Exhibit 10
The Ohio Casualty Insurance Company
2003 Officer Annual Incentive Program
Overview
The 2003 Officer Annual Incentive Program ("Program") is designed to give
participants the opportunity to earn a cash bonus based on criteria defined in
Exhibit 1.
Eligibility for Participation
To be a participant, the employee must satisfy the eligibility requirements
specified in Exhibit 1.
Eligibility for Bonus Payment
Unless otherwise provided in Exhibit 1, the following rules shall govern a
participant's ability to receive a bonus payment under the Program.
Participants who have been placed on disciplinary probation within the 12-
month period preceding the bonus payment date are not eligible for the bonus.
Participants must be employed and in good standing at the time of payout in
order to receive any bonus under this Program.
If a participant retires, dies or becomes disabled in 2003, he/she is eligible
for a prorated bonus (as described below). If a participant retires, dies or
becomes disabled after December 31, 2003 but before the bonus payment is made,
he/she is eligible for the bonus earned.
If a participant is displaced out of an eligible position (as defined in
Exhibit 1) in 2003, he/she is eligible for a prorated bonus.
If a participant is demoted out of an eligible position in 2003, he/she is not
eligible for the bonus. If a participant is demoted out of an eligible
position after December 31, 2003 but before the bonus payment date, he/she is
eligible for the bonus earned.
Any bonus will be prorated for the period of time that a participant is on a
leave of absence in 2003 (except for any leave of absence covered under the
Family Medical Leave Act).
Bonus Payments
The bonus amount will be calculated after all necessary data is available in
accordance with Exhibit 1. It is expected that the bonus will be paid in the
spring of 2004.
If Exhibit 1 provides that a portion of the bonus earned will be delayed, it
is expected that the deferred portion will be paid in the spring of 2005. Any
portion of the bonus to be paid in 2005 will be paid to those who met the
eligibility requirements for the 2004 payout, unless the participant is no
longer in good standing, has been placed on disciplinary probation within the
12-month period preceding the bonus payment date, or has terminated
employment. Participants who have retired, died, or become disabled will
receive any earned bonus.
A participant's prorated bonus shall be determined by multiplying the bonus
amount by x/12, with x being the number of whole months in the year during
which the person was "eligible for the bonus." A person is considered
"eligible for the bonus" for each month in which he/she meets the eligibility
requirements as of the 15th day of the month.
If a participant dies prior to payment of the earned bonus, the bonus will be
payable to the participant's estate.
Payment of a bonus to an employee on a leave of absence will not be made until
the employee returns from the leave of absence.
The bonus payments will be considered a part of Final Average Compensation (as
defined in The Ohio Casualty Insurance Company Employees Retirement Plan) if
paid to the employee prior to his/her termination date.
The bonus payment will be included in a participant's Compensation (as defined
in The Ohio Casualty Insurance Company Employee Savings Plan) if paid to the
employee before his/her termination date. If the employee is contributing to
the Employee Savings Plan at the time a bonus is paid and such bonus is
included in his/her Compensation for purposes of the Employee Savings Plan,
contributions to the Employee Savings Plan will be deducted from any amount
payable to the employee under this Program.
The Ohio Casualty Insurance Company ("OC") shall deduct from any amount
payable to the employee under this Program any taxes required to be withheld
under federal, state and local law.
Confidential Information
At all times during employment with OC or any of its subsidiaries and
thereafter, employees shall not disclose, divulge, use or publish any
Confidential Information (as defined below) except in connection with the
employee's job responsibilities for OC or its subsidiaries or with the written
permission by an authorized senior officer of The Ohio Casualty Insurance
Company. For purposes of this section, Confidential Information means any and
all confidential and/or proprietary information, data or knowledge of the Ohio
Casualty Corporation ("OCC") or any of its subsidiaries including but not
limited to (i) information regarding research, development, new products,
marketing and selling strategies, operating plans and procedures, reinsurance,
policyholders and agents, (ii) information regarding business plans and
strategies, budgets, litigation and governmental proceedings, prices, costs
and expenses and premium data, (iii) skills and compensation of other
employees, and (iv) trade secrets, ideas, processes, source and object codes,
data, computer programs and software, and other intellectual property.
Confidential Information does not include information which is or becomes
generally available to the public other than as a result of a disclosure by an
employee in violation of this Program.
When an employee leaves the employ of OC (or at OC's earlier request), he or
she will deliver to OC any and all computer disks and tapes, notes, memoranda
and other documents, together with all copies thereof, and any other material
containing or disclosing any Confidential Information.
Breach of this section will result in appropriate disciplinary action by OC up
to and including termination of employment. OCC and OC shall have the right
to enforce this section by injunction,
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specific performance or other equitable relief, without bond and without
prejudice to any other rights and remedies that OCC or OC may have for breach
of this provision.
Miscellaneous
Full power and authority to construe, interpret and administer this Program,
including determining the eligibility and the amount of any bonus payments
hereunder will be vested in the Executive Compensation Committee of the Board
of Directors. Such group shall have the sole and exclusive discretion in
making any and all decisions regarding the Program's operation. In no
circumstances may the Program be construed or interpreted as guaranteeing
bonus payments being made to any eligible employee.
Since no employee has a guaranteed right to any bonus amount under this
Program, any attempt by such an employee to sell, transfer, assign, pledge, or
otherwise encumber any anticipated bonus amount shall be void and neither OCC
nor any of its subsidiaries shall be liable in any manner for, or subject to,
the debts, contracts, liabilities, engagements or torts of any such employee
who might anticipate a bonus under this Program.
Nothing in this Program shall confer upon any employee any right to continue
in the employment of OC or any subsidiary or limit in any way the right of OC
or any subsidiary to terminate the employment of the employee at any time.
This Program shall at all times be entirely unfunded, and no provision shall
at any time be made with respect to segregating assets of OCC or any of its
subsidiaries for payment of any bonus amount under this Program. No employee
or any other person shall have any interest in any particular assets of OCC or
any of its subsidiaries by reason of the right to receive a bonus payment
under this Program and any such employee or any such other person shall have
only the rights of a general unsecured creditor of OC or its applicable
subsidiary regarding his or her rights under this Program.
OC reserves the right to amend or terminate the Program (in its sole
discretion) by action of the Executive Compensation Committee of the Board of
Directors. A termination of the Program shall cause a discontinuance or
forfeiture of any bonus amounts not earned at the time of termination. Any
amendment made to the Program shall be effective as of the date such amendment
is adopted and no such amendment shall adversely affect the rights of any
employee to bonus amounts earned prior to the adoption of such amendment.
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EXHIBIT 1
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2003 Officer Annual Incentive Program Details
Eligibility to Participate
To be a participant, an employee must be employed in an officer position
("eligible position") on or after January 1, 2003 and before December 15, 2003
("eligible employee"). An eligible employee will become a participant on the
earliest date on or after January 1, 2003 on which he/she becomes an eligible
employee.
Program Design
A target bonus amount has been defined for each participant based on his or
her position. The target bonus amount is stated as a percent of base salary.
Annual base salary as of December 31, 2003 will be used to calculate the
bonus.
The target bonus amount is divided into two components, one based on operating
income and one based on combined ratio (and premium for most business units).
The initial amount of each component will be 50% of the total target bonus
amount. No component of the bonus will be paid under this program unless the
minimum threshold for corporate operating income is achieved.
Operating Income Component:
To determine the operating income component of the bonus, the target
bonus amount will be multiplied by 50% (the weight of the component)
and adjusted up or down based on before-tax operating income as shown
in the Operating Income Matrix on the personalized sheet. Individual
performance is then used as a modifier, adjusting the result from the
preceding sentence up or down as shown in the Individual Performance
Matrix on the personalized sheet.
Combined Ratio Component:
For both Support Areas and Business Units, payment of the combined
ratio component of the bonus is dependent on meeting the minimum
threshold for corporate operating income.
To determine the combined ratio component of the bonus, the target
bonus amount will be multiplied by 50% (the weight of the component)
and adjusted up or down based on the Combined Ratio Matrix on the
personalized sheet. Individual performance is then used as a
modifier, adjusting the result up or down as shown in the Individual
Performance Matrix on the personalized sheet.
For Support Areas, the Combined Ratio Matrix will use 2003 corporate
accident year combined ratio. For Business Units, the Combined Ratio
Matrix will use the business unit's 2003 accident year combined ratio,
and 2003 gross written premium for most business units. The
appropriate matrix is shown on the personalized sheet.
For the combined ratio component of the bonus, the 2004 bonus payout
will be 60% of the bonus earned based on 2003 results as evaluated in
early 2004. The 2005 payout of the combined ratio component of the
bonus will be 100% of the incentive earned based on 2003 results as
evaluated in early 2005, less previous combined ratio bonus payments
made for 2003
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results. If the calculation of the bonus payment results in a negative
number, there will be no repayment of bonus payouts from a previous year.
Calculation
The following steps will be followed to calculate the bonus.
Step 1: Determine if the minimum threshold for operating income is
achieved. If so, proceed to the next step. If not, no
component of the bonus will be paid.
Operating Income Component:
Step 2: Multiply the target bonus amount by 50% and use the Operating
Income Matrix to adjust the amount.
Step 3: Use the Individual Performance Matrix to adjust the result of
step 2. This is the operating income component of the bonus.
Combined Ratio Component:
Step 4: Multiply the target bonus amount by 50% and use the
appropriate Combined Ratio Matrix to adjust the amount.
Step 5: Use the Individual Performance Matrix to adjust the result of
step 4. This is the combined ratio component of the bonus.
First Payout Amount:
Step 6: Determine the first payout of the combined ratio component of
the bonus by multiplying the result of step 5 by 60%.
Step 7: Determine the total amount for the first payout by adding the
result of Step 3 to the result of Step 6.
Deferred Payout Amount:
Step 8: Repeat steps 4 and 5 using updated combined ratio data.
Subtract from this amount the amount previously calculated in
step 6 using original combined ratio data. This is the
deferred payout amount.
Measures of Performance
Operating Income: Ohio Casualty Corporation ("OCC") 2003 before-tax
operating income which may be adjusted to account for an
extraordinary event(s), but only if approved by the
Executive Compensation Committee of the Board of
Directors.
Corporate Combined Ratio: 2003 accident year combined ratio for the company
as a whole. The accident year combined ratio (on
an estimated/projected basis) is net of
reinsurance, includes residual markets and the
effect of canceled agents, and excludes National
Workers' Compensation Pool.
Business Unit Performance: Measured by the business unit's 2003 accident
year combined ratio and/or 2003 gross written
premium. If both measures are used, they will
be combined in a matrix with payouts established
for various
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combinations. Separate matrices will be used for
different business units. The combined ratio
and/or the gross written premium may be adjusted
to account for an extraordinary event(s), but
only if approved by the Executive Compensation
Committee of the Board of Directors.
Commercial Umbrella for the home office staff
includes all commercial umbrellas.
Specifically, it is unsupported umbrellas written
through umbrella-only agents plus unsupported and
supported commercial umbrellas written through
agents who are not umbrella-only agents.
Premium:
Gross written premium excludes residual markets
and National Workers' Compensation Pool, and is
gross of reinsurance.
The Home Office Commercial Lines gross written
premium is all commercial lines, excluding all
bonds and umbrellas. The regions' Commercial
Lines gross written premium is all commercial
lines, excluding bonds and unsupported
umbrellas written through umbrella-only agents.
Combined Ratio:
The accident year combined ratio (on an
estimated/projected basis) is net of reinsurance,
includes residual markets and the effect of
canceled agents, and excludes National Workers'
Compensation Pool.
The Home Office Commercial Lines accident year
combined ratio is all commercial lines,
excluding all bonds and umbrellas. The regions'
Commercial Lines accident year combined ratio is
all commercial lines, including unsupported and
supported umbrellas written through any agent,
but excluding bonds.
Individual Performance: Measured using the Overall Performance Rating on
the participant's 2003 Employee Evaluation Form.
Miscellaneous
If a participant has a job change in 2003 that does not affect eligibility for
participation in this Program but does affect the bonus amount or bonus
structure (for example, due to promotion from Assistant Vice President to Vice
President or transfer from Support Area to Business Unit), the bonus will be
prorated for the portion of the year that was spent in each position. For
example, if the participant spends part of the year in a Support Area and part
of the year in a Business Unit, he/she is eligible for a prorated Support Area
bonus and a prorated Business Unit bonus. The bonus amounts would be prorated
based on the number of months the participant spent in the Support Area or
Business Unit.
Any questions about the Officer Annual Incentive Program should be directed to
Lynn Schoel (extension 2029 in the Home Office) or any other member of the
Compensation Department.
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Sample Calculation
Assume an individual target bonus of $25,000, 2003 before-tax operating income
of $100,000,000 and 2003 Overall Performance Rating for the individual of
"Excellent". Assume the individual is in a Support Area, and the corporate
accident year combined ratio was 99.0
Step 1: Determine if the minimum threshold for corporate operating income is
achieved. If so, proceed to the next step. If not, no component of
the bonus will be paid.
Operating Income minimum threshold = $50,000,000
Operating Income of $100,000,000 exceeds the minimum threshold
Step 2: Multiply the target bonus amount by 50% and use the Operating Income
Matrix to adjust the amount.
Operating Income Matrix
2003 Before-tax Operating Income Initial Bonus Calculation
-------------------------------- -------------------------
$148,900,000+ 150.0% of target bonus
$141,600,000 - $148,899,000 137.5% of target bonus
$134,000,000 - $141,599,000 125.0% of target bonus
$126,500,000 - $133,999,000 112.5% of target bonus
$119,100,000 - $126,499,000 100.0% of target bonus
$104,100,000 - $119,099,000 87.5% of target bonus
$97,100,000 - $104,099,000 75.0% of target bonus
$89,100,000 - $97,099,000 62.5% of target bonus
$82,100,000 - $89,099,000 50.0% of target bonus
Operating Income Component After Initial Calculation = 50% x 75% x
target bonus
amount
= 50% x 75% x
$25,000
= $9,375
Step 3: Use the Individual Performance Matrix to adjust the result of step 2.
This is the operating income component of the bonus.
Individual Performance Matrix
2003 Overall Performance Rating Bonus Amount
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Clearly Outstanding performance 150% of result of initial
calculation
Excellent performance 125% of result of initial
calculation
Good performance 100% of result of initial
calculation
Marginal performance 0% of result of initial
calculation
Unsatisfactory performance 0% of result of initial
calculation
Operating Income Component = 125% x result of step 2
= 125% x $9,375
= $11,718.75
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Step 4: Multiply the target bonus amount by 50% and use the appropriate
Combined Ratio Matrix to adjust the amount.
Combined Ratio Matrix
2003 Corporate A/Y Combined Ratio Initial Bonus Calculation
--------------------------------- -------------------------
< 97.1 150.0% of target bonus
97.2 - 97.7 137.5% of target bonus
97.8 - 98.1 125.0% of target bonus
98.2 - 98.7 112.5% of target bonus
98.8 - 99.6 100.0% of target bonus
99.7 - 100.2 87.5% of target bonus
100.3 - 100.7 75.0% of target bonus
100.8 - 101.2 62.5% of target bonus
101.3 - 101.7 50.0% of target bonus
Combined Ratio Component After Initial Calculation = 50% x 100% x
target bonus
amount
= 50% x 100% x
$25,000
= $12,500
Step 5: Use the Individual Performance Matrix to adjust the result of step 4.
This is the combined ratio component of the bonus.
Combined Ratio Component = 125% x result of step 4
= 125% x $12,500
= $15,625
Step 6: Determine the first payout of the combined ratio component of the
bonus by multiplying the result of step 5 by 60%.
2004 payout of Combined Ratio Component = 60% x result of step 5
= 60% x $15,625
= $9,375
Step 7: Determine the total amount for the first payout by adding the result
of Step 3 to the result of Step 6.
2004 payout = result of step 3 + result of step 6
= $11,718.75 + $9,375
= $21,093.75
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