==============================================================================
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, 2001.
--------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
------------ ------------
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
31-0783294
(I.R.S. Employer Identification No.)
9450 SEWARD ROAD, FAIRFIELD, OHIO
(Address of principal executive offices)
45014
(Zip Code)
(513) 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, 2001 of the voting stock held by
non-affiliates of the registrant was $501,137,447.
On May 1, 2001 there were 60,071,871 shares outstanding.
Page 1 of 15
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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) 2001 2000
- ----------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,491,212 and $2,470,375) $ 2,559,416 $ 2,513,654
Equity securities, at fair value
(cost: $154,219 and $168,779) 687,929 754,919
Short-term investments, at fair value
(cost: $37,201 and $59,679) 37,201 59,679
- ----------------------------------------------------------------------------------
Total investments 3,284,546 3,328,252
Cash 28,762 30,365
Premiums and other receivables, net of allowance
for bad debts of $9,900 and $10,700,
respectively 349,408 357,108
Deferred policy acquisition costs 170,707 175,071
Property and equipment, net of accumulated
depreciation of $124,767 and $122,040,
respectively 91,824 91,259
Reinsurance recoverable 159,283 148,633
Agent relationships, net of accumulated
amortization of $27,886 and $25,013,
respectively 256,101 263,379
Other assets 100,862 95,298
- ----------------------------------------------------------------------------------
Total assets $ 4,441,493 $ 4,489,365
==================================================================================
Liabilities
Insurance reserves:
Unearned premiums $ 685,853 $ 696,513
Losses 1,645,270 1,627,568
Loss adjustment expenses 378,126 375,951
Notes payable 210,643 220,798
California Proposition 103 reserve 10,310 17,500
Deferred income taxes 54,127 65,613
Other liabilities 363,069 368,831
- ----------------------------------------------------------------------------------
Total liabilities 3,347,398 3,372,774
Shareholders' Equity
Common stock, $.125 par value
Authorized: 150,000 shares;
issued shares: 94,418 11,802 11,802
Preferred stock, No par value
Authorized: 2,000 shares;
issued shares: 0 0 0
Additional paid-in capital 4,174 4,180
Common stock purchase warrants 21,138 21,138
Accumulated other comprehensive income:
Unrealized gain on investments, net of applicable
income taxes 391,517 409,904
Retained earnings 1,118,772 1,122,867
Treasury stock, at cost:
(Shares: 34,346; 34,346) (453,308) (453,300)
- ----------------------------------------------------------------------------------
Total shareholders' equity 1,094,095 1,116,591
- ----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 4,441,493 $ 4,489,365
==================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 29-40 of the Corporation's 2000 Annual Report to Shareholders.
2
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Three Months
Ended March 31,
(In thousands, except per share data) (Unaudited) 2001 2000
- ----------------------------------------------------------------------------
Premiums and finance charges earned $ 383,496 $ 387,188
Investment income less expenses 51,280 51,793
Investment gains (losses) realized, net 12,613 (6,308)
- ----------------------------------------------------------------------------
Total revenues 447,389 432,673
Losses and benefits for policyholders 267,673 294,637
Loss adjustment expenses 46,746 47,150
General operating expenses 35,161 42,206
Amortization of agent relationships 2,873 3,069
Write-off of agent relationships 4,405 42,169
Amortization of deferred policy acquisition costs 96,211 98,859
Restructuring charge 0 22
California Proposition 103 reserve, including
interest 0 611
- ----------------------------------------------------------------------------
Total expenses 453,069 528,723
Loss before income taxes
(5,680) (96,050)
Income tax benefit:
Current 0 (12,986)
Deferred (1,585) (8,051)
- ----------------------------------------------------------------------------
Total income tax benefit (1,585) (21,037)
- ----------------------------------------------------------------------------
Net loss $ (4,095) $ (75,013)
============================================================================
Other comprehensive income, net of taxes:
Net change in unrealized gains, net of income
tax (benefit) expense of $(9,901) and $(10,274),
respectively (18,387) (19,080)
- ----------------------------------------------------------------------------
Comprehensive loss $ (22,482) $ (94,093)
============================================================================
Average shares outstanding - basic* 60,073 60,080
============================================================================
Earnings per share - basic:
Net loss, per share $ (0.07) $ (1.25)
Average shares outstanding - diluted* 60,073 60,102
============================================================================
Earnings per share - diluted:
Net loss, per share $ (0.07) $ (1.25)
Cash dividends, per share $ 0.00 $ 0.23
============================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 29-40 of the Corporation's Annual Report to Shareholders.
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, 2000 $11,802 $4,286 $21,138 $329,354 $1,237,562 $(453,155) $1,150,987
Net change in unrealized gain (29,354) (29,354)
Deferred income tax on net change
in unrealized gain 10,274 10,274
Net forfeiture of treasury
stock under stock award
plan (10 shares) (85) (132) (217)
Net loss (75,013) (75,013)
Cash dividends paid
($.23 per share) (13,816) (13,816)
- --------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2000 $11,802 $4,201 $21,138 $310,274 $1,148,733 $(453,287) $1,042,861
==========================================================================================================================
Balance
January 1, 2001 $11,802 $4,180 $21,138 $409,904 $1,122,867 $(453,300) $1,116,591
Net change in unrealized gain (28,288) (28,288)
Deferred income tax on net
change in unrealized gain 9,901 9,901
Net forfeiture of treasury
stock under stock award
plan (1 shares) (6) (8) (14)
Net loss (4,095) (4,095)
- --------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2001 $11,802 $4,174 $21,138 $391,517 $1,118,772 $(453,308) $1,094,095
==========================================================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 29-40 of the Corporation's 2000 Annual Report to Shareholders.
4
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Three Months
Ended March 31,
(in thousands) (Unaudited) 2001 2000
- -----------------------------------------------------------------------------
Cash flows from:
Operations
Net loss $ (4,095) $ (75,013)
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves 9,217 38,629
Income taxes (1,585) (7,054)
Premiums and other receivables 7,700 (29,791)
Deferred policy acquisition costs 4,364 543
Reinsurance recoverable (10,650) 1,955
Other assets 4,575 50,933
Other liabilities (3,057) 7,698
California Proposition 103 reserves (7,190) 611
Amortization and write-off of agent
relationships 7,278 45,237
Depreciation and amortization 3,580 3,721
Investment (gains) losses (12,613) 6,308
- -----------------------------------------------------------------------------
Net cash generated (used) by operating
activities (2,476) 43,777
- -----------------------------------------------------------------------------
Investing
Purchase of securities:
Fixed income securities -
available-for-sale (517,297) (305,537)
Equity securities (2,588) (21,836)
Proceeds from sales:
Fixed income securities -
available-for-sale 492,397 236,201
Equity securities 18,710 22,787
Proceeds from maturities and calls:
Fixed income securities -
available-for-sale 620 21,570
Equity securities 0 0
Property and equipment:
Purchases (3,419) (4,755)
Sales 127 555
- -----------------------------------------------------------------------------
Net cash used for investing activities (11,450) (51,015)
- -----------------------------------------------------------------------------
Financing
Notes payable:
Borrowings 0 0
Repayments (10,156) (163)
Proceeds from exercise of stock options 1 0
Dividends paid to shareholders 0 (13,816)
- -----------------------------------------------------------------------------
Net cash used for financing activities (10,155) (13,979)
- -----------------------------------------------------------------------------
Net change in cash and cash equivalents (24,081) (21,217)
Cash and cash equivalents, beginning of period 90,044 149,957
- -----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 65,963 $ 128,740
=============================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 29-40 of the Corporation's 2000 Annual Report to Shareholders.
5
Ohio Casualty Corporation & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Ohio Casualty Corporation (the Corporation) is the holding company of The
Ohio Casualty Insurance Company (the Company), which is one of six property-
casualty companies that make up the Ohio Casualty Group (the Group).
NOTE I - INTERIM ADJUSTMENTS
It is believed that all material adjustments necessary to present a fair
statement of the results of the interim period covered are reflected in this
report. The operating results for the interim periods are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with the financial statements and notes thereto
in the Corporation's 2000 Annual Report to Shareholders.
NOTE II - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement standardizes
the accounting for derivative instruments by requiring those items to be
recognized as assets or liabilities with changes in fair value reported in
earnings or other comprehensive income in the current period. In June 1999,
the FASB issued SFAS 137 which deferred the effective date of adoption of
SFAS 133 for fiscal quarters of fiscal years beginning after June 15, 2000
(January 1, 2001 for the Corporation). The adoption of FAS 133 has had an
immaterial impact on the financial results of the Corporation.
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
2001 2000
---- ----
Net loss $ (4,095) $(75,013)
Weighted average common shares
outstanding - basic 60,073 60,080
Basic loss per weighted average
share $ (0.07) $ (1.25)
==================================================================
Weighted average common shares
outstanding 60,073 60,080
Effect of dilutive securities 0 22
Weighted average common shares
outstanding - diluted 60,073 60,102
Diluted loss per weighted average
share $ (0.07) $ (1.25)
==================================================================
6
NOTE IV -- SEGMENT INFORMATION
The Corporation has determined its reportable segments based upon its method
of internal reporting in the reportable periods, 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
investment income and premium financing.
Each segment of the Corporation was managed separately during the selected
periods. The property and casualty segments are managed by assessing the
performance and profitability of the segments through analysis of industry
financial measurements including statutory loss and loss adjustment expense
ratios, statutory combined ratio, premiums written, statutory 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.
Three Months Ended March 31
(in thousands)
Private Passenger Auto - Agency 2001 2000
- -----------------------------------------------------------------------
Net premiums written $116,129 $120,750
% Increase (decrease) (3.8)% (18.4)%
Net premiums earned 114,269 121,096
% Increase (decrease) (5.6)% (6.8)%
Underwriting gain (loss)
(before tax) (12,843) (23,505)
Loss ratio 72.0% 81.2%
Loss expense ratio 12.9% 14.3%
Underwriting expense ratio 25.9% 24.0%
Combined ratio 110.8% 119.5%
Impact of catastrophe losses on
combined ratio 0.0% 0.4%
Private Passenger Auto - Direct 2001 2000
- ----------------------------------------------------------------------
Net premiums written $2,675 $4,124
% Increase (decrease) (35.1)% (21.4)%
Net premiums earned 2,605 3,888
% Increase (decrease) (33.0) 85.7%
Underwriting gain (loss)
(before tax) (642) (5,229)
Loss ratio 98.1% 139.4%
Loss expense ratio 7.4% 11.3%
Underwriting expense ratio 18.6% 79.0%
Combined ratio 124.1% 229.7%
Impact of catastrophe losses on
combined ratio (0.2)% 0.1%
CMP, Fire, Inland Marine 2001 2000
- ----------------------------------------------------------------------
Net premiums written $76,713 $80,543
% Increase (decrease) (4.8)% 7.5%
Net premiums earned 78,039 77,273
% Increase (decrease) 1.0% 4.7%
Underwriting gain (loss)
(before tax) (8,162) (13,763)
Loss ratio 61.6% 63.5%
Loss expense ratio 10.1% 12.3%
Underwriting expense ratio 39.4% 40.3%
Combined ratio 111.1% 116.1%
Impact of catastrophe losses on
combined ratio 0.7% 3.5%
General Liability 2001 2000
- ----------------------------------------------------------------------
Net premiums written $22,191 $20,697
% Increase (decrease) 7.2% 4.0%
Net premiums earned 21,699 21,117
% Increase (decrease) 2.8% (3.4)%
Underwriting gain (loss)
(before tax) (1,259) (5,594)
Loss ratio 45.1% 52.5%
Loss expense ratio 16.1% 26.5%
Underwriting expense ratio 43.6% 48.5%
Combined ratio 104.8% 127.5%
Umbrella 2001 2000
- ----------------------------------------------------------------------
Net premiums written $20,107 $16,669
% Increase (decrease) 20.6% 36.0%
Net premiums earned 21,494 15,238
% Increase (decrease) 41.1% 68.7%
Underwriting gain (loss)
(before tax) 6,454 1,725
Loss ratio 34.2% 52.3%
Loss expense ratio 6.2% 1.4%
Underwriting expense ratio 31.6% 32.0%
Combined ratio 72.0% 85.7%
Workers' Compensation 2001 2000
- ----------------------------------------------------------------------
Net premiums written $39,396 $56,836
% Increase (decrease) (30.7)% 20.6%
Net premiums earned 44,989 49,606
% Increase (decrease) (9.3)% (1.6)%
Underwriting gain (loss)
(before tax) (28,770) (25,349)
Loss ratio 114.9% 105.5%
Loss expense ratio 24.5% 10.1%
Underwriting expense ratio 28.0% 31.0%
Combined ratio 167.4% 146.6%
7
Commercial Auto 2001 2000
- ----------------------------------------------------------------------
Net premiums written $48,644 $47,827
% Increase (decrease) 1.7% 10.9%
Net premiums earned 46,771 43,770
% Increase (decrease) 6.9% 3.0%
Underwriting gain (loss)
(before tax) (4,783) (9,147)
Loss ratio 65.0% 70.3%
Loss expense ratio 11.2% 10.6%
Underwriting expense ratio 32.7% 36.5%
Combined ratio 108.9% 117.4%
Impact of catastrophe losses
on combined ratio 0.0% 0.2%
Homeowners 2001 2000
- ----------------------------------------------------------------------
Net premiums written $35,856 $38,099
% Increase (decrease) (5.9)% 1.7%
Net premiums earned 43,665 45,509
% Increase (decrease) (4.1)% (0.3)%
Underwriting gain (loss)
(before tax) (7,266) (11,375)
Loss ratio 79.3% 83.1%
Loss expense ratio 6.7% 8.3%
Underwriting expense ratio 37.2% 40.1%
Combined ratio 123.2% 131.5%
Impact of catastrophe losses
on combined ratio 2.8% 10.5%
Fidelity & Surety 2001 2000
- ----------------------------------------------------------------------
Net premiums written $9,638 $9,099
% Increase (decrease) 5.9% (3.2)%
Net premiums earned 9,849 9,219
% Increase (decrease) 6.8% (0.6)%
Underwriting gain (loss)
(before tax) 3,022 906
Loss ratio 9.0% 20.5%
Loss expense ratio (1.0)% 6.3%
Underwriting expense ratio 62.7% 64.2%
Combined ratio 70.7% 91.0%
Total Property & Casualty 2001 2000
- ----------------------------------------------------------------------
Net premiums written $371,349 $394,644
% Increase (decrease) (5.9)% (0.7)%
Net premiums earned 383,380 386,716
% Increase (decrease) (0.9)% 0.6%
Underwriting gain (loss)
(before tax) (54,249) (91,331)
Loss ratio 69.8% 76.2%
Loss expense ratio 12.2% 12.2%
Underwriting expense ratio 33.2% 34.5%
Combined ratio 115.2% 122.9%
Impact of catastrophe losses
on combined ratio 0.5% 2.1%
All other 2001 2000
- ----------------------------------------------------------------------
Revenues $ 1,026 $ 1,159
Expenses 3,579 4,623
- ----------------------------------------------------------------------
Net income (loss) $(2,553) $(3,464)
Reconciliation of Revenues 2001 2000
- ----------------------------------------------------------------------
Net premiums earned for
reportable segments $383,380 $386,716
Investment income 50,723 50,773
Realized gains (losses) 10,350 232
Miscellaneous income 46 344
- ----------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 444,499 438,065
Property and casualty statutory
to GAAP adjustment (1,863) (6,551)
- ----------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 446,362 431,514
Other segment revenues 1,026 1,159
- ----------------------------------------------------------------------
Total revenues $447,388 $432,673
======================================================================
Reconciliation of Underwriting
gain (loss) (before tax) 2001 2000
- ----------------------------------------------------------------------
Property and casualty
underwriting gain (loss)
(before tax)
(Statutory basis) $(54,249) $(91,331)
Statutory to GAAP adjustment (10,390) (43,815)
- ----------------------------------------------------------------------
Property and casualty under-
writing gain (loss) (before tax)
(GAAP basis) (64,639) (135,146)
Net investment income 51,280 51,793
Realized gains (losses) 12,613 (6,308)
Other income (losses) (4,934) (6,389)
- ----------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $ (5,680) $(96,050)
======================================================================
NOTE V - AGENT RELATIONSHIPS
The agent relationship asset is the identifiable intangible asset acquired in
connection with the Great American Insurance Company commercial lines
acquisition. Agent relationships are evaluated periodically as events or
circumstances indicate a possible inability to recover their carrying amount.
The current quarter included a $4.4 million pre-tax write-off to the agent
relationships asset. Included in the write-offs were agents cancelled and
certain agents determined to be impaired based on updated estimated future
undiscounted cash flows that were insufficient to recover the carrying amount
of the asset for the agent. During the first quarter of 2000, the Group made
the strategic decision to discontinue its relationship with Managing General
Agents. The result was a write-off to the agent relationships asset of $42.2
million. The Group believes the termination of Managing General Agents will
give it better control of its underwriting and pricing practices. The
remaining portion of the agent relationships asset will be amortized on a
straight line basis over the remaining amortization period.
8
The purchase agreement called for an additional payment of up to $40.0
million if annualized revenue production of the transferred agents equaled or
exceeded production for the twelve months prior to the acquisition. This
amount was added to the agent relationships asset for the acquisition and
will be amortized over the remaining life. The Company has paid $27.1
million of the payment. The remaining amount has been agreed upon, however,
the final installment has not been paid as of March 31, 2001. Additional
information related to agent relationships is included in Note 1G, Agent
Relationships on page 29 of the Corporation's 2000 Annual Report to
Shareholders.
NOTE VI - RESTRUCTURING CHARGE
During December 1998, the Group adopted a plan to restructure its branch
operations. To continue in the Corporation's efforts to reduce expenses,
personal lines business centers were reduced from five to three locations.
Underwriting branch locations were reduced from seventeen to eight locations
and claims branches were reduced from thirty-eight to six locations in 1999.
As part of this plan, the Corporation established a $10.0 million liability
for future expenses related to its branch office consolidation plan,
resulting in a one-time charge of $10.0 million being reflected in the 1998
income statement. These expenses consisted solely of future contractual
lease payments related to abandoned facilities. The activities under the
plan were completed in 1999, but due to leases still in effect, the balance
in the restructuring reserve will continue to remain as leases expire. The
Corporation reduced $2.2 million of liability in 2000 due to payments under
leases. In the first quarter of 2001, the Corporation further reduced $.4
million of the liability due to payments under leases. The balance in the
restructuring reserve was $2.1 million at March 31, 2001.
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).
RESULTS OF OPERATIONS
Property and casualty pre-tax underwriting losses, excluding California
Proposition 103 and restructuring charges, for the three months ended March
31, 2001 were $64.6 million, $1.07 per share, compared with $134.5 million,
$2.25 per share for the same period in 2000. The results for both periods
were impacted by poor results in the workers' compensation line of business.
Property and casualty gross premiums for the first three months of 2001
decreased 5.8% for all lines of business compared with 2000. Commercial
lines decreased 6.2% compared to the same period 2000. Personal lines
decreased 5.6% year to date from the same period last year.
First quarter 2001 net premiums written totaled $371.3 million, a decrease of
$23.3 million or 5.9% from the first quarter 2000. Agency closures and
tighter underwriting guidelines combined with strong competition in personal
lines contributed to a 5.1% decrease in personal lines premiums for the
current quarter. Commercial lines average renewal price increases for direct
premiums written improved to 12.5% in the current quarter from 11.7% in the
fourth quarter of 2000. Renewal price increase means the average increase in
premium for policies renewed by the Group. The average increase in premium
for each renewed policy is calculated by comparing the total expiring premium
for the policy with the total renewal premium for the same policy. Renewal
price increases include, among other things, the effects of rate increases
and changes in the underlying insured exposures of the policy. Only policies
issued by the Group in the previous policy term with the same policy
identification codes are included. Therefore, renewal price increases do not
include changes in premiums for newly issued policies, business assumed
through reinsurance agreements, including Great American business not yet
issued in the Group's systems. Renewal price increases also do not reflect
the cost of any reinsurance purchased on the policies issued. Despite the
renewal price increases, management's decision in 2000 to cancel all Managing
General Agents and eliminate other consistently unprofitable business led to
a decrease in commercial lines net premiums written of 7.1% in the first
quarter 2001. That decision included the non-renewal of unprofitable
workers' compensation business of approximately $50 million in annual premium
volume which contributed to a $17.4 million decrease in workers' compensation
net premiums written in the current quarter.
During first quarter 2001, 16.8% of the Group's total net premiums written
were for policyholders in New Jersey, which historically has been a
profitable state for the Group. In recent years, however, New Jersey's
legislative environment has become less favorable. The Group's results have
been adversely impacted by legislative rules and regulations.
First quarter consolidated before-tax investment income was $51.3 million, or
$.85 per share, decreasing from $51.8 million, or $.86 per share, for the
same period last year. The effective tax rate for the first quarter of 2001
was 32.7% compared with 30.9% for the comparable period in 2000. The
increase in effective tax rate reflects a reallocation of investments from
tax exempt municipal bonds to taxable bonds.
For the first quarter, consolidated after-tax realized gain was $8.2 million,
or $.13 per share, compared with an after-tax realized loss of $4.1 million,
or $.07 per share, for the first three months of 2000. The loss in 2000 was
caused by write-downs to certain securities determined to have an other than
temporary decline in market value.
10
STATUTORY RESULTS
The statutory combined ratio for the first quarter was 115.2%, decreasing
from 122.9% in the 2000 first quarter. The improvement in the statutory
combined ratio is attributable to the actions taken in 2000 to reduce
expenses and improve the loss results. Both quarters were negatively
impacted by high losses in the workers' compensation line of business.
Excluding the workers' compensation line of business, the statutory combined
ratio for the first quarter of 2001 was 108.2%. Poor results for New Jersey
private passenger auto business added 1.7 points to the all lines loss ratio
for the current quarter.
The year-to-date March 31, 2001 accident year loss ratio of 67.2% was better
than the calendar year-to-date loss ratio of 69.8%. Severe cold weather near
the end of December 2000 resulted in late reported claims for the first
quarter of 2001 that were approximately $4.5 million higher than historical
levels. Large losses (claims over $250,000) for accident year 2001 totaled
$10.4 million as of March 31, 2001, approximately $3.2 million more than
accident year 2000 as of March 31, 2000.
The first quarter catastrophe losses were $1.8 million and accounted for .5
points on the statutory combined ratio. This compares with $8.0 million and
a 2.1 point catastrophe impact for the same period in 2000. The effect of
future catastrophes on the Corporation's results cannot be accurately
predicted. Severe weather patterns can have a material adverse impact on the
Corporation's results. During the first quarter of 2001, there were 3
additional catastrophes with the largest catastrophe generating $.3 million
in incurred losses as compared with 7 additional catastrophes in the first
quarter of 2000 with the largest catastrophe generating $5.7 million in
incurred losses. For additional disclosure of catastrophe losses, refer to
Note 9, Losses and Loss Reserves in the Notes to the Consolidated Financial
Statements on pages 35 and 36 of the Corporation's 2000 Annual Report to
Shareholders.
The first quarter 2001 statutory underwriting expense ratio improved to 33.2%
from 34.5% in the same quarter of 2000. The decrease is due primarily to
lower salary expense and decreased advertising expenditures, both a result of
expense reduction initiatives during 2000. Salary expense was $5.2 million
lower in the first quarter of 2001 compared with 2000. The employee count of
3,450 at March 31, 2001 was down slightly from 3,470 at year-end 2000 and
down significantly from 3,802 at March 31, 2000.
LINE OF BUSINESS DISCUSSION
The statutory combined ratio for homeowners decreased 8.3 points to 123.2%
from 131.5%. Catastrophe losses added 2.8 points to the statutory combined
ratio in the first quarter of 2001, and 10.5 points in the same period of
2000. The 2001 results included approximately 4.5 points from an unusually
large amount of late reported claims related to severe cold weather in the
last few days of 2000. The Group continues to implement price increases in
this line.
Private passenger auto-agency, the Group's largest line, recorded a 2001
three-month statutory combined ratio of 110.8%, decreasing from 119.5% in
2000. The private passenger auto-agency loss ratio decreased 9.2 points to
72.0% from 81.2% in 2000. Although the results improved in the first quarter
of 2001 from the same period of 2000, poor results in New Jersey business
added 6.4 points to the private passenger auto loss ratio in the current
quarter.
The New Jersey State Senate passed an auto insurance reform bill effective in
early 1999 that mandated a 15% rate reduction for personal auto policies
based on legal reform intended to provide a reduction in medical expense
benefits, limitations on lawsuits and enhanced fraud prevention. New
Jersey's private passenger auto net premiums written represented
approximately 25% of the Group's total private passenger auto book of
business in the first quarter of 2001.
Since 1999, New Jersey has required insurance companies to write a portion of
their personal auto premiums in Urban Enterprise Zones (UEZ). These zones
are urban areas frequently having high loss ratios. The Group is required to
write one policy in an UEZ for every seven policies written outside an UEZ.
The Group is assigned policies if it does not write the required quota. As
of March 31, 2001, the Group has
11
written $2.9 million year to date in UEZ premiums, with $2.5 million in
additional assigned premiums. The 2001 first quarter loss ratio on the UEZ
premiums was 174.6% and the loss ratio on the assigned business was 255.4%.
Private passenger auto - direct statutory combined ratio for the first three
months of 2001 decreased to 124.1% from 229.7% in 2000. During 2000, the
Corporation discontinued the private passenger auto - direct line of business.
As a result of this restructuring, net premiums written dropped from $4.1
million in the first quarter of 2000 to $2.7 million in the first three
months of 2001. The line was discontinued in order to allow the Corporation
to focus on the independent agency system as the sole distribution channel
for its products.
Commercial auto reported a first quarter statutory combined ratio of 108.9%,
a decrease of 8.5 points over the same period of 2000 statutory combined
ratio of 117.4%. Inadequate pricing continues to be an issue in this line.
For this line, as well as other commercial lines, price increases are being
implemented. The full effect of these price increases will be realized over
the next several quarters in earned premiums.
Workers' compensation statutory combined ratio for the first three months of
2001 increased 20.8 points to 167.4% from 146.6% during the same period last
year. The increase is a result of deterioration in the underwriting results
for the current accident year and adverse development in prior year reserves.
Prior year development added 38.1 points to the first quarter combined ratio.
In response to the deteriorating results in workers' compensation, the Group
is eliminating dividends on new and renewal policies, implementing price and
rate increases where permitted and instituting more restrictive renewal
underwriting guidelines. These actions are expected to begin having a
positive impact on results by year-end 2001. In addition to the cancellation
of the Managing General Agents during 2000, the Corporation is non-renewing
its most unprofitable workers' compensation policies which amounts to
approximately $50 million in annual premium volume. These cancellations and
non-renewals led to a decrease in workers' compensation net premiums written
of $17.4 million in the first quarter of 2001.
The general liability year-to-date statutory combined ratio decreased in 2001
to 104.8% from 127.5% in 2000. Umbrella statutory combined ratio for the
first three months of 2000 decreased to 72.0% from 85.7% in 2000. These
decreases are largely due to these lines being relatively volatile segments
and having favorable loss developments in the first quarter of 2001.
The statutory combined ratio for CMP, fire and inland marine decreased 5.0
points to 111.1% from 116.1% during the first three months of 2001. The line
has experienced an improved statutory combined ratio partially driven by
better catastrophe experience. Catastrophe losses added 0.7 points to the
2001 statutory combined ratio, compared with 3.5 points in the first quarter
of 2000.
INVESTMENTS
At March 31, 2001, the Corporation's fixed income portfolio totaled $2.6
billion, which consisted of 95.0% investment grade and 5.0% below investment
grade securities. The Corporation classifies securities as below investment
grade based upon ratings provided by Standard & Poor's Ratings Group, Moody's
Investors Service or other rating agencies, including the National
Association of Insurance Commissioners (NAIC). Below investment grade
securities are summarized as follows:
March 31, December 31,
(in millions) 2001 2000
- --------------------------------------------------------------------------
Below investment grade securities:
Carrying value $129.2 $127.4
Amortized cost 124.2 133.6
The securities in the Corporation's below investment grade portfolio have
been issued by 51 corporate borrowers in approximately 36 industries.
Investments in below investment grade securities have greater risks than
investments in investment grade securities. The risk of default by borrowers
that issue below investment grade securities is significantly greater because
these borrowers are often highly leveraged and more sensitive to adverse
economic conditions, including a recession or a sharp increase in interest
rates.
12
Additionally, investments in below investment grade securities are generally
unsecured and subordinate to other debt. Investment grade securities are
also subject to significant risks, including additional leveraging or changes
in control of the issuer. In most instances, investors are unprotected with
respect to these risks, the effects of which can be substantial.
The Corporation marks the value of its equity portfolio to fair market value
on its balance sheet. As a result, shareholders' equity and statutory
surplus fluctuate with changes in the value of the equity portfolio.
Current liquidity needs of the Corporation are expected to be met by
scheduled bond maturities, dividend payments, interest payments, and cash
balances. For further discussion of the Corporation's investments, see Item
1 pages 6 through 9 of the Corporation's Form 10-K for the year ended
December 31, 2000.
LIQUIDITY AND FINANCIAL STRENGTH
Net cash used by operations was $2.5 million for the first three months of
the year compared with cash generated of $43.8 million for the same period in
2000. This change is due in part to payments made in first quarter of 2001
related to the settlement of California Proposition 103 (see Legal
Proceedings below) and payment received in first quarter of 2000 as part of
the commutation of a reinsurance treaty in the fourth quarter of 1999.
The Corporation had no shareholder dividend payments in the first three
months of 2001 compared with payments of $13.8 million for the same period in
2000. On February 8, 2001, the Corporation eliminated its current quarter
dividend in order to further strengthen the Corporation's financial position.
Ohio Casualty Corporation did not repurchase any of its shares during the
first three months of the year. The Corporation has remaining authorization
to repurchase 1,649,824 additional shares.
As of March 31, 2001, the Corporation had $210.6 million of outstanding notes
payable. Of the $210.6 million, $5.6 million related to a low interest loan
outstanding with the state of Ohio used in conjunction with the purchase of a
new home office located in Fairfield, Ohio. The remaining $205.0 million is
related to a 1997 credit facility that provided a $300.0 million revolving
line of credit available to the Corporation. On March 19, 2001, the
Corporation elected to reduce the aggregate amount available under the line
of credit from $300.0 million to $250.0 million. The credit facility
agreement contains financial covenants and provisions customary for such
arrangements. The most restrictive covenants include a maximum permissible
consolidated funded debt that cannot exceed 30% of consolidated tangible net
worth and a minimum statutory surplus. The original minimum statutory
surplus was required to be at least $750.0 million. In light of recent
declines in statutory surplus and in order to minimize the risk of default,
the Corporation sought relief from this requirement. Effective March 31,
2001, the covenant was amended to reduce the required minimum statutory
surplus to $675.0 million for the quarters ending March 31, 2001 and June 30,
2001 only. In consideration of such relief, the Corporation agreed to
modifications of the applicable margins for interest rate and facility fee
under the credit agreement. As of March 31, 2001, the Corporation is in
compliance with these covenants. However, further deterioration of operating
results, reductions in the equity portfolio valuation or other changes in
surplus, including the effects of adopting new statutory accounting
principles (such as the Codification of Statutory Accounting Principles
guidance adopted by the NAIC in 1998), could lead to violations and
ultimately result in default. The Corporation continues to review its
financial covenants in the credit agreement in light of its operating losses.
Additional information related to bank notes payable is included in Note 17
Bank Note Payable on page 39 of the Corporation's 2000 Annual Report to
Shareholders.
Regularly the Group's financial strength is reviewed by independent rating
agencies. These agencies may upgrade, downgrade, or affirm their previous
ratings of the Group. On May 7, 2001, Standard & Poor's (S&P) Rating
Services downgraded the Group's financial strength rating. The Group's S&P
rating moved from "BBB+" to "BBB". S&P cited operating performance,
declining capitalization, and limited financial flexibility as reasons for
the rating change. S&P recognized the Group's improved strategic focus and
re-underwriting actions as positive attributes. On May 2, 2001, Moody's
Investors Services affirmed the Group's "A2" rating based on new executive
leadership, ongoing expense reduction and re-underwriting initiatives,
reduction or elimination of its shareholder dividends, and strength of its
independent agency relationships.
13
LEGAL PROCEEDINGS
California voters passed Proposition 103 in 1988 in an attempt to legislate
premium rates for that state. The proposition required premium rate
rollbacks for 1989 California policyholders while allowing for a "fair"
return for insurance companies. In 1998, an Administrative Law Judge issued
a proposed ruling with a rollback liability for the Group of $24.4 million
plus simple interest at 10% per annum from May 8, 1989. This brought the
total reserve to $52.3 million at September 30, 2000. On October 25, 2000,
the Group announced a settlement agreement for California Proposition 103
that was approved by the California Insurance Commissioner. Under the terms
of the settlement, the members of the Group will pay $17.5 million in
refunded premiums to eligible 1989 California policyholders. With this
development, the total reserve was decreased to $17.5 million as of December
31, 2000. The Corporation began to make payments in the first quarter of
2001. The Group expects the remaining refund payments to be issued in the
first half of 2001. The remaining liability was $10.3 million as of March
31, 2001.
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects and plans, regulatory developments and similar matters. The
statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not historical
information, are forward looking statements. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor under The Securities Act
of 1933 and The Securities Exchange Act of 1934 for forward-looking
statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the Company's business include the following:
changes in property and casualty reserves; catastrophe losses; premium and
investment growth; product pricing environment; availability of credit;
changes in government regulation; performance of financial markets;
fluctuations in interest rates; availability and pricing of reinsurance;
litigation and administrative proceedings; ability of Ohio Casualty to
integrate and to retain the business acquired from the Great American
Insurance Company; and general economic and market conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the information about market risk
set forth in the Corporation's Annual Report on Form 10-K.
PART II
ITEM 1. LEGAL PROCEEDINGS - Refer to Management's Discussion and Analysis
of Legal Proceedings as described on Pages 16 and 17 regarding
California Proposition 103.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
At the annual meeting on April 18,2001, shareholders voted on board
of director seats for three year terms. Those elected were:
Wayne Embry: For 48,038,240; against/abstentions 1,891,759
Stephen S. Marcum: For 48,158,684; against/abstentions 1,771,315
Stanley N. Pontius: For 48,184,051; against/abstentions 1,745,948
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued) -
Those directors whose term of office continued after the meeting
were: Terrence J. Baehr, Arthur J. Bennert, Jack E. Brown, Dan R.
Carmichael, Catherine E. Dolan, Vaden Fitton, and Howard L.
Sloneker III.
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) The Corporation filed a Form 8-K/A on March 30, 2001 amending
the date of the appointment of Ernst & Young LLP as its
independent public accountants, replacing
PricewaterhouseCoopers LLP filed on Form 8-K February 15, 2001.
(b) The Corporation filed a Form 8-K on April 27, 2001 regarding
amendment to the Credit Agreement with Chase Manhattan Bank and
other various lenders effective March 30, 2001.
Also filed on Form 8-K on April 27, 2001 as Exhibit 99.2 was
the press release concerning change in the Corporation's
organizational structure and executive leadership.
(c) The Corporation filed on Form 8-K on May 2, 2001 as Exhibit
99 the press release reporting first quarter 2001 results.
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)
May 14, 2001 /s/ Elizabeth M. Riczko
--------------------------------------
Elizabeth M. Riczko, Executive Vice
President and COO (on behalf of
Registrant and as Principal Accounting
Officer)
15