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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 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) 603-2400
(Registrant's telephone number)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Par Value $.125 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [ X ].
The aggregate market value as of February 28, 2002 of the voting stock
held by non-affiliates of the registrant was $1,004,983,423.
On February 28, 2002 there were 60,186,435 shares outstanding.
Page 1 of 75
INDEX TO EXHIBITS ON PAGES 74-75
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Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held on April 17, 2002, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
2
PART I
Item 1. Business
(a) Business Overview
Ohio Casualty Corporation ("the Corporation") was incorporated in Ohio
in 1969. With its predecessors, the Corporation has been engaged in
the property and casualty insurance business since 1919 through a
group of six direct and indirect subsidiaries which are
collectively known as the Ohio Casualty Group ("the Group").
The Group consists of:
- - The Ohio Casualty Insurance Company ("the Company");
- - West American Insurance Company ("West American");
- - Ohio Security Insurance Company ("Ohio Security");
- - American Fire and Casualty Company ("American Fire");
- - Avomark Insurance Company ("Avomark"); and
- - Ohio Casualty of New Jersey, Inc. ("OCNJ").
The Corporation is in the process of phasing out its premium finance business,
which was conducted through Ocasco Budget, Inc. In 1995, the Company
discontinued its life insurance operations, which had been conducted through
The Ohio Life Insurance Company.
On December 1, 1998, the Company acquired substantially all of the assets
of the commercial lines business of the Great American Insurance Company
("GAI") and its affiliates. The major lines of business included in the
acquisition were workers' compensation, commercial multi-peril, umbrella,
general liability and commercial auto.
Since late 1999, the property and casualty insurance industry has
experienced a general improvement in pricing conditions, especially in the
commercial lines business. While the industry tends to exhibit alternating
cycles of rising prices, followed by declining prices and poor underwriting
performance, the commercial lines business was in an unusually protracted
period of declining or inadequate prices from the late 1980s until
recently. The Group implemented renewal price increases in its Standard
Commercial Lines business unit averaging 15.2% during 2001 and 9.9% during
2000. The commercial umbrella business in the Specialty Commercial Lines
business unit average renewal price increases were 20.3% for 2001, compared
with 8.9% for 2000. The Group continues to seek additional renewal price
increases on its Standard Commercial Lines and commercial umbrella business
in 2002.
When used in this report, renewal price increase means the average increase
in premium for policies renewed by the Group. The average increase in
premiums 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 and business assumed through reinsurance agreements, including GAI
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.
3
Item 1. Continued
In June of 2001, a new Corporate Strategic Plan ("Plan") was announced.
The Plan introduced an organization structured around three business units:
Standard Commercial Lines, Specialty Commercial Lines, and Personal Lines
and established measurable financial targets for each business unit and the
Group. The Corporation also completed its senior management team in 2001
with the additions of experienced officers in the Chief Financial Officer,
Chief Technology Officer and Chief Actuary positions.
In the fourth quarter of 2001, OCNJ entered into an agreement to transfer
its obligations to renew private passenger auto business in New Jersey.
This transaction will allow the Group to stop writing business in the New
Jersey private passenger auto market in early 2002. In recent years, the
market in New Jersey private passenger auto insurance has become more
unstable due to the inability to control either the volume of writings or
the profitability. Under the terms of the transaction, OCNJ will pay $40.6
million to Proformance Insurance Company to transfer its renewal
obligations. The $40.6 million amount was taken as a charge in the fourth
quarter of 2001 and will be paid out over the course of twelve months
beginning in early 2002. OCNJ will cease writing private passenger auto
business in New Jersey in 2002, and OCNJ will be retained by the Company as
a subsidiary. The Group will maintain all of its other lines of business
in New Jersey. OCNJ may also have a contingent liability of up to $15.6
million to be paid to the transferee company to maintain a maximum
premiums-to-surplus ratio of 2.5 to 1 on the transferred business during
the next three years. At December 31, 2001, it is not possible to
determine the likelihood or extent of the liability and, therefore, it has
not been recognized in the financial statements. The transaction is
expected to positively impact operating results beginning in 2002.
(b) Financial Information About Industry Segments
The revenues, operating profit and combined ratios of each industry segment
for the three years ended December 31, 2001 are set forth in Item 14, Note
14, Segment Information, in the Notes to the Consolidated Financial
Statements on page 58 of this Form 10-K.
Business Unit Description
Standard Commercial Lines
The Group transacts business in over 40 states. The Group's Standard
Commercial Lines business unit, which accounted for 46.9% of net premiums
written in 2001, includes primarily:
- - commercial multi-peril insurance, which insures a business against
several risks, usually including property, liability, crime and boiler
and machinery explosion;
- - commercial automobile insurance, which insures policyholders against
third party liability related to the ownership and operation of motor
vehicles in the course of business and property damage to insured
vehicles. These policies may provide uninsured motorist coverage,
which provides coverage to insureds and their employees for bodily
injury and property damage caused by an uninsured party;
4
Item 1. Continued
- - workers' compensation insurance, which provides coverage to employers
for their obligations to provide workers' compensation benefits as
required by applicable statutes, including medical payments,
rehabilitation, lost wages, disability and death benefits. These
policies also provide coverage to employees for their liability
exposures under common law; and
- - general liability insurance, which insures policyholders against third
party liability for bodily injury and property damage, including
liability for products sold, and the defense of claims alleging such
damages.
Specialty Commercial Lines
The Group's Specialty Commercial Lines business unit, which accounted for
9.2% of net premiums written in 2001 includes primarily:
- - commercial umbrella insurance, which insures policyholders against
liability and defense costs which exceed coverage provided within the
underlying policies, typically commercial automobile and general
liability policies, and provides coverage for some items not covered by
underlying policies; and
- - fidelity and surety, which insure against dishonest acts of bonded
employees and against the non-performance of parties under contracts,
respectively.
Personal Lines
The Group's Personal Lines business unit, which accounted for the remaining
43.9% of net premiums written in 2001, includes primarily personal
automobile and homeowners' insurance sold to individuals.
The following table shows the Group's total property and casualty net
premiums written by business units and selected lines of business for the
periods indicated. Net premiums written includes gross premiums less
premiums ceded pursuant to reinsurance programs.
BUSINESS UNITS and
SELECTED LINES OF BUSINESS Statutory Net Premiums Written
- -------------------------- ------------------------------
(in thousands)
2001 2000 1999
---- ---- ----
Standard Commercial Lines $ 689,596 $ 721,681 $ 720,755
Workers' compensation 148,628 185,800 191,688
Auto - Commercial 186,726 178,727 175,482
General liability 79,034 80,663 82,489
CMP, fire & inland marine 275,207 276,491 271,096
Specialty Commercial Lines 136,085 107,255 102,499
Commercial umbrella 92,154 65,576 62,795
Fidelity & surety 38,739 37,600 37,684
Personal Lines 646,504 676,457 763,643
Auto - Agency 444,385 455,330 526,515
Auto - Direct 6,821 10,711 17,145
Homeowners 161,960 173,222 181,905
Total all lines $1,472,185 $1,505,393 $1,586,897
5
Item 1. Continued
Property and casualty statutory net premiums written decreased $33.2
million in 2001 from 2000. The net premiums written decrease in 2001 and
2000 can be attributed primarily to a more selective underwriting
philosophy that led to the elimination and cancellation of certain
business. Renewal price increases had a positive impact during 2001.
Actions taken in 2000 to cancel the Managing General Agents and the Group's
most unprofitable agents and policies represented over $150 million in
annual net premiums written. The Group terminated its relationships with
all managing general agents in the first quarter of 2001. Managing general
agents are granted wider latitude to make underwriting decisions than the
Group's other agents. The Group concluded that this latitude was
inconsistent with the emphasis on strengthening underwriting guidelines for
the business. The managing general agent relationships were acquired as
part of the GAI commercial lines business.
(c) Narrative Description of Business
Marketing and Distribution
The Group is represented on a commission basis by approximately 3,200
independent insurance agencies with over 5,800 agents. In most cases,
these agents also represent other unaffiliated companies which may compete
with the Group. The six claim and eight underwriting and service offices
operated by the Group assist these independent agents in producing and
servicing the Group's business.
Certain agencies that meet established profitability and production targets
are eligible for "key agent" status. At December 31, 2001, these agencies
represented 18.6% of the Group's total agency force and wrote 38.4% of its
book of business. The policies placed by key agents have consistently
produced a lower statutory loss ratio for the Group than policies placed by
other agents.
Historically, the Group has targeted small business customers for its
Standard Commercial Lines business. The Group's typical commercial lines
customer is a small business with a small number of employees and a need
for a package of coverages which can be conveniently purchased. For the
year 2001, this commercial lines customer group, categorized by commercial
liability premium volume, included approximately 71% contractors/artisans,
10% building/premises, 12% mercantile and 7% manufacturing. The Company
believes that this small business customer group offers the opportunity to
develop strong customer and agent relationships, apply its underwriting
experience to this specific type of customer and achieve superior
underwriting results.
6
Item 1. Continued
The Group markets personal automobile insurance primarily to standard and
preferred risk drivers. Standard and preferred risk drivers are those who
have met certain criteria, including a driving record which reflects a low
historical incidence of at-fault accidents and moving violations of traffic
laws. The Group does not target "non-standard" risk drivers who fall
outside these criteria. Because the Group's personal automobile insurance
line of business has been more profitable than its homeowners' insurance
line of business, the Group emphasizes writing a single customer's auto
insurance and homeowners' insurance and de-emphasizes the marketing of
homeowners' insurance to those customers who have not purchased automobile
insurance.
The Group's business is geographically concentrated in the Midwest and Mid-
Atlantic regions. The following table shows consolidated direct premiums
written for the Group's ten largest states:
Ten Largest States
Direct Premiums Written
From Continuing Operations
(in thousands)
Percent Percent Percent
2001 of Total 2000 of Total 1999 of Total
---- -------- ---- -------- ---- --------
New Jersey* $264,866 17.1 New Jersey $221,965 15.6 New Jersey $230,652 17.4
Ohio 150,635 9.6 Ohio 153,057 10.8 Ohio 153,146 11.5
Kentucky 119,126 7.7 Kentucky 132,631 9.3 Kentucky 125,438 9.5
Pennsylvania 105,536 6.8 Pennsylvania 91,979 6.5 Pennsylvania 87,986 6.6
Illinois 78,954 5.1 Illinois 81,747 5.8 Illinois 77,035 5.8
North Carolina 70,910 4.6 Indiana 75,340 5.3 Indiana 74,073 5.6
Indiana 68,224 4.4 North Carolina 54,710 3.9 North Carolina 39,345 3.0
Maryland 58,516 3.8 Maryland 45,496 3.2 Maryland 38,851 2.9
Texas 49,181 3.2 Texas 45,386 3.2 Texas 37,894 2.9
New York 41,446 2.7 Michigan 39,347 2.8 Oklahoma 33,995 2.6
---------- ---- -------- ---- -------- ----
$1,007,394 65.0 $941,658 66.4 $898,415 67.8
========== ==== ======== ==== ======== ====
*New Jersey private passenger auto and personal umbrella business
represented 46.4% of the total New Jersey direct premiums written in 2001.
The New Jersey renewal transfer will allow the Group to stop writing
business in the New Jersey private passenger auto and personal umbrella
markets in early 2002. Excluding the Group's New Jersey private passenger
auto and personal umbrella direct premiums written, New Jersey would have
represented 14.1% of the total direct premiums written.
7
Item 1. Continued
Investments
The distribution of the Corporation's invested assets is determined by a
number of factors, including:
- - insurance law requirements;
- - liquidity needs;
- - tax planning;
- - general market conditions; and
- - business mix and liability payout patterns.
Periodically, the Group reallocates its investment portfolio subject to the
parameters set by the investment committee. In 2001, the Group reallocated
a portion of its equity portfolio to fixed income holdings. Significant
appreciation in the equities sold, as part of the reallocation, contributed
to before-tax realized gains of $182.9 million in 2001. During 1999, the
Group reallocated a portion of its investment portfolio by selling
approximately $200 million in equity securities, resulting in approximately
$145 million of before-tax realized gains. The funds previously invested
in equity securities were reallocated to investment grade fixed income
securities.
The Group also has reduced its tax exempt bond portfolio
significantly since 1999. Tax exempt bonds decreased to 1.1% of the fixed
income portfolio at December 31, 2001, versus 3.2% at December 31, 2000 and
19.4% at December 31, 1999. The Group applied the funds previously
invested in tax exempt bonds to investment grade taxable bonds. Due to
recent poor operating results, the Group reduced its holdings of tax
exempt securities during the past three years in order to maximize after-
tax income. Assets relating to property and casualty operations are
invested to maximize after-tax returns with appropriate diversification of
risk.
The following table sets forth the carrying values and other data of the
Corporation's invested assets as of the end of the years indicated:
8
Item 1. Continued
Distribution of Invested Assets
($ in millions)
2001
Average % of % of % of
Rating 2001 Total 2000 Total 1999 Total
------- ---- ----- ---- ----- ---- -----
U.S. government AAA $ 29.4 0.9 $ 55.6 1.7 $ 65.1 2.0
Tax exempt bonds
and notes
Investment grade AA+ 29.6 0.9 77.4 2.2 459.2 14.4
Below investment
grade BB- 1.7 0.1 1.9 0.1 2.2 0.1
Corporate securities
Investment grade A 1,516.6 45.7 1,143.1 34.3 877.7 27.6
Below investment
grade BB- 87.0 2.6 111.8 3.4 188.4 5.9
Mortgage-backed
securities
Investment grade AA+ 1,102.2 33.2 1,110.2 33.4 761.1 23.9
Below investment
grade BB 5.6 0.2 13.7 0.4 23.3 0.8
-------- ----- -------- ----- -------- -----
Total bonds A+ 2,772.1 83.6 2,513.7 75.5 2,377.0 74.7
Common stocks 488.6 14.7 754.8 22.7 698.0 22.0
Preferred stocks 0.4 - 0.1 - 0.1 -
-------- ----- -------- ----- -------- -----
Total stocks 489.0 14.7 754.9 22.7 698.1 22.0
Short-term 54.8 1.7 59.7 1.8 104.4 3.3
-------- ----- -------- ----- -------- -----
Total investments $3,315.9 100.0 $3,328.3 100.0 $3,179.5 100.0
======== ===== ======== ===== ======== =====
Total market value
of investments $3,315.9 $3,328.3 $3,179.5
======== ======== ========
Total amortized cost
of investments $2,895.0 $2,698.8 $2,674.1
======== ======== ========
At December 31, 2001, the Corporation's fixed income portfolio totaled
$2,772.1 million, which consisted of 96.6% investment grade securities and
3.4% 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").
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. Additionally, investments in below investment
grade securities are generally unsecured and subordinate to other debt.
Investment grade securities are also subject to significant adverse risks,
including additional leveraging of, and changes in control of the issuer.
In most instances, investors are unprotected with respect to these risks,
the effects of which can be substantial.
9
Item 1. Continued
The following table shows yield, based on cost, of the Corporation's fixed
income portfolio as of the end of the years indicated:
2001 2000 1999
---- ---- ----
Investment grade 7.3% 7.4% 7.5%
Below investment grade 9.1% 10.1% 10.0%
Total taxable 7.5% 7.6% 7.8%
Tax exempt 6.5% 5.4% 5.5%
The Corporation has a diversified common stock portfolio. At December 31,
2001, the Corporation's common stock portfolio totaled $488.6 million and
consisted of stocks of 46 separate entities, diversified across 34
different industries. The largest single position, however, was 11.8% of
the portfolio.
The portfolio strategy, with respect to common stocks, is to invest in
companies whose stocks have below average valuations but above average
growth prospects. The Corporation focuses on large companies with dominant
or strong market positions, strong profitability and stability and strength
in balance sheet structure. The turnover rate in the portfolio has been
low for the past several years. These factors created a portfolio
structure that has been overweighted in the financial services sector and
underweighted in the technology sector for the ten years ending
December 31, 2001.
The Corporation is required by both accounting principles generally
accepted in the United States ("GAAP") and statutory accounting principles
to mark the value of its equity portfolio to market for reporting on its
balance sheet. As a result, GAAP shareholders' equity and statutory
surplus fluctuate with changes in the value of its equity portfolio.
Liabilities for Unpaid Loss and Loss Adjustment Expenses
Liabilities for loss and loss adjustment expenses are established for the
estimated ultimate costs of settling claims for insured events, both
reported claims and incurred but not reported claims, based on information
known as of the evaluation date. As more information becomes available and
claims are settled, the estimated liabilities are adjusted upward or
downward with the effect of increasing or decreasing net income at the time
of the adjustments. Such estimated liabilities include direct costs of the
loss under terms of insurance policies, as well as legal fees and general
expenses of administering the claims adjustment process.
The effect of catastrophes on the Group's results cannot be accurately
predicted and they may have a material adverse effect on the Group's
results. In 2001, 2000 and 1999 the Group was impacted by 19, 24 and 27
catastrophes, respectively. The largest catastrophe in each of these years
was $17.8 million, $7.1 million and $17.9 million in incurred losses.
Additional catastrophes with over $1 million in incurred losses numbered 4
in 2001, 9 in 2000 and 7 in 1999. The additional catastrophes with over
$1.0 million in incurred losses included $3.0 million of net of reinsurance
losses related to the September 11, 2001 terrorist attacks in New York.
For additional discussion of catastrophe losses, please refer to Item 14,
Note 10, Loss and Loss Reserves, of the Notes to the Consolidated Financial
Statements on pages 56 and 57 of this Form 10-K.
10
Item 1. Continued
In the normal course of business, the Group is involved in disputes and
litigation regarding the terms of insurance contracts and the amount of
liability under such contracts arising from insured events. The
liabilities for loss and loss adjustment expenses include estimates of the
amounts for which the Group may be liable upon settlement or other
conclusion of such litigation.
Because of the inherent future uncertainties in estimating ultimate costs
of settling claims, actual loss and loss adjustment expenses may deviate
substantially from the amounts recorded in the Corporation's consolidated
financial statements. Furthermore, the timing, frequency and extent of
adjustments to the estimated liabilities cannot be accurately predicted
since conditions and events which established historical loss and loss
adjustment expense development and which serve as the basis for estimating
ultimate claims cost may not occur in the future in exactly the same
manner, if at all.
The anticipated effect of inflation is implicitly considered when
estimating the liability for losses and loss adjustment expenses based on
historical loss development trends adjusted for anticipated changes in
underwriting standards, policy provisions and general economic trends.
The following tables present an analysis of losses and loss adjustment
expenses and related liabilities for the periods indicated. The accounting
policies used to estimate liabilities for losses and loss adjustment
expenses are described in Item 14, Note 1H, Accounting Policies and Note
10, Losses and Loss Reserves, in the Notes to the Consolidated Financial
Statements on pages 50, 56 and 57 of this Form 10-K.
Reconciliation of Liabilities for Losses and Loss Adjustment Expense
(in thousands)
2001 2000 1999
---- ---- ----
<c>
Net liabilities, beginning
of year $1,907,331 $1,823,329 $1,865,643
Provision for current
accident year claims 1,145,545 1,237,319 1,176,072
Increase (decrease) in
provisions for prior
accident year claims 58,489 56,846 (418)
----------- ----------- -----------
1,204,034 1,294,165 1,175,654
Payments for claims
occurring during:
Current accident year 520,232 596,114 600,942
Prior accident years 609,148 614,049 617,026
----------- ----------- -----------
1,129,380 1,210,163 1,217,968
Net liabilities, end of year 1,981,985 1,907,331 1,823,329
Reinsurance recoverable 168,737 96,188 85,126
----------- ----------- -----------
Gross liabilities, end of year $2,150,722 $2,003,519 $1,908,455
=========== =========== ===========
11
Item 1. Continued
Analysis of Development of Loss and Loss Adjustment Expense Liabilities
(In thousands)
Year Ended December 31 1991 1992 1993 1994 1995 1996
- ---------------------- ---- ---- ---- ---- ---- ----
Net liability as originally
estimated: $1,566,738 $1,673,868 $1,693,551 $1,606,487 $1,557,065 $1,486,622
Life Operations Liability 599 663 656 961 3,934 3,722
P&C Operations Liabiity $1,566,139 $1,673,205 $1,692,895 $1,605,526 $1,553,131 $1,482,900
Net cumulative payments as of:
One year later 526,973 561,133 533,634 510,219 486,168 483,574
Two years later 822,634 869,620 833,399 803,273 772,670 747,374
Three years later 1,007,189 1,060,433 1,017,893 997,027 944,294 950,138
Four years later 1,123,591 1,176,831 1,147,266 1,106,361 1,080,373 1,058,300
Five years later 1,201,317 1,264,900 1,218,916 1,203,717 1,151,001 1,121,263
Six years later 1,266,605 1,316,756 1,288,148 1,257,334 1,198,340
Seven years later 1,302,313 1,369,889 1,331,291 1,293,461
Eight years later 1,342,839 1,405,107 1,363,089
Nine years later 1,370,913 1,433,612
Ten years later 1,393,469
Gross cumulative payments as of:
One year later 556,691 586,869 547,377 522,811 500,150 498,274
Two years later 867,483 904,911 859,142 827,232 798,078 781,853
Three years later 1,056,173 1,107,980 1,051,915 1,030,701 988,674 983,440
Four years later 1,182,598 1,231,386 1,190,466 1,158,798 1,123,163 1,098,738
Five years later 1,266,170 1,328,478 1,278,602 1,254,475 1,200,600 1,171,207
Six years later 1,339,559 1,394,890 1,347,025 1,314,586 1,257,360
Seven years later 1,387,821 1,446,560 1,396,505 1,359,925
Eight years later 1,428,103 1,487,891 1,437,481
Nine years later 1,461,989 1,524,506
Ten years later 1,492,373
Year Ended December 31 1997 1998 1999 2000 2001
- ---------------------- ---- ---- ---- ---- ----
Net liability as originally
estimated: $1,421,804 $1,865,643 $1,823,329 $1,907,331 $ 1,981,985
Life Operations Liability 100 98 - - -
P&C Operations Liability 1,421,704 1,865,545 1,823,329 1,907,331 1,981,985
Net cumulative payments as of:
One year later 449,802 640,209 614,049 609,148
Two years later 751,179 999,069 960,503
Three years later 919,272 1,223,348
Four years later 1,016,871
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Gross cumulative payments as of:
One year later 469,933 654,204 636,530 647,115
Two years later 775,371 1,022,220 1,007,084
Three years later 950,445 1,261,136
Four years later 1,057,505
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
12
Item 1. Continued
Analysis of Development of Loss and Loss Adjustment Expense Liabilities
(continued)(In thousands)
Year Ended December 31 1991 1992 1993 1994 1995 1996
- ---------------------- ---- ---- ---- ---- ---- ----
Net liability re-estimated as of:
One year later 1,515,129 1,601,406 1,539,178 1,500,528 1,474,795 1,427,992
Two years later 1,500,890 1,555,452 1,510,943 1,501,530 1,441,081 1,403,059
Three years later 1,467,256 1,524,054 1,515,114 1,486,455 1,445,738 1,439,008
Four years later 1,449,789 1,559,492 1,525,493 1,507,331 1,478,787 1,456,890
Five years later 1,498,881 1,561,763 1,551,024 1,546,849 1,497,573 1,447,959
Six years later 1,499,009 1,588,063 1,587,885 1,566,276 1,491,985
Seven years later 1,526,136 1,627,385 1,609,600 1,560,871
Eight years later 1,558,571 1,649,372 1,606,164
Nine years later 1,577,553 1,649,387
Ten years later 1,577,036
Decrease (increase) in
original estimates: $ (10,897) $ 23,818 $ 86,731 $ 44,655 $ 61,146 $ 34,941
Net liability as originally
estimated: $1,566,139 $1,673,205 $1,692,895 $1,605,526 $1,553,131 $1,482,900
Reinsurance recoverable on
unpaid losses and LAE 98,456 80,114 75,738 65,336 71,066 64,695
Gross liability as originally
estimated: $1,665,194 $1,753,982 $1,769,289 $1,671,823 $1,631,184 $1,556,670
Life Operations Liability 599 663 656 961 6,987 9,075
P&C Operations Liability 1,664,595 1,753,319 1,768,633 1,670,862 1,624,197 1,547,595
One year later 1,609,793 1,693,958 1,611,032 1,574,177 1,546,001 1,496,100
Two years later 1,603,891 1,645,634 1,591,328 1,579,932 1,515,032 1,507,365
Three years later 1,567,801 1,623,559 1,601,354 1,565,580 1,561,675 1,537,356
Four years later 1,558,508 1,664,239 1,612,300 1,630,314 1,585,459 1,559,519
Five years later 1,612,537 1,666,556 1,680,806 1,657,037 1,608,296 1,558,160
Six years later 1,612,012 1,722,897 1,704,863 1,680,592 1,609,850
Seven years later 1,666,562 1,758,687 1,731,007 1,682,809
Eight years later 1,695,786 1,784,615 1,735,071
Nine years later 1,718,840 1,791,221
Ten years later 1,724,804
Decrease (increase) in
original estimates: (60,209) (37,902) 33,562 (11,947) 14,347 (10,564)
Year Ended December 31 1997 1998 1999 2000 2001
- ---------------------- ---- ---- ---- ---- ----
Net liability re-estimated as of:
One year later 1,355,586 1,888,387 1,880,174 1,965,820
Two years later 1,386,401 1,885,236 1,907,575
Three years later 1,400,662 1,901,776
Four years later 1,391,970
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Decrease (increase) in
original estimates: $ 29,734 $ (36,232) $ (84,246) $ (58,489)
Net liability as originally
estimated: $1,421,704 $1,865,545 $1,823,329 $1,907,331 $1,981,985
Reinsurance recoverable on
unpaid losses and LAE 59,952 80,215 85,126 96,188 168,737
Gross liability as originally
estimated: $1,483,807 $1,956,939 $1,908,455 $2,003,519 $2,150,722
Life Operations Liability 2,150 11,180 - - -
P&C Operations Liability 1,481,657 1,945,759 1,908,455 2,003,519 2,150,722
One year later 1,447,044 1,972,890 1,981,093 2,129,865
Two years later 1,477,874 1,975,657 2,041,717
Three years later 1,495,816 2,006,064
Four years later 1,495,563
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Decrease (increase) in
original estimates: (13,907) (60,305) (133,262) (126,346)
13
Item 1. Continued
Reinsurance
Reinsurance is a contract by which one insurer, called a reinsurer, agrees
to cover, under certain defined circumstances, a portion of the losses
incurred by a primary insurer in the event a claim is made under a policy
issued by the primary insurer. The Group purchases reinsurance to protect
against large or catastrophic losses. There are several programs that
provide reinsurance coverage.
The Group's property per risk program covers property losses in excess of
$1.0 million for a single insured, for a single event. This property per
risk program covers up to $29.0 million in losses in excess of the $1.0
million retention level for a single event. The Group's casualty per
occurrence program covers liability losses. Workers' compensation,
umbrella and other casualty reinsurance cover losses up to $99.0 million,
$49.0 million and $23.0 million, respectively, in excess of the $1.0
million retention level for a single insured event.
The property catastrophe reinsurance program protects the Group against an
accumulation of losses arising from one defined catastrophic occurrence or
series of events. This program provides $150.0 million of coverage in
excess of the Group's $25.0 million retention level. In 2001, a portion of
the catastrophe program was renewed with a multi-year placement as in
previous years. This provides continuity and maintains rates and each
reinsurer's overall share of the program. Over the last 20 years, two
events triggered coverage under the catastrophe reinsurance program.
Losses and loss adjustment expenses from the Oakland fires in 1991 totaled
$35.6 million and losses and loss adjustment expenses from Hurricane Andrew
in 1992 totaled $29.8 million. Both of these losses exceeded the prior
retention amount of $13.0 million, resulting in significant recoveries from
reinsurers. Reinsurance limits are purchased to cover exposure to
catastrophic events having the probability of occurring every 150-250
years.
GAI has agreed to maintain reinsurance on the commercial lines
business that the Company acquired from GAI and its affiliates in 1998.
GAI is obligated to reimburse the Company if Great American's reinsurers
are unable to pay claims with respect to the acquired commercial lines
business.
Reinsurance contracts do not relieve the Group of their obligations to
policyholders. The collectibility of reinsurance depends on the solvency
of the reinsurers at the time any claims are presented. The Group monitors
each reinsurer's financial health and claims settlement performance because
reinsurance protection is an important component of the Corporation's
financial plan. Each year, the Group reviews financial statements and
calculates various ratios used to identify reinsurers who no longer meet
appropriate standards of financial strength. Reinsurers who fail these
tests are removed from the program at renewal. Additionally, a large base
of reinsurers is utilized to mitigate concentration of risk. During the
last three fiscal years, no reinsurer accounted for more than 15% of total
ceded premiums. As a result of these controls, amounts of uncollectible
reinsurance have not been significant.
14
Item 1. Continued
All of the Company's insurance subsidiaries, except Ohio Casualty of New
Jersey, Inc., have entered into an intercompany reinsurance pooling
agreement. The purpose of this agreement is to:
- - pool or share proportionately the results of property and casualty
insurance underwriting operations through reinsurance;
- - reduce administration and executive expense; and
- - broaden each participating insurance subsidiary's distribution of risk.
Under the terms of the intercompany reinsurance pooling agreement, all of
the participants' outstanding underwriting liabilities as of January 1,
1984 and all subsequent insurance transactions were pooled. The
participating insurance subsidiaries share in losses based on the following
percentages:
Insurance Subsidiary Percentage of Losses
-------------------- --------------------
The Company 46.75
West American 46.75
American Fire 5.00
Ohio Security 1.00
Avomark 0.50
Competition
The Group competes on the basis of service, price and coverage.
Competition in the property and casualty industry is highly competitive.
According to A.M. Best, based on net insurance premiums written in 2000,
the latest year for which industry nationwide comparison statistics are
available:
- - more than $300 billion of net premiums were written by property and
casualty insurance companies in the United States and no one company or
company group had a market share greater than approximately 11.0%; and
- - the Group ranked as the thirty-seventh largest property and casualty
insurance group in the United States.
15
Item 1. Continued
Regulation
State Regulation
The Corporation's insurance subsidiaries are subject to regulation and
supervision in the states in which they are domiciled and in which they are
licensed to transact business. The Company, American Fire, Ohio Security
and OCNJ are all domiciled in Ohio. West American and Avomark are
domiciled in Indiana. Collectively, the Corporation's subsidiaries are
licensed to transact business in all 50 states and the District of
Columbia. Although the federal government does not directly regulate the
insurance industry, federal initiatives can also impact the industry.
The authority of state insurance departments extends to various matters,
including:
- - the establishment of standards of solvency, which must be met and
maintained by insurers;
- - the licensing of insurers and agents;
- - the imposition of restrictions on investments;
- - approval and regulation of premium rates for property and casualty
insurance;
- - the payment of dividends and distributions;
- - the provisions which insurers must make for current losses and future
liabilities; and
- - the deposit of securities for the benefit of policyholders and the
approval of policy forms.
State insurance departments also conduct periodic examinations of the
financial and business affairs of insurance companies and require the
filing of annual and other reports relating to the financial condition of
insurance companies. Regulatory agencies require that premium rates not be
excessive, inadequate or unfairly discriminatory. In general, the
Corporation's insurance subsidiaries must file all rates for personal and
commercial insurance with the insurance department of each state in which
they operate.
State laws also regulate insurance holding company systems. Each insurance
holding company in a holding company system is required to register with
the insurance supervisory agency of its state of domicile and furnish
information concerning the operations of companies within the holding
company system that may materially affect the operations, management or
financial condition of the insurers. Pursuant to these laws, the
respective departments may examine the parent and the insurance
subsidiaries at any time and require prior approval or notice of various
transactions including dividends or distributions to the parent from the
subsidiary domiciled in that state.
These state laws also require prior notice or regulatory agency approval of
changes in control of an insurer or its holding company and of other
material transfers of assets within the holding company structure. Under
applicable provisions of Indiana and Ohio insurance statutes, the states in
which the members of the Group are domiciled, a person would not be
permitted to acquire direct or indirect control of the Corporation or any
of its insurance subsidiaries, unless that person had obtained prior
approval of the Indiana Insurance Commissioner and the Ohio Superintendent
of Insurance. For the purposes of Indiana and Ohio insurance laws, any
person acquiring more than 10% of the voting securities of a company is
presumed to have acquired "control" of that company.
16
Item 1. Continued
New Jersey
New Jersey's private passenger auto net premiums written represented
approximately 27% of the Group's total private passenger auto book of
business in 2001.
Given the unfavorable regulatory environment in New Jersey and the
continued unprofitability of its private passenger auto business in the
state, the Group announced in the fourth quarter of 2001 the transaction to
allow the Group to stop writing business in early 2002 in the private
passenger auto market in New Jersey. See discussion of this transaction
and the New Jersey regulatory environment for private passenger automobile
insurance in Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 25, 26, 32 and 33 of this Form 10-K.
National Association of Insurance Commissioners
The Corporation's insurance subsidiaries are subject to the general
statutory accounting practices and reporting formats established by the
NAIC. The NAIC also promulgates model insurance laws and regulations
relating to the financial condition and operations of insurance companies,
including the Insurance Regulating Information System. The Insurance
Regulating Information System identifies twelve industry ratios and
specifies "usual values" for each ratio for 2001. Departure from the usual
values on four or more of the ratios can lead to inquiries from individual
state insurance departments about aspects of the insurer's business. For
the last five calendar years, none of Ohio Casualty's insurance
subsidiaries, other than Avomark and Ohio Casualty of New Jersey, Inc.
("OCNJ"), had four or more ratios departing from the usual range. In 1998,
Avomark had four ratios outside of the usual range due to the initial
start-up of Avomark in 1997 and Avomark joining the intercompany
reinsurance pooling agreement in 1998. In 2001, OCNJ had five ratios
outside the usual range due to the $40.6 million transfer fee related to
the New Jersey private passenger auto renewal obligation transfer. The
Corporation expects the ratios outside the usual range to decrease as the
$40.6 million transfer fee is paid and premiums written decrease as OCNJ
discontinues the renewal of policies.
NAIC model laws and rules are not usually applicable unless enacted into
law or promulgated into regulation by the individual states. The adoption
of NAIC model laws and regulations is a key aspect of the NAIC Financial
Regulations Standards and Accreditation Program, which also sets forth
minimum staffing and resource levels for all state insurance departments.
Ohio and Indiana are accredited. The NAIC intends to create an eventual
nationwide regulatory network of accredited states.
The NAIC has developed a "Risk-Based Capital" model for property and
casualty insurers. The model is used to establish standards, which relate
insurance company statutory surplus to risks of operations and assist
regulators in determining solvency requirements. The standards are
designed to assess capital adequacy and to raise the level of protection
that statutory surplus provides for policyholders. The Risk-Based Capital
model measures the following four major areas of risk to which property and
casualty insurers are exposed:
- - asset risk;
- - credit risk;
- - underwriting risk; and
- - off-balance sheet risk.
17
Item 1. Continued
The Risk-Based Capital model requires the calculation of a ratio of total
adjusted capital to Authorized Control Level. Insurers with a ratio below
200% are subject to different levels of regulatory intervention and action.
Based upon their 2001 statutory financial statements, each of Ohio
Casualty's insurance subsidiaries had the following ratio of total adjusted
capital to the Authorized Control Level:
The Company 454.9%
American Fire 887.1%
Ohio Security 2,600.1%
West American 668.6%
Avomark 1,201.3%
OCNJ 83.5%
As of December 31, 2001, OCNJ was below the required ratio. The 2001
authorized control level of capital, as calculated by the Risk-Based
Capital model, approximately doubled from previous years. The model
assumes that OCNJ's unusually high underwriting expense ratio in 2001
continues in the future, therefore assuming an increase in underwriting
risk. The unusually high underwriting expense ratio in 2001 related to the
accrual of the $40.6 million transfer fee in the New Jersey private
passenger auto transaction. In addition, the ratio was impacted by a
temporary reduction in statutory surplus, which is the adjusted capital
component of the Risk-Based Capital calculation. Statutory surplus, as of
December 31, 2001, was negatively impacted by the temporary inability to
recognize a deferred tax asset related to the New Jersey private passenger
auto transfer fee due to statutory accounting limitations. The Corporation
believes that as the OCNJ business transfers and as the transfer fee is paid
in 2002 the ratio will improve, but the amount and timing of the improvement
cannot be determined with certainty. The failure of OCNJ to meet the
required ratio would give the regulators the right to take action against
OCNJ, including requiring the Company to contribute capital into OCNJ. The
Corporation does not anticipate that further regulatory action will be taken
as long as the ratio shows continuing improvement.
The Corporation has notified the state regulators for OCNJ of the temporary
nature of the Risk-Based Capital ratio at a level that is below acceptable
standards. The regulators will periodically review the financial
results of OCNJ until the temporary items reverse and the ratio is at an
acceptable level.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance, which replaced the former Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting.
The new principles provide guidance for areas where statutory accounting
had been silent and changed former statutory accounting in some areas. The
Group implemented the Codification guidance effective January 1, 2001. The
cumulative effect of adopting Codification reduced statutory policyholders'
surplus by $21.7 million on January 1, 2001.
Regulations on Dividends
The Corporation is dependent on dividend payments from its insurance
subsidiaries in order to meet operating expenses, debt obligations and to
pay dividends. Insurance regulatory authorities impose various
restrictions and prior approval requirements on the payment of dividends by
insurance companies and holding companies. This regulation allows
dividends to equal the greater of (1) 10% of policyholders' surplus or (2)
100% of the insurer's net income, each determined as of the preceding year
end, without prior approval of the insurance department.
18
Item 1. Continued
Dividend payments to the Corporation from the Company are limited to
approximately $156.5 million during 2002 without restriction or prior approval
of the Ohio insurance department based on 100% of the Company's net income for
the year ending December 31, 2001.
The ratio of net premiums written to statutory surplus is one of the
measures used by insurance regulators to gauge the operating leverage of an
insurance company and indicates the ability of Ohio Casualty's insurance
subsidiaries to grow by writing additional business. The ratio of premiums
written to statutory surplus for the Corporation's insurance subsidiaries
was 1.9 to 1 at December 31, 2001. The ratio was 1.9 to 1 in 2000 and 1.8
to 1 in 1999.
Employees
At December 31, 2001, the Company had approximately 3,365 employees of
which approximately 1,430 were located in the Fairfield and Hamilton, Ohio
offices.
Impact of 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 SFAS
133 has had an immaterial impact on the financial results of the
Corporation.
In June 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no
longer be amortized but will be subject to annual impairment tests in
accordance with the standards. Other intangible assets will continue to be
amortized over their useful lives. The Corporation will apply the new
rules on accounting for goodwill and other intangible assets beginning in
the first quarter of 2002. The Corporation does not expect that the
adoption of the statement will have a material impact on the Corporation's
financial position and results of operations. The Corporation's only
current intangible asset, agent relationships, is reported on the balance
sheet in accordance with the standards and is being amortized over its
useful life. The agent relationships intangible asset is also evaluated
periodically for possible impairment.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations for a disposal of a segment of a business. SFAS 144 is
effective for fiscal years beginning after December 15, 2001 (January 1,
2002 for the Corporation). The Corporation does not expect that the
adoption of the statement will have a material impact on the Corporation's
financial position and results of operations.
19
Item 2. Properties
The Corporation owns and leases office space in various parts of the
country. The principal office buildings consist of facilities owned in
Fairfield and Hamilton, Ohio.
Item 3. Legal Proceedings
There are no material pending legal proceedings against the Corporation or
its subsidiaries other than litigation arising in connection with
settlement of insurance claims as described on page 11 of this Form 10-K.
Item 4. Submission of Matters to a Vote of Shareholders
There were no matters submitted during the fourth quarter of the
Corporation's 2001 fiscal year to a vote of Shareholders through the
solicitation of proxies or otherwise.
20
Item 4. Continued
Executive Officers of the Registrant
The following table provides information for executive officers of the
Corporation who are not separately reported in the Corporation's Proxy
Statement:
Position with Company and/or
Principal Occupation or Employment
Name Age During Last Five Years
- ---- --- -----------------------
<S.
John E. Bade, Jr. 47 Senior Vice President of the Corporation's
insurance subsidiaries since February 2000.
Mr. Bade served as Vice President of the
Corporation's insurance subsidiaries from
January 1997 through January 2000.
Debra K. Crane 44 Senior Vice President and General Counsel
of the Corporation since September 2000 and
Senior Vice President of the Corporation's
subsidiaries since April 2000. Ms. Crane
served as Vice President of the Corporation's
subsidiaries from May 1999 through March 2000
and as Assistant Treasurer of the Corporation's
subsidiaries from February 1996 through April
1999.
Ralph G. Goode 56 Senior Vice President of the Corporation's
insurance subsidiaries since December 1998.
Mr. Goode served as Vice President of the
Corporation's insurance subsidiaries from October
1995 through November 1998.
John S. Kellington 40 Chief Technology Officer of the Corporation's
insurance subsidiaries since April 2001. Mr.
Kellington served as Chief Architect and
Principal, National Insurance Practice of IBM
Global Services from 1996 to April 2001.
Richard B. Kelly 47 Senior Vice President of the Corporation's
insurance subsidiaries since February 2000.
Mr. Kelly served as Vice President of the
Corporation's insurance subsidiaries from
November 1996 through January 2000.
Donald F. McKee 55 Chief Financial Officer of the Corporation
and its insurance subsidiaries since September
2001. Mr. McKee served as Chief Financial
Officer and Senior Vice President, Titan
Technology Partners from 2000 to 2001 and
as Chief Investment Officer, The Capstone
Group, LLC from 1997 to 2000. Mr. McKee also
served as Senior Vice President, Information
Systems and Chief Financial Officer, Integon
Corporation from 1995 to 1997.
Thomas E. Schadler 51 Chief Actuary of the Corporation's insurance
subsidiaries since April 2001. Mr. Schadler
served as Vice President and Chief Actuary of
Grange Insurance Company from September 1997
to April 2001 and as Vice President and Chief
Actuary of Shelby/Anthem/Vesta Companies from
September 1988 to September 1997.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(a) The Corporation's common shares, par value $.125 per share, are
traded on the Nasdaq Stock Market under the symbol OCAS. On February
28, 2002, the Corporation's common shares were held by 5,644
shareholders of record.
(b) The following table shows the high and low sales prices for the
Corporation's common shares for each quarterly period within the
Corporation's last three most recent fiscal years:
High/Low Market Price Per Share
(in dollars, adjusted for 1999 stock split)
Quarter 1st 2nd 3rd 4th
2001 High 11.63 13.38 14.30 16.05
Low 8.38 8.47 10.93 12.43
2000 High 17.87 17.12 10.56 10.25
Low 11.06 10.94 6.34 6.50
1999 High 21.69 20.03 18.56 17.00
Low 19.03 17.81 15.06 15.06
(c) The following table shows the cash dividends paid by the Corporation
to the holders of its common shares for the three most recent fiscal
years of the Corporation. The Corporation's Board of Directors
discontinued the Corporation's regular quarterly dividend in
February, 2001.
Quarterly Cash Dividends Per Share
Quarter 1st 2nd 3rd 4th
2001 $ - $ - $ - $ -
2000 $.23 $.12 $.12 $.12
1999 $.23 $.23 $.23 $.23
A description of statutory restrictions on the ability of the
Corporation's insurance company subsidiaries to transfer funds to the
Corporation in the form of cash dividends and distributions, which
may limit the ability of the Corporation to pay dividends to its
shareholders, may be found in Item 14, Note 17, Statutory Accounting
Information, in the Notes to the Consolidated Financial Statements on
pages 59 and 60 of this Form 10-K.
22
Item 6. Selected Financial Data
Ohio Casualty Corporation & Subsidiaries
TEN-YEAR SUMMARY OF OPERATIONS
(in millions, except per share data) 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------
Consolidated Operations
Income (loss) after taxes
Operating income (loss) $(36.4) $(77.7) $ 1.4 $ 73.6
Realized investment gains (losses) 135.0 (1.5) 104.5 9.4
- --------------------------------------------------------------------------------------------
Income (loss) from continuing operations 98.6 (79.2) 105.9 83.0
Discontinued operations - - 4.3 1.9
Gain on sale of discontinued operations - - 6.2 -
Cumulative effect of accounting changes - - (2.3) -
- --------------------------------------------------------------------------------------------
Net income (loss) 98.6 (79.2) 114.1 84.9
============================================================================================
Income (loss) after taxes per average share
outstanding - basic*
Operating income (loss) (0.61) (1.29) 0.02 1.12
Realized investment gains (losses) 2.25 (0.03) 1.71 0.14
Discontinued operations - - 0.07 0.03
Gain on sale of discontinued operations - - 0.11 -
Cumulative effect of accounting changes - - (0.04) -
- --------------------------------------------------------------------------------------------
Net income (loss) 1.64 (1.32) 1.87 1.29
============================================================================================
Average shares outstanding - basic* 60.1 60.1 61.1 65.8
Income (loss) after taxes per average share
outstanding - diluted*
Operating income (loss) (0.61) (1.29) 0.02 1.12
Realized investment gains (losses) 2.25 (0.03) 1.71 0.14
Discontinued operations - - 0.07 0.03
Gain on sale of discontinued operations - - 0.11 -
Cumulative effect of accounting changes - - (0.04) -
- --------------------------------------------------------------------------------------------
Net income (loss) 1.64 (1.32) 1.87 1.29
============================================================================================
Average shares outstanding -diluted* 60.2 60.1 61.1 65.9
Total assets 4,524.6 4,489.4 4,476.4 4,802.3
Shareholders' equity 1,080.0 1,116.6 1,151.0 1,321.0
Book value per share* 17.97 18.59 19.16 21.12
Dividends paid per share* - 0.59 0.92 0.88
Percent increase/decrease over previous (100.0)% (35.9)% 4.5% 4.8%
Property and Casualty Operations
Net premiums written 1,472.2 1,505.4 1,586.9 1,299.6
Net premiums earned 1,506.2 1,533.0 1,554.1 1,267.8
GAAP underwriting loss before taxes (253.8) (312.8) (184.2) (74.1)
Statutory loss ratio 66.5% 72.8% 66.9% 63.7%
Statutory loss adjustment expense ratio 13.4% 11.6% 10.7% 9.1%
Statutory underwriting expense ratio 35.4% 34.8% 35.2% 34.4%
Statutory combined ratio 115.3% 119.2% 112.8% 107.2%
Investment income before taxes 211.1 202.0 181.1 164.8
Per average share outstanding* 3.51 3.36 2.96 2.51
Property and casualty reserves
Unearned premiums 666.7 696.4 725.2 668.4
Losses 1,746.8 1,627.6 1,545.0 1,569.5
Loss adjustment expense 403.9 376.0 363.5 376.3
Statutory policyholders' surplus 767.5 812.1 899.8 1,027.1
*Adjusted for 2 for 1 stock dividend effective July 22, 1999 (See Note 23)
23
Item 6. Selected Financial Data
Ohio Casualty Corporation & Subsidiaries
TEN-YEAR SUMMARY OF OPERATIONS
(in millions, except per share data) 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
Consolidated Operations
Income (loss) after taxes
Operating income (loss) $ 97.4 $ 64.9 $ 91.4 $ 77.1
Realized investment gains (losses) 33.0 32.3 4.0 14.2
- --------------------------------------------------------------------------------------------
Income (loss) from continuing operations 130.4 97.2 95.4 91.3
Discontinued operations 8.7 5.3 4.3 5.9
Gain on sale of discontinued operations - - - -
Cumulative effect of accounting changes - - - (0.3)
- --------------------------------------------------------------------------------------------
Net income (loss) 139.1 102.5 99.7 96.9
============================================================================================
Income (loss) after taxes per average share
outstanding - basic*
Operating income (loss) 1.42 0.93 1.28 1.07
Realized investment gains (losses) 0.48 0.46 0.05 0.20
Discontinued operations 0.13 0.07 0.06 0.08
Gain on sale of discontinued operations - - - -
Cumulative effect of accounting changes - - - -
- --------------------------------------------------------------------------------------------
Net income (loss) 2.03 1.46 1.39 1.35
============================================================================================
Average shares outstanding - basic* 68.5 70.4 71.5 72.0
Income (loss) after taxes per average share
outstanding - diluted*
Operating income (loss) 1.42 0.93 1.28 1.07
Realized investment gains (losses) 0.48 0.46 0.05 0.20
Discontinued operations 0.13 0.07 0.06 0.08
Gain on sale of discontinued operations - - - -
Cumulative effect of accounting changes - - - -
- --------------------------------------------------------------------------------------------
Net income (loss) 2.03 1.46 1.39 1.35
============================================================================================
Average shares outstanding -diluted* 68.5 70.5 71.5 72.0
Total assets 3,778.8 3,890.0 3,980.1 3,739.0
Shareholders' equity 1,314.8 1,175.1 1,111.0 850.8
Book value per share* 19.56 16.72 15.69 11.82
Dividends paid per share* 0.84 0.80 0.76 0.73
Percent increase/decrease over previous 5.0% 5.3% 4.1% 2.8%
Property and Casualty Operations
Net premiums written 1,207.6 1,209.0 1,250.6 1,286.4
Net premiums earned 1,204.3 1,223.4 1,264.6 1,297.7
GAAP underwriting loss before taxes (49.6) (112.2) (68.8) (92.9)
Statutory loss ratio 62.7% 66.5% 61.2% 61.6%
Statutory loss adjustment expense ratio 9.4% 9.7% 10.2% 10.0%
Statutory underwriting expense ratio 33.2% 33.3% 32.6% 32.2%
Statutory combined ratio 105.3% 109.5% 104.0% 103.8%
Investment income before taxes 172.4 179.4 184.6 183.8
Per average share outstanding* 2.52 2.54 2.58 2.55
Property and casualty reserves
Unearned premiums 494.9 491.4 505.8 517.8
Losses 1,174.5 1,215.8 1,268.1 1,303.6
Loss adjustment expense 307.2 331.8 356.1 367.3
Statutory policyholders' surplus 1,109.5 984.9 876.9 660.0
Ohio Casualty Corporation & Subsidiaries
TEN-YEAR SUMMARY OF OPERATIONS
10-Year Compound
(in millions, except per share data) 1993 1992 Annual Growth
- --------------------------------------------------------------------------------------
Consolidated Operations
Income (loss) after taxes
Operating income (loss) $ 51.5 $ 57.8 -
Realized investment gains (losses) 28.7 35.1 30.3%
Income (loss) from continuing operations 80.2 92.9 (1.3)%
Discontinued operations 6.8 4.1 (100.0)%
Gain on sale of discontinued operations - - -
Cumulative effect of accounting changes - 1.5 -
- --------------------------------------------------------------------------------------
Net income (loss) 87.0 98.5 (1.2)%
======================================================================================
Income (loss) after taxes per average share
outstanding - basic*
Operating income (loss) 0.72 0.80 -
Realized investment gains (losses) 0.40 0.49 32.0%
Discontinued operations 0.09 0.06 (100.0)%
Gain on sale of discontinued operations - - -
Cumulative effect of accounting changes - 0.02 -
- --------------------------------------------------------------------------------------
Net income (loss) 1.21 1.37 0.9%
======================================================================================
Average shares outstanding - basic* 72.0 72.0 (1.7)%
Income (loss) after taxes per average share
outstanding - diluted*
Operating income (loss) 0.72 0.80 -
Realized investment gains (losses) 0.40 0.49 32.0%
Discontinued operations 0.09 0.06 (100.0)%
Gain on sale of discontinued operations - - -
Cumulative effect of accounting changes - 0.02 -
- --------------------------------------------------------------------------------------
Net income (loss) 1.21 1.37 0.9%
======================================================================================
Average shares outstanding -diluted* 72.0 72.0 (1.7)%
Total assets 3,816.8 3,760.7 2.5%
Shareholders' equity 862.3 825.2 6.9%
Book value per share* 11.97 11.72 5.2%
Dividends paid per share* 0.71 0.67 (100.0)%
Percent increase/decrease over previous 6.0% 8.1% -
Property and Casualty Operations
Net premiums written 1,306.0 1,508.5 (0.1)%
Net premiums earned 1,379.4 1,517.6 0.2%
GAAP underwriting loss before taxes (147.3) (130.8) 13.0%
Statutory loss ratio 64.9% 63.7%
Statutory loss adjustment expense ratio 11.8% 10.8%
Statutory underwriting expense ratio 33.6% 33.5%
Statutory combined ratio 110.3% 108.0%
Investment income before taxes 190.4 194.6 1.0%
Per average share outstanding* 2.64 2.70 2.8%
Property and casualty reserves
Unearned premiums 529.6 596.1 1.0%
Losses 1,378.0 1,309.2 3.7%
Loss adjustment expense 390.6 364.0 1.4%
Statutory policyholders' surplus 713.6 674.2 1.8%
*Adjusted for 2 for 1 stock dividend effective July 22, 1999 (See Note 23)
24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
In June of 2001, a new Corporate Strategic Plan ("Plan") was announced. The
Plan introduced an organization structured around three business units:
Standard Commercial Lines, Specialty Commercial Lines, and Personal Lines
and established measurable financial targets for each business unit and the
Group. During 2001, certain operating results of the Corporation improved.
The improvements were a result of renewal price increases, more favorable
underwriting results and aggressive expense management. The year also
included the tragic events of September 11, 2001, which had an impact on
2001.
RESULTS OF OPERATIONS
Net Income
The Corporation reported after-tax net income of $98.6 million, or $1.64
per share for the year 2001, compared with a net loss of $79.2 million, or
$1.32 per share in 2000, and net income of $114.1 million, or $1.87 per
share in 1999.
Operating Results
For the year 2001, the Corporation reported a net operating loss(1) of $36.4
million, or $.61 per share. Excluding a one-time after-tax charge of $26.8
million, or $.45 per share, for the transfer of the renewal obligation of
New Jersey private passenger auto business, the after-tax operating loss
for the twelve months ending December 31, 2001, was $9.6 million, or $.16
per share, compared with an operating loss of $77.7 million, or $1.29 per
share in 2000, and operating income of $1.4 million, or $.02 per share in
1999. Also contributing to the 2001 operating loss were the effects of
additions to the Group's asbestos reserves and the impact of an early
retirement plan. The 2000 operating loss included the adverse effects of
write-offs to the agent relationships intangible asset relating to the 1998
acquisition of the Great American Insurance Company's ("GAI") commercial
lines division, the impact of inadequate pricing and the negative effects
of premium cessions on experience rated reinsurance contracts. Positively
impacting 2000 results was the settlement of the California Proposition 103
liability.
In the fourth quarter of 2001, a member of the Group, Ohio Casualty of New
Jersey, Inc. ("OCNJ"), entered into an agreement to transfer its
obligations to renew private passenger auto business in New Jersey. The
transaction will allow the Group to stop writing business in the New Jersey
private passenger auto market in early 2002. In recent years, the market
in New Jersey private passenger auto has become more unstable due to the
inability to control either the volume of writings or the profitability.
Under the terms of the transaction, the Group member, OCNJ, will pay $40.6
million to a third party to transfer its renewal obligations. The $40.6
million amount was taken as a charge in the fourth quarter of 2001 and will
be paid out over the course of twelve months beginning in early 2002. OCNJ
may also have a contingent liability of up to $15.6 million to be paid to
the transferee company to maintain a maximum premiums-to-surplus ratio of
2.5 to 1
25
(1) Operating income (loss) differs from net income by the exclusion of
realized investment gains (losses). It is not intended as a substitute
for net income prepared in accordance with accounting principles generally
accepted in the United States.
Item 7. Continued
on the transferred business during the next three years. At December 31,
2001, it is not possible to determine the likelihood of the liability and,
therefore, it has not been recognized in the financial statements. The
transaction is expected to positively impact operating results beginning in
2002.
The 2001 results were also impacted by additions to the Group's asbestos
reserves and an early retirement charge. During 2001, loss and loss
adjustment expense reserves were strengthened by $10.5 million after-tax
for asbestos related claims development. Also in 2001, the Corporation
adopted an early retirement plan. Of the approximately 330 employees
eligible to retire under the program, 147 accepted. The early retirement
plan resulted in a one-time after-tax charge of $4.0 million for the year.
The events of September 11, 2001 had an impact on the results of operations
for the year. The Group incurred before-tax losses of $3.0 million. This
loss has not reached any reinsurance limits for the Group. The $3.0
million represents the Group's best estimate of total losses, which could
ultimately exceed the amount estimated. Based upon year-end 2001 analysis
of the financial strength of reinsurers, the Group believes any potential
future increases in this estimate covered under its reinsurance programs
would be collectible.
In the first quarter of 2000, the Group made the decision to discontinue
its relationship with all of its Managing General Agents. The business
written by the Managing General Agents was acquired in the 1998 purchase of
the GAI commercial lines division. The result of the decision was a
before-tax write-off of $42.2 million to the agent relationships intangible
asset, which was recorded on the balance sheet in connection with the GAI
purchase. The asset was also written off in 2000 by $3.8 million as a
result of additional agent cancellations for a total write-off of $46.0
million for the year. In 2001, the Corporation further wrote off the agent
relationships asset by $11.0 million as a result of additional agency
cancellations and for certain agents determined to be impaired. The
impairment analysis is a critical accounting policy and was based on
updated estimated future undiscounted cash flows that were insufficient to
recover the carrying amount of the asset for the agent. The determination
of impairment involves the use of management estimates and assumptions.
Due to the inherent uncertainties and judgments involved in making these
assumptions, changes in the valuation of the agent relationship asset could
again occur in the future if the underlying estimates change materially.
The 2000 operating loss was also impacted negatively by $23.2 million
before tax for ceded premiums on certain experience rated reinsurance
contracts covering losses exceeding $1.0 million. The 1999 operating
income was impacted by $13.0 million before tax for similar premium
cessions. The premium cessions reflect changes in estimated loss
experience, and have resulted in the maximum premium cessions under these
contracts for business written through year 2000.
Investment Results
Consolidated after-tax realized investment gains (losses) amounted to
$135.0 million, or $2.25 per share in 2001, $(1.5) million, or $(.03) per
share in 2000, and $104.5 million, or $1.71 per share in 1999. The 2001
realized gains included the effects of the Group's partial reallocation of
its equity portfolio to fixed income holdings. Significant appreciation in
the equities, as part of the reallocation, contributed to the realized
gains in 2001. The 2001 realized gains included a non-recurring tax
benefit of $16.1 million related to the sale of a minority interest in
stock of OCNJ. Contributing to the 1999 realized investment gains were
gains from a reallocation of the Group's investment portfolio during the
second quarter. The Corporation completed the reallocation by selling
approximately $200 million in equity securities, resulting in after-tax
realized gains of approximately $94 million.
26
Item 7. Continued
The Corporation's largest assets are its investments and, therefore, the
related accounting policies are considered critical. See further
discussion of important investment accounting policies in Note 1C. The
Corporation reviews its investment portfolio quarterly to determine if any
securities have sustained other than temporary decline in market value.
Any loss on a security determined to be impaired is recognized as a
realized loss in the current period. The after-tax realized gain (loss)
was impacted by the write-down of securities for other than temporary
declines in market value by $7.8 million in 2001, $10.9 million in 2000 and
$5.3 million in 1999.
Consolidated before-tax investment income increased 3.6% to $212.4 million
in 2001, compared with $205.1 million in 2000 and $184.3 million in 1999.
The increases in investment income can be attributed to the equity
portfolio reallocations in 1999 and 2001. The reallocations in the
investment portfolio reduced equity securities and increased investment
grade securities. Also contributing to the increase in before-tax
investment income was the reallocation of investments from tax exempt
municipal bonds to taxable bonds. After-tax investment income totaled
$141.3 million in 2001, compared with $140.3 million in 2000 and $138.0
million in 1999. Before-tax and after-tax investment income comparisons
are impacted by investments in municipal bonds, which provide tax-
advantaged investment income.
Reinsurance Results
The Group has renewed all of its reinsurance programs for 2002 with only
moderate changes in the program structure and pricing. Although the
terrorist events of September 11, 2001 had a significant impact on the
reinsurance market, the Group's reinsurance contracts do include coverage
for acts of terrorism. Instead of being unlimited as in the past,
terrorism coverage in the 2002 contracts has been modified to exclude or
limit coverage for certain upper layers of reinsurance. The Corporation
believes that the terrorism coverage in its reinsurance programs is
adequate to protect its financial health. The pricing of reinsurance in
2002 increased only moderately from prior years due to the tragic events of
September 11, 2001 and from other changes in the reinsurance market.
Internally Developed Software
In 2001, the Corporation introduced into limited production a new
internally developed application for issuing and maintaining insurance
policies. The Corporation capitalizes costs incurred to develop certain
software used in the Corporation's operations. The cost associated with
this application is amortized on a straight-line basis over the estimated
useful life of ten years from the date placed into service. Upon full
implementation in 2003, the new application should impact results by
approximately $4 to $5 million per year in amortization expense until 2012.
Although management believes the asset represents its fair value, the
useful life of the internally developed software was determined by using
certain assumptions and estimates. Inherent changes in these assumptions
could result in an immediate impairment to the asset and a corresponding
charge to net income.
Discontinued Operations
During 1995, the Corporation's life operations were discontinued. In order
to exit the life operations, the Company executed an agreement in 1995 to
reinsure the existing blocks of business through a 100% coinsurance
arrangement.
27
Item 7. Continued
On December 31, 1999, the Company sold 100% of The Ohio Life Insurance
Company stock, thereby transferring all remaining assets and liabilities to
the buyer. The after-tax gain on this sale totaled $6.2 million, or $.11
per share.
Net income from discontinued operations amounted to $4.3 million, or $.07
per share in 1999.
Statutory Results
Management uses statutory financial criteria to analyze the property and
casualty results. Management analyzes statutory results through the use of
insurance industry financial measures including statutory loss and loss
adjustment expense ratios, statutory underwriting expense ratio, statutory
combined ratio, net premiums written and net premiums earned. The
statutory combined ratio is a commonly used gauge of underwriting
performance measuring the percentages of premium dollars used to pay
insurance losses and related expenses. A discussion of the differences
between statutory accounting and accounting principles generally accepted
in the United States is included in Note 17.
All Lines Discussion
Statutory net premiums written decreased $33.2 million in 2001 to $1.47
billion. Net premiums written totaled $1.51 billion in 2000 and $1.59
billion in 1999. The net premiums written decrease in 2001 and 2000 can be
attributed primarily to a more selective underwriting philosophy that led
to the elimination and cancellation of certain business. Actions taken in
2000 to cancel the Managing General Agents and the Group's most
unprofitable agents and policies represented over $150 million in annual
net premiums written.
The Group's business is geographically concentrated in the Mid-West and
Mid-Atlantic regions. The following table shows consolidated net premiums
written for the Group's five largest states:
ALL LINES NET PREMIUMS WRITTEN
DISTRIBUTED BY TOP STATES
2001 2000 1999
---- ---- ----
New Jersey 17.4% 14.9% 15.8%
Ohio 9.8% 9.7% 9.6%
Kentucky 7.9% 8.5% 8.7%
Pennsylvania 6.8% 6.2% 6.2%
Illinois 5.1% 5.2% 5.1%
New Jersey is the Group's largest state with 17.4% of the total net
premiums written during 2001. In recent years, New Jersey's legislative
and regulatory environments have become less favorable to the Group. The
state requires insurance companies to accept all risks that meet
underwriting guidelines for private passenger automobile. In the fourth
quarter of 2001, OCNJ entered into an agreement to transfer its New Jersey
private passenger auto renewal obligations to Proformance Insurance
Company. This transaction will allow the Group to stop writing business in
the New Jersey private passenger auto and personal umbrella markets in
early 2002. New Jersey private passenger auto and personal umbrella made
up 46.9% of the Group's New Jersey net premiums written in 2001. Excluding
the Group's New Jersey private passenger auto and personal umbrella net
premiums written, New Jersey would have represented 10.1% of the total all
lines net premiums written in 2001. The Group expects to continue writing
all of its other lines of business in the state.
28
Item 7. Continued
Excluding the $40.6 million, or 2.7 point impact of the New Jersey renewal
obligation transfer fee, the statutory combined ratio improved 6.6 points
to 112.6% in 2001, compared with 119.2% in 2000 and 112.8% in 1999. The
improvement in the statutory combined ratio in 2001 over 2000 was due to
improvement in the Standard Commercial Lines statutory loss ratio and all
lines statutory underwriting expense ratio when excluding the $40.6 million
New Jersey transfer fee. The 2001 Standard Commercial Lines statutory loss
ratio improved to 64.5% from 78.6% in 2000. The 2000 statutory combined
ratio was impacted adversely by increases in the loss and loss adjustment
expense ratios. The 2000 loss ratio was impacted by adverse development in
the workers' compensation and general liability lines of business for 1999
and prior accident years. The workers' compensation line of business added
6.8 points to the overall 2000 loss ratio.
The 2001 all lines statutory accident year combined ratio excluding the New
Jersey transfer fee was 108.8%, 3.8 points lower than the calendar year
results. The loss and loss adjustment expense ("LAE") ratio component of the
all lines statutory accident year combined ratio measures losses and claims
expenses arising from insured events during the year. The loss and LAE
ratio component of the all lines statutory calendar year combined ratio
includes loss and LAE payments made during the current year and changes in
the provision for future loss and LAE payments. The difference between the
statutory accident year and calendar year combined ratios is concentrated
in the workers' compensation, homeowners and general liability lines of
business.
At year-end 2000, the Group reallocated its carried bulk reserves in
anticipation of Statement of Statutory Accounting Principles No. 55 under
Statutory Accounting Codification, which requires that companies carry
their best estimate of loss reserves for each line of business, while
previous requirements focused on the overall reserves. The reallocation
did not affect the all lines calendar year 2000 statutory combined ratio
and did not have a material impact on most lines of business other than
workers' compensation and general liability. The reallocation added 9.6
points to the workers' compensation statutory combined ratio and reduced
the general liability statutory combined ratio by 4.7 points.
Catastrophe losses in 2001 totaled $34.6 million, compared with $36.2
million in 2000 and $52.2 million in 1999. The Group was impacted by 19
separate catastrophes in 2001, compared with 24 catastrophes in 2000 and 27
in 1999. Catastrophe losses added 2.3 points to the statutory combined
ratio in 2001, compared with 2.4 points in 2000 and 3.4 points in 1999.
The 2001 catastrophes included the losses from the events of September 11,
2001. The Group incurred before-tax losses of $3.0 million related to the
terrorist activities. The 1999 catastrophes included tornadoes in the
greater Cincinnati and Oklahoma City areas as well as damage from Hurricane
Floyd. The effects of catastrophes on the Corporation's results cannot be
accurately predicted. As such, severe weather patterns, acts of war or
terrorist activities could have a material adverse impact on the
Corporation's results, reinsurance pricing and availability of reinsurance.
Catastrophe losses, net of reinsurance, for each of the last three years
were:
Catastrophe Losses
(before-tax)
Statutory Combined
Dollar Impact Ratio Impact
------------- ------------
2001 $34.6 million 2.3%
2000 $36.2 million 2.4%
1999 $52.2 million 3.4%
29
Item 7. Continued
Statutory underwriting expenses, as a percentage of net premiums written,
increased by .6 points in 2001 to 35.4%, compared with 34.8% in 2000 and
35.2% in 1999. The 2001 statutory underwriting expense ratio includes 2.7
points from the $40.6 million charge for the New Jersey transfer.
Excluding the New Jersey transfer fee, the improvement in the 2001
statutory underwriting expense ratio was the result of actions to lower
commissions, eliminate workers' compensation policyholder dividends and
decrease the employee count. The actions to lower commissions to current
market levels for selected product lines improved the 2001 underwriting
expense ratio .5 points. The actions to eliminate workers' compensation
policyholders dividends on new and renewal business and changes in reserves
for dividends of issued policies improved the 2001 underwriting ratio .7
points. The reduction in employee count during 2001 improved the 2001
underwriting ratio by .6 points. The employee count was 3,365 as of
December 31, 2001, compared with 3,470 at December 31, 2000 and 3,889 at
December 31, 1999. The 2001 statutory underwriting expenses also included
$.5 million of software amortization related to the limited rollout of a
new internally developed software application. On a statutory accounting
basis, the new application is being amortized over a five-year period in
accordance with statutory accounting principles. For year 2002, the Group
will continue the rollout of the new application and expects the impact to
statutory expenses to be approximately $2 million to $3 million in
amortization. Upon full implementation in 2003, the new application
amortization should impact the statutory expenses by approximately $8 to
$10 million per year through 2007. The additional cost is expected to be
offset in part by reduced labor costs related to policy processing.
Segment Discussion
In June of 2001, the Corporation introduced an organizational structure
around three business units: Standard Commercial Lines, Specialty
Commercial Lines, and Personal Lines. The Corporation also announced
projected 2001 statutory combined ratios for the three business units.
Standard Commercial Lines
Standard Commercial Lines statutory combined ratio for the year 2001
decreased 13.8 points to 116.2% from 130.0% in 2000. The 1999 statutory
combined ratio was 122.6%. The 2001 actual statutory combined ratio
results were slightly better than the 2001 projected Standard Commercial
Lines statutory combined ratio of 117.0%. Renewal price increases had a
positive impact during the year. The 2001 average renewal price increase(2)
was 15.2% for the Standard Commercial Lines direct premiums written,
compared with a 9.9% average renewal price increase in 2000.
The workers' compensation line of business in the Standard Commercial Lines
segment impacted the year's results. Although overall results improved in
2001, continued deterioration in the workers' compensation line of business
in 2001 led to disappointing results for the line.
Workers' compensation statutory combined ratio decreased 27.0 points in
2001 to 138.6%, compared with 165.6% and 117.5% for 2000 and 1999,
respectively. The statutory loss ratio was the main component driving the
high statutory combined ratio. The 2001 statutory loss ratio was
30
(2) When used in this report, renewal price increase means the average
increase in premium for policies renewed by the Group. The average
increase in premiums 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 and 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.
Item 7. Continued
95.8%, compared with 118.8% and 71.9% in 2000 and 1999, respectively.
Deterioration in prior year losses due to an increase in claims severity
contributed to the poor 2001 results. The 2001 accident year loss ratio of
81.8% was 14.0 points lower than the calendar year loss ratio. The poor
results in the workers' compensation line of business in 2000 added 6.8
points to the all lines statutory loss ratio, when including the year-end
reserve reallocation mentioned in the All Lines Discussion section.
In response to the deterioration of results, the Group took action in 2000
to begin non-renewing its most unprofitable workers' compensation policies.
This business has a loss ratio approximately 10 points higher than the
total workers' compensation line of business and is referred to as
unsupported workers' compensation as it is the only product in the
customer's account. As mentioned in the Operating Results section, the
Group also took action to discontinue its relationship with Managing
General Agents. These Managing General Agents accounted for $29.0 million
in annual workers' compensation premium. These non-renewals and
cancellations contributed to a 20.0%, or $37.2 million, decrease in 2001
workers' compensation net premiums written, and a 3.1%, or $5.9 million,
decrease in 2000 workers' compensation net premiums written. The Group was
able to achieve average renewal price increases for the workers'
compensation business of 16.6% and 12.4% for 2001 and 2000, respectively.
Net premiums written for 2001, 2000 and 1999 totaled $148.6 million, $185.8
million and $191.7 million, respectively.
Commercial auto net premiums written increased $8.0 million, or 4.5% in
2001 to $186.7 million, compared with $178.7 million in 2000 and $175.5
million in 1999. The 2001 increase was driven by renewal price increases,
averaging 15.5% on the commercial auto line of business.
The 2001 commercial auto statutory combined ratio decreased to 107.6%, from
121.5% in 2000 and 117.1% in 1999. The improvement in 2001 was largely due
to better underwriting and risk selection and the effect of renewal price
increases. 2000 was hindered by increased severity combined with
inadequate pricing.
Commercial multi-peril ("CMP"), fire & inland marine net premiums written
were $275.2 million in 2001, compared with $276.5 million in 2000 and
$271.1 million in 1999. The statutory combined ratio decreased to 106.4%
in 2001 from 111.1% in 2000 and 127.2% in 1999. The improvement in the
line has been a result of implementing renewal price increases and more
selective underwriting.
General liability net premiums written decreased $1.6 million, or 2.0% in
2001 to $79.0 million, compared with $80.7 million in 2000 and $82.5
million in 1999. The 2001 and 2000 decreases reflected the Group's focus
on fundamental underwriting strategies.
The general liability statutory combined ratio decreased 6.1 points in 2001
to 120.8%, compared with 126.9% in 2000 and 130.8% in 1999. While
improvement in underwriting is being shown, the higher than desired loss
ratios are attributable to adverse development on prior accident years.
The accident year statutory combined ratio for 2001 was 106.8%. The
difference between the accident and calendar year results is primarily due
to increases in asbestos reserves in 2001 for further development on
existing claims outstanding.
31
Item 7. Continued
Statutory Combined Ratios (by business unit, including selected major lines
of business)
2001 2000 1999
========================================================================
Standard Commercial Lines 116.2% 130.0% 122.6%
Workers' Compensation 138.6% 165.6% 117.5%
Auto Commercial 107.6% 121.5% 117.1%
General Liability 120.8% 126.9% 130.8%
CMP, Fire & Inland Marine 106.4% 111.1% 127.2%
Specialty Commercial Lines 90.8% 79.8% 50.7%
Commercial Umbrella 93.6% 81.9% 33.5%
Fidelity & Surety 76.8% 70.7% 75.9%
Personal Lines 119.2% 113.5% 112.2%
Auto - Agency 118.2% 110.4% 106.3%
Auto - Direct 155.2% 167.9% 208.4%
Homeowners 120.5% 119.6% 124.1%
- ------------------------------------------------------------------------
Total All Lines 115.3% 119.2% 112.8%
========================================================================
Specialty Commercial Lines
Specialty Commercial Lines statutory combined ratio for the year 2001 was
90.8%, compared with the 2001 projected statutory combined ratio of 88.9%.
The statutory combined ratio was 79.8% and 50.7% for 2000 and 1999,
respectively.
The fidelity & surety line of business in the Specialty Commercial Lines
contributed to the favorable results for the segment. Fidelity & surety
net premiums written increased $1.1 million, or 3.0% in 2001 to $38.7
million, compared with $37.6 million in 2000 and $37.7 million in 1999.
The statutory combined ratio was 76.8% in 2001, compared with 70.7% in 2000
and 75.9% in 1999.
Commercial umbrella net premiums written increased $26.6 million, or 40.5%
in 2001 to $92.2 million, compared with $65.6 million in 2000 and $62.8
million in 1999. The 2001 increase was primarily generated by renewal
price increases implemented in 2001 and 2000. The average renewal price
increase in 2001 was 20.3%, compared with 8.9% in 2000. The 2001
statutory combined ratio was 93.6%, compared with 81.9% in 2000 and 33.5%
in 1999. Although the combined ratio increased, the results are still
profitable for the Group.
Personal Lines
The Personal Lines statutory combined ratio for the year 2001 increased 5.7
points to 119.2% in 2001, compared with 113.5% in 2000 and 112.2% in 1999.
Excluding the $40.6 million fee related to the New Jersey personal auto
transaction, the 2001 statutory combined ratio was 112.9%, a decrease of .6
points from 2000. Excluding the New Jersey transfer fee, the actual 2001
statutory combined ratio was 1.4 points better than the projected 2001
statutory combined ratio of 113.7%.
Private passenger auto - agency net premiums written decreased $10.9
million, or 2.4% to $444.4 million in 2001, compared with $455.3 million in
2000 and $526.5 million in 1999. Selective underwriting and agency
cancellations contributed to the decline in premiums in 2001. New Jersey's
private passenger auto net premiums written represented approximately 27%
of the
32
Item 7. Continued
Group's total private passenger auto book of business in 2001. New Jersey
regulation mandates private passenger automobile insurers in the state to
provide insurance to all eligible consumers with limited exceptions. This
"take-all-comers" regulation eliminates the Group's ability to control the
volume and selection of writings in the state. The statutory combined ratio
was 109.1%, excluding the fee related to the transfer of the New Jersey
personal auto book in 2001, compared with 110.4% in 2000 and 106.3% in
1999. Poor underwriting results in New Jersey was the primary cause of the
poor performance in 2001. The New Jersey results added 4.5 points to the
2001 private passenger auto-agency statutory loss ratio. New Jersey
results were driven by regulatory restraints in the state which restrict
the insurers' ability to raise rates. In addition, the New Jersey State
Senate passed an auto insurance reform bill effective in 1999 that mandated
a 15% rate reduction for personal auto policies. This reform bill was
based on legal reform intended to provide a reduction in medical expense
benefits, limitations on lawsuits and enhanced fraud protection. While the
rate reduction was immediate, many of the reforms have not yet been
implemented, resulting in inadequate rate levels for the Group.
The state of New Jersey also requires additional assessments to be paid by
insurers and requires insurance companies to write a portion of their
business in high risk areas. New Jersey requires assessments to be paid
for the New Jersey Unsatisfied Claim and Judgement Fund ("UCJF"). This
assessment is based upon estimated future direct premiums written in that
state. The Group paid assessments of $4.7 million in 2001, $3.3 million in
2000 and $3.4 million in 1999. Since 1999, New Jersey has also required
insurance companies to write a portion of their personal auto premiums in
Urban Enterprise Zones ("UEZ"). These zones are generally higher risk urban
areas. The Group is required to write one policy in UEZ for every seven
policies written outside UEZ. The Group is assigned premiums if it does
not write the required quota. In 2001, the Group wrote $8.1 million in UEZ
premiums, with $4.3 million in additional assigned premiums in 2001,
compared with $6.5 million in UEZ premiums and $4.9 million in additional
assigned premiums in 2000. In 1999, the Group wrote $5.7 million in UEZ
premiums, with $6.7 million in additional assigned premiums in 1999. The
loss ratios on UEZ premiums were 159.3%, 146.3% and 132.1% for 2001, 2000
and 1999, respectively. The loss ratios on the assigned business were
219.6%, 198.5% and 142.9% for 2001, 2000 and 1999, respectively.
Given the unfavorable regulatory environment in New Jersey and the
continued unprofitability of its private passenger auto business in the
state, the Group announced in the fourth quarter of 2001 the transaction to
allow the Group to stop writing business in early 2002 in the private
passenger auto market in New Jersey. The transaction, described in the
Operating Results section, is expected to positively impact private
passenger auto results beginning in 2002.
The Group is implementing price increases in other states, claims
management procedures and insurance scoring to improve results. The Group
began to rollout insurance scoring in selected states in 2001 and expects
this to help improve results by matching prices more closely with
anticipated loss experience.
The Group began direct marketing of personal auto coverage in January 1998.
In 2000, the Corporation first restructured its private passenger auto -
direct operations with an Internet-only strategy, and later discontinued
the private passenger auto - direct line of business in the fourth quarter.
The line was discontinued in order to focus on the independent agency
system as the distribution channel for the Group. As a result of the
restructuring, net premiums written dropped from $10.7 million in 2000 to
$6.8 million in 2001. The Group wrote $17.1 million of net premiums in
1999. Statutory combined ratios were 155.2%, 167.9% and 208.4% for 2001,
2000 and 1999,
33
Item 7. Continued
respectively. The 2001 underwriting expense ratio included $2.0 million,
or 29.3 points, in expenses for fees for the removal of certain obligations
related to assigned private passenger auto policies in New York.
Although the Group discontinued the private passenger auto - direct line,
the Group remains committed to expanding its Internet capabilities that
focus on full service options for our agents and convenience options for
our policyholders.
Homeowners net premiums written fell 6.5% in 2001 to $162.0 million from
$173.2 million in 2000 and $181.9 million in 1999. The Group has placed
emphasis on price increases, insurance scoring and agency management. The
company introduced an Insurance-To-Value program in 2000 which addressed
underinsured homeowner properties and emphasized adequate replacement cost
values.
The 2001 homeowners statutory combined ratio increased .9 points to 120.5%.
This compares with a statutory combined ratio of 119.6% in 2000 and 124.1%
in 1999. Combined ratios are heavily impacted by catastrophe losses which
added 12.3 points to the combined ratio in 2001, 10.3 points in 2000 and
12.6 points in 1999.
LIQUIDITY AND FINANCIAL STRENGTH
Cash Flow
Net cash generated from operations was $70.2 million in 2001, compared with
cash generated of $99.6 million in 2000 and cash used of $137.7 million in
1999. The 2001 cash generated reflects the operating results and the
reduction in paid losses and paid loss adjustment expenses. The change in
2000 is due in part to payment received in 2000 as part of the commutation
of a reinsurance treaty in the fourth quarter of 1999 and a refund of prior
year taxes paid. The 1999 cash used primarily resulted from lower
operating results and taxes paid. Investing activities used net cash of
$57.4 million in 2001, compared with net cash used of $103.5 million in
2000 and net cash generated of $108.1 million in 1999. Total cash used for
financing activities was $10.6 million in 2001, compared with $56.0 million
in 2000 and total cash used of $125.5 million in 1999. Cash used for
financing decreased in 2001 was a result of the elimination of shareholder
dividends. Cash used from financing decreased in 2000 from 1999 as a
result of the reduction in shareholder dividends and the Corporation's
decision not to repurchase any of its shares. Overall, total cash
generated in 2001 was $2.2 million, compared with cash used of $59.9
million in 2000 and cash used of $155.0 million in 1999.
The Corporation did not pay any shareholder dividends in 2001, compared
with dividend payments of $35.4 million in 2000 and $56.0 million in 1999.
The Corporation did not pay shareholder dividends in 2001 as a result of
the Corporation's decision to further strengthen the Corporation's
financial position.
34
Item 7. Continued
Cash flow has also been impacted by our share repurchase program. Although
the Corporation did not repurchase any shares of its common stock in 2001
or 2000, the Corporation did repurchase 2,478,000 shares for $46.1 million
in 1999. Since the beginning of 1987, 31.7 million shares have been
repurchased at an average cost of $14.10 per share.
The Corporation is dependent on dividend payments from its insurance
subsidiaries in order to meet operating expenses, debt obligations, and to
pay dividends. Insurance regulatory authorities impose various
restrictions and prior approval requirements on the payment of dividends by
insurance companies and holding companies. As of December 31, 2001,
approximately $156.5 million of statutory surplus was not subject to
restriction or prior dividend approval requirements.
The following table presents the Corporation's obligations (other than
obligations relating to its ordinary insurance operations) to make future
payments under contracts, such as debt and lease agreements:
($ in millions) Payments Due by Period
- ----------------------------------------------------------------------------
Less
than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
- ----------------------- ----- ------ ----- ----- -------
Notes payable $210.2 $205.6 $ 1.9 $1.3 $1.4
Operating leases 13.7 5.7 8.0 - -
New Jersey transfer fee 40.6 30.5 10.1 - -
- ----------------------------------------------------------------------------
Total contractual cash
obligations $264.5 $241.8 $10.0 $1.3 $1.4
Debt
As of December 31, 2001, the Corporation had $210.2 million of outstanding
notes payable. Of the $210.2 million, $5.2 million is a long-term low
interest loan with the state of Ohio used in conjunction with the home
office purchase. The remaining $205.0 million is a current note payable
under a 1997 credit facility that provided a $300.0 million revolving line
of credit to the Corporation. On March 19, 2001, the Corporation elected
to reduce the aggregate amount available under the revolving 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 (as defined in the agreement) and a minimum statutory surplus of
$750.0 million. Effective March 30, 2001, the covenant was amended to
require a minimum statutory surplus of $675.0 million for the quarters
ending March 31, 2001 and June 30, 2001, returning to minimum statutory
surplus of $750.0 million for subsequent quarters. The Corporation
continues to review its financial covenants in the credit agreement in
light of its operating losses. As of December 31, 2001, the Corporation
was in compliance with these covenants. However, further deterioration of
operating results, reductions in the equity portfolio valuation, or other
changes in statutory surplus may lead to covenant violations which could
ultimately result in default.
35
Item 7. Continued
The credit agreement expires in October 2002, with any outstanding loan
balance due at that time. The Corporation is evaluating its capital
requirements and is exploring ways to refinance its debt and increase its
financial flexibility. The Corporation has taken steps to strengthen its
financial position by aggressively managing expenses and first reducing
quarterly dividends to shareholders and later eliminating the current
quarterly dividend in the first quarter of 2001. The Corporation will be
required to obtain additional external funding, either in the form of debt
or equity, in order to repay the balance of its current notes payable,
which comes due October 2002. While the Corporation believes that it
should be able to obtain such external funding, the ability to raise such
funding cannot be assured nor can the cost of such funding be determined at
this time.
Rating Agencies
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 July 25, 2001, A.M. Best announced that its
rating of the group of companies is now "A-" (Excellent) from "A"
previously. The rating action reflects the sharp deterioration in the
Group's earnings and the significant reduction in policyholders' surplus
over recent years. A.M. Best stated the "Excellent" rating was due to
solid capitalization and strategic initiatives put in place by management
to improve earnings. A.M. Best has placed a silent outlook on the Group's
rating. 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. S&P has placed a negative
outlook on the Group's rating. 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. Moody's has revised the outlook for the Group's rating from
negative to stable.
Statutory Surplus
Statutory surplus, a traditional insurance industry measure of strength and
underwriting capacity, was $767.5 million at December 31, 2001, compared
with $812.1 million at December 31, 2000 and $899.8 million at December 31,
1999. On January 1, 2001, statutory surplus was reduced by $21.7 million
to $790.4 million for the cumulative effect of adopting new required
statutory accounting principles. The 2001 surplus was further reduced by
the $26.8 million after-tax charge associated with the New Jersey private
passenger auto transfer and a decrease in the market value of the equity
investment portfolio. Statutory surplus increased in 2001 due to the sale
of a minority interest in the stock of a subsidiary, which caused a non-
recurring tax benefit of $16.1 million. The decrease in the 2000 surplus
was due primarily to poor underwriting results, dividend payments, and the
statutory treatment of the final installment payment for the acquisition of
the commercial lines division of GAI.
The ratio of premiums written to statutory surplus is one of the measures
used by insurance regulators to gauge the financial strength of an
insurance company and indicates the ability of the Group to grow by writing
additional business. At December 31, 2001, the Group's premiums written to
surplus ratio is 1.9 to 1. The ratio was 1.9 to 1 and 1.8 to 1 in 2000 and
1999, respectively.
36
Item 7. Continued
The National Association of Insurance Commissioners ("NAIC") has developed a
"Risk-Based Capital" formula for property and casualty insurers and life
insurers. The formula is intended to measure the adequacy of an insurer's
capital given the asset structure and product mix of the company. As of
December 31, 2001, all insurance companies in the Group, with the exception
of OCNJ, exceed the necessary capital. The exception for OCNJ is due to a
temporary difference in the recognition of deferred taxes related to the
$40.6 million New Jersey transfer fee.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance, which replaced the former Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting.
The new policies provide guidance for areas where statutory accounting had
been silent and changed former statutory accounting in some areas. The
Group implemented the Codification guidance effective January 1, 2001. The
cumulative effect of changes in accounting principles adopted to conform to
the Codification guidance were reported as an adjustment to statutory
policyholders' surplus as of January 1, 2001. The cumulative effect of
adopting Codification reduced statutory policyholders' surplus by $21.7
million on January 1, 2001.
Reinsurance
Reinsurance is a contract by which one insurer, called a reinsurer, agrees
to cover, under certain defined circumstances, a portion of the losses
incurred by a primary insurer in the event a claim is made under a policy
issued by the primary insurer. The Group purchases reinsurance to protect
against large or catastrophic losses. There are several programs that
provide reinsurance coverage.
The Group's property per risk program covers property losses in excess of
$1.0 million for a single insured, for a single event. This property per
risk program covers up to $29.0 million in losses in excess of the $1.0
million retention level for a single event. The Group's casualty per
occurrence program covers liability losses. Workers' compensation,
umbrella and other casualty reinsurance cover losses up to $99.0 million,
$49.0 million and $23.0 million, respectively, in excess of the $1.0
million retention level for a single insured event.
The property catastrophe reinsurance program protects the Group against an
accumulation of losses arising from one defined catastrophic occurrence or
series of events. This program provides $150.0 million of coverage in
excess of the Group's $25.0 million retention level. In 2001, a portion of
the catastrophe program was renewed with a multi-year placement as in
previous years. This provides continuity and maintains rates and each
reinsurer's overall share of the program. Over the last 20 years, two
events triggered coverage under the catastrophe reinsurance program.
Losses and loss adjustment expenses from the Oakland fires in 1991 totaled
$35.6 million and losses and loss adjustment expenses from Hurricane Andrew
in 1992 totaled $29.8 million. Both of these losses exceeded the prior
retention amount of $13.0 million, resulting in significant recoveries from
reinsurers. Reinsurance limits are purchased to cover exposure to
catastrophic events having the probability of occurring every 150-250
years.
37
Item 7. Continued
GAI has agreed to maintain reinsurance on the commercial lines business
that the Company acquired from GAI and its affiliates in 1998. GAI is
obligated to reimburse the Company if Great American's reinsurers are
unable to pay claims with respect to the acquired commercial lines
business.
Reinsurance contracts do not relieve the Group of their obligations to
policyholders. The collectibility of reinsurance depends on the solvency
of the reinsurers at the time any claims are presented. The Group monitors
each reinsurer's financial health and claims settlement performance because
reinsurance protection is an important component of the Corporation's
financial plan. Each year, the Group reviews financial statements and
calculates various ratios used to identify reinsurers who no longer meet
appropriate standards of financial strength. Reinsurers who fail these
tests are removed from the program at renewal. Additionally, a large base
of reinsurers is utilized to mitigate concentration of risk. During the
last three fiscal years, no reinsurer accounted for more than 15% of total
ceded premiums. As a result of these controls, amounts of uncollectible
reinsurance have not been significant.
Loss and Loss Adjustment Expenses
The Group's largest liabilities are reserves for losses and loss adjustment
expenses. The accounting policies related to the loss and loss adjustment
expense reserves are considered critical. Loss and loss adjustment expense
reserves are established for all incurred claims and are carried on an
undiscounted basis before any credits for reinsurance recoverable. The
establishment of loss and loss adjustment expense reserves involves the use
of certain assumptions and estimates. Actual losses and loss adjustment
expenses may change with further developments. These reserves amounted to
$2.15 billion at December 31, 2001, $2.00 billion at December 31, 2000 and
$1.91 billion at December 31, 1999.
In recent years, asbestos and environmental liability claims have expanded
greatly in the insurance industry. Historically, the Group has written
small commercial accounts and has not sold policies with significant
manufacturing liability coverages. Within the manufacturing category, we
have concentrated on the light manufacturers, which further limits exposure
to environmental claims. Consequently, the Group's asbestos and
environmental liability exposure is substantially below the industry
average.
Estimated asbestos and environmental reserves are composed of case
reserves, incurred but not reported reserves and reserves for loss
adjustment expense. For 2001, 2000 and 1999, respectively, those reserves
were $53.5 million, $40.4 million and $41.1 million. Asbestos reserves
were $31.8 million, $13.5 million and $9.6 million and environmental
reserves were $21.7 million, $26.9 million and $31.5 million for those
respective years. These loss estimates are based on currently available
information. However, given the expansion of coverage and liability by the
courts and legislatures, there is substantial uncertainty as to the
ultimate liability. The Group increased its asbestos reserves in 2001 for
further development on existing claims outstanding.
Construction defect claims filed under general liability insurance policies
involve allegations of defective work on construction projects, such as
condominiums, apartment complexes, housing developments, and office
buildings. These claims usually involve multiple parties and carriers.
38
Item 7. Continued
The loss estimates for these claims are based on currently available
information. However, given the expansion of coverage and liability by the
courts and legislatures, there is substantial uncertainty as to the
ultimate liability.
California Legal Proceedings
Proposition 103 was passed in the state of California 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, the Administrative Law Judge issued a proposed ruling with a
rollback liability of $24.4 million plus interest. The Group established a
contingent liability for the Proposition 103 rollback of $24.4 million plus
simple interest at 10% 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 Commissioner of Insurance of the state of California.
Under the terms of the settlement, the members of the Group agreed to pay
$17.5 million in refund premiums to eligible 1989 California policyholders.
With this development, the total reserve was decreased to $17.5 million as
of December 31, 2000. This decrease in the reserve resulted in an increase
in operating income and net income in 2000, but had no effect on the
statutory combined ratio reported. The Group began to make payments in the
first quarter of 2001. The remaining liability was $7.8 million as of
December 31, 2001.
To date, the Group has paid approximately $5.7 million in legal costs
related to the California withdrawal and Proposition 103.
Investment Portfolio
At year-end 2001, consolidated investments had a carrying value of $3.3
billion. The excess of market value over cost was $420.9 million, compared
with $629.4 million at year-end 2000 and $505.4 million at year-end 1999.
The decrease in 2001 was largely due to the recognition of realized gains
in connection with the sale of appreciated equity securities in the 2001
equity portfolio reallocation. The 2000 increase was due to market growth
in both the fixed income and equity portfolios, while a 1999 decrease in
unrealized gains was largely attributable to the Group's reallocation of
its investment portfolio mentioned in the Investment Results section.
The Group's fixed income portfolio has an intermediate duration and a
laddered maturity structure. The Group chooses always to remain fully
invested and does not try to time markets. The Group also does not invest
in off-balance sheet investments or arrangements.
Tax exempt bonds decreased to 1.1% of the fixed income portfolio at year-
end 2001 versus 3.2% and 19.4% for December 31, 2000 and 1999,
respectively. The funds previously held in tax exempt bonds have been
reallocated to investment grade taxable bonds. Due to poor underwriting
results over the past few years, the Group has reduced its holdings to
maximize after-tax income.
As of December 31, 2001, the Group held $1,107.8 million in mortgage-backed
securities, compared with $1,124.0 million and $784.3 million at December
31, 2000 and 1999, respectively. The increase from December 31, 1999 is
attributable to a redistribution of investments previously held in tax
exempt bonds and the 2001 and 1999 reallocations mentioned above. The
majority of
39
Item 7. Continued
mortgage-backed security holdings are less volatile planned amortization
class, sequential structures and agency pass-through securities. Of this
portfolio, $10.0 million, $13.1 million and $19.3 million were invested in
more volatile bond classes (e.g. interest-only, super-floaters, inverses)
in 2001, 2000 and 1999, respectively.
At year-end 2001, consolidated equity investments had a market value of
$489.0 million. Equity investments have decreased as a percentage of the
consolidated portfolio from 22.0% in 1999 to 14.7% at year-end 2001. This
decrease is attributable to the 2001 reallocation of the Group's investment
portfolio.
The Corporation adopted Statement of Financial Accounting Standards ("SFAS")
133 effective January 1, 2001. The adoption of SFAS 133 has had an
immaterial impact on the financial results of the Corporation.
The Corporation's largest assets are its investments and, therefore, the
accounting policies are considered critical. The Corporation uses certain
assumptions and estimates when valuing certain investments and related
income. These assumptions include estimations of cash flows and interest
rates. Although the Corporation believes the values of its investments
represent fair value, due to the inherent uncertainties and judgments
involved with accounting measurements, certain estimates could change and
lead to changes in fair values.
NEW ACCOUNTING STANDARDS
See discussion in Note 22, New Accounting Standards, in the Notes to
Consolidated Financial Statements on page 61 of this Form 10-K.
FORWARD-LOOKING STATEMENTS
From time to time, the Corporation 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 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 Corporation notes that a variety of factors could cause the
Corporation's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Corporation's
forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the Corporation'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; acts of war and terrorist
activities; rating agency actions; ability of Ohio Casualty to retain the
business acquired from the Great American Insurance Company; ability to
achieve targeted expense savings; ability to refinance indebtedness;
ability to achieve premium targets and profitability goals; ability to
implement major software applications; and general economic and market
conditions.
40
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Disclosures for Financial Instruments
Market risk is the risk of loss resulting from adverse changes in interest
rates. In addition to market risk, the Corporation is exposed to other
risks such as credit, reinvestment and liquidity risk. Credit risk refers
to the financial risk that an obligation will not be paid and a loss will
result. Reinvestment risk is the risk that interest rates will fall
causing interim cash flows to earn less than the original investment.
Liquidity risk describes the ease with which an investment can be sold
without substantially affecting the asset's price. The sensitivity
analysis below summarizes only the exposure to market risk.
The Corporation strives to produce competitive returns by investing in a
diverse portfolio of high-quality companies. All investments are held as
"available-for-sale," as defined by SFAS No. 115.
Market Risk - The Corporation has exposure to losses resulting from
potential volatility in interest rates. The Corporation attempts to
mitigate its exposure to interest rate risk through active portfolio
management, periodic reviews of asset and liability positions and through
maintaining a laddered maturity structure with an intermediate duration.
Estimates of cash flows and the impact of interest rate fluctuations
relating to the Corporation's investment portfolio are modeled semi-
annually and reviewed regularly.
Equity Price Risk - Equity price risk can be separated into two elements.
The first, systematic risk, is the portion of a portfolio or individual
security's price movement attributed to stock market movement as a whole.
The second element, nonsystematic risk, is the portion of price movement
unique to the individual portfolio or security. This risk can be further
divided between characteristics of the industry and of the individual
issuer. The Corporation attempts to manage nonsystematic risk by
monitoring a portfolio that is diversified across industries.
The following tables illustrate the hypothetical effect of an increase in
interest rates of 100 basis points (1%) and a 10% decrease in equity values
at December 31, 2001, 2000 and 1999, respectively. The changes selected
above reflect the Corporation's view of shifts in rates and values that are
quite possible over a one-year period. These rates should not be
considered a prediction of future events by the Corporation as interest
rates may be much more volatile in the future. This analysis is not
intended to provide a precise forecast of the effect of changes in interest
rates and equity prices on the Corporation's income, cash flow or
shareholders' equity. In addition, the analysis does not take into account
any actions the Corporation may take to reduce its exposure in response to
market fluctuations.
($ in thousands) Estimated Adjusted Market Value
December 31, 2001 Fair Value as indicated above
- ---------------------------------------------------------------------------
Interest Rate Risk:
Fixed maturities $2,772 $2,633
Short-term
investments 55 55
Equity Price Risk:
Equity securities 489 440
- ----------------------------------------------------------------------------
Totals $3,316 $3,128
============================================================================
41
Item 7A. Continued
($ in thousands) Estimated Adjusted Market Value
December 31, 2000 Fair Value as indicated above
- ---------------------------------------------------------------------------
Interest Rate Risk:
Fixed maturities $2,514 $2,419
Short-term
investments 60 60
Equity Price Risk:
Equity securities 755 679
- ----------------------------------------------------------------------------
Totals $3,329 $3,158
============================================================================
($ in thousands) Estimated Adjusted Market Value
December 31, 1999 Fair Value as indicated above
- ---------------------------------------------------------------------------
Interest Rate Risk:
Fixed maturities $2,377 $2,272
Short-term
investments 104 104
Equity Price Risk:
Equity securities 698 698
- ----------------------------------------------------------------------------
Totals $3,179 $3,004
============================================================================
In addition to the above scheduled investments, the Corporation has a
revolving line of credit. An increase in interest rates of one hundred
basis points to the index against which the line of credit is priced would
result in additional annual interest expense of $2.1 million.
Certain assumptions are inherent in the above analysis. The Corporation
assumes an instantaneous and parallel shift in interest rates and equity
prices at December 31, 2001, 2000 and 1999, and that the composition of its
investment portfolio remains relatively constant. Also, the Corporation
assumes a change in interest rates is reflected uniformly across all
financial instruments. The adjusted market values are estimated using
discounted cash flow analysis and duration modeling.
Item 8. Financial Statements and Supplementary Data
See Item 14 for Index to Consolidated Financial Statements, including the
Notes to Consolidated Financial Statements and the Report of Independent
Auditors, and Schedules on page 44 of this Form 10-K.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
42
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference herein from those portions of the Corporation's
Proxy Statement for the Annual Meeting of Shareholders of the Corporation
for 2002 under the headings "Election of Directors," and "Other
Directorships and Related Transactions" and "Section 16(a) Beneficial
Ownership Reporting Compliance."
Item 11. Executive Compensation
Incorporated by reference herein from those portions of the Corporation's
Proxy Statement for the Annual Meeting of Shareholders of the Corporation
for 2002 under the headings "Executive Compensation," "Employment
Agreement," "Change in Control Agreements," "Directors' Fees and Other
Compensation," "Pension Plans," "Report of the Executive Compensation
Committee," and "Comparison of Five-Year Cumulative Total Return."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference herein from those portions of the Corporation's
Proxy Statement for the Annual Meeting of Shareholders of the Corporation
for 2002 under the headings "Principal Shareholders," and "Shareholdings of
Directors, Executive Officers and Nominees for Election as Director."
Item 13. Certain Relationships and Related Transactions
Incorporated by reference herein from those portions of the Corporation's
Proxy Statement from the Annual Meeting of Shareholders of the Corporation
for 2002 under the heading "Other Directorships and Related Transactions."
43
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) Financial statements and financial statement schedules required
to be filed by Item 8 of this Form and Regulation S-X
(1) The following statements are included herein:
Page Number
in this Report
--------------
Consolidated Balance Sheet at December 31, 2001,
2000, 1999 45
Statement of Consolidated Income for the years
ended December 31, 2001, 2000 and 1999 46
Statement of Consolidated Shareholders' Equity
for the years ended December 31, 2001, 2000
and 1999 47
Statement of Consolidated Cash Flows for the
years ended December 31, 2001, 2000 and 1999 48
Notes to Consolidated Financial Statements 49-62
Report of Independent Auditors 63
(2) The following financial statement schedules are
included herein:
Schedule I - Consolidated Summary of Investments Other
Than Investments in Related Parties at December 31, 2001 66
Schedule II - Condensed Financial Information of
Registrant for the years ended December 31, 2001,
2000 and 1999 67
Schedule III - Consolidated Supplementary Insurance
Information for the years ended December 31, 2001,
2000 and 1999 68-70
Schedule IV - Consolidated Reinsurance for the years
ended December 31, 2001, 2000 and 1999 71
Schedule V - Valuation and Qualifying Accounts for the
years ended December 31, 2001, 2000 and 1999 72
Schedule VI - Consolidated Supplemental Information
Concerning Property and Casualty Insurance Operations
for the years ended December 31, 2001, 2000 and 1999 73
44
Item 14. Continued
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31 (in thousands, except per share data) 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities:
Available-for-sale, at fair value $2,772,104 $2,513,654 $2,376,973
(Cost: $2,729,998; $2,470,375; $2,408,201)
Equity securities, at fair value 488,988 754,919 698,129
(Cost: $110,206; $168,779; $161,498)
Short-term investments, at fair value 54,785 59,679 104,398
(Cost: $54,785; $59,679; $104,446)
- --------------------------------------------------------------------------------------------
Total investments 3,315,877 3,328,252 3,179,500
Cash 37,499 30,365 45,559
Premiums and other receivables, net of
allowance for bad debts of $8,400, $10,700,
and $9,338, respectively 341,986 357,108 366,202
Deferred policy acquisition costs 166,759 175,071 177,745
Property and equipment, net of accumulated
depreciation of $133,213, $122,040, and
$113,541, respectively 99,810 91,259 94,670
Reinsurance recoverable 237,688 148,633 139,021
Agent relationships, net of accumulated
amortization of $36,310, $25,013, and
$13,298, respectively 241,022 263,379 293,565
Interest and dividends due or accrued 43,319 38,227 38,022
Other assets 40,659 57,071 142,160
- --------------------------------------------------------------------------------------------
Total assets $4,524,619 $4,489,365 $4,476,444
============================================================================================
Liabilities
Insurance reserves:
Losses $1,746,828 $1,627,568 $1,544,967
Loss adjustment expenses 403,894 375,951 363,488
Unearned premiums 666,739 696,513 725,399
Notes payable 210,173 220,798 241,446
California Proposition 103 reserve 7,816 17,500 50,486
Deferred income taxes 3,124 65,613 62,843
Other liabilities 406,013 368,831 336,828
- --------------------------------------------------------------------------------------------
Total liabilities (See Notes 1 and 9) 3,444,587 3,372,774 3,325,457
- --------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $.125 par value
Authorized: 150,000 shares; Issued: 94,418 shares 11,802 11,802 11,802
Preferred stock, No par value
Authorized: 2,000 shares; Issued: 0 shares - - -
Additional paid-in capital 4,152 4,180 4,286
Common stock purchase warrants 21,138 21,138 21,138
Accumulated other comprehensive income 274,359 409,904 329,354
Retained earnings 1,221,447 1,122,867 1,237,562
Treasury stock, at cost:
(Shares: 34,312; 34,346; 34,335) (452,866) (453,300) (453,155)
- --------------------------------------------------------------------------------------------
Total shareholders' equity 1,080,032 1,116,591 1,150,987
- --------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,524,619 $4,489,365 $4,476,444
============================================================================================
See notes to consolidated financial statements
45
Item 14. Continued
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED INCOME
Year ended December 31 (in thousands, except
per share data) 2001 2000 1999
- ------------------------------------------------------------------------------------------
Premiums and finance charges earned $1,506,678 $1,533,998 $1,554,966
Investment income less expenses 212,385 205,062 184,287
Investment gains (losses) realized, net 182,940 (2,391) 160,827
- ------------------------------------------------------------------------------------------
Total revenues 1,902,003 1,736,669 1,900,080
Losses and benefits for policyholders 1,001,590 1,116,271 1,008,668
Loss adjustment expenses 202,444 177,894 166,986
General operating expenses 111,833 136,898 151,088
Amortization of agent relationships 11,297 11,715 12,267
Write-off of agent relationships 10,966 45,971 -
Early retirement charge 6,016 - -
New Jersey renewal obligation transfer fee 40,600 - -
Amortization of deferred policy acquisition costs 375,650 394,515 401,993
Depreciation expense 10,220 12,308 15,600
Amortization of software 4,999 3,785 4,146
California Proposition 103 reserve,
including interest - (32,986) 2,443
- ------------------------------------------------------------------------------------------
Total expenses 1,775,615 1,866,371 1,763,191
- ------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 126,388 (129,702) 136,889
Income tax (benefit) expense:
Current 17,311 (9,850) 11,067
Deferred 10,497 (40,603) 19,886
- ------------------------------------------------------------------------------------------
Total income tax (benefit)expense 27,808 (50,453) 30,953
- ------------------------------------------------------------------------------------------
Income (loss) before discontinued operations and
cumulative effect of accounting change 98,580 (79,249) 105,936
Income from discontinued operations, net of taxes
of $- , $-, and $78, respectively (See Note 21) - - 4,270
Gain on sale of discontinued operations, net of
taxes of $- , $-, and $235 (See Note 21) - - 6,190
Cumulative effect of accounting change, net of taxes - - (2,255)
- ------------------------------------------------------------------------------------------
Net income (loss) $ 98,580 $ (79,249) $ 114,141
==========================================================================================
Average shares outstanding - basic* 60,076 60,075 61,126
Average shares outstanding - diluted* 60,209 60,075 61,139
Earnings per share (basic and diluted):*
Income (loss) from continuing operations, per share $1.64 $(1.32) $1.73
Income from discontinued operations, per share - - 0.07
Gain on sale of discontinued operations, per share - - 0.11
Effect of change in accounting principle (net of ta - - (0.04)
- ------------------------------------------------------------------------------------------
Net income (loss), per share $1.64 $(1.32) $ 1.87
==========================================================================================
*Adjusted for 2 for 1 stock dividend effective July 22, 1999
See notes to consolidated financial statements
46
Item 14. Continued
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) 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
Net income 114,141 114,141
Net change in unrealized gain,
net of deferred income tax
of $(98,249) (182,462) (182,462)
-----------
Comprehensive loss (68,321)
Net issuance of treasury
stock under stock option
plan (24 shares) 151 290 441
Repurchase of treasury
Stock (2,478 shares) (46,087) (46,087)
Cash dividends paid
($.92 per share)* (56,027) (56,027)
Stock dividend (47,209 shares) 5,901 (5,901) -
- ---------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 $11,802 $ 4,286 $21,138 $ 329,354 $1,237,562 $(453,155) $1,150,987
Net loss (79,249) (79,249)
Net change in unrealized gain,
net of deferred income tax
of $43,374 80,550 80,550
-----------
Comprehensive income 1,301
Net forfeiture of treasury
stock under stock award
plan (11 shares) (106) (145) (251)
Cash dividends paid
($.59 per share) (35,446) (35,446)
- ---------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2000 $11,802 $ 4,180 $21,138 $ 409,904 $1,122,867 $(453,300) $1,116,591
Net income 98,580 98,580
Net change in unrealized gain,
net of deferred income tax
of $(72,986) (135,545) (135,545)
-----------
Comprehensive loss (36,965)
Net issuance of treasury
stock under stock award
plan (34 shares) (28) 434 406
- ---------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2001 $11,802 $ 4,152 $21,138 $ 274,359 $1,221,447 $(452,866) $1,080,032
===========================================================================================================================
*Adjusted for 2 for 1 stock dividend effective July 22, 1999 (See Note 23)
See notes to consolidated financial statements
47
Item 14. Continued
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
Year ended December 31 (in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------
Cash flows from:
Operations
Net income (loss) $ 98,580 $ (79,249) $ 114,141
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves 117,429 66,178 (17,153)
Income taxes 31,951 (36,193) (5,510)
Premiums and other receivables 15,122 9,094 (64,259)
Deferred policy acquisition costs 8,312 2,674 (1,139)
Reinsurance recoverable (89,055) (9,612) 15,101
Other assets 2,967 80,105 (16,930)
Other liabilities 45,136 24,048 (38,806)
California Proposition 103 reserves (9,684) (32,986) 2,443
Amortization and write-off of agent
relationships 22,357 57,686 12,267
Depreciation and amortization 9,978 15,510 28,769
Investment (gains) losses (182,940) 2,391 (162,698)
Gain on sale of discontinued
operations (See Note 21) - - (6,190)
Cumulative effect of an accounting change - - 2,255
- ----------------------------------------------------------------------------------------
Net cash generated (used) from operating
activity $ 70,153 $ 99,646 $ (137,709)
========================================================================================
Investing
Purchase of securities:
Fixed income securities - available-for-sale (1,571,538) (1,131,406) (1,572,645)
Equity securities (55,446) (80,375) (26,696)
Proceeds from sales:
Fixed income securities - available-for-sale 1,215,596 990,390 1,287,982
Equity securities 298,659 54,817 302,355
Proceeds from maturities and calls:
Fixed income securities - available-for-sale 77,542 57,930 133,269
Equity securities - 10,200 3,000
Property and equipment:
Purchases (22,940) (9,511) (31,425)
Sales 764 4,423 1,270
Cash proceeds from sale of discontinued
operations (See Note 21) - - 11,011
- ----------------------------------------------------------------------------------------
Net cash generated (used) from investing
activities (57,363) (103,532) 108,121
- ----------------------------------------------------------------------------------------
Financing
Notes payable:
Borrowings - - 16,500
Repayments (10,625) (20,648) (40,054)
Proceeds from exercise of stock options 75 67 211
Purchase of treasury stock - - (46,087)
Dividends paid to shareholders - (35,446) (56,027)
- ----------------------------------------------------------------------------------------
Net cash used from financing activities (10,550) (56,027) (125,457)
- ----------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,240 (59,913) (155,045)
Cash and cash equivalents, beginning of year 90,044 149,957 305,002
- ----------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 92,284 $ 90,044 $ 149,957
========================================================================================
Additional disclosures:
Interest and related fees paid 14,271 15,953 13,790
Income taxes paid (refunded) (1,549) (14,248) 34,824
See notes to consolidated financial statements
48
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless
otherwise stated)
NOTE 1 -- Accounting Policies
A. Nature of Business
Ohio Casualty Corporation is the holding company of The Ohio Casualty
Insurance Company, which is one of six property-casualty companies that
make up Ohio Casualty Group, whose primary products consist of
insurance for personal auto, commercial property, homeowners, commercial
auto, workers' compensation and other miscellaneous lines. The Group
operates through the independent agency system in over 40 states. Of
net premiums written in 2001, approximately 17.4% was generated in the
state of New jersey, 9.8% in Ohio and 7.9% in Kentucky.
B. Principles of Consolidation
The consolidated financial statements have been prepared on the basis
of accounting principles generally accepted in the United States and
include the accounts of Ohio Casualty Corporation and its subsidiaries
(The Ohio Casualty Insurance Company, West American Insurance Company,
Ohio Security Insurance Company, American Fire and Casualty Company,
Avomark Insurance Company, and Ohio Casualty of New Jersey, Inc.).
Certain reclassifications have been made to prior years to conform to
the current year's presentation. All significant inter-company
transactions have been eliminated.
C. Investments
Investment securities are classified upon acquisition into one of the
following categories:
(1) held to maturity securities
(2) trading securities
(3) available-for-sale securities
Currently, all of the Corporation's investments are held as
available-for-sale securities. Available-for-sale securities are those
securities that would be available to be sold in the future in response
to liquidity needs, changes in market interest rates and asset-liability
management strategies, among others. Available-for-sale securities are
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity, net
of deferred tax. Equity securities are carried at quoted market values and
include nonredeemable preferred stocks and common stocks. Fair values of
fixed maturities and equity securities are determined on the basis of
dealer or market quotations or comparable securities on which quotations
are available. The Corporation regularly evaluates all of its investments
based on current economic conditions, credit loss experience and other
specific developments. If there is a decline in a security's net
realizable value that is other than temporary, it is treated as a realized
loss and the cost basis of the security is reduced to its estimated fair
value.
Short-term investments include commercial paper and notes with
original maturities of 90 days or less and are stated at fair value.
Realized gains or losses on disposition of investments are determined on
the basis of specific cost of investments.
D. Premiums
Property and casualty insurance premiums are earned principally on a monthly
pro rata basis over the term of the policy; the premiums applicable to the
unexpired terms of the policies are included in unearned premium reserve.
Premiums receivable represents amounts due on insurance policies. The
premiums receivable balance is presented net of allowances determined by
management.
E. Deferred Policy Acquisition Costs
Acquisition costs incurred at policy issuance net of applicable ceding
commissions are deferred and amortized over the term of the policy.
Acquisition costs deferred consist of commissions, brokerage fees, salaries
and benefits, and other underwriting expenses to include allocations for
inspections, taxes, rent and other expenses which vary directly with the
acquisition of insurance contracts. Periodically, an analysis of the
deferred policy acquisition costs is performed in relation to the expected
recognition of revenues including investment income to determine if any
deficiency exists. No deficiencies have been indicated in the periods
presented.
F. Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed principally on the straight-line method over the
estimated lives of the assets. The Corporation capitalizes costs incurred
to internally develop certain software assets used in the Corporation's
operations. The Corporation amortizes these costs on a straight-line basis
over the estimated useful life of the asset when placed into service.
Capitalized software costs are evaluated periodically as events
or circumstances indicate a possible inability to recover their carrying
amounts. Such evaluation is based on various analyses, including cash
flow and profitability projections that incorporate, as applicable, the
impact on existing company businesses. Unamortized software costs and
accumulated amortization in the consolidated balance sheet were $41,410
and $1,035 at December 31, 2001, and $28,764 and $552 at December 31, 2000,
respectively.
G. Agent Relationships
The Corporation recorded an asset (agent relationships) for the excess of
cost over the fair value of net assets acquired. Agent relationships
are amortized on a straight-line basis over a twenty-five year period.
Agent relationships are evaluated periodically as events or circumstances,
such as cancellation of agents, indicate a possible inability to recover
their carrying amount. Such evaluation is based on various analyses,
including cash flow and profitability projections that incorporate, as
applicable, the impact on existing company businesses. The analyses
necessarily involve significant management judgments to evaluate the
capacity of an acquired business to perform within projections. If future
49
Item 14. Continued
undiscounted cash flows are insufficient to recover the carrying amount of
the asset, an impairment loss will be recognized (See Note 15).
H. Loss Reserves
The reserves for unpaid losses and loss adjustment expenses are based on
estimates of ultimate claim costs, including claims incurred but not
reported, salvage and subrogation and inflation without discounting. The
methods of making such estimates are continually reviewed and updated,
and any resulting adjustments are reflected in earnings currently. The
amounts are necessarily based on estimates of future rates of inflation
and other factors, and accordingly there can be no assurance that the
ultimate liability will not vary from such estimates.
I. Reinsurance
In the normal course of business, the Group seeks to diversify risk and
reduce the loss that may arise from catastrophes or other events that cause
unfavorable underwriting results by reinsuring certain levels of risk in
various areas of exposure with other insurance enterprises or reinsurers.
To the extent that any reinsuring companies are unable to meet obligations
under the agreements covering the reinsurance ceded, the Group would
remain liable. Amounts recoverable from reinsurers are estimated in a
manner consistent with the reinsured contract.
J. Income Taxes
The Corporation files consolidated federal income tax returns.
The Corporation records deferred tax assets and liabilities based
on temporary differences between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the
year in which the differences are expected to reverse.
K. Stock Options
The Corporation accounts for stock options issued to employees in
accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees". Under APB 25, the Corporation
recognizes expense based on the intrinsic value of options.
L. Insurance Assessments
The Group accrues a liability for insurance related assessments in
accordance with Statement of Position 97-3 "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments". As of December
31, 2001, 2000, and 1999 the liability for these assessments was $6,582,
$4,278, and $4,808, respectively. In 1999, the Corporation recorded the
liability as a change in accounting method.
M. Earnings Per Share
Earnings per share of common stock is presented using basic and diluted
earnings per share. Basic earnings per share is calculated using the
weighted average number of common stock shares outstanding during the
period. Diluted earnings per share include the effect of the assumed
exercise of dilutive common stock options.
N. Statement of Cash Flows
Short-term investments are comprised of highly liquid investments that are
readily convertible into known amounts of cash. Such investments have
maturities of 90 days or less from the date of purchase. Short-term
investments are deemed to be cash equivalents.
O. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The insurance industry is subject to heavy regulation that differs
by state. A dramatic change in regulation in a given state may have a
material adverse impact on the Corporation.
NOTE 2 -- Investments
Investment income is summarized as follows:
2001 2000 1999
- ---------------------------------------------------------------
Investment income from:
Fixed maturities $208,042 $199,474 $177,018
Equity securities 10,676 11,234 12,961
Short-term securities 3,188 5,352 5,942
- ---------------------------------------------------------------
Total investment income 221,906 216,060 195,921
Investment expenses 9,521 10,998 11,634
- ---------------------------------------------------------------
Net investment income $212,385 $205,062 $184,287
===============================================================
The gross realized gains and gross realized losses from sales
of available-for-sale securities were as follows:
Gross Gross Net
Realized Realized Realized
December 31 Gains (Losses) Gains/Losses
- ---------------------------------------------------------------------
2001 $202,758 $(19,818) $182,940
2000 18,728 (21,119) (2,391)
1999 169,301 (8,474) 160,827
The increase in realized gains in 2001 was due to the partial
reallocation of the Corporation's equity portfolio to fixed income
holdings. Significant appreciation in the equity holdings sold as
part of the reallocation, contributed to the realized gains in 2001.
The increase in realized gains in 1999 was due to a strategic
asset reallocation involving the sale of approximately $200,000 in
equity securities resulting in $145,000 of realized gains.
Changes in unrealized gains (losses) on investment in securities
are summarized as follows:
50
Item 14. Continued
2001 2000 1999
- ---------------------------------------------------------------------------
Unrealized gains (losses):
Securities $(208,531) $123,924 $(280,711)
Deferred tax 72,986 (43,374) 98,249
- ---------------------------------------------------------------------------
Net unrealized gains (losses) $(135,545) $ 80,550 $(182,462)
===========================================================================
The amortized cost and estimated market values of investments in debt
and equity securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2001 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Securities available-
for-sale:
U.S. Government $ 27,775 $ 1,611 $ (5) $ 29,381
States, municipalities
and political subdivisions 30,057 1,271 - 31,328
Corporate securities 1,577,939 47,945 (22,325) 1,603,559
Mortgage-backed
securities:
U.S. Government
Agency 56,307 243 (488) 56,062
Other 1,037,920 26,649 (12,795) 1,051,774
- ---------------------------------------------------------------------------------
Total fixed maturities 2,729,998 77,719 (35,613) 2,772,104
Equity securities 110,206 381,580 (2,798) 488,988
Short-term investments 54,785 - - 54,785
- ---------------------------------------------------------------------------------
Total securities,
available-for-sale $2,894,989 $459,299 $(38,411) $3,315,877
=================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2000 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Securities available-
for-sale:
U.S. Government $ 54,290 $ 1,530 $ (212) $ 55,608
States, municipalities
and political subdivisions 78,049 1,322 (128) 79,243
Corporate securities 1,233,418 40,427 (18,994) 1,254,851
Mortgage-backed
securities:
U.S. Government
Agency 25,764 199 (136) 25,827
Other 1,078,854 26,388 (7,117) 1,098,125
- ---------------------------------------------------------------------------------
Total fixed maturities 2,470,375 69,866 (26,587) 2,513,654
Equity securities 168,779 598,840 (12,700) 754,919
Short-term investments 59,679 - - 59,679
- ---------------------------------------------------------------------------------
Total securities,
available-for-sale $2,698,833 $668,706 $(39,287) $3,328,252
=================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
2001 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Securities available-
for-sale:
U.S. Government $ 65,214 $ 1,001 $ (1,108) $ 65,107
States, municipalities
and political subdivisions 456,959 9,724 (5,256) 461,427
Corporate securities 1,082,975 17,344 (34,196) 1,066,123
Mortgage-backed
securities:
U.S. Government
Agency 47,865 30 (1,438) 46,457
Other 755,188 5,093 (22,422) 737,859
- ---------------------------------------------------------------------------------
Total fixed maturities 2,408,201 33,192 (64,420) 2,376,973
Equity securities 161,498 543,718 (7,087) 698,129
Short-term investments 104,446 29 (77) 104,398
- ---------------------------------------------------------------------------------
Total securities,
available-for-sale $2,674,145 $576,939 $(71,584) $3,179,500
=================================================================================
The Group is required to hold investments on deposit with regulatory
authorities in various states. As of December 31, 2001, 2000 and 1999,
these investments had a fair value of $55,222, $50,863, and $43,801,
respectively.
The amortized cost and estimated fair value of debt securities at
December 31, 2001, by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
Estimated
Amortized Fair
Cost Value
- -----------------------------------------------------------------------------
Due in one year or less $ 11,144 $ 11,322
Due after one year through five years 297,429 306,584
Due after five years through ten years 861,646 880,050
Due after ten years 465,552 466,312
Mortgage-backed securities:
U.S. Government Agency 56,307 56,062
Other 1,037,920 1,051,774
- -----------------------------------------------------------------------------
Total fixed maturities $2,729,998 $2,772,104
=============================================================================
Certain securities were determined to have other than temporary declines
in book value and were written down through realized investment losses.
The before-tax realized gain (loss) was impacted by the write-down of
securities for other than temporary declines in market value by $11,951,
$16,720, and $8,195 in 2001, 2000 and 1999, respectively.
Gross gains of $39,821, $14,179 and $13,677 and gross losses of $35,160,
$35,858 and $37,126 were realized on the maturities and sales of debt
securities in 2001, 2000 and 1999, respectively.
51
Item 14. Continued
NOTE 3 -- Fair Value of Financial Instruments
The following table presents the carrying amounts and fair values of the
Corporation's financial instruments:
Carrying Fair
2001 Amount Value
- -----------------------------------------------------------------
Assets
Cash and short-term
investments $ 92,284 $ 92,284
Securities available-
for-sale 3,261,092 3,261,092
Liabilities
Notes payable $ 210,173 $ 210,173
Carrying Fair
2000 Amount Value
- -----------------------------------------------------------------
Assets
Cash and short-term
investments $ 90,044 $ 90,044
Securities available-
for-sale 3,268,573 3,268,573
Liabilities
Notes payable $ 220,798 $ 220,798
Carrying Fair
1999 Amount Value
- -----------------------------------------------------------------
Assets
Cash and short-term
investments $ 149,957 $ 149,957
Securities available-
for-sale 3,075,102 3,075,102
Liabilities
Notes payable $ 241,446 $ 241,446
The Corporation believes that the fair value of notes payable is
approximately equal to its carrying value due to the market-based variable
interest rates associated with the debt.
NOTE 4 -- Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs are summarized as follows:
2001 2000 1999
- -----------------------------------------------------------------------------
Deferred, January 1 $175,071 $177,745 $176,606
- -----------------------------------------------------------------------------
Additions:
Commissions and brokerage 237,435 249,940 250,390
Salaries and employee benefits 57,559 61,067 70,823
Other 72,344 80,834 80,826
- -----------------------------------------------------------------------------
Deferral of expense 367,338 391,841 402,039
- -----------------------------------------------------------------------------
Amortization to expense
Discontinued operations - - (1,093)
Continuing operations 375,650 394,515 401,993
- -----------------------------------------------------------------------------
Deferred, December 31 $166,759 $175,071 $177,745
=============================================================================
NOTE 5 -- Income Tax
The effective income tax rate is less than the statutory corporate tax rate
of 35% for 2001, 2000 and 1999 for the following reasons:
2001 2000 1999
- -------------------------------------------------------------------------
Tax at statutory rate $ 44,236 $(45,396) $ 45,626
Tax exempt interest (875) (5,578) (12,543)
Dividends received
deduction (DRD) (2,677) (1,399) (3,483)
Proration of DRD and tax
exempt interest 275 1,012 2,124
Loss on disposition of
subsidiary stock (16,100) - -
Miscellaneous 2,949 908 (771)
- ------------------------------------------------------------------------
Actual tax expense (benefit) $ 27,808 $(50,453) $ 30,953
=========================================================================
The loss on disposition of subsidiary stock in 2001 was a non-recurring
tax benefit related to the sale of a minority interest in stock of the Ohio
Casualty of New Jersey, Inc. subsidiary.
Tax years 1993 through 1995 and 1997 through 1999 are being examined by
the Internal Revenue Service. Management believes there will not be a
significant impact on the financial position or results of operations of
the Corporation as a result of this audit.
The components of the net deferred tax liability were as follows:
2001 2000 1999
- -------------------------------------------------------------------------
Unearned premium proration $ 34,260 $ 36,640 $ 38,574
Accrued expenses 39,228 42,515 34,578
NOL and AMT carryforward 9,612 23,250 -
Postretirement benefits 33,873 32,905 31,766
Discounted loss and loss expense
reserves 85,579 80,647 69,955
- -------------------------------------------------------------------------
Total deferred tax assets 202,552 215,957 174,873
- -------------------------------------------------------------------------
Deferred policy acquisition costs (58,366) (61,275) (60,811)
Unrealized gains on investments (147,310) (220,295) (176,905)
- -------------------------------------------------------------------------
Total deferred tax liabilities (205,676) (281,570) (237,716)
- -------------------------------------------------------------------------
Net deferred tax liability $ (3,124) $ (65,613) $ (62,843)
=========================================================================
NOTE 6 -- Employee Benefits
The Corporation has a non-contributory defined benefit retirement plan, a
contributory health care, life and disability insurance plan and a savings
plan covering substantially all employees. Benefit expenses are as follows:
2001 2000 1999
- -------------------------------------------------------------------------
Employee benefit costs:
Pension plan $(3,826) $(2,816) $ 1,858
Health care 15,569 16,718 16,180
Life and disability insurance 773 741 743
Savings plan 2,867 2,787 2,948
- -------------------------------------------------------------------------
Total $15,383 $17,430 $21,729
=========================================================================
52
Item 14. Continued
The pension benefit is determined as follows:
2001 2000 1999
- -------------------------------------------------------------------------
Service cost earned
during the year $ 6,334 $ 6,556 $ 8,545
Interest cost on projected
benefit obligation 17,359 17,167 15,729
Expected return on plan
assets (24,010) (23,348) (19,598)
Amortization of unrecognized
net asset (2,946) (2,946) (3,017)
Amortization of accumulated
gains (762) (444) -
Amortization of unrecognized
prior service cost 199 199 199
- -------------------------------------------------------------------------
Net pension (benefit) cost $ (3,826) $ (2,816) $ 1,858
=========================================================================
Changes in the benefit obligation during the year:
2001 2000 1999
- -------------------------------------------------------------------------
Benefit obligation at
beginning of year $224,556 $229,094 $239,293
- -------------------------------------------------------------------------
Service cost 6,334 6,556 8,545
Interest cost 17,359 17,167 15,729
Actuarial loss (gain) 6,352 (12,176) (24,141)
Benefits paid (16,020) (16,085) (14,956)
Curtailments 9,032 - 1,115
Special termination benefits - - 3,509
- -------------------------------------------------------------------------
Benefit obligation at end of year $247,613 $224,556 $229,094
=========================================================================
Changes in pension plan assets during the year:
2001 2000 1999
- -------------------------------------------------------------------------
Fair value of plan assets at
beginning of year $273,469 $277,588 $252,224
- -------------------------------------------------------------------------
Actual return on plan assets (1,319) 11,850 40,279
Benefits paid (15,031) (15,969) (14,915)
- -------------------------------------------------------------------------
Fair value of plan assets at
end of year $257,119 $273,469 $277,588
=========================================================================
Pension plan funding at December 31:
2001 2000 1999
- -------------------------------------------------------------------------
Funded status $ 9,506 $48,913 $48,495
Unrecognized net gain 3,284 37,558 37,323
Unrecognized net assets 1,735 5,892 8,837
Unrecognized prior service cost (1,672) (1,896) (2,093)
- -------------------------------------------------------------------------
Accrued pension asset $ 6,159 $ 7,359 $ 4,428
=========================================================================
Expected long-term return on
plan assets 8.50% 9.00% 8.75%
Discount rate on plan benefit
obligations 7.50% 8.00% 7.75%
Expected future rate of salary
increases 5.25% 5.25% 5.25%
Pension benefits are based on service years and average compensation
using the five highest consecutive years of earnings in the last decade of
employment. The pension plan measurement date is October 1, 2001, 2000
and 1999. Plan assets at December 31, 2001 include $27,142 of the
Corporation's common stock at market value compared to $18,066 and $27,057
at December 31, 2000 and 1999, respectively. Plan assets also include
investments in mutual funds, common stock, corporate bonds, common/collective
trusts, separate accounts, U.S. government securities, and other investements.
The Corporation's postretirement benefit cost at December 31:
2001 2000 1999
- -------------------------------------------------------------------------
Service cost $1,946 $2,333 $ 3,141
Interest cost 6,703 6,563 6,448
Amortization of unrecognized
prior service costs 215 240 535
- -------------------------------------------------------------------------
Net periodic postretirement
benefit cost $8,864 $9,136 $10,124
=========================================================================
Changes in the postretirement benefit obligation during the year:
2001 2000 1999
- -------------------------------------------------------------------------
Benefit obligation at beginning
of year $86,973 $92,239 $98,347
- -------------------------------------------------------------------------
Service cost 1,946 2,333 3,141
Interest cost 6,703 6,563 6,448
Plan participants' contributions (5,361) (5,719) (4,652)
Increase due to actuarial loss
(gain), change in discount rate,
or other assumptions (5,101) (8,443) (11,045)
- -------------------------------------------------------------------------
Benefit obligation at end of year $85,160 $86,973 $92,239
=========================================================================
Accrued postretirement benefit liability at December 31:
2001 2000 1999
- -------------------------------------------------------------------------
Accumulated postretirement
benefit obligation $85,160 $86,973 $92,239
Unrecognized net gain 9,116 8,847 4,404
Unrecognized prior service
cost (benefit) 2,505 (1,806) (5,882)
- -------------------------------------------------------------------------
Accrued postretirement
benefit liability $96,781 $94,014 $90,761
=========================================================================
Postretirement benefit weighted average rate assumptions at
October 1:
2001 2000 1999
- -------------------------------------------------------------------------
Medical trend rate 8% 8% 8%
Dental trend rate 5% 5% 5%
Ultimate health care trend rate 5% 5% 5%
Discount rate 7.50% 8.00% 7.75%
53
Item 14. Continued
The above medical trend rates assumed for 2001, 2000 and 1999 were
assumed to decrease .5% per year to the ultimate rate of 5% in 6 years.
The postretirement plan measurement date is October 1 for 2001, 2000 and
1999.
Increasing the assumed health care cost trend by one percentage point
in each year would increase the accumulated postretirement benefit
obligation as of December 31, 2001 by approximately $11,071 and increase the
postretirement benefit cost for 2001 by $1,418. Likewise, decreasing the
assumed health care cost trend by one percentage point in each year would
decrease the accumulated postretirement benefit obligation as of December 31,
2001 by approximately $9,368 and decrease the postretirement benefit cost
for 2001 by $1,152.
The Corporation's health care plan is a predominately managed care
plan. Retired employees continue to be eligible to participate in the
health care and life insurance plans. Employee contributions to the health
care plan have been established as a flat dollar amount with periodic
adjustments as determined by the Corporation. The health care plan is
unfunded. Benefit costs are accrued based on actuarial projections of
future payments. There are currently 3,049 active employees
and 1,565 retired employees covered by these plans.
Employees may contribute a percentage of their compensation to a
savings plan. A portion of employee contributions is matched by the
Corporation and invested in Corporation stock purchased on the open market
by trustees of the plan.
NOTE 7 - Stock Options and Warrants
The Corporation is authorized under provisions of the 1993 and 1999 Stock
Incentive Programs to grant options to purchase 2,587,000 and 1,500,000
shares, respectively, of the Corporation's common stock to key executive
employees, directors and other full time employees at a price not less than
the fair market value of the shares on dates the options are granted. The
options granted under the 1993 program may be either "Incentive Stock
Options" or "Nonqualified Stock Options" as defined by the Internal Revenue
Code; the difference in the option plans affects treatment of the options
for income tax purposes by the individual employee and the Corporation. The
options granted under the 1999 program are "Nonqualified Stock Options". The
options under both plans are non-transferable and exercisable at any time
after the vesting requirements are met. Option expiration dates are ten
years from the grant date. Options vest under the 1993 plan at either 50%
per year for two consecutive years, or at 33% per year for three consecutive
years. Options vest under the 1999 plan at 50% per year for two consecutive
years from the date of the grant. The options also have accelerated vesting
periods for participant retirement, death, or disability, subject to a
holding period of 6 months for the 1993 program and 12 months for the 1999
program. As of December 31, 2001, there are 497,116 and 361,525 remaining
options available to be granted for the 1993 and 1999 Stock Incentive Programs,
respectively.
In addition, the 1993 Stock Incentive Program provides for the grant of
Stock Appreciation Rights. Stock Appreciation Rights provide the recipient
with the right to receive payment in cash or stock equal to appreciation in
value of the optioned stock from the date of grant in lieu of exercise of the
stock options held. At December 31, 2001, there were no outstanding stock
appreciation rights.
In 2000 and 2001, the Corporation granted stock options to purchase
570,000 and 600,000 shares, respectively, of the Corporation's common stock
to key executive employees and directors. The options were granted as either
"Incentive Stock Options" or "Nonqualified Stock Options" in accordance with
Market Place Rules available under NASDAQ Stock Market regulations. Option
expiration dates are ten years from the grant date. The stock options
granted vest at either 50% per year for two consecutive years, or at 33% per
year for three consecutive years.
Restricted stock awards are occasionally granted by the Corporation. The
common shares covered by a restricted stock award may be sold or otherwise
disposed of only after a minimum of three years from the grant date of the
award. The difference between issue price and the fair market value on the
date of issuance is recorded as compensation expense. The amount of
compensation expense (benefit) recognized related to restricted stock awards
was $(15) in 2001, $(319) in 2000 and $231 in 1999 before tax, respectively.
The benefits in 2001 and 2000 related to employee forfeitures. Currently
there are 3,800 shares of restricted stock outstanding.
The Corporation also issues, at its discretion, dividend payment rights
in connection with the grant of stock options. These rights entitle the holder
to receive, for each dividend payment right, an amount in cash equal to the
aggregate amount of dividends that the Corporation has paid on each common
share from the date on which such right becomes effective through the payout
date. One third of these rights becomes vested on each anniversary after the
grant. Payment is made when the rights are fully vested by the rightholder.
The Corporation recognizes compensation expense accordingly. The amount of
compensation expense (benefit) related to dividend payment rights recognized
in 2001 was $(26) with $(335) in 2000 and $52 in 1999 before tax. The
benefit in 2000 related to employee forfeitures. As of December 31, 2001,
258,000 dividend payment rights were outstanding.
The following table summarizes information about the stock-based
compensation plan as of December 31, 2001, 2000 and 1999, and changes that
occurred during the year:
54
Item 14. Continued
2001 2000 1999*
- ---------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Avg Avg Avg
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------------------ ----------------- -----------------
Outstanding
beginning
of year 3,212 $13.91 1,324 $20.28 729 $20.26
Granted 1,352 10.96 2,679 12.05 723 20.31
Exercised (34) 12.27 - (16) 17.50
Forfeited (300) 15.56 (791) 18.25 (142)
------- ------- ------
Outstanding end
of year 4,230 $12.87 3,212 $13.91 1,324 $20.28
====== ======= ======
Options exercisable
at year end 1,690 $14.64 590 $19.28 527 $19.38
Avg Remaining
Contractual Life 8.37 yrs 8.73 yrs 7.97 yrs
Weighted-Avg fair
value of options
granted during the
year $5.73 $3.15 $4.70
*Adjusted for July 22, 1999 2 for 1 stock dividend (See Note 23).
The following table summarizes the status of stock options outstanding
and exercisable at December 31, 2001:
--------------------------------------------------------------
Stock Options Outstanding Stock Options Exercisable
---------------------------------- -------------------------
Weighted-
Range of Avg Weighted- Weighted-
Exercose Remaining Avg Avg
Prices Per Shares Contractual Exercise Shares Exercise
Share (000) Life (Yrs.) Price (000) Price
- ---------------------------------------------------------------------------------
$8.60 - $8.60 18 9.31 $ 8.60 18 $ 8.60
$8.99 - $8.99 669 9.42 8.99 12 8.99
$9.07 - $9.75 441 8.98 9.70 139 9.72
$11.20 - $11.46 210 9.71 11.21 - -
$12.38 - $12.38 1,693 8.16 12.38 881 12.38
$13.12 - $14.38 565 9.41 14.03 89 13.18
$14.88 - $20.34 440 6.11 19.19 357 18.92
$20.69 - $21.13 94 5.17 20.74 94 20.74
$23.47 - $23.47 82 6.13 23.47 82 23.47
$23.63 - $23.63 18 6.40 23.63 18 23.63
- -------------------------------------------------------------------------------
$8.60 - $23.63 4,230 8.37 $12.87 1,690 $14.64
===============================================================================
The Corporation continues to elect APB 25 for recognition of stock-based
compensation expense. Under APB 25, expense is recognized based on the
intrinsic value of the options. However, under the provision of FAS 123 the
Corporation is required to estimate on the date of grant the fair value of
each option using an option-pricing model. Accordingly, the Black-Scholes
option pricing model is used with the following weighted-average assumptions:
dividend yield of 1.8% for 2001, 4.5% for 2000 and 4.5% for 1999, expected
volatility of 53.01% for 2001, 31.1% for 2000 and 28.5% for 1999, risk free
interest rate of 5.10% for 2001, 5.87% for 2000 and 5.25% for 1999, and
expected life of eight years. Had the Corporation adopted FAS 123, the
amount of compensation expense that would have been recognized in 2001, 2000
and 1999 was $5,795, $4,367 and $1,831, respectively. The Corporation's
net income and earnings per share would have been reduced to the pro forma
amounts disclosed below:
2001 2000 1999
- -------------------------------------------------------------------------
Net income (loss) As Reported: $98,580 $(79,249) $114,141
Pro Forma: $94,402 $(82,457) $112,491
Basic and diluted earnings per share
As Reported: $1.64 $(1.32) $1.87
Pro Forma: $1.57 $(1.37) $1.84
In connection with the 1998 acquisition of substantially all of the
Commercial Lines Division of Great American Insurance Companies (GAI), an
insurance subsidiary of the American Financial Group, Inc. (AFG), the
Corporation issued warrants to AFG to purchase 6 million shares of Ohio
Casualty Corporation common stock. The warrants provide for the purchase of
the Corporation's common stock at $22.505 per share and expire in December
2003. The warrants may be settled through physical or net share settlement
and thus have been recorded as equity in the financial statements at their
estimated fair value. Estimated fair value was determined based on a third
party appraisal of the warrants.
NOTE 8 -- Reinsurance
In the normal course of business, the Group seeks to reduce the loss that
may arise from catastrophes, including severe weather and terrorist
activities, or other events that cause unfavorable underwriting results by
reinsuring certain levels of risk with other insurers or reinsurers. In the
event that such reinsuring companies might be unable at some future date to
meet their obligations under the reinsurance agreements in force, the Group
would continue to have primary liability to policyholders for losses
incurred. The Group evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies. The following amounts are
reflected in the financial statements as a result of reinsurance ceded:
2001 2000 1999
- -------------------------------------------------------------------------
Ceded premiums written, presented
net $ 93,984 $121,682 $96,610
Ceded premiums earned, presented
net 89,664 122,923 72,297
Ceded losses incurred, presented
net 107,544 38,751 19,346
Reserve for unearned premiums 39,681 35,361 36,603
Reserve for losses 151,111 83,897 75,882
Reserve for loss adjustment
expenses 17,626 12,291 9,770
Reinsurance recoveries 34,186 25,935 22,875
NOTE 9 -- Other Contingencies and Commitments
Annuities are purchased from other insurers to pay certain claim settlements.
These payments are made directly to the claimants; should such insurers be
unable to meet their obligations under the annuity contracts, the
55
Item 14. Continued
Group would be liable to claimants for the remaining amount of annuities.
The claim reserves are presented net of the related annuities on the
Corporation's balance sheet. The total amount of unpaid annuities was
$21,509, $22,505 and $23,267 at December 31, 2001, 2000 and 1999,
respectively.
The Corporation leases many of its operating and office facilities for
various terms under long-term, non-cancelable operating lease agreements.
The leases expire at various dates through 2006 and provide for renewal
options ranging from one to five years. In the normal course of business,
it is expected that these leases will be renewed or replaced by leases on
other properties. The leases provide for increases in future minimum annual
rental payments based on such measures as defined increases in the Consumer
Price Index, increases in operating expenses, and pre-negotiated rates. Also,
the agreements generally require the Corporation to pay executory costs
(utilities, real estate taxes, insurance, and repairs). Lease expense and
related items totaled $6,500, $5,900, and $4,100 during 2001, 2000 and 1999,
respectively.
The following is a schedule by year of future minimum rental payments
required under the operating lease agreements:
Year Ending
December 31 Amount
- ---------------------------------------------------------
2002 $ 5,724
2003 4,869
2004 2,993
2005 94
2006 15
- ---------------------------------------------------------
$13,695
=========================================================
Total minimum lease payments do not include contingent rentals that
may be paid under certain leases because of use in excess of specified
amounts. Contingent rental payments were not significant in 2001, 2000,
or 1999.
In the fourth quarter of 2001, Ohio Casualty of New Jersey, Inc. (OCNJ)
entered into an agreement to transfer its obligations to renew private
passenger auto business in New Jersey to Proformance Insurance Company
(Proformance). The transaction will effectively exit the Group from the New
Jersey private passenger auto market. The Group continues to write private
passenger auto in other markets. Under the terms of the transaction, the
Group member OCNJ, will pay Proformance $40,600 to assume its renewal
obligations. The amount was taken as a charge in the fourth quarter of 2001
and will be paid out over the course of twelve months beginning in early
2002. OCNJ may also have a contingent liability of up to $15,600 to be paid
to Proformance to maintain a premiums-to-surplus ratio of 2.5 to 1 on the
transferred business during the next three years. At December 31, 2001, it
is not possible to determine the likelihood of this liability and, therefore,
has not been recognized in the financial statements.
In the normal course of business, the Corporation and its subsidiaries
are involved in lawsuits related to their operations. In each of the
matters, the Corporation believes the ultimate resolution of such litigation
will not result in any material adverse impact to operations or financial
condition of the Corporation.
NOTE 10 -- Losses and Loss Reserves
The following table presents a reconciliation of liabilities for losses and
loss adjustment expenses:
2001 2000 1999
- -------------------------------------------------------------------------
Balance as of January 1, net of
reinsurance recoverables of
$96,188, $85,126 and$91,296 $1,907,331 $1,823,329 $1,865,643
Incurred related to:
Current year 1,145,545 1,237,319 1,176,072
Prior years 58,489 56,846 (418)
- ---------------------------------------------------------------------------
1,204,034 1,294,165 1,175,654
Paid related to:
Current year 520,232 596,114 600,942
Prior years 609,148 614,049 617,026
- --------------------------------------------------------------------------
Total paid 1,129,380 1,210,163 1,217,968
- --------------------------------------------------------------------------
Balance as of December 31,
net of reinsurance recoverables
of $168,737, $96,188 and $85,126 $1,981,985 $1,907,331 $1,823,329
==========================================================================
The 2001 and 2000 incurred loss and loss adjustment expenses for prior
years changed due to an increase in severity as losses developed. The 2001
change was concentrated in the workers' compensation and general liability
lines of business. The 2000 change was concentrated in the workers'
compensation line of business.
The following table presents before-tax catastrophe losses incurred and
the respective impact on the statutory loss ratio:
2001 2000 1999
- -------------------------------------------------------------------------
Incurred losses $34,577 $36,181 $52,208
Statutory loss ratio effect 2.3% 2.4% 3.4%
In 2001, 2000 and 1999 there were 19, 24 and 27 catastrophes,
respectively. The largest catastrophe in each year was $17,800, $7,095 and
$17,900 in incurred losses. Additional catastrophes with over $1,000 in
incurred losses numbered 4, 9 and 7 in 2001, 2000 and 1999. The additional
catastrophes with over $1,000 in incurred losses included $3,000 of net of
reinsurance losses related to the September 11, 2001 terrorist attacks in New
York.
56
Item 14. Continued
The effect of catastrophes on the Corporation's results cannot be
accurately predicted. As such, severe weather patterns, acts of war or
terrorist activities could have a material adverse impact on the
Corporation's results.
Inflation has historically affected operating costs, premium revenues
and investment yields as business expenses have increased over time. The
long-term effects of inflation are considered when estimating the ultimate
liability for losses and loss adjustment expenses. The liability is based
on historical loss development trends which are adjusted for anticipated
changes in underwriting standards, policy provisions and general economic
trends. It is not adjusted to reflect the effect of discounting.
Reserves for asbestos-related illnesses and toxic waste cleanup claims
cannot be estimated with traditional loss reserving techniques. In
establishing liabilities for claims for asbestos-related illnesses and for
toxic waste cleanup claims, management considers facts currently known and
the current state of the law and coverage litigation. However, given the
expansion of coverage and liability by the courts and the legislatures in
the past and the possibilities of similar interpretations in the future,
there is uncertainty regarding the extent of remediation. Accordingly,
additional liability could develop. Estimated asbestos and environmental
reserves are composed of case reserves, incurred but not reported reserves
and reserves for loss adjustment expense. For 2001, 2000 and 1999,
respectively, total case, incurred but not reported and loss adjustment
expense reserves were $53,497, $40,368 and $41,098. Asbestos reserves were
$31,792, $13,493 and $9,564 and environmental reserves were $21,705, $26,875
and $31,534 for those respective years. The increase in 2001 asbestos
reserves related to additional claim development.
NOTE 11 -- Earnings Per Share
Basic and diluted earnings per share are summarized as follows:
2001 2000 1999
- -------------------------------------------------------------------------
Income (loss) from continuing
operations $98,580 $(79,249) $105,936
Average common shares
outstanding - basic (000's) 60,076 60,075 61,126
Basic income (loss) from
continuing operations per
average share $1.64 $(1.32) $1.73
=========================================================================
Average common shares outstanding 60,076 60,075 61,126
Effect of dilutive securities 133 - 13
- -------------------------------------------------------------------------
Average common shares
outstanding - diluted 60,209 60,075 61,139
Diluted income (loss) from
continuing operations per
average share $1.64 $(1.32) $1.73
=========================================================================
Adjusted for July 22, 1999 2 for 1 stock dividend (See Note 23).
At December 31, 2001, 6,000,000 purchase warrants and 2,641,080 stock
options were not included in earnings per share calculations for 2001 as
they were antidilutive.
NOTE 12 -- Quarterly Financial Information (Unaudited)
2001 First Second Third Fourth
- ---------------------------------------------------------------------------
Premiums and finance
charges earned $383,496 $376,574 $374,327 $372,281
Net investment income 51,280 52,120 53,068 55,917
Investment gains realized 12,613 42,419 71,033 56,875
Net income (loss) (4,095) 16,651 44,228 41,796
Basic net income (loss)
per share (0.07) 0.28 0.74 0.70
Diluted net income (loss)
per share (0.07) 0.28 0.73 0.69
As part of the Corporate Strategic Plan announced in the second quarter
of 2001, the Corporation began to reallocate a portion of its equity
portfolio holdings to fixed income holdings. Significant appreciation in
the equity holdings sold as part of the reallocation contributed to the
sizeable investment gains realized during 2001.
2000 First Second Third Fourth
- ---------------------------------------------------------------------------
Premiums and finance
charges earned $387,188 $369,874 $394,015 $382,921
Net investment income 51,793 49,275 49,673 54,321
Investment gains (losses)
realized (6,308) (2,387) 1,395 4,909
Net income (loss) (75,013) (8,198) 14,550 (10,588)
Basic and diluted net
income (loss) per share (1.25) (0.14) 0.24 (0.18)
The first quarter of 2000 was negatively impacted by approximately
$33,000 due to write-offs to the agent relationships intangible asset.
Positively impacting third quarter 2000 results by $22,100 was the settlement
of the California Proposition 103 liability.
NOTE 13 -- Comprehensive Income
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities were as follows:
2001 2000 1999
- -------------------------------------------------------------------------
Unrealized holding gains
(losses) arising during the
period, net of taxes $ (678) $152,472 $ (56,994)
Less: Reclassification
adjustment for gains
included in net income,
net of taxes 134,867 71,922 125,468
- -------------------------------------------------------------------------
Net unrealized gains (losses) on
securities, net of taxes $(135,545) $ 80,550 $(182,462)
=========================================================================
57
Item 14. Continued
NOTE 14 -- Segment Information
The Corporation has determined its reportable segments based upon its method
of internal reporting, which was organized by product line. The Corporation
adopted a new Corporate Strategic Plan in the second quarter of 2001 that
realigned its method of internal reporting during the quarter to three
reportable segments. In accordance with SFAS 131, the Corporation has
elected to restate prior period segment information in order to present
comparable segment information. The new property and casualty segments are
Standard Commercial Lines, Specialty Commercial Lines, and Personal Lines.
Standard Commercial Lines includes workers' compensation, general liability,
CMP, fire, inland marine, and commercial auto. Specialty Commercial Lines
includes umbrella, fidelity and surety. Personal Lines includes private
passenger auto, homeowners, fire, inland marine, and umbrella. 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 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
statutory loss and loss adjustment expense ratios, statutory combined ratio,
premiums written, premiums earned and statutory underwriting gain/loss. 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.
Standard Commercial Lines 2001 2000 1999
- ----------------------------------------------------------------------------
Net premiums written $689,596 $721,681 $720,755
% Increase (decrease) (4.4)% 0.1% 42.5%
Net premiums earned 707,635 739,698 704,525
% Increase (decrease) (4.3)% 5.0% 40.9%
Underwriting gain (loss)
(before tax) (107,828) (215,193) (166,305)
Loss ratio 64.5% 78.6% 69.9%
Loss expense ratio 15.3% 13.2% 12.4%
Underwriting expense ratio 36.4% 38.2% 40.3%
Combined ratio 116.2% 130.0% 122.6%
Specialty Commercial Lines 2001 2000 1999
- ----------------------------------------------------------------------------
Net premiums written $136,085 $107,255 $102,499
% Increase (decrease) 26.9% 4.6% 103.0%
Net premiums earned 130,559 104,384 102,680
% Increase (decrease) 25.1% 1.7% 107.8%
Underwriting gain (loss)
(before tax) 9,880 19,841 50,777
Loss ratio 42.0% 30.0% 9.1%
Loss expense ratio 10.4% 5.4% (1.9)%
Underwriting expense ratio 38.4% 44.4% 43.5%
Combined ratio 90.8% 79.8% 50.7%
Personal Lines 2001 2000 1999
- ----------------------------------------------------------------------------
Net premiums written $646,504 $676,457 $763,643
% Increase (decrease) (4.4)% (11.4)% 2.7%
Net premiums earned 667,985 688,939 747,103
% Increase (decrease) (3.0)% (7.8)% 4.0%
Underwriting gain (loss)
(before tax) (120,740) (89,268) (95,615)
Loss ratio 73.4% 73.1% 72.0%
Loss expense ratio 12.1% 10.8% 10.9%
Underwriting expense ratio 33.7% 29.6% 29.3%
Combined ratio 119.2% 113.5% 112.2%
Total Property & Casualty 2001 2000 1999
- ----------------------------------------------------------------------------
Net premiums written $1,472,185 $1,505,393 $1,586,897
% Increase (decrease) (2.2)% (5.1)% 22.1%
Net premiums earned 1,506,179 1,533,021 1,554,308
% Increase (decrease) (1.8)% (1.4)% 22.6%
Underwriting loss(before tax) (218,688) (284,620) (211,143)
Loss ratio 66.5% 72.8% 66.9%
Loss expense ratio 13.4% 11.6% 10.7%
Underwriting expense ratio 35.4% 34.8% 35.2%
Combined ratio 115.3% 119.2% 112.8%
Impact of catastrophe losses on
combined ratio 2.3% 2.4% 3.4%
All other 2001 2000 1999
- ----------------------------------------------------------------------------
Revenues $ 8,036 $ 4,146 $13,707
Expenses 14,159 14,366 20,814
- ----------------------------------------------------------------------------
Net income $(6,123) $(10,220) $(7,107)
Reconciliation of Revenues 2001 2000 1999
- ----------------------------------------------------------------------------
Net premiums earned for
reportable segments $1,506,179 $1,533,021 $1,554,308
Investment income 211,017 201,812 181,078
Realized gain/loss 198,298 (5,904) 144,754
Miscellaneous income 382 444 (2,426)
- ----------------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 1,915,876 1,729,373 1,877,714
Property and casualty statutory
to GAAP adjustment (21,909) 3,150 8,658
- ----------------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 1,893,967 1,732,523 1,886,372
Other segment revenues 8,036 4,146 13,708
- ----------------------------------------------------------------------------
Total revenues $1,902,003 $1,736,669 $1,900,080
===========================================================================
Reconciliation of Underwriting
loss (before tax) 2001 2000 1999
- ----------------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(Statutory basis) $(218,688) $(284,620) $(211,143)
Statutory to GAAP adjustment (35,091) (28,175) 26,905
- ----------------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(GAAP basis) (253,779) (312,795) (184,238)
Net investment income 212,385 205,062 184,287
Realized gain (loss) 182,940 (2,391) 160,827
Other income (15,158) (19,578) (23,987)
- ----------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $126,388 $(129,702) $136,889
============================================================================
58
Item 14. Continued
NOTE 15 -- Agent Relationships
The agent relationship asset is an identifiable intangible asset acquired in
connection with the 1998 Great American Insurance Company (GAI) commercial
lines acquisition. The Corporation follows the practice of allocating
purchase price to specifically identifiable intangible assets based on their
estimated values as determined by appropriate valuation methods. In the GAI
acquisition, allocation of the purchase price was made to agent relationships
and deferred policy acquisition costs as the Corporation believes it did not
acquire any other significant specifically identifiable intangible assets.
Periodically, agent relationships are evaluated as events or circumstances
indicate a possible inability to recover their carrying amount. 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
of the agent relationships asset by $42,170. In addition, the Corporation
again wrote-off the agent relationships asset $3,801 in 2000 for further
agent cancellations. In 2001, the Corporation further wrote off the agent
relationships asset by $10,966 for additional agency cancellations and for
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. The remaining portion of the agent relationships
asset will be amortized on a straight-line basis over the remaining
amortization period of approximately 22 years.
The purchase agreement with GAI called for an additional payment of up to
$40,000 if annualized production of the transferred agents for the 18 month
period ending June 1, 2000 equaled or exceeded production for the twelve
months prior to the acquisition. The Ohio Casualty Insurance Company paid an
additional $27,400 for the final payment. Of the $27,400 payment, $27,100
was paid in 2000, while the remaining $300 was paid in 2001. The final
payment was added to the agent relationships asset for the acquisition and
will be amortized over the remaining life.
NOTE 16 -- Early Retirement Charge
During the second quarter of 2001, the Corporation adopted an early
retirement plan. The early retirement plan was available to approximately
330 employees. Of the employees eligible to retire under the program, 147
accepted. The early retirement plan resulted in a one-time before-tax
charge of $6,016, or $3,971 after-tax to 2001 results.
NOTE 17 -- Statutory Accounting Information
The following information has been prepared on the basis of statutory
accounting principles which differ from generally accepted accounting
principles. The principal differences relate to deferred acquisition
costs, reinsurance, assets not admitted for statutory reporting,
California Proposition 103 reserve, agent relationships and the treatment
of deferred federal income taxes.
2001 2000 1999
- -------------------------------------------------------------------------
Statutory net income
(loss) $172,513 $(81,223) $109,172
Statutory policyholders'
surplus 767,503 812,133 899,759
The Ohio Casualty Insurance Company (the Company), domiciled in Ohio,
prepares its statutory financial statements in accordance with the accounting
practices prescribed or permitted by the Ohio Insurance Department.
Prescribed statutory accounting practices include a variety of publications
of the National Association of Insurance Commissioners (NAIC), as well as
state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The Company received written approval from the Ohio Insurance
Department to have the California Proposition 103 liability reported as a
direct charge to surplus and not included as a charge in the 1995 statutory
statement of operations. Following this same treatment, during 2000 the
principal reduction in the Proposition 103 liability was taken as an increase
to statutory surplus and not included in the statutory statements of
operations.
For statutory purposes, agent relationships related to the GAI
acquisition were taken as a direct charge to surplus.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance, which replaced the former Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting.
The new principles provide guidance for areas where statutory accounting had
been silent and changed former statutory accounting in some areas. The Group
implemented the Codification guidance effective January 1, 2001. The
cumulative effect of adopting Codification reduced statutory policyholders'
surplus by $21,694 on January 1, 2001.
The NAIC has developed a "Risk-Based Capital" formula for property and
casualty insurers and life insurers. The formula is intended to measure the
adequacy of an insurer's capital given the asset structure and product mix of
the company. As of December 31, 2001, all insurance companies in the Group,
with the exception of the Ohio Casualty of New Jersey, Inc. (OCNJ), exceed
the necessary capital. The exception for OCNJ is due to a temporary
difference in the recognition of deferred taxes related to the $40,600 New
Jersey transfer fee.
The Corporation is dependent on dividend payments from its insurance
subsidiaries in order to meet operating expenses, debt obligations, and to
pay dividends.
59
Item 14. Continued
Insurance regulatory authorities impose various restrictions and prior
approval requirements on the payment of dividends by insurance companies
and holding companies. At December 31, 2001, approximately $156,480 of
statutory surplus is not subject to restriction or prior dividend approval
requirements.
NOTE 18 -- Bank Note Payable
During 1997, the Corporation signed a credit facility that makes available a
$300,000 revolving line of credit. This line of credit was accessed in 1997
to refinance the outstanding term loan balance the Corporation had at that
time. In 1998, the line of credit was used for capital infusion of $200,000
into the property and casualty subsidiaries due to the acquisition of the
commercial lines division of GAI. The line of credit was again accessed
during 1998 for the purchase of a building and to purchase shares. The
remaining balance and any additional borrowings under the line of credit
bear interest at a periodically adjustable rate (3.44% at December 31, 2001).
The interest rate is determined on various bases including prime rates,
certificate of deposit rates and the London Interbank Offered Rate. Interest
incurred and related fees on borrowings amounted to $13,549, $16,075 and
$14,385 in 2001, 2000 and 1999, respectively. The credit agreement contains
financial covenants and provisions customary for such arrangements. Under
the loan agreement the maximum permissible consolidated funded debt cannot
exceed 30% of consolidated tangible net worth (as defined in the agreement)
and statutory surplus cannot be less than $750,000. Effective March 30,
2001, the covenant was amended to require a minimum statutory surplus of
$675,000 for the quarters ending March 31, 2001 and June 30, 2001, returning
to minimum statutory surplus of $750,000 for subsequent quarters. The
Corporation continues to review its financial covenants in the credit
agreement in light of its operating losses. As of December 31, 2001,
the Corporation was in compliance with these covenants. However, further
deterioration of operating results, reductions in the equity portfolio
valuation, or other changes in statutory surplus may lead to covenant
violations, which could ultimately result in default.
The credit agreement expires in October 2002, with any outstanding loan
balance due at that time. The Corporation is evaluating its capital
requirements and is exploring ways to restructure and/or reduce its debt and
strengthen its financial position. The Corporation has taken steps to
strengthen its financial position by aggressively managing expenses and first
reducing quarterly dividends to shareholders and later eliminating the
current quarterly dividend in the first quarter of 2001. The Corporation
will be required to obtain additional external funding, either in the form
of debt or equity funding, in order to repay the balance of its current notes
payable which comes due October 2001. While the Corporation believes that it
should be able to obtain such external funding, the availability of such
funding cannot be assured nor can the cost of such funding be evaluated at
this time.
During 1999, the Corporation signed a $6,500 low interest loan with the
state of Ohio used in conjunction with the home office purchase. The
Corporation granted a mortgage on its home office property as security for
the loan. As of December 31, 2001, the loan bears a fixed interest rate of
1%, increasing to 2% in December 2002, and increasing to the maximum rate of
3% in December 2004. The loan requires annual principal payments of
approximately $630. The remaining balance at December 31, 2001 was $5,173.
The loan expires in November 2009.
NOTE 19 -- California Proposition 103
Proposition 103 was passed in the state of California 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, the Administrative Law Judge issued a proposed ruling with a
rollback liability of $24,428 plus interest. The Group established a
contingent liability for the Proposition 103 rollback of $24,428 plus simple
interest at 10% from May 8, 1989. This brought the total reserve to $52,318
at September 30, 2000. On October 25, 2000, the Group announced a settlement
agreement for California Proposition 103 that was approved by the
Commissioner of Insurance of the state of California. Under the terms of the
settlement, the members of the Group agreed to pay $17,500 in refund premiums
to eligible 1989 California policyholders. With this development, the total
reserve was decreased to $17,500 as of December 31, 2000. This decrease in
the reserve resulted in an increase in operating income and net income for
the third quarter 2000, and had no effect on the statutory combined ratio
reported. The Corporation began to make payments in the first quarter of
2001. The remaining liability was $7,816 as of December 31, 2001.
To date, the Group has paid approximately $5,713 in legal costs related
to the withdrawal and Proposition 103.
NOTE 20 -- Shareholder Rights Plan
In December 1989, the Board of Directors adopted the Shareholders Rights
Agreement (the Agreement). The Agreement is designed to deter coercive or
unfair takeover tactics and to prevent a person(s) from gaining control of
the Corporation without offering a fair price to all shareholders.
Under the terms of the Agreement, each outstanding common share is
associated with one half of one common share purchase right, expiring in
2009. Currently, each whole right, when exercisable, entitles the
registered
60
Item 14. Continued
holder to purchase one common share of the Corporation at a purchase price
of $125 per share.
The rights become exerciseable for a 60 day period commencing 11 business
days after a public announcement that a person or group has acquired shares
representing 20 percent or more of the outstanding shares of common stock,
without the prior approval of the board of directors; or 11 business days
following commencement of a tender or exchange of 20 percent or more of such
outstanding shares of common stock.
If after the rights become exercisable, the Corporation is involved in a
merger, other business consolidation or 50 percent or more of the assets or
earning power of the Corporation is sold, the rights will then entitle the
rightholders, upon exercise of the rights, to receive shares of common stock
of the acquiring company with a market value equal to twice the exercise
price of each right.
The Corporation can redeem the rights for $0.01 per right at any time
prior to becoming exercisable.
NOTE 21 -- Discontinued Operations (Life Insurance)
Discontinued operations included the operations of Ohio Life, a subsidiary of
The Ohio Casualty Insurance Company.
On October 2, 1995, the Company transferred its life insurance and related
businesses through a 100% coinsurance arrangement to Employers' Reassurance
Corporation and entered into an administrative and marketing agreement with
Great Southern Life Insurance Company (Great Southern). In connection with
the reinsurance agreement, $144,469 in cash and $161,401 of securities were
transferred to Employers' Reassurance to cover the liabilities of $348,479.
Ohio Life received an adjusted ceding commission of $37,641 as payment.
After deduction of deferred acquisition costs, the net ceding commission from
the transaction was $17,284. During the fourth quarter of 1997, Great
Southern legally replaced Ohio Life as the primary insurer for approximately
76% of the life insurance policies subject to the 1995 agreement.
At December 31, 1998, Great Southern had assumed 95% of the life
insurance policies subject to the 1995 agreement. As a result of this
assumption, the Corporation recognized an additional amount of unamortized
ceding commission of $1,093 before tax during 1999.
During 1999, Great Southern replaced Employers' Reassurance 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. The after-tax gain on this
sale totaled $6,190, or $.11 per share.
For the year ended December 31, 1999, the discontinued life insurance
operations had income before income taxes of $4,349 and net income of $4,270.
NOTE 22 -- New 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 SFAS 133 has had an
immaterial impact on the financial results of the Corporation.
In June 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no
longer be amortized but will be subject to annual impairment tests in
accordance with the standards. Other intangible assets will continue to be
amortized over their useful lives. The Corporation will apply the new rules
on accounting for goodwill and other intangible assets beginning in the first
quarter of 2002. The Corporation does not expect that the adoption of the
statement will have a material impact on the Corporation's financial position
and results of operations. The Corporation's only current intangible asset,
agent relationships, is reported on the balance sheet in accordance with the
standards and is being amortized over its useful life. The agent
relationships intangible asset is also evaluated periodically for possible
impairment.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 (January 1, 2002 for the Corporation). The
Corporation does not expect that the adoption of the statement will have a
material impact on the Corporation's financial position and results of
operations.
61
Item 14. Continued
NOTE 23 -- Stock Dividend
On May 27, 1999, the Board of Directors declared a 2 for 1 stock split
effective in the form of a 100% stock dividend of the outstanding common
shares of record on July 1, 1999. The dividend was payable on July 22, 1999.
The number of common shares outstanding, earnings per share, and stock option
information for prior years have been adjusted to reflect the stock dividend.
62
Item 14. Continued
Report of Independent Auditors
The Board of Directors and Shareholders
Ohio Casualty Corporation
We have audited the accompanying consolidated balance sheet of Ohio Casualty
Corporation and subsidiaries as of December 31, 2001, and the related
consolidated statements of income, shareholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement
schedules listed in the Index at Item 14(a)(2) of this Form 10-K. These
consolidated financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ohio Casualty Corporation and subsidiaries at December 31, 2001, and the
consolidated results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Cincinnati, Ohio
February 15, 2002
To the Board of Directors and Shareholders
of Ohio Casualty Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 44 present fairly, in all material
respects, the financial position of Ohio Casualty Corporation and its
subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the two years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedules listed in the index appearing under
Item 14 (a)(2) on page 44, for the years ended December 31, 2000 and 1999,
present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 16, 2001
63
Item 14. Continued
(b) Reports on Form 8-K or 8-K/A since October 1, 2001.
On January 4, 2002, the Corporation filed Form 8-K announcing
the transfer of private passenger automobile business renewal
obligations from Ohio Casualty of New Jersey, Inc. to
Proformance Insurance Company.
(c) Exhibits.
See Index to Exhibits on pages 74 and 75 of this Form 10-K.
64
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
OHIO CASUALTY CORPORATION
(Registrant)
March 5, 2002 By: /s/ Dan R. Carmichael
-----------------------
Dan R. Carmichael
President
Chief Executive Officer
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 5, 2002 /s/ Stanley N. Pontius
-----------------------------------------
Stanley N. Pontius, Chairman of the Board
March 5, 2002 /s/ Dan R. Carmichael
-----------------------------------------
Dan R. Carmichael, President, Chief Executive
Officer, and Director
March 5, 2002 /s/ Terrence J. Baehr
-----------------------------------------
Terrence J. Baehr, Director
March 5, 2002 /s/ Arthur J. Bennert
-----------------------------------------
Arthur J. Bennert, Director
March 5, 2002 /s/ Jack E. Brown
-----------------------------------------
Jack E. Brown, Director
March 5, 2002 /s/ Catherine E. Dolan
-----------------------------------------
Catherine E. Dolan, Director
March 5, 2002 /s/ Wayne R, Embry
-----------------------------------------
Wayne R. Embry, Director
March 5, 2002 /s/ Vaden Fitton
-----------------------------------------
Vaden Fitton, Director
March 5, 2002 /s/ Stephen S. Marcum
-----------------------------------------
Stephen S. Marcum, Director
March 5, 2002 /s/ Edward T. Roeding
-----------------------------------------
Edward T. Roeding, Director
March 5, 2002 /s/ Howard L. Sloneker III
-----------------------------------------
Howard L. Sloneker III, Sr. Vice President,
Secretary and Director
March 5, 2002 /s/ Donald F. McKee
-----------------------------------------
Donald F. McKee, Chief Financial Officer
65
Schedule I
Ohio Casualty Corporation and Subsidiaries
Consolidated Summary of Investments
Other than Investments in Related Parties
(In thousands)
December 31, 2001
Amount
shown
in balance
Type of investment Cost Value sheet
- ------------------ ---- ----- ----------
Fixed maturities
Bonds:
United States govt. and
govt. agencies with auth. $ 27,775 $ 29,381 $ 29,381
States, municipalities and
political subdivisions 30,057 31,328 31,328
Corporate securities 1,577,939 1,603,559 1,603,559
Mortgage-backed securities:
U.S. government guaranteed 56,307 56,062 56,062
Other 1,037,920 1,051,774 1,051,774
----------- ----------- -----------
Total fixed maturities 2,729,998 2,772,104 2,772,104
Equity securities:
Common stocks:
Banks, trust and insurance
companies 30,808 164,766 164,766
Industrial, miscellaneous and
all other 79,040 323,864 323,864
Preferred stocks:
Non-redeemable 358 358 358
Convertible - - -
----------- ----------- -----------
Total equity securities 110,206 488,988 488,988
Short-term investments 54,785 54,785 54,785
----------- ----------- -----------
Total investments $2,894,989 $3,315,877 $3,315,877
=========== =========== ===========
66
Schedule II
Ohio Casualty Corporation
Condensed Financial Information of Registrant
(In thousands)
2001 2000 1999
---- ---- ----
Condensed Balance Sheet:
Investment in wholly-owned
subsidiaries, at equity $1,242,718 $1,269,563 $1,304,268
Investment in bonds/stocks,
at fair value 18,870 34,767 62,712
Cash and other assets 31,859 35,456 32,145
----------- ----------- -----------
Total assets 1,293,447 1,339,786 1,399,125
Notes payable 210,173 220,798 241,446
Other liabilities 3,242 2,397 6,692
----------- ----------- -----------
Total liabilities 213,415 223,195 248,138
----------- ----------- -----------
Shareholders' equity $1,080,032 $1,116,591 $1,150,987
=========== =========== ===========
Condensed Statement of Income:
Dividends from subsidiaries $ 5,175 $ 59,571 $ 112,122
Equity in subsidiaries 103,050 (128,681) 8,955
Operating (expenses) (9,645) (10,139) (6,936)
----------- ----------- -----------
Net income (loss) $ 98,580 $ (79,249) $ 114,141
=========== =========== ===========
Condensed Statement of Cash Flows:
Cash flows from operations
Net distributed income $ (4,470) $ 49,432 $ 105,186
Other 2,069 (16,255) (8,609)
----------- ----------- -----------
Net cash from operations (2,401) 33,177 96,577
Investing
Purchase of bonds/stocks (6,037) (46,937) (11,987)
Sales of bonds/stocks 19,392 69,525 42,148
----------- ----------- -----------
Net cash from investing 13,355 22,588 30,161
Financing
Notes payable:
Borrowings - - 16,500
Repayments (10,625) (20,648) (40,054)
Exercise of stock options 75 67 211
Purchase of treasury stock - - (46,087)
Dividends paid to shareholders - (35,446) (56,027)
----------- ----------- -----------
Net cash from financing (10,550) (56,027) (125,457)
Net change in cash 404 (262) 1,281
----------- ----------- -----------
Cash, beginning of year 9,573 9,835 8,554
----------- ----------- -----------
Cash, end of year $ 9,977 $ 9,573 $ 9,835
=========== =========== ===========
67
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 2001
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
----------- ------------- -------- ------- ----------
Segment
- -------
Property and
casualty insurance:
Underwriting
Standard Commercial Lines $ 90,989 $1,467,331 $ 331,948 $ 707,635
Specialty Commercial Lines 21,095 188,340 88,782 130,559
Personal Lines 54,675 495,051 246,009 667,982
Miscellaneous income 392
Investment $211,114
---------- ----------- ---------- ------------ ---------
Total property and
casualty insurance 166,759 2,150,722 666,739 1,506,568 211,114
Premium finance 110 126
Corporation 1,145
---------- ----------- ---------- ------------ ---------
Total $ 166,759 $2,150,722 $ 666,739 $1,506,678 $212,385
========== =========== ========== =========== =========
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
---------- ----------- --------- --------
Segment
- -------
Property and
casualty insurance:
Underwriting
Standard Commercial Lin $564,468 $ 192,542 $ 86,926 $ 689,596
Specialty Commercial Li 68,450 37,662 13,797 136,085
Personal Lines 571,116 145,446 79,938 646,506
Miscellaneous income
Investment
----------- ---------- ---------- -----------
Total property and
casualty insurance 1,204,034 375,650 180,661 1,472,187
Premium finance 345 9
Corporation 14,925
----------- ---------- ---------- -----------
Total $1,204,034 $ 375,650 $ 195,931 $1,472,196
=========== ========== ========== ===========
1. Net investment income has been allocated to principal business segments
on the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on premium revenue.
68
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 2000
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
----------- ------------- -------- ------- ----------
Segment
- -------
Property and
casualty insurance:
Underwriting
Standard Commercial Lines $ 97,985 $1,434,735 $ 351,506 $ 739,698
Specialty Commercial Lines 17,347 83,763 76,940 104,384
Personal Lines 59,739 485,021 267,967 688,865
Miscellaneous income 483
Investment $202,002
---------- ----------- ---------- ------------ ---------
Total property and
casualty insurance 175,071 2,003,519 696,413 1,533,430 202,002
Premium finance 100 568 167
Corporation 2,893
---------- ----------- ---------- ------------ ---------
Total $ 175,071 $2,003,519 $ 696,513 $1,533,998 $205,062
========== =========== ========== =========== =========
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
---------- ----------- --------- --------
Segment
- -------
Property and
casualty insurance:
Underwriting
Standard Commercial Lin $ 679,432 $ 191,133 $ 113,532 $ 721,681
Specialty Commercial Li 36,950 34,544 17,602 107,255
Personal Lines 577,783 168,838 26,415 676,416
Miscellaneous income
Investment
----------- ---------- ---------- -----------
Total property and
casualty insurance 1,294,165 394,515 157,549 1,505,352
Premium finance 857 480
Corporation 19,285
----------- ---------- ---------- -----------
Total $1,294,165 $ 394,515 $ 177,691 $1,505,832
=========== ========== ========== ===========
1. Net investment income has been allocated to principal business segments
on the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on premium revenue.
69
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1999
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
----------- ------------- -------- ------- ----------
Segment
- -------
Property and
casualty insurance:
Underwriting
Standard Commercial Lines $ 88,517 $1,329,039 $ 378,782 $ 704,525
Specialty Commercial Lines 17,598 71,107 66,670 102,680
Personal Lines 71,630 508,309 279,793 746,789
Miscellaneous income 69
Addition due to acquisition
Investment $181,131
---------- ----------- ---------- ------------ ---------
Total property and
casualty insurance 177,745 1,908,455 725,245 1,554,063 181,131
Life ins. (discontinued
operations) 1,765 827
Premium finance 154 903 113
Corporation 3,043
---------- ----------- ---------- ------------ ---------
Total $ 177,745 $1,908,455 $ 725,399 $1,556,731 $185,114
========== =========== ========== =========== =========
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
---------- ----------- --------- --------
Segment
- -------
Property and
casualty insurance:
Underwriting
Standard Commercial Lin $ 565,194 $ 171,455 $ 95,270 $ 720,755
Specialty Commercial Li 5,501 30,744 11,809 102,499
Personal Lines 604,959 168,392 53,574 763,412
Miscellaneous income
Addition due to acquisition 31,402
Investment
----------- ---------- ---------- -----------
Total property and
casualty insurance 1,175,654 401,993 160,653 1,586,666
Life ins. (discontinued
operations) (731) 174
Premium finance 1,277 804
Corporation 23,614
----------- ---------- ---------- -----------
Total $1,175,654 $ 401,262 $ 185,718 $1,587,470
=========== ========== ========== ===========
1. Net investment income has been allocated to principal business segments
on the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on policy counts.
70
Schedule IV
Ohio Casualty Corporation and Subsidiaries
Consolidated Reinsurance
(In thousands)
December, 2001, 2000 and 1999
Percent of
amount
Ceded to Assumed assumed
Gross other from other Net to net
amount companies companies amount amount
------ --------- ---------- ------ ----------
Year Ended December 31, 2001
Premiums
Property and casualty insurance $1,550,875 $ 93,827 $ 15,139 $1,472,187 1.0%
Accident and health insurance 157 157 - - -
---------- -------- -------- ----------
Total premiums 1,551,032 93,984 15,139 1,472,187 1.0%
Premium finance charges 9
----------
Total premiums and finance charges written 1,472,196
Change in unearned premiums and finance charges 34,090
----------
Total premiums and finance charges earned 1,506,286
Miscellaneous income 392
----------
Total premiums & finance charges earned - continuing operations $1,506,678
==========
Year Ended December 31, 2000
Premiums
Property and casualty insurance $1,418,835 $121,504 $208,021 $1,505,352 13.8%
Accident and health insurance 178 178 - - -
---------- -------- -------- ----------
Total premiums 1,419,013 121,682 208,021 1,505,352 13.8%
Premium finance charges 480
----------
Total premiums and finance charges written 1,505,832
Change in unearned premiums and finance charges 27,682
----------
Total premiums and finance charges earned 1,533,514
Miscellaneous income 484
----------
Total premiums & finance charges earned - continuing operations $1,533,998
==========
Year Ended December 31, 1999
Life insurance in force $ 279 $ 279 $ - $ - -
Premiums
Property and casualty insurance $1,325,243 $ 96,412 $357,835 $1,586,666 22.6%
Life insurance (Discontinued
operations) 1,694 1,694 - - -
Accident and health insurance 198 198 - - -
---------- -------- -------- ----------
Total premiums 1,327,135 98,304 357,835 1,586,666 22.6%
Premium finance charges 804
----------
Total premiums and finance charges written 1,587,470
Change in unearned premiums and finance charges (29,911)
----------
Total premiums and finance charges earned 1,557,559
Miscellaneous income (2,593)
----------
Total premiums & finance charges earned - continuing operations $1,554,966
==========
71
Schedule V
Ohio Casualty Corporation and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
Balance at Balance at
beginning Charged to end of
of period expenses period
Year ended December 31, 2001
Reserve for bad debt $10,700 $(2,300) $ 8,400
Year ended December 31, 2000
Reserve for bad debt 9,338 1,362 10,700
Year ended December 31, 1999
Reserve for bad debt 8,739 599 9,338
72
Schedule VI
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplemental Information Concerning
Property and Casualty Insurance Operations
(In thousands)
Reserves for
Deferred unpaid claims
policy and claim Discount Net
Affiliation with acquisition adjustment of Unearned Earned investment
registrant costs expenses reserves premiums premiums income
----------- ------------- -------- -------- -------- ----------
Property and casualty
subsidiaries
Year ended December 31,
2001 $ 166,759 $2,150,722 $ - $ 666,739 $1,506,568 $ 211,114
========= ========== ====== ========= ========== =========
Year ended December 31,
2000 $ 175,071 $2,003,519 $ - $ 696,413 $1,533,430 $ 202,002
========= ========== ====== ========= ========== =========
Year ended December 31,
1999 $ 177,745 $1,908,455 $ - $ 725,245 $1,554,063 $ 181,131
========= ========== ====== ========= ========== =========
Claims and claim Amortization Paid
adjustment expenses of deferred claims
incurred related to policy and claim
Affiliation with Current Prior acquisition adjustment Premiums
registrant year years costs expenses written
-------------------- ------------ ---------- --------
Property and casualty
subsidiaries
Year ended December 31,
2001 $1,145,545 $ 58,489 $ 375,650 $1,129,380 $1,472,187
========== ======== ========= ========== ==========
Year ended December 31,
2000 $1,237,319 $ 56,846 $ 394,515 $1,210,163 $1,505,352
========== ======== ========= ========== ==========
Year ended December 31,
1999 $1,176,072 $ (418) $ 401,993 $1,217,948 $1,586,666
========== ======== ========= ========== ==========
73
Form 10-K
Ohio Casualty Corporation
Index to Exhibits
Exhibit 4b First amendment to the Amended and Restated Rights Agreement
dated as of February 19, 1998, signed November 8, 2001
Exhibit 10k Replacement carrier agreement between Ohio Casulaty of New
Jersey, Inc. and Proformance Insurance Company and its parent,
National Atlantic Holdings Corporation
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Independent Auditors to incorporation of
their opinion by reference in Registration Statements on
Forms S-3 and Form S-8
Exhibit 23a Consent of Independent Accountants to incorporation of
their opinion by reference in Registration Statements on
Forms S-3 and Form S-8
Exhibit 28 Information from Reports Furnished to State Insurance
Regulation Authorities
Exhibits incorporated by reference:
Exhibit 2 Asset Purchase Agreement between Ohio Casualty Corporation
and Great American Insurance Company, filed as Exhibit 2 to
the Registrant's SEC Form 10-Q on November 13, 1998
Exhibit 3 Articles of Incorporation, as amended, filed as Exhibits
4(a), 4(b), 4(c), 4(d), 4(e) and 4(f) to the Registrant's
SEC Form S-8 (333-42942) on August 3, 2000
Exhibit 3a Code of Regulations, as amended, filed as Exhibits 4(g),
4(h) and 4(i) to the Registrant's SEC Form S-8 (333-42942)
on August 3, 2000
Exhibit 4 Amended and Restated Rights Agreement between the Registrant
and First Chicago Trust Company of New York as Rights Agent
dated as of February 19, 1998, filed as Exhibit 4(g) to the
Registrant's SEC Form 8-A/A amendment no. 3 on March 5, 1998
Exhibit 4a Certificate of Adjustment by the Registrant dated as of July
1, 1999, filed as Exhibit 9 to the Registrant's SEC Form 8-A/A
amendment no. 4 on July 2, 1999
Exhibit 10a Ohio Casualty Corporation 1993 Stock Incentive Program, filed
as Exhibit 10d to the Registrant's SEC Form 10-Q on May 31, 1993
Exhibit 10a1 Ohio Casualty Corporation amended 1993 Stock Incentive Program,
filed as Exhibit 10.a1 to the Registrant's SEC Form 10-Q on
May 14, 1997
74
Form 10-K
Ohio Casualty Corporation
Index to Exhibits, Continued
Exhibit 10b Coinsurance Life, Annuity and Disability Income Reinsurance
Agreement between Employer's Reassurance Corporation and The
Ohio Life Insurance Company dated as of October 2, 1995, filed
as Exhibit 10b to the Registrant's SEC Form 10-K on
March 26, 1996
Exhibit 10c Credit Agreement dated October 27, 1997 with Chase Manhattan
Bank, N.A. as agent, filed as Exhibit 10c to the Registrant's
SEC Form 10-Q on November 13, 1997
Exhibit 10c1 Amendment to Credit Agreement by and between Ohio
Casualty, various lenders and The Chase Manhattan
Bank (as administrative agent for the lenders), dated as
of August 11, 1998, filed as Exhibit 99.2 to the
Registrant's SEC Form S-3 (333-70761) on January 19, 1999
Exhibit 10c2 Amendment to Credit Agreement by and between Ohio Casualty,
various lenders and The Chase Manhattan Bank (as
administrative agent for the lenders), effective as of
March 30, 2001, filed as Exhibit 99.1 to the Registrant's
SEC Form 8-K on April 27, 2001
Exhibit 10d Employment Agreement with Dan R. Carmichael dated December
12, 2000, filed as Exhibit 10 to the Registrant's SEC
Form 10-K on March 30, 2001
Exhibit 10e Employment Agreement with Donald F. McKee dated September
19, 2001, filed as Exhibit 10 to the Registrant's SEC
Form 10-Q on November 14, 2001
Exhibit 10f Agreement with Howard L. Sloneker III, as Amended, dated
July 24, 2000, filed as Exhibit 10.2 to the Registrant's
SEC Form 10-Q on November 14, 2000
Exhibit 10g Information regarding Omitted Exhibits (Schedule to Exhibit
10.2) dated July 24, 2000, filed as Exhibit 10.3 to the
Registrant's SEC Form 10-Q on November 14, 2000
Exhibit 10h Stock Option Agreement for Directors' year 2000 grant, filed
as Exhibit 10.1 to the Registrant's SEC Form 10-Q on May 15,
2000
Exhibit 10i Stock Option Agreement for Chief Executive Officer year 2000
grant, filed as Exhibit 10.2 to the Registrant's SEC Form
10-Q on May 15, 2000
Exhibit 10j Ohio Casualty Corporation 1999 Warrant Registration, filed
on Registrant's Form S-3 (333-90231) on November 3, 1999
75