,331 198 15,133 0 0 0 0 1991 49,676 606 49,070 0 0 0 0 1992 108,651 1,326 107,325 0 0 0 0 1993 137,578 1,728 135,850 60,000 0 23,077 0 1994 158,192 2,025 156,167 20,192 0 256,325 0 1995 395,268 108,203 287,065 255,868 0 177,225 0 1996 807,258 290,207 517,051 40,126 0 22,304 0 1997 1,010,179 369,462 640,717 13,736 0 10,090 0 1998 1,156,442 439,750 716,691 3,324 0 0 0 TOTAL XXXX XXXX XXXX 393,246 0 489,021 0
SALVAGE & NUMBER OF UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS PAYMENTS RECEIVED TOTAL NET PAID REPORTED (1) (9) (10) (11) (12) (13) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 0 0 0 0 XXXX 1989 0 0 0 0 0 1990 0 0 0 0 0 1991 0 0 0 0 0 1992 0 0 0 0 0 1993 25,830 0 0 108,907 0 1994 29,324 0 0 305,841 0 1995 50,137 0 0 483,230 0 1996 840 0 250 63,270 -1 1997 1,849 0 1,183 25,674 23 1998 0 0 0 3,324 8 TOTAL 107,979 0 1,433 990,246 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR (1) (14) (15) (16) (17) (18) (19) (20) (21) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 0 0 341 6 157 0 672 11 1989 0 0 103 2 59 0 252 4 1990 0 0 310 6 88 0 378 6 1991 0 0 413 8 152 0 651 10 1992 0 0 413 8 275 0 1,176 19 1993 0 0 1,104 20 491 0 2,099 34 1994 0 0 3,509 64 747 0 3,191 51 1995 0 0 7,844 143 1,174 0 5,017 80 1996 10,000 0 12,075 220 1,867 0 7,977 128 1997 5,000 0 28,071 511 2,359 0 10,077 162 1998 16,200 0 49,022 892 2,457 0 10,497 168 TOTAL 31,200 0 103,204 1,877 9,828 0 41,986 673
TOTAL NET SALVAGE & LOSSES & NUMBER OF SUBROGATION EXPENSES CLAIMS UNALLOCATED LOSS EXPENSES UNPAID ANTICIPATED UNPAID OUTSTANDING (1) (22) (23) (24) (25) (26) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 36 0 0 1,188 0 1989 11 0 0 419 0 1990 33 0 0 796 0 1991 44 1 0 1,241 0 1992 44 1 0 1,880 0 1993 116 1 0 3,756 0 1994 370 5 0 7,697 0 1995 827 10 0 14,629 0 1996 1,795 16 0 33,351 1 1997 3,221 37 0 48,018 1 1998 6,014 65 0 83,065 4 TOTAL 12,510 136 0 196,042 6
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT (1) (27) (28) (29) (30) (31) (32) (33) (34) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0 1989 425 6 419 0 0 0 0 0 1990 809 12 796 5 6 5 0 0 1991 1,259 18 1,241 3 3 3 0 0 1992 1,907 27 1,880 2 2 2 0 0 1993 112,718 55 112,663 82 3 83 0 0 1994 313,658 120 313,538 198 6 201 0 0 1995 498,092 233 497,859 126 0 173 0 0 1996 96,985 363 96,621 12 0 19 0 0 1997 74,402 709 73,693 7 0 12 0 0 1998 87,514 1,124 86,389 8 0 12 0 0 TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES PARTICIPATION % AFTER DISCOUNT (1) (35) (36) (37) ACC/YR LOSS EXPENSES LOSSES UNPAID UNPAID PRIOR XXXX 334 854 1989 0.0 101 318 1990 0.0 304 493 1991 0.0 405 836 1992 0.0 405 1,475 1993 0.0 1,084 2,672 1994 0.0 3,445 4,252 1995 0.0 7,701 6,928 1996 0.0 21,855 11,496 1997 0.0 32,561 15,457 1998 0.0 64,330 18,735 TOTAL XXXX 132,527 63,515
106 10 OHIO CASUALTY GROUP SCHEDULE P-PART 1I - SPECIAL PROPERTY
ALLOCATED LOSS EXPENSE PREMIUMS EARNED LOSS PAYMENTS PAYMENTS (1) (2) (3) (4) (5) (6) (7) (8) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 473,088 0 170,550 0 1997 67,467,867 3,977,870 63,489,997 31,685,210 0 674,065 0 1998 70,487,663 4,140,649 66,347,014 29,520,360 15,388 8,363 0 TOTAL XXXX XXXX XXXX 61,678,657 15,388 852,979 0
SALVAGE & NUMBER OF UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS PAYMENTS RECEIVED TOTAL NET PAID REPORTED (1) (9) (10) (11) (12) (13) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 14,906 0 308,724 658,544 XXXX 1997 2,691,122 0 490,138 35,050,397 XXXX 1998 2,536,002 0 176,972 32,049,337 XXXX TOTAL 5,242,029 0 975,835 67,758,278 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR (1) (14) (15) (16) (17) (18) (19) (20) (21) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 1,275,865 2,340 246,380 14,252 38,514 87 7,943 83 1997 571,113 0 115,882 6,703 18,462 48 4,364 46 1998 7,435,789 20,350 961,722 39,433 52,851 93 8,475 89 TOTAL 9,282,767 22,690 1,323,984 60,388 109,828 227 20,782 217
TOTAL NET SALVAGE & LOSSES & NUMBER OF UNALLOCATED LOSS EXPENSES SUBROGATION EXPENSES CLAIMS UNPAID ANTICIPATED UNPAID OUTSTANDING (1) (22) (23) (24) (25) (26) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 53,873 0 0 1,605,814 92 1997 39,257 0 0 742,282 99 1998 510,824 0 0 8,909,697 1,160 TOTAL 603,954 0 0 11,257,793 1,351
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT (1) (27) (28) (29) (30) (31) (32) (33) (34) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0 1997 35,799,476 6,796 35,792,680 53.1 0.2 56.4 0 0 1998 41,034,386 75,352 40,959,034 58.2 1.8 61.7 0 0 TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES NONTABULAR DISCOUNT PARTICIPATION % AFTER DISCOUNT (1) (33) (34) (35) (36) (37) ACC/YR LOSS EXPENSES LOSS LOSS EXPENSE LOSSES UNPAID UNPAID PRIOR 0 0 XXXX 1,505,654 100,160 1997 0 0 0.0 680,292 61,990 1998 0 0 0.0 8,337,727 571,970 TOTAL 0 0 XXXX 10,523,673 734,120
107 11 OHIO CASUALTY GROUP SCHEDULE P-PART 1J - AUTO PHYSICAL DAMAGE
ALLOCATED LOSS EXPENSE PREMIUMS EARNED LOSS PAYMENTS PAYMENTS (1) (2) (3) (4) (5) (6) (7) (8) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX -2,074,371 -201,309 103,622 -100,757 1997 217,918,241 569,662 217,348,579 130,430,751 164,202 1,171,274 -89,845 1998 251,379,525 9,168,020 242,211,506 142,902,024 168,644 -54,626 -70,666 TOTAL XXXX XXXX XXXX 271,258,404 131,537 1,220,270 -261,268
SALVAGE & NUMBER OF UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS PAYMENTS RECEIVED TOTAL NET PAID REPORTED (1) (9) (10) (11) (12) (13) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR -98,799 0 2,317,048 -1,767,482 XXXX 1997 14,748,006 0 17,026,767 146,275,674 XXXX 1998 15,355,476 20,795 9,049,732 158,084,101 XXXX TOTAL 30,004,683 20,795 28,393,546 302,592,293 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR (1) (14) (15) (16) (17) (18) (19) (20) (21) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 397,358 87,647 0 0 459,111 57,453 203,131 36,478 1997 1,184,417 202,283 0 0 345,561 39,499 158,413 25,079 1998 19,641,752 2,326,732 6,573,299 1,076,330 648,370 82,588 277,830 52,438 TOTAL 21,223,527 2,616,662 6,573,299 1,076,330 1,453,043 179,540 639,374 113,995
TOTAL NET SALVAGE & LOSSES & NUMBER OF SUBROGATION EXPENSES CLAIMS UNALLOCATED LOSS EXPENSES UNPAID ANTICIPATED UNPAID OUTSTANDING (1) (22) (23) (24) (25) (26) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 28,632 0 0 906,654 234 1997 94,409 0 0 1,515,939 567 1998 1,811,561 0 0 25,414,725 11,206 TOTAL 1,934,602 0 0 27,837,318 12,007
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT (1) (27) (28) (29) (30) (31) (32) (33) (34) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0 1997 148,132,831 341,218 147,791,613 68.0 59.9 68.0 0 0 1998 187,155,687 3,656,861 183,498,825 74.5 39.9 75.8 0 0 TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES PARTICIPATION % AFTER DISCOUNT (1) (35) (36) (37) ACC/YR LOSS EXPENSES LOSSES UNPAID UNPAID PRIOR XXXX 309,711 596,943 1997 0.0 982,134 533,805 1998 0.0 22,811,989 2,602,736 TOTAL XXXX 24,103,834 3,733,484
108 12 OHIO CASUALTY GROUP SCHEDULE P-PART 1K - FIDELITY AND SURETY
ALLOCATED LOSS EXPENSE PREMIUMS EARNED LOSS PAYMENTS PAYMENTS (1) (2) (3) (4) (5) (6) (7) (8) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 473,985 -61,043 566,493 121,467 1997 36,372,708 1,967,157 34,405,551 3,667,382 503,208 262,218 36,814 1998 37,440,572 1,626,552 35,814,021 754,476 135,183 37,006 0 TOTAL XXXX XXXX XXXX 4,895,843 577,349 865,717 158,281
SALVAGE & CLAIMS UNALLOCATED LOSS EXPENSE SUBROGATION NUMBER OF PAYMENTS RECEIVED TOTAL NET PAID REPORTED (1) (9) (10) (11) (12) (13) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 62,014 0 585,386 1,042,068 XXXX 1997 1,009,550 0 318,319 4,399,128 XXXX 1998 575,251 0 16,176 1,231,550 XXXX TOTAL 1,646,815 0 919,882 6,672,746 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR (1) (14) (15) (16) (17) (18) (19) (20) (21) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 1,838,025 132,504 910,702 41,442 769,350 120,020 525,519 24,050 1997 3,085,586 963,243 428,067 19,492 404,587 65,945 288,636 13,215 1998 1,946,447 699 2,518,270 114,667 785,669 128,058 560,504 25,661 TOTAL 6,870,058 1,096,446 3,857,040 175,601 1,959,606 314,023 1,374,660 62,926
SALVAGE & TOTAL NET NUMBER OF UNALLOCATED LOSS EXPENSES SUBROGATION LOSSES & CLAIMS UNPAID ANTICIPATED EXPENSES UNPAID OUTSTANDING (1) (22) (23) (24) (25) (26) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 58,515 0 0 3,784,095 225 1997 104,685 0 0 3,249,668 121 1998 65,821 0 0 5,607,626 322 TOTAL 229,021 0 0 12,641,389 668
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT (1) (27) (28) (29) (30) (31) (32) (33) (34) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0 1997 9,250,712 1,601,916 7,648,796 25.4 81.4 22.2 0 0 1998 7,243,444 404,269 6,839,176 19.3 24.9 19.1 0 0 TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES PARTICIPATION % AFTER DISCOUNT (1) (35) (36) (37) ACC/YR LOSS EXPENSES LOSSES UNPAID UNPAID PRIOR XXXX 2,574,781 1,209,314 1997 0.0 2,530,919 718,750 1998 0.0 4,349,351 1,258,275 TOTAL XXXX 9,455,051 3,186,338
109 13 OHIO CASUALTY GROUP SCHEDULE P-PART 1L - ACCIDENT & HEALTH
ALLOCATED LOSS EXPENSE PREMIUMS EARNED LOSS PAYMENTS PAYMENTS (1) (2) (3) (4) (5) (6) (7) (8) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 127,809 227,809 1,789 1,789 1997 1,062,936 1,062,937 -1 179,135 179,135 0 0 1998 616,092 616,092 0 87,206 87,206 0 0 TOTAL XXXX XXXX XXXX 394,150 494,150 1,789 1,789
SALVAGE & NUMBER OF UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS PAYMENTS RECEIVED TOTAL NET PAID REPORTED (1) (9) (10) (11) (12) (13) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 0 0 0 -100,000 XXXX 1997 0 0 0 0 XXXX 1998 0 0 0 0 XXXX TOTAL 0 0 0 -100,000 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR (1) (14) (15) (16) (17) (18) (19) (20) (21) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 309,375 209,375 161,700 161,700 0 0 0 0 1997 52,157 52,157 40,281 40,281 0 0 0 0 1998 80,471 80,471 62,148 62,148 0 0 0 0 TOTAL 442,004 342,004 264,129 264,129 0 0 0 0
TOTAL NET SALVAGE & LOSSES & NUMBER OF UNALLOCATED LOSS EXPENSES SUBROGATION EXPENSES CLAIMS UNPAID ANTICIPATED UNPAID OUTSTANDING (1) (22) (23) (24) (25) (26) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 0 0 0 100,000 1 1997 0 0 0 0 0 1998 0 0 0 0 0 TOTAL 0 0 0 100,000 1
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT (1) (27) (28) (29) (30) (31) (32) (33) (34) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0 1997 271,573 271,573 0 25.5 25.5 -11.2 0 0 1998 229,826 229,826 0 37.3 37.3 0.0 0 0 TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES PARTICIPATION % AFTER DISCOUNT (1) (35) (36) (37) ACC/YR LOSS EXPENSES LOSSES UNPAID UNPAID PRIOR 0 100,000 0 1997 0.0 0 0 1998 0.0 0 0 TOTAL XXXX 100,000 0
110 14 OHIO CASUALTY GROUP SCHEDULE P-PART 1R1 - PRODUCT LIABILITY (OCCURRENCE)
ALLOCATED LOSS EXPENSE PREMIUMS EARNED LOSS PAYMENTS PAYMENTS (1) (2) (3) (4) (5) (6) (7) (8) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR XXXX XXXX XXXX 1,939,978 181,250 2,462,949 731,490 1989 14,373,177 258,717 14,114,460 4,665,475 0 3,396,732 0 1990 13,298,268 218,187 13,080,081 4,278,801 0 3,422,074 0 1991 10,830,510 132,713 10,697,797 3,322,502 45,000 2,169,916 10,785 1992 9,395,225 114,623 9,280,602 2,164,705 0 1,507,204 0 1993 6,068,861 75,297 5,993,564 2,227,051 0 1,237,995 0 1994 1,231,286 15,761 1,215,525 784,178 0 537,537 0 1995 485,873 6,255 479,618 345,640 0 186,661 0 1996 384,859 1,279 383,580 543,015 0 165,704 0 1997 396,349 1,454 394,895 94,045 0 46,653 0 1998 1,082,805 9,236 1,073,569 1,102,452 0 8,354 0 TOTAL XXXX XXXX XXXX 21,467,841 226,250 15,141,779 742,275
SALVAGE & NUMBER OF UNALLOCATED LOSS EXPENSE SUBROGATION CLAIMS PAYMENTS RECEIVED TOTAL NET PAID REPORTED (1) (9) (10) (11) (12) (13) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 107,495 0 3,088 3,597,682 XXXX 1989 628,126 0 26,870 8,690,333 532 1990 368,431 0 44,169 8,069,306 411 1991 358,471 0 109,081 5,795,103 348 1992 263,382 0 31,953 3,935,290 308 1993 324,610 0 22,663 3,789,655 128 1994 359,104 0 18,570 1,680,820 219 1995 1,111,768 0 7,261 1,644,069 133 1996 716,960 0 6,906 1,425,679 122 1997 322,661 0 3,379 463,359 95 1998 644,022 0 3,680 1,754,828 74 TOTAL 5,205,030 0 277,622 40,846,125 XXXX
LOSSES UNPAID ALLOCATED LOSS EXPENSES UNPAID CASE BASIS BULK + IBNR CASE BASIS BULK + IBNR (1) (14) (15) (16) (17) (18) (19) (20) (21) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED DIR & ASSUMED CEDED PRIOR 2,682,116 0 123,154 4 491,225 0 66,194 4 1989 945,530 0 25,493 1 196,941 0 26,484 2 1990 500,500 0 85,680 3 256,200 0 34,609 2 1991 1,079,000 0 75,753 5 286,430 0 39,400 4 1992 244,510 0 106,942 5 267,702 0 38,581 8 1993 334,500 0 86,712 12 229,138 0 36,410 14 1994 173,300 0 15,422 38 40,857 0 15,218 21 1995 422,000 0 34,472 86 64,148 0 23,917 33 1996 170,200 0 53,069 132 101,728 0 37,992 52 1997 247,500 0 123,374 306 128,498 0 47,990 66 1998 175,084 0 215,451 534 134,019 0 50,011 68 TOTAL 6,974,240 0 945,522 1,125 2,196,886 0 416,806 273
TOTAL NET SALVAGE & LOSSES & NUMBER OF UNALLOCATED LOSS EXPENSES SUBROGATION EXPENSES CLAIMS UNPAID ANTICIPATED UNPAID OUTSTANDING (1) (22) (23) (24) (25) (26) ACC/YR DIR & ASSUMED CEDED DIR & ASSUMED PRIOR 171,376 0 0 3,534,057 882 1989 108,790 0 0 1,303,236 41 1990 29,990 0 0 906,973 38 1991 51,584 0 0 1,532,158 31 1992 16,400 0 0 674,124 39 1993 14,794 0 0 701,529 20 1994 27,197 0 0 271,936 14 1995 65,863 0 0 610,282 13 1996 85,982 0 0 448,788 14 1997 50,160 0 0 597,151 22 1998 49,846 0 0 623,808 26 TOTAL 671,983 -1 0 11,204,040 1,140
TOTAL LOSSES & LOSS EXPENSES INCURRED LOSS AND LOSS EXPENSE PERCENTAGE NONTABULAR DISCOUNT (1) (27) (28) (29) (30) (31) (32) (33) (34) ACC/YR DIR & ASSUMED CEDED NET DIR & ASSUMED CEDED NET LOSS LOSS EXPENSE PRIOR XXXX XXXX XXXX XXXX XXXX XXXX 0 0 1989 9,993,572 3 9,993,569 69.5 0.0 70.8 0 0 1990 8,976,284 6 8,976,278 67.5 0.0 68.6 0 0 1991 7,383,054 55,794 7,327,261 68.2 42.0 68.5 0 0 1992 4,609,426 12 4,609,414 49.1 0.0 49.7 0 0 1993 4,491,209 26 4,491,184 74.0 0.0 74.9 0 0 1994 1,952,815 59 1,952,756 158.6 0.4 160.7 0 0 1995 2,254,469 118 2,254,351 464.0 1.9 470.0 0 0 1996 1,874,650 183 1,874,467 487.1 14.3 488.7 0 0 1997 1,060,882 371 1,060,511 267.7 25.5 268.6 0 0 1998 2,379,238 602 2,378,636 219.7 6.5 221.6 0 0 TOTAL XXXX XXXX XXXX XXXX XXXX XXXX 0 0
INTER-COMPANY POOLING NET BALANCE SHEET RESERVES PARTICIPATION % AFTER DISCOUNT (1) (35) (36) (37) ACC/YR LOSS EXPENSES LOSSES UNPAID UNPAID PRIOR XXXX 2,805,266 728,790 1989 0.0 971,022 332,214 1990 0.0 586,176 320,797 1991 0.0 1,154,749 377,409 1992 0.0 351,448 322,676 1993 0.0 421,200 280,328 1994 0.0 188,683 83,252 1995 0.0 456,387 153,895 1996 0.0 223,137 225,650 1997 0.0 370,568 226,583 1998 0.0 390,000 233,808 TOTAL XXXX 7,918,637 3,285,403
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