==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended March 31, 2000.
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
31-0783294
(I.R.S. Employer Identification No.)
136 North Third Street, Hamilton, Ohio
(Address of principal executive offices)
45025
(Zip Code)
(513) 867-3000
(Registrant's telephone number)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Par Value $.125 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The aggregate market value as of May 1, 2000 of the voting stock held by
non-affiliates of the registrant was $885,052,333.
On May 1, 2000 there were 60,070,187 shares outstanding.
Page 1 of 16
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PART I
ITEM 1. FINANCIAL STATEMENTS
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED BALANCE SHEET
March 31, December 31,
(In thousands, except per share
data) (Unaudited) 2000 1999
- ------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,437,954 and $2,408,201) $2,412,867 $2,376,973
Equity securities, at fair value
(cost: $187,834 and $161,498) 671,826 698,129
Short-term investments, at fair value
(cost: $57,173 and $104,446) 57,173 104,398
- ------------------------------------------------------------------------------
Total investments 3,141,866 3,179,500
Cash 71,567 45,559
Premiums and other receivables, net of allowance
for bad debts of $9,539 and $9,338,
respectively 395,993 366,202
Deferred policy acquisition costs 177,202 177,745
Property and equipment, net of accumulated
depreciation of $115,722 and $113,541,
respectively 96,688 94,670
Reinsurance recoverable 140,976 139,021
Agent relationships, net of accumulated
amortization of $16,367 and $13,298,
respectively 248,328 293,565
Other assets 124,148 180,182
- ------------------------------------------------------------------------------
Total assets $4,396,768 $4,476,444
==============================================================================
Liabilities
Insurance reserves:
Unearned premiums $ 732,999 $ 725,399
Losses 1,572,070 1,544,967
Loss adjustment expenses 367,414 363,488
Notes payable 241,283 241,446
California Proposition 103 reserve 51,097 50,486
Deferred income taxes 44,518 62,843
Other liabilities 344,526 336,828
- ------------------------------------------------------------------------------
Total liabilities 3,353,907 3,325,457
Shareholders' Equity
Common stock, $.0625 par value 5,901 5,901
Authorized: 150,000 shares
Issued: 94,418
Additional paid-in capital 4,201 4,286
Common stock purchase warrants 21,138 21,138
Accumulated other comprehensive income:
Unrealized gain on investments, net of
applicable income taxes 310,274 329,354
Retained earnings 1,154,634 1,243,463
Treasury stock, at cost:
(Shares: 34,345; 34,335) (453,287) (453,155)
- ------------------------------------------------------------------------------
Total shareholders' equity 1,042,861 1,150,987
- ------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $4,396,768 $4,476,444
==============================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
45-58 of the Corporation's 1999 Form 10-K, Item 14.
2
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED INCOME
Three Months
Ended March 31,
(In thousands, except per share
data) (Unaudited) 2000 1999
- ------------------------------------------------------------------------------
Premiums and finance charges earned $387,188 $384,545
Investment income less expenses 51,793 41,809
Investment gains(losses) realized, net (6,308) 903
- ------------------------------------------------------------------------------
Total revenues 432,673 427,257
Losses and benefits for policyholders 294,637 231,753
Loss adjustment expenses 47,150 34,061
General operating expenses 42,206 42,789
Amortization of agent relationships 3,069 3,094
Write-down of agent relationships 42,169 0
Amortization of deferred policy acquisition costs 98,859 99,969
Restructuring charge 22 198
California Proposition 103 reserve, including
interest 611 611
- ------------------------------------------------------------------------------
Total expenses 528,723 412,475
- ------------------------------------------------------------------------------
Income(loss) from continuing operations
before income taxes (96,050) 14,782
Income tax (benefit)expense:
Current (12,986) 2,237
Deferred (8,051) 828
- ------------------------------------------------------------------------------
Total income tax (benefit)expense (21,037) 3,065
- ------------------------------------------------------------------------------
Income(loss) before discontinued operations (75,013) 11,717
Income from discontinued operations, net of taxes of
$0 and $78, respectively 0 1,795
Cumulative effect of accounting change, net of taxes 0 (2,255)
- ------------------------------------------------------------------------------
Net income(loss) $(75,013) $ 11,257
==============================================================================
Other comprehensive income, net of taxes:
Net change in unrealized gains, net of income
tax (benefit) expense of $(10,274) and
$(14,844), respectively (19,080) (27,569)
- ------------------------------------------------------------------------------
Comprehensive loss $(94,093) $(16,312)
==============================================================================
Average shares outstanding - basic* 60,080 62,290
Average shares outstanding - diluted* 60,102 62,326
==============================================================================
Earnings per share (basic and diluted):*
Income(loss) from continuing operations, per share $ (1.25) $ 0.19
Income from discontinued operations, per share 0.00 0.03
Effect of change in accounting principle (net of
taxes 0.00 (0.04)
- ------------------------------------------------------------------------------
Net income(loss), per share $ (1.25) $ 0.18
Cash dividends, per share $ 0.23 $ 0.23
==============================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
45-58 of the Corporation's 1999 Form 10-K, Item 14.
*1999 adjusted for 2 for 1 stock split effective July 22, 1999
3
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
Common Accumulated
Additional stock other Total
(In thousands, except per Common paid-in purchase comprehensive Retained Treasury shareholders'
share data) (Unaudited) Stock capital warrants income earnings stock equity
- -------------------------------------------------------------------------------------------------------------------------------
Balance
January 1, 1999 $5,901 $4,135 $21,138 $511,816 $1,185,349 $(407,358) $1,320,981
Unrealized loss (42,413) (42,413)
Deferred income tax benefit on
net unrealized loss 14,844 14,844
Net issuance of treasury
stock under stock option
plan (18 shares)* 126 212 338
Repurchase of treasury
stock (1,034 shares)* (20,682) (20,682)
Net income 11,257 11,257
Cash dividends paid
($.23 per share)* (14,351) (14,351)
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1999 $5,901 $4,261 $21,138 $484,247 $1,182,255 $(427,828) $1,269,974
===============================================================================================================================
Balance
January 1, 2000 $5,901 $4,286 $21,138 $329,354 $1,243,463 $(453,155) $1,150,987
Unrealized loss (29,354) (29,354)
Deferred income tax benefit on
net unrealized loss 10,274 10,274
Forfeiture of restricted
stock under stock award
plan (10 shares) (85) (132) (217)
Net loss (75,013) (75,013)
Cash dividends paid
($.23 per share) (13,816) (13,816)
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2000 $5,901 $4,201 $21,138 $310,274 $1,154,634 $(453,287) $1,042,861
===============================================================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 45-58 of the Corporation's 1999 Form 10-K, Item 14.
*Adjusted for 2 for 1 stock split effective July 22, 1999
4
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Three Months
Ended March 31,
(in thousands) (Unaudited) 2000 1999
- ------------------------------------------------------------------------------
Cash flows from:
Operations
Net income(loss) $ (75,013) $ 11,257
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves 38,629 (21,013)
Income taxes (7,054) 1,349
Premiums and other receivables (29,791) (45,979)
Deferred policy acquisition costs 543 2,046
Reinsurance recoverable 1,955 16,589
Other assets 50,933 (12,399)
Other liabilities 7,698 (25,689)
California Proposition 103 reserves 611 611
Amortization and write-down of agent relati 45,237 2,939
Depreciation and amortization 3,721 8,318
Investment (gains)losses 6,308 (2,103)
Cumulative effect of an accounting change 0 2,255
- ------------------------------------------------------------------------------
Net cash generated(used) by operating
activities 43,777 (61,819)
- ------------------------------------------------------------------------------
Investing
Purchase of securities:
Fixed income securities - available-for-sale (305,537) (255,146)
Equity securities (21,836) (6,395)
Proceeds from sales:
Fixed income securities - available-for-sale 236,201 140,013
Equity securities 22,787 15,146
Proceeds from maturities and calls:
Fixed income securities - available-for-sale 21,570 27,998
Equity securities 0 3,000
Property and equipment:
Purchases (4,755) (11,612)
Sales 555 135
- ------------------------------------------------------------------------------
Net cash used from investing activities (51,015) (86,861)
- ------------------------------------------------------------------------------
Financing
Notes payable:
Borrowings 0 10,000
Repayments (163) (20,000)
Proceeds from exercise of stock options 0 103
Purchase of treasury stock 0 (20,682)
Dividends paid to shareholders (13,816) (14,351)
- ------------------------------------------------------------------------------
Net cash used from financing activities (13,979) (44,930)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents (21,217) (193,610)
Cash and cash equivalents, beginning of period 149,957 305,002
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 128,740 $ 111,392
==============================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
45-58 of the Corporation's 1999 Form 10-K, Item 14.
5
Ohio Casualty Corporation & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - INTERIM ADJUSTMENTS
It is believed that all material adjustments necessary to present a fair
statement of the results of the interim period covered are reflected in this
report. The operating results for the interim periods are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with the financial statements and notes thereto
in the Corporation's 1999 Form 10-K, Item 14.
NOTE II - RECENTLY ISSUED ACCOUNTING STANDARDS
During the first quarter of 1999, the Corporation adopted Statement of
Position 97-3 "Accounting by Insurance and Other Enterprises for Insurance-
Related Assessments". This statement provides guidance on accounting for
insurance related assessments and required disclosure information. In
accordance with SOP 97-3, the Corporation accrued a liability for insurance
assessments of $2.3 million net of tax, as of January 1, 1999. This was
recorded as a change in accounting method.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement standardizes the accounting for
derivative instruments by requiring those items to be recognized as assets or
liabilities with changes in fair value reported in earnings or other
comprehensive income in the current period. The Corporation expects the
adoption of FAS 133 to have an immaterial impact on the financial results due
to its limited use of derivative instruments. This statement is effective for
fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001
for the Corporation).
NOTE III - EARNINGS PER SHARE
Basic and diluted earnings per share are summarized as follows (in thousands,
except per share data):
Three months ended
March 31
2000 1999
---- ----
Income(loss) from continuing operations $(75,013) $11,717
Weighted average common shares
outstanding - basic 60,080 62,290
Basic income(loss) from continuing
operations per weighted average share $ (1.25) $ .19
==============================================================================
Weighted average common shares outstanding 60,080 62,290
Effect of dilutive securities 22 36
- ------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 60,102 62,326
Diluted income(loss) from continuing
operations per weighted average share $ (1.25) $ .19
==============================================================================
1999 adjusted for July 22, 1999 2 for 1 stock split
6
NOTE IV -- SEGMENT INFORMATION
The Corporation has determined its reportable segments based upon its method
of internal reporting which is organized by product line. The property and
casualty segments are private passenger auto - agency, private passenger auto
- - direct, CMP, fire, inland marine, general liability, umbrella, workers'
compensation, commercial auto, homeowners, fidelity and surety. These
segments generate revenues by selling a wide variety of personal, commercial
and surety insurance products. The Corporation also has an all other segment
which derives its revenues from premium financing, investment income, royalty
income and discontinued life insurance operations.
Each segment of the Corporation is managed separately. The property and
casualty segments are managed by assessing the performance and profitability
of the segments through analysis of industry financial measurements including
loss and loss adjustment expense ratios, combined ratio, premiums written,
underwriting gain/loss and the effect of catastrophe losses on the segment.
The following tables present this information by segment as it is reported
internally to management. In 1999, the Group began managing the private
passenger auto - direct segment separately from private passenger auto -
agency and umbrella segment separately from general liability. As a result,
prior year results for general liability and private passenger auto - agency
have been restated to reflect this change. Asset information by reportable
segment is not reported, since the Corporation does not produce such
information internally.
Three Months Ended March 31
(in thousands)
Private Passenger Auto - Agency 2000 1999
- -----------------------------------------------------------------------
Net premiums written $120,750 $147,905
% Increase(decrease) (18.4)% 17.9%
Net premiums earned 121,096 129,894
% Increase(decrease) (6.8)% 6.8%
Underwriting gain/(loss)
(before tax) (23,505) (138)
Loss ratio 81.2% 62.6%
Loss expense ratio 14.3% 10.6%
Underwriting expense ratio 24.0% 23.6%
Combined ratio 119.5% 96.8%
Impact of catastrophe
losses on combined ratio 0.4% 0.3%
Private Passenger Auto - Direct 2000 1999
- -----------------------------------------------------------------------
Net premiums written $4,124 $5,243
% Increase(decrease) (21.4)% N/A
Net premiums earned 3,888 2,094
% Increase(decrease) 85.7% N/A
Underwriting gain/(loss)
(before tax) (5,229) (4,170)
Loss ratio 139.4% 164.3%
Loss expense ratio 11.3% 21.4%
Underwriting expense ratio 79.0% 45.3%
Combined ratio 229.7% 231.0%
Impact of catastrophe
losses on combined ratio 0.1% 0.0%
CMP, Fire, Inland Marine 2000 1999
- -----------------------------------------------------------------------
Net premiums written $80,543 $74,925
% Increase(decrease) 7.5% 42.4%
Net premiums earned 77,273 73,793
% Increase(decrease) 4.7% 42.9%
Underwriting gain/(loss)
(before tax) (13,763) (14,743)
Loss ratio 63.5% 69.8%
Loss expense ratio 12.3% 8.0%
Underwriting expense ratio 40.3% 41.5%
Combined ratio 116.1% 119.3%
Impact of catastrophe
losses on combined ratio 2.2% 4.6%
General Liability 2000 1999
- -----------------------------------------------------------------------
Net premiums written $20,697 $19,904
% Increase(decrease) 4.0% 3.1%
Net premiums earned 21,117 21,852
% Increase(decrease) (3.4)% 12.4%
Underwriting gain/(loss)
(before tax) (5,594) 2,376
Loss ratio 52.5% 37.9%
Loss expense ratio 26.5% 2.4%
Underwriting expense ratio 48.5% 53.6%
Combined ratio 127.5% 93.9%
Umbrella 2000 1999
- -----------------------------------------------------------------------
Net premiums written $16,669 $12,258
% Increase(decrease) 36.0% 156.4%
Net premiums earned 15,238 9,031
% Increase(decrease) 68.7% 100.3%
Underwriting gain/(loss)
(before tax) 1,725 3,504
Loss ratio 52.3% 12.8%
Loss expense ratio 1.4% (6.0)%
Underwriting expense ratio 32.0% 40.1%
Combined ratio 85.7% 46.9%
Workers' Compensation 2000 1999
- -----------------------------------------------------------------------
Net premiums written $56,836 $47,126
% Increase(decrease) 20.6% 87.1%
Net premiums earned 49,606 50,428
% Increase(decrease) (1.6)% 104.5%
Underwriting gain/(loss)
(before tax) (25,349) 4,011
Loss ratio 105.5% 48.4%
Loss expense ratio 10.1% 8.5%
Underwriting expense ratio 31.0% 37.6%
Combined ratio 146.6% 94.5%
7
Commercial Auto 2000 1999
- -----------------------------------------------------------------------
Net premiums written $47,827 $43,124
% Increase(decrease) 10.9% 21.2%
Net premiums earned 43,770 42,502
% Increase(decrease) 3.0% 23.4%
Underwriting gain/(loss)
(before tax) (9,147) (7,049)
Loss ratio 70.3% 67.1%
Loss expense ratio 10.6% 12.4%
Underwriting expense ratio 36.5% 36.6%
Combined ratio 117.4% 116.1%
Impact of catastrophe losses on
combined ratio 0.2% 0.2%
Homeowners 2000 1999
- -----------------------------------------------------------------------
Net premiums written $38,099 $37,478
% Increase(decrease) 1.7% (6.5)%
Net premiums earned 45,509 45,654
% Increase(decrease) (0.3)% 3.4%
Underwriting gain/(loss)
(before tax) (11,375) (9,703)
Loss ratio 83.1% 82.7%
Loss expense ratio 8.3% 8.8%
Underwriting expense ratio 40.1% 36.2%
Combined ratio 131.5% 127.7%
Impact of catastrophe losses on
combined ratio 10.5% 7.9%
Fidelity & Surety 2000 1999
- ----------------------------------------------------------------------
Net premiums written $9,099 $9,401
% Increase(decrease) (3.2)% 7.3%
Net premiums earned 9,219 9,275
% Increase(decrease) (0.6)% 4.9%
Underwriting gain/(loss)
(before tax) 906 2,472
Loss ratio 20.5% 2.7%
Loss expense ratio 6.3% 4.6%
Underwriting expense ratio 64.2% 65.2%
Combined ratio 91.0% 72.5%
Total Property & Casualty 2000 1999
- ----------------------------------------------------------------------
Net premiums written $394,644 $397,364
% Increase(decrease) (0.7)% 27.4%
Net premiums earned 386,716 384,523
% Increase(decrease) 0.6% 24.3%
Underwriting gain/(loss)
(before tax) (91,331) (23,440)
Loss ratio 76.2% 61.5%
Loss expense ratio 12.2% 8.9%
Underwriting expense ratio 34.5% 34.5%
Combined ratio 122.9% 104.9%
Impact of catastrophe losses on
combined ratio 1.8% 1.9%
All other 2000 1999
- ----------------------------------------------------------------------
Revenues $ 1,159 $ (376)
Expenses 4,623 4,973
- ----------------------------------------------------------------------
Net income(loss) $(3,464) $(5,349)
Reconciliation of Revenues 2000 1999
- -----------------------------------------------------------------------
Net premiums earned for
reportable segments $386,716 $384,523
Investment income 50,773 42,467
Realized gains 232 1,078
Miscellaneous income 344 43
- -----------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 438,065 428,111
Property and casualty
statutory to GAAP adjustment (6,551) (478)
- -----------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 431,514 427,633
Other segment revenues 1,159 (376)
- -----------------------------------------------------------------------
Total revenues $432,673 $427,257
=======================================================================
Reconciliation of Underwriting
gain/(loss) (before tax) 2000 1999
- -----------------------------------------------------------------------
Property and casualty under-
writing gain/(loss) (before tax)
(Statutory basis) $ (91,331) $(23,440)
Statutory to GAAP adjustment (43,815) 77
- -----------------------------------------------------------------------
Property and casualty under-
writing gain/(loss) (before tax)
(GAAP basis) (135,146) (23,363)
Net investment income 51,793 41,809
Realized gain/(loss) (6,308) 903
Other income(loss) (6,389) (4,567)
- -----------------------------------------------------------------------
Income(loss) from continuing
operations before income taxes $ (96,050) $ 14,782
=======================================================================
NOTE V - AGENT RELATIONSHIPS WRITE-DOWN
During first quarter of 2000, the Group made the strategic decision to
discontinue its relationship with Managing General Agents. The result was a
write-down of the agent relationships asset by $42.2 million, with an after
tax impact of $.55 per share. The agent relationship is the identified
intangible asset acquired in connection with the Great American Insurance
Company commercial lines acquisition. The Managing General Agents accounted
for $48 million in commercial lines premium written, of which $29 million was
workers' compensation. This business will be non-renewed as permitted by law
and contractual agreements. The Group believes this termination of the
Managing General Agents will give it better control of its underwriting and
pricing practices. The remaining portion of the agent relationships will be
amortized on a straight line basis over the balance of the twenty-five year
period. Additional information related to agent relationships is included in
Item 14, Note 1G, Accounting Policies on page 45 of the Corporation's 1999
Form 10-K.
8
NOTE VI - RESTRUCTURING CHARGE
During December 1998, the Group adopted a plan to restructure its branch
operations. To continue in the Corporation's efforts to reduce expenses,
personal lines business centers were reduced from five to three locations.
Underwriting branch locations were reduced from seventeen to eight locations
and claims branches were reduced from thirty-eight to six locations in 1999.
As part of this plan, the Corporation established a $10.0 million liability
for future expenses related to its branch office consolidation plan,
resulting in a one-time charge of $10.0 million being reflected in its 1998
income statement. These expenses consisted solely of future contractual
lease payments related to abandoned facilities. During 1999, the Corporation
reduced $5.3 million of the liability, of which $2.9 million was due to
payments under leases and $2.4 million was due to changes in assumptions used
to establish the initial reserve. The activities under the plan were
completed in 1999, but due to leases still in effect, the balance in the
restructuring reserve, $4.7 million at December 31, 1999, will continue to
remain as leases expire in 2000. In the first quarter of 2000, the
Corporation further reduced $1.1 million of the liability. Of the $1.1
million, $.02 million related to changes in assumptions used to establish the
initial reserve. The balance in the restructuring reserve was $3.6 million
at March 31, 2000.
9
ITEM 2. Management's Discussion and Analysis of Financial Condition
- ------ and Results of Operations
-----------------------------------------------------------------
Ohio Casualty Corporation (the Corporation) is the holding company of The Ohio
Casualty Insurance Company (the Company), which is one of six property-
casualty companies that make up the Ohio Casualty Group (the Group).
Property and casualty pre-tax underwriting losses for the quarter ended March
31, 2000 were $135.1 million, $2.25 per share, compared with $23.4 million,
$.38 per share for the same period in 1999. The March 31, 2000 results
include the effects of the agent relationships write-down taken in the
quarter. The agent relationships write-down amounted to $42.2 million before
tax, or $.55 per share after tax. Gross premiums for the first three months
of 2000 decreased 4.5% for all lines of business compared with the first
quarter of 1999. Commercial lines increased 11.6% and personal lines
decreased 19.6% from the same period last year. Property and casualty net
premiums dropped 0.7% in the first quarter of 2000 against the same period a
year ago. First quarter of 1999 net premiums were higher due to the effects
of the New Jersey private passenger automobile annual policy conversion.
Additionally, a rate rollback in New Jersey private passenger automobile was
mandated in mid 1999 and reduced premiums for first quarter 2000 relative to
first quarter 1999. Excluding these effects, first quarter 2000 net premiums
increased approximately 4.1% against 1999.
Premium from Key Agents grew 2.1% over the same period of 1999. Key Agents
work closely with the Group to establish goals to increase profitability,
growth and retention. Premiums from non-key active agents fell 3.5% in the
first quarter. Together with new appointments the year-to-date growth rate
for all active agencies was 1.9%.
New Jersey is the Group's largest state with 14.9% of total net premiums
written during the quarter. Legislation passed in 1992 requires automobile
insurers operating in the state to accept all risks that meet underwriting
guidelines regardless of risk concentration. This leads to a greater risk
concentration in the state than the Group would otherwise accept. New Jersey
also requires assessments to be paid for the New Jersey Unsatisfied Claim and
Judgment Fund (UCJF). This assessment is based upon estimated future direct
premium written in that state. The Group has paid $3.3 million in 2000 for
fiscal year 2001 assessment and paid $3.4 million in 1999 for fiscal year 2000
assessments. The Corporation anticipates future assessments will not
materially affect the Corporation's results of operations, financial position
or liquidity.
The New Jersey State Senate passed an auto insurance reform bill effective
March 22, 1999, that mandated a 15% rate reduction for personal auto policies
based on a reduction in medical expense benefits, limitations on lawsuits and
enhanced fraud prevention provisions. All new policies and renewal policies
written on or after that date reflect the 15% rate reduction. The anticipated
impact on the Group is a tradeoff of lower premium rates on personal auto
policies for presumably lower losses but the degree of offset, if any, is
uncertain at present. As of March 31, 2000, the Group had personal auto net
premium written of $25.7 million or 43.7% of total premium that the Group
writes in New Jersey compared with $124.4 million or 49.5% at year-end 1999.
In 1999, the state of New Jersey began to require insurance companies to write
a portion of their premiums in Urban Enterprise Zones (UEZ). These zones are
urban areas frequently having high loss ratios. The Group is assigned
premiums if it does not write the required amount on its own. As of March 31,
2000, the Group has written $1.6 million year-to-date in UEZ premiums, with
$2.9 million in additional assigned premiums. As of March 31, 2000, the loss
ratio on the UEZ premiums is 167.3% and the loss ratio on the assigned
business is 188.6%.
The combined ratio for the first three months increased 18.0 points to 122.9%
from 104.9% from the same period last year. The poor combined ratio is a
result of continued price inadequacy and a material deterioration in prior
accident year experience. This has been concentrated in the private passenger
auto, workers' compensation, umbrella, and general liability lines of
business.
10
The three-month combined ratio for homeowners increased 3.8 points to 131.5%
from 127.7% in the same period last year. The Group continues to review its
exposure to underinsured homeowner properties to maintain adequate replacement
cost values on its homeowners book of business. Selected homeowners accounts
are reviewed upon renewal for a replacement cost valuation and any necessary
premium increases will be implemented at that time.
Private passenger automobile-agency, the Group's largest line, recorded a 2000
three-month combined ratio of 119.5% increasing from 96.8% in 1999. Private
passenger automobile-agency combined ratio rose in response to higher than
anticipated incurred losses in the first quarter for prior accident years and
the effects of the New Jersey rate rollback. Private passenger automobile-
agency loss ratio increased 18.6 points to 81.2% from 62.6% in 1999.
Commercial automobile reported a first quarter combined ratio of 117.4%,
increasing 1.3 points over the 1999 combined ratio of 116.1%.
Workers' compensation combined ratio for the first three months of 2000
increased 52.1 points to 146.6% from 94.5% during the same period last year.
The increase in the workers' compensation ratio is due to inadequate price
increases and adverse prior year loss reserve development that has caused
incurred loss and loss adjustment expenses to increase significantly.
Workers' compensation loss ratio increased 57.1 points to 105.5% from 48.4% in
the same quarter last year.
The general liability combined ratio increased during the first quarter 2000
to 127.5% from 93.9% in 1999. Umbrella combined ratio for the first quarter
of 2000 increased 38.8 points to 85.7% from 46.9% in 1999. These increases
are largely due to adverse development of prior accident years. The combined
ratio for CMP, fire and inland marine decreased 3.2 points to 116.1% from
119.3% during March 2000.
The first quarter catastrophe losses were $7.0 million and accounted for 1.8
points on the combined ratio. This compares with $7.4 million and 1.9 point
for the same period in 1999. The effect of future catastrophes on the
Corporation's results cannot be accurately predicted. Severe weather patterns
can have a material adverse impact on the Corporation's results. During the
first quarter of 2000 there were 7 catastrophes compared with 5 catastrophes
in the first quarter of 1999. The largest catastrophe in each quarter was
$5.7 million and $2.4 million, respectively, in incurred losses. For
additional disclosure of catastrophe losses, refer to Item 14, Note 9, Losses
and Loss Reserves in the Notes to the Consolidated Financial Statements on
pages 51 and 52 of the Corporation's 1999 Form 10-K.
For the quarter, property and casualty after tax investment income was $35.1
million, $.58 per share, increasing slightly from $31.8 million, $.51 per
share, for the same period last year. The effective tax rate on investment
income for the first quarter of 2000 was 30.9% compared with 25.1% for the
comparable period in 1999. The increase in effective tax rate reflects a
decreasing tax exempt municipal bond portfolio.
For the first quarter, property and casualty after tax realized losses were
$4.1 million, compared with an after tax realized gain of $.6 million for the
same period of 1999. The capital loss reflects a current period write-down of
securities due to permanent declines in market value of $4.7 million.
Net cash generated by operations was $43.8 million for the first three months
of the year compared with net cash used of $61.8 million for the same period
in 1999. This change is due to payment received in 2000 as part of the
commutation of a reinsurance treaty in the fourth quarter of 1999. Also, 1999
cash used reflected a large payment for the remaining purchase price of the
Great American Insurance Company commercial lines. Shareholder dividend
payments were $13.8 million in the first three months of 2000 compared with
$14.4 million for the same period of 1999.
In 1995, the Company reinsured substantially all of its life insurance and
related businesses to Employer's Reassurance Corporation and entered into an
administrative and marketing agreement with Great Southern Life Insurance
Company. During 1999, Great Southern Life Insurance Company replaced
Employers' Reassurance Corporation on the 100% coinsurance treaty. On
December 31, 1999, the Company completed the sale of the Ohio Life shell,
thereby transferring all remaining assets and liabilities, as well as
reinsurance treaty obligations, to the Buyer. Additional information related
to the discontinued life insurance operations is included in Item 14, Note 20
Discontinued Operations on page 57 of the Corporation's 1999 Form 10-K.
11
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) and unrated securities are summarized as follows:
March 31, December 31,
2000 1999
Below investment grade securities:
Carrying value $160.3 $175.2
Amortized cost 177.9 187.1
Unrated securities:
Carrying value $326.3 $303.2
Amortized cost 323.5 310.0
Utilizing ratings provided by other agencies, such as the NAIC, the
Corporation categorizes additional unrated securities into below investment
grade ratings. The following summarizes the additional unrated securities
that are rated in the below investment grade category by other rating
agencies:
March 31, December 31,
2000 1999
Below investment grade securities at
carrying value $160.3 $175.2
Other rating agencies categorizing unrated
securities as below investment grade 37.2 8.7
Below investment grade securities at
carrying value $197.5 $213.9
All of the Corporation's below investment grade securities are performing in
accordance with contractual terms and are making principal and interest
payments as required. The securities in the Corporation's below investment
grade portfolio have been issued by 66 corporate borrowers in approximately 45
industries.
Investments in below investment grade securities have greater risks than
investments in investment grade securities. The risk of default by borrowers
which issue securities rated below investment grade is significantly greater
because these securities are generally unsecured and often subordinated to
other debt and these borrowers are often highly leveraged and are more
sensitive to adverse economic conditions such as a recession or a sharp
increase in interest rates. Current liquidity needs are expected to be met by
scheduled bond maturities, even if the below investment grade and unrated
securities are excluded. Investment grade securities are also subject to
significant adverse risks including the risks of re-leveraging and changes in
control of the issuer. In most instances, investors are unprotected with
respect to such risks, the effects of which can be substantial.
For further discussion of the Corporation's investments, see Item 1 pages 6
through 9 of the Corporation's 1999 Form 10-K for the year ended December 31,
1999.
In 1994, the National Association of Insurance Commissioners (NAIC) developed
a risk-based capital model to establish standards which will compare insurance
company statutory surplus to required minimum capital based on risks of
operations and assist regulators in determining solvency requirements. The
model is based on four risk factors in two categories: asset risk consisting
of investment risk and credit risk; and underwriting risk composed of loss
reserve and premiums written risks. Based on current calculations, all of the
Ohio Casualty Group companies are in excess of the necessary capital to
conform with the risk-based capital model.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The
Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas, e.g. deferred
income taxes are recorded. The Ohio
12
and Indiana Insurance Departments have adopted the Codification guidance,
effective January 1, 2001. The Group has not estimated the potential effect
of the Codification guidance.
Proposition 103 was passed in the state of California in 1988 in an attempt to
legislate premium rates for that state. As construed by the California
Supreme Court, the proposition requires premium rate rollbacks for 1989
California policyholders while allowing for a "fair" return for insurance
companies. Even after considering investment income, total returns in
California have been less than what would be considered "fair" by any
reasonable standard. During the fourth quarter of 1994, the state of
California assessed the Group $59.9 million for Proposition 103. In February
1995, California revised this billing to $47.3 million. The assessment was
revised again in August 1995 to $42.1 million plus interest. In December
1997, during Administrative Law hearings, the California Department of
Insurance filed two revised rollback calculations. These calculations
indicated rollback liabilities of either $35.9 million or $39.9 million plus
interest. In 1998, the Administrative Law Judge finally issued a proposed
ruling with a rollback liability of $24.4 million plus interest. Her ruling
was sent to the California Commissioner of Insurance to be accepted, rejected
or modified. The Group expected the commissioner to rule sometime after the
election in November 1998, but he has so far failed to do so. The asserted
rollbacks to date have ranged from $24.4 million to $61.2 million. The
Administrative Law Judge indicates clearly in her ruling that by her
calculation the Group would have lost approximately $1.0 million on 1989
operations if a rollback of $24.4 million were imposed. Given that
conclusion, it is clear that any assessment greater than $24.4 million would
strengthen the Group's Constitutional argument that this rollback is
confiscatory. The Group does not believe it is possible to pinpoint a
specific rollback that may be required that is the most probable. The Group
has established a contingent liability for Proposition 103 rollback at $24.4
million plus simple interest at 10% from May 8, 1989. This brings the total
reserve to $51.1 million at March 31, 2000.
In December 1992, the Group stopped writing business in California due to a
lack of profitability and a difficult regulatory environment. In April 1995,
the California Department of Insurance gave final approval for withdrawal.
Currently, subsidiary American Fire and Casualty remains in the state to wind
down the affairs of the Group.
Ohio Casualty Corporation did not repurchase any of its shares during the
first quarter. The Corporation has remaining authorization to repurchase
1,649,824 additional shares.
The Corporation successfully moved into the Year 2000 without impact or
interruption to the business as a result of Year 2000 computer problems.
Though no Year 2000 problems have occurred or are anticipated, the Corporation
continues to monitor the situation in order to be able to address any future
issues in a timely fashion. The total related cost of the Year 2000 project
was $2.8 million through March 31, 2000. The Corporation expects that Year
2000 project costs incurred in 2000, if any, will be immaterial.
From time to time, the Company may publish forward looking statements relating
to such matters as anticipated financial performance, business prospects and
plans, regulatory developments and similar matters. The statements contained
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations that are not historical information, are forward looking
statements. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor under The Securities Act of 1933 and The Securities Exchange Act
of 1934 for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following: changes in property and casualty reserves; catastrophe
losses; premium and investment growth; product pricing environment;
availability of credit; changes in government regulation; performance of
financial markets; fluctuations in interest rates; availability and pricing of
reinsurance; litigation and administrative proceedings; Year 2000 issues;
ability of Ohio Casualty to integrate and to retain any acquired insurance
business; and general economic and market conditions.
13
PART II
Item 1. Legal Proceedings - None
Item 2. Changes in Securities -
On March 23, 2000, Ohio Casualty Corporation ("Ohio Casualty")
granted an option to purchase 15,000 common shares, $.125 par value
(the "common shares"), to each of ten continuing directors of Ohio
Casualty (for an aggregate of 150,000 common shares), in lieu of the
payment of any cash annual retainer in respect of serving as a
director during the year 2000. The exercise price of each option is
$13.125, the closing price of the Company's common shares on The
Nasdaq National Market on the grant date. Each option becomes
exercisable in two equal annual installments beginning on the first
anniversary of the grant date and has a stated term of 10 years.
If a director ceases to be a member of the Board of Directors of Ohio
Casualty because of his/her death or disability or retirement,
his/her option would vest and become fully exercisable and must be
exercised within 12 months after the director ceases to serve as
such, subject to the stated term of the option and a six-month
holding requirement prior to exercise. If a director's status is
terminated for any other reason, the director would be able to
exercise only the vested portion of his/her option. Such exercise
must occur within three months after the director ceases to be such,
subject to the stated term of the option.
On February 29, 2000, Ohio Casualty also granted an option ( the
"Woodall Option") to purchase 20,000 common shares, to William L.
Woodall, (the "Optionee") as part of Mr. Woodall's compensation
package following his appointment as President and Chief Executive
Officer of the Company. The exercise price of the option is $12.375,
the closing price of the Company's common shares on The Nasdaq
National Market on the grant date. The Woodall Option becomes
exercisable in two equal annual installments beginning on the first
anniversary of the grant date and has a stated term of 10 years.
If the Optionee ceases to be an employee of the Company because of
death, disability or retirement, the Woodall Option would vest and
become fully exercisable and must be exercised within 3 years
following the date the Optionee's termination of employment, subject
to the stated terms of the Woodall option and a six-month holding
requirement prior to exercise. If the Optionee ceases to be an
employee of the Company or any subsidiary of the Company for any
other reason, the Woodall Option would be cancelled by the Company
without consideration.
Ohio Casualty granted the options described above in reliance upon
the exemptions from registration provided by Sections 4(2) and 4(6)
under the Securities Act of 1933 based upon the limited number of
persons to whom the options were granted and the status of each
individual as a director and or executive officer of the Company.
14
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
At the annual meeting on April 26, 2000, shareholders voted on board
of director seats for three year terms. Those elected were:
Jack E. Brown: For 53,048,550; against/abstentions 1,453,232
Vaden Fitton: For 53,108,289; against/abstentions 1,393,493
Howard L. Sloneker III: For 49,441,508; against/abstentions 5,060,274
Those directors whose term of office continued after the meeting
were: Terrence J. Baehr, Arthur J. Bennert, Catherine Dolan, Wayne
R. Embry, Stephen S. Marcum, Stanley N. Pontius and William L.
Woodall.
At the annual meeting on April 26, 2000, shareholders approved an
amendment to the Company's Code of Regulations to permit electronic
voting of shareholder proxies.
At the annual meeting on April 26, 2000, shareholders approved an
amendment to the Amended Articles of Incorporation of the Corporation
to change the location of the Corporation's principal office.
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K -
(a) Exhibits
10.1 Stock Option Agreement for Directors' year 2000 grant.
10.2 Stock Option Agreement for Chief Executive Officer year
2000 grant.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Corporation filed a Form 8-K on February 24, 2000,
announcing the resignation of Lauren N. Patch and appointment
of William L. Woodall as President and Chief Executive
Officer.
The Corporation filed Form 8-K on March 15, 2000, announcing
the retirement of Barry S. Porter as Chief Financial Officer.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO CASUALTY CORPORATION
-------------------------------
(Registrant)
/s/ Elizabeth M. Riczko
May 15, 2000 ------------------------------------------
Elizabeth M. Riczko, Senior Vice President
(on behalf of Registrant and as
Principal Accounting Officer)
16