==============================================================================
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2005.
------------------
[ ] 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 0-05544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-0783294
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9450 Seward Road, Fairfield, Ohio 45014
(Address of principal executive offices) (Zip Code)
(513) 603-2400
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
On October 24, 2005, there were 63,613,520 shares of common stock
outstanding.
Page 1 of 32
==============================================================================
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 31
Item 4. Controls and Procedures 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 31-32
Item 6. Exhibits 32
Signature
Exhibit 31.1 Certification of Chief Executive Officer of Ohio
Casualty Corporation in accordance with SEC Rule
13(a)-14(a) and Rule 15(d)-14(a)
Exhibit 31.2 Certification of Chief Financial Officer of Ohio
Casualty Corporation in accordance with SEC Rule
13(a)-14(a) and Rule 15(d)-14(a)
Exhibit 32.1 Certification of Chief Executive Officer of Ohio
Casualty Corporation in accordance with Section
1350 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer of Ohio
Casualty Corporation in accordance with Section 1350
of the Sarbanes-Oxley Act of 2002
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(in millions, except share data) 2005 2004
- -------------------------------------------------------------------------------------------
Assets
Investments, at fair value:
Fixed maturities:
Available-for-sale, at fair value
(amortized cost: $3,453.5 and $3,176.8) $ 3,553.5 $ 3,346.1
Held-to-maturity, at amortized cost
(fair value: $271.9 and $303.1) 273.8 301.4
Equity securities, at fair value
(cost: $120.2 and $98.9) 352.2 357.4
Short-term investments, at fair value 48.4 239.1
- -------------------------------------------------------------------------------------------
Total investments 4,227.9 4,244.0
Cash 5.8 13.5
Premiums and other receivables, net of allowance 325.0 350.8
Deferred policy acquisition costs 156.9 159.8
Property and equipment, net of accumulated depreciation 80.3 82.9
Reinsurance recoverable, net of allowance 706.3 666.5
Agent relationships, net of accumulated amortization 111.9 122.0
Interest and dividends due or accrued 51.2 49.9
Deferred tax asset 3.9 -
Other assets 46.0 25.6
- -------------------------------------------------------------------------------------------
Total assets $ 5,715.2 $ 5,715.0
===========================================================================================
Liabilities
Insurance reserves:
Losses $ 2,402.8 $ 2,269.6
Loss adjustment expenses 514.3 486.8
Unearned premiums 707.9 715.5
Debt 200.5 383.3
Reinsuance treaty funds held 163.0 195.0
Deferred income taxes - 21.9
Other liabilities 334.0 348.0
- -------------------------------------------------------------------------------------------
Total liabilities 4,322.5 4,420.1
Shareholders' Equity
Common stock, $.125 par value
Authorized: 150,000,000
Issued shares: 72,418,344; 72,418,344 9.0 9.0
Additional paid-in capital 16.6 -
Accumulated other comprehensive income 196.0 259.1
Retained earnings 1,289.0 1,161.5
Treasury stock, at cost:
(Shares: 8,380,479; 10,209,215) (117.9) (134.7)
- -------------------------------------------------------------------------------------------
Total shareholders' equity 1,392.7 1,294.9
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,715.2 $ 5,715.0
===========================================================================================
Accompanying notes are an integral part of these consolidated financial
statements. For complete disclosures see Notes to Consolidated Financial
Statements on pages 54-71 of the Corporation's 2004 Form 10-K.
3
ITEM 1. Continued
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended September 30,
(in millions, except share and per share data) (Unaudited) 2005 2004
- -------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 362.5 $ 356.5
Investment income, less expenses 51.4 44.9
Investment gains/(losses) realized, net 22.4 (4.3)
- -------------------------------------------------------------------------------------------
Total revenues 436.3 397.1
Losses and benefits for policyholders 204.5 205.5
Loss adjustment expenses 42.5 38.2
General operating expenses 121.6 115.3
Write-down and amortization of agent relationships 2.4 5.0
Amortization of deferred policy acquisition costs 83.3 91.4
Deferral of deferred policy acquisition costs (87.4) (88.7)
Depreciation and amortization expense 3.0 3.3
- -------------------------------------------------------------------------------------------
Total expenses 369.9 370.0
- -------------------------------------------------------------------------------------------
Income before income taxes 66.4 27.1
Income tax expense/(benefit):
Current 11.2 (1.6)
Deferred (0.3) 9.1
- -------------------------------------------------------------------------------------------
Total income tax expense 10.9 7.5
- -------------------------------------------------------------------------------------------
Net income $ 55.5 $ 19.6
===========================================================================================
Average shares outstanding - basic 64,400,341 61,627,447
===========================================================================================
Earnings per share - basic:
Net income, per share $ 0.86 $ 0.32
===========================================================================================
Average shares outstanding - diluted 65,656,774 71,678,727
===========================================================================================
Earnings per share - diluted:
Net income, per share $ 0.85 $ 0.30
===========================================================================================
Accompanying notes are an integral part of these consolidated financial
statements. For complete disclosures see Notes to Consolidated Financial
Statements on pages 54-71 of the Corporation's 2004 Form 10-K.
4
ITEM 1. Continued
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Nine Months
Ended September 30,
(in millions, except share and per share data) (Unaudited) 2005 2004
- -------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 1,090.3 $ 1,084.8
Investment income, less expenses 148.4 144.0
Investment gains realized, net 36.2 2.6
- -------------------------------------------------------------------------------------------
Total revenues 1,274.9 1,231.4
Losses and benefits for policyholders 587.3 603.8
Loss adjustment expenses 125.8 116.6
General operating expenses 355.3 381.3
Write-down and amortization of agent relationships 10.1 16.5
Amortization of deferred policy acquisition costs 255.1 275.6
Deferral of deferred policy acquisition costs (252.2) (276.2)
Depreciation and amortization expense 8.7 9.8
Loss on retirement of convertible debt, including
debt conversion expenses 9.0 -
- -------------------------------------------------------------------------------------------
Total expenses 1,099.1 1,127.4
- -------------------------------------------------------------------------------------------
Income before income taxes 175.8 104.0
Income tax expense:
Current 32.2 22.0
Deferred 8.2 8.9
- -------------------------------------------------------------------------------------------
Total income tax expense 40.4 30.9
- -------------------------------------------------------------------------------------------
Income before cumulative effect of an accounting change 135.4 73.1
Cumulative effect of an accounting change, net of tax - 1.6
- -------------------------------------------------------------------------------------------
Net income $ 135.4 $ 71.5
===========================================================================================
Average shares outstanding - basic 63,487,313 61,346,664
===========================================================================================
Earnings per share - basic:
Net income, per share $ 2.13 $ 1.17
===========================================================================================
Average shares outstanding - diluted 68,012,120 71,360,958
===========================================================================================
Earnings per share - diluted:
Net income, per share $ 2.02 $ 1.07
===========================================================================================
Accompanying notes are an integral part of these consolidated financial
statements. For complete disclosures see Notes to Consolidated Financial
Statements on pages 54-71 of the Corporation's 2004 Form 10-K.
5
ITEM 1. Continued
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Additional other Total
(in millions, except share and Common paid-in comprehensive Retained Treasury shareholders'
per share data) (Unaudited) Stock capital income earnings stock equity
- ---------------------------------------------------------------------------------------------------------------------
Balance
January 1, 2004 $ 9.0 $ - $ 254.7 $ 1,033.4 $ (151.3) $ 1,145.8
Net income 71.5 71.5
Change in unrealized gain,
net of deferred income tax
benefit of $7.1 11.1 11.1
Change in minimum pension
liability, net of deferred income tax
benefit of $8.9 16.4 16.4
----------
Other comprehensive income 99.0
Net issuance of restricted stock
(57,284 shares) (0.6) 0.8 0.2
Net issuance of treasury
stock (865,313 shares) 0.4 10.7 11.1
- ---------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 2004 $ 9.0 $ - $ 282.2 $ 1,104.7 $ (139.8) $ 1,256.1
=====================================================================================================================
Balance
January 1, 2005 $ 9.0 $ - $ 259.1 $ 1,161.5 $ (134.7) $ 1,294.9
Net income 135.4 135.4
Change in unrealized gain,
net of deferred income tax
benefit of $34.2 (63.1) (63.1)
----------
Other comprehensive income 72.3
Net issuance of restricted stock
(26,828 shares) 0.2 0.4 0.6
Net issuance of treasury
stock (1,066,438 shares) 5.2 (0.2) 13.7 18.7
Repurchase of treasury stock
(570,115 shares) (14.6) (14.6)
Cash dividends paid ($0.06 per share) (7.7) (7.7)
Issuance of common stock pursuant
to Convertible Note transaction
(See Note VII) 11.2 17.3 28.5
- ---------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 2005 $ 9.0 $16.6 $ 196.0 $ 1,289.0 $ (117.9) $ 1,392.7
=====================================================================================================================
Accompanying notes are an integral part of these consolidated financial
statements. For complete disclosures see Notes to Consolidated Financial
Statements on pages 54-71 of the Corporation's 2004 Form 10-K.
6
ITEM 1. Continued
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Ended September 30,
(in millions) (Unaudited) 2005 2004
- -------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Operating Activities
Net income $ 135.4 $ 71.5
Adjustments to reconcile net income to cash
from operations:
Changes in:
Insurance reserves 153.1 165.1
Reinsurance treaty funds held (32.0) 31.0
Income taxes (0.2) (11.7)
Premiums and other receivables 25.8 (16.9)
Deferred policy acquisition costs 2.9 (0.7)
Reinsurance recoverable (39.8) (75.6)
Other assets (9.0) (6.4)
Other liabilities (33.5) (0.4)
Loss on retirement of convertible debt, including
debt conversion expenses 9.0 -
Income tax benefit from stock option exercises 3.6 -
Amortization and write-down of agent relationships 10.1 16.5
Depreciation and amortization 16.7 16.8
Investment gains realized, net (36.2) (2.6)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 205.9 186.6
- -------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of securities:
Fixed maturity, available-for-sale (1,073.1) (1,285.3)
Fixed maturity, held-to-maturity (0.7) (1.7)
Equity (18.5) (12.3)
Proceeds from sales of securities:
Fixed maturity, available-for-sale 745.3 957.7
Equity 34.2 12.7
Proceeds from maturities and calls of securities:
Fixed maturity, available-for-sale 58.7 81.7
Fixed maturity, held-to-maturity 26.6 38.2
Equity - 3.3
Property and equipment
Purchases (7.4) (3.7)
Sales 1.2 0.3
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (233.7) (209.1)
- -------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Debt:
Repayments (160.2) (0.5)
Proceeds from the issuance of senior notes - 199.3
Payment of issuance costs - (1.3)
Loss on retirement of convertible debt,
including conversion expense (3.6) -
Proceeds from exercise of stock options 14.2 10.4
Repurchase of treasury stock (13.3) -
Dividends paid to shareholders (7.7) -
- -------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (170.6) 207.9
- -------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (198.4) 185.4
Cash and cash equivalents, beginning of period 252.6 56.9
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 54.2 $ 242.3
=================================================================================================
Accompanying notes are an integral part of these consolidated financial
statements. For complete disclosures see Notes to Consolidated Financial
Statements on pages 54-71 of the Corporation's 2004 Form 10-K.
7
Ohio Casualty Corporation & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Ohio Casualty Corporation (the Corporation) is the holding company of The Ohio
Casualty Insurance Company (the Company), which is one of six
property-casualty insurance companies that make up the Ohio Casualty Group
(the Group), collectively the "Consolidated Corporation". All dollar amounts,
except per share data, presented in the Notes to Consolidated Financial
Statements are in millions unless otherwise noted.
NOTE I - INTERIM ADJUSTMENTS
We prepared the Consolidated Balance Sheets as of September 30, 2005 and the
Consolidated Statements of Income, Shareholders' Equity and Cash Flows for
the three and nine months ended September 30, 2005 and 2004, without an audit.
In the opinion of management, all adjustments necessary to fairly present the
financial position, results of operations and cash flows at September 30, 2005
and for each period presented have been made.
We prepared the accompanying unaudited Consolidated Financial Statements in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to the Quarterly
Report on Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted. The unaudited Consolidated
Financial Statements should be read together with the consolidated financial
statements and notes thereto included in the Corporation's 2004 Annual Report
on Form 10-K. The results of operations for the period ended September 30,
2005 are not necessarily indicative of the results of operations for the full
year.
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, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The premiums receivable balance is presented net of bad debt allowances
determined by management of $4.4 at September 30, 2005 and $4.3 at December 31,
2004. Property and equipment are carried at cost less accumulated depreciation
of $174.7 and $167.4 at September 30, 2005 and December 31, 2004, respectively.
Amounts recoverable from reinsurers are calculated in a manner consistent with
the reinsurance contract and are reported net of allowance of $2.3 at September
30, 2005 and December 31, 2004.
NOTE II - STOCK OPTIONS
The Consolidated Corporation accounts for stock options issued to employees and
directors in accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." Under APB 25, the Consolidated
Corporation recognizes expense based on the intrinsic value of options. Had
the Consolidated Corporation adopted income statement recognition requirements
of Financial Accounting Standards Board (FASB) 123 "Accounting for Stock Based
Compensation," the Consolidated Corporation's net income and earnings per
share would have been reduced to the pro forma amounts disclosed below:
8
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
- --------------------------------------------------------------------------------------
Net income
As reported $55.5 $19.6 $135.4 $71.5
Add: Stock-based employee
compensation reported in net
income under APB 25, net of related
tax effect 0.6 0.1 0.9 0.2
Deduct: Total stock-based employee
Compensation under FAS 123, net of
related tax effect 1.6 1.8 4.2 4.9
----- ----- ------ -----
Pro forma $54.5 $17.9 $132.1 $66.8
Basic EPS
As reported $0.86 $0.32 $2.13 $1.17
Pro Forma $0.85 $0.29 $2.08 $1.09
Diluted EPS*
As reported $0.85 $0.30 $2.02 $1.07
Pro Forma $0.83 $0.27 $1.97 $1.01
- --------------------------------------------------------------------------------------
*Diluted EPS has been adjusted for the effect of EITF Issue No. 04-8 for the
nine months ended September 30, 2005 and the three and nine months ended
September 30, 2004. The three month period ended September 30, 2005 was not
impacted due to the redemption/repurchase of the Convertible Notes in the
second quarter of 2005. Also see Note III.
See Note XII - Recently Issued Accounting Standards for additional information
pertaining to FASB 123(R) - "Share-Based Payment."
NOTE III - EARNINGS PER SHARE
Basic and diluted earnings per share are summarized as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
- --------------------------------------------------------------------------------------
Net income $55.5 $19.6 $135.4 $ 71.5
Weighted average common shares
outstanding - basic (thousands) 64,400 61,627 63,487 61,347
Income before cumulative effect of
an accounting change $0.86 $0.32 $2.13 $ 1.20
Cumulative effect of an accounting
change - - - $(0.03)
Basic net income per weighted
average share $0.86 $0.32 $2.13 $ 1.17
======================================================================================
Net income $55.5 $19.6 $135.4 $ 71.5
Effect of EITF 04-8 on net income
using "if-converted" method - 1.7 1.8 5.0
Adjusted net income using
"if-converted" method 55.5 21.3 137.2 76.5
Weighted average common shares
outstanding (thousands) 64,400 61,627 63,487 61,347
Effect of dilutive securities
(thousands) 1,257 1,154 1,259 1,116
Effect of EITF 04-8 (thousands) - 8,898 3,266 8,898
- --------------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted (thousands) 65,657 71,679 68,012 71,361
Income before cumulative effect of
an accounting change $0.85 $0.30 $2.02 $ 1.09
Cumulative effect of an accounting
change - - - $(0.02)
Diluted net income per weighted
average share $0.85 $0.30 $2.02 $ 1.07
======================================================================================
In accordance with Emerging Issues Task Force (EITF) 04-8 "The Effect of
Contingently Convertible Debt on Diluted Earnings Per Share," the earnings
per share treatment of those securities that contain a contingent conversion
feature require all of the shares underlying the convertible securities to be
treated as outstanding using the "if-converted" method. As required by the
EITF, all prior period earnings per share amounts would need to be restated
for periods presented subsequent to the March 2002 Convertible Notes
issuance. The "if-converted" method gives effect to the add back to net
income of interest expense and
9
amortization of debt issuance costs, net of tax, associated with the
convertible instruments. The adoption of EITF 04-8 reduced previously
reported diluted earnings per share by $0.01 and $0.07 for the three and
nine months ended September 30, 2004, respectively.
NOTE IV -- SEGMENT INFORMATION
The Consolidated Corporation has determined its reportable segments based
upon its method of internal reporting, which is organized by product line.
The property and casualty segments are Commercial, Specialty,and Personal
Lines. These segments generate revenues by selling a wide variety of
commercial, surety and personal insurance products. The Corporation also
has an All Other segment which derives its revenues from investment income.
The other expenses included in this segment consist principally of costs
related to the retirement of the convertible debt and interest expense in
2005. In 2004, the other expenses consist primarily of interest expense.
Each of the segments of the Consolidated 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 determined on a GAAP basis, which includes loss, loss
adjustment and underwriting expense ratios, combined ratio, premiums earned,
underwriting gain/loss and statutory premiums written. The following tables
present information by segment as it is reported internally to management.
Asset information by reportable segment is not reported, since the
Consolidated Corporation does not produce such information internally.
Three Months Ended September 30
Commercial Lines Segment 2005 2004
- ---------------------------------------------------------------------------
Net premiums written $207.1 $203.3
% Change 1.9% 3.3%
Net premiums earned 206.1 201.7
% Change 2.2% 2.0%
Underwriting loss (before tax) (23.1) (3.5)
Specialty Lines Segment 2005 2004
- ---------------------------------------------------------------------------
Net premiums written $38.0 $28.7
% Change 32.4% (40.7)%
Net premiums earned 36.3 32.0
% Change 13.4% (23.1)%
Underwriting gain/(loss) (before tax) 1.8 (2.6)
Personal Lines Segment 2005 2004
- ----------------------------------------------------------------------------
Net premiums written $123.9 $128.7
% Change (3.7)% 1.3%
Net premiums earned 120.1 122.8
% Change (2.2)% 1.3%
Underwriting gain (before tax) 23.1 5.1
Total Property & Casualty 2005 2004
- ----------------------------------------------------------------------------
Net premiums written $369.0 $360.7
% Change 2.3% (3.1)%
Net premiums earned 362.5 356.5
% Change 1.7% (1.1)%
Underwriting gain/(loss) (before tax) 1.8 (1.0)
All Other 2005 2004
- ----------------------------------------------------------------------------
Revenues $ 5.9 $ 2.6
Write-down and amortization of agent
relationships (2.4) (5.0)
Other expenses (6.8) (7.5)
- ----------------------------------------------------------------------------
Net loss before income taxes $(3.3) $(9.9)
10
Reconciliation of Revenues 2005 2004
- ----------------------------------------------------------------------------
Net premiums earned for reportable
segments $362.5 $356.5
Net investment income 47.6 42.3
Realized gains/(losses), net 20.3 (4.3)
- ----------------------------------------------------------------------------
Total property and casualty revenues 430.4 394.5
Other segment revenues 5.9 2.6
- ----------------------------------------------------------------------------
Total revenues $436.3 $397.1
============================================================================
Reconciliation of Underwriting
Gain/(Loss) (before tax) 2005 2004
- ----------------------------------------------------------------------------
Property and casualty underwriting
gain/(loss) (before tax) 1.8 (1.0)
Net investment income 51.4 44.9
Realized gains/(losses), net 22.4 (4.3)
Write-down and amortization of agent
relationships (2.4) (5.0)
Other expenses (6.8) (7.5)
- ----------------------------------------------------------------------------
Income before income taxes $66.4 $27.1
============================================================================
Nine Months Ended September 30
Commercial Lines Segment 2005 2004
- ---------------------------------------------------------------------------
Net premiums written $634.5 $635.8
% Change (0.2)% 3.9%
Net premiums earned 618.4 601.9
% Change 2.7% 4.0%
Underwriting loss (before tax) (41.4) (13.5)
Specialty Lines Segment 2005 2004
- --------------------------------------------------------------------------
Net premiums written $116.8 $102.6
% Change 13.8% (17.6)%
Net premiums earned 107.8 114.5
% Change (5.8)% (5.1)%
Underwriting gain (before tax) 4.8 3.6
Personal Lines Segment 2005 2004
- ---------------------------------------------------------------------------
Net premiums written $361.1 $373.0
% Change (3.2)% 2.5%
Net premiums earned 364.1 368.4
% Change (1.2)% 1.9%
Underwriting gain/(loss) (before tax) 70.6 (1.9)
Total Property & Casualty 2005 2004
- ---------------------------------------------------------------------------
Net premiums written $1,112.4 $1,111.4
% Change 0.1% 1.0%
Net premiums earned 1,090.3 1,084.8
% Change 0.5% 2.3%
Underwriting gain/(loss) (before tax) 34.0 (11.8)
All Other 2005 2004
- ---------------------------------------------------------------------------
Revenues $18.0 $ 6.3
Write-down and amortization of agent
relationships (10.1) (16.5)
Other expenses (32.7) (14.3)
- ---------------------------------------------------------------------------
Net loss before income taxes $(24.8) $(24.5)
===========================================================================
Reconciliation of Revenues 2005 2004
- ---------------------------------------------------------------------------
Net premiums earned for reportable
segments $1,090.3 $1,084.8
Net investment income 137.4 139.4
Realized gains, net 29.2 0.9
- ---------------------------------------------------------------------------
Total property and casualty revenues 1,256.9 1,225.1
Other segment revenues 18.0 6.3
- ---------------------------------------------------------------------------
Total revenues $1,274.9 $1,231.4
===========================================================================
11
Reconciliation of Underwriting
Gain/(Loss) (before tax) 2005 2004
- --------------------------------------------------------------------------
Property and casualty underwriting
gain/(loss) (before tax) $ 34.0 $ (11.8)
Net investment income 148.4 144.0
Realized gains, net 36.2 2.6
Write-down and amortization of agent
relationships (10.1) (16.5)
Other expenses (32.7) (14.3)
- --------------------------------------------------------------------------
Income before income taxes and cumulative
effect of an accounting change $175.8 $104.0
==========================================================================
NOTE V - AGENT RELATIONSHIPS
The agent relationships asset is an identifiable intangible asset acquired in
connection with the 1998 Great American Insurance Company (GAI) commercial
lines acquisition. The Consolidated 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, the purchase price was allocated to agent relationships
and deferred policy acquisition costs. Agent relationships are evaluated
quarterly as events or circumstances indicate a possible inability to recover
their carrying amount. As a result of the evaluation, the agent relationship
asset was written down before tax by $0.8 and $3.3 in the third quarter of
2005 and 2004, respectively. For the nine months ended September 30, 2005
and 2004, the asset was written down before tax by $5.3 and $11.3,
respectively. The write-downs are a result of agency cancellations and
certain agents determined to be impaired based on updated estimated future
undiscounted cash flows that were insufficient to recover the carrying amount
of the asset for the agent. The remaining portion of the agent relationships
asset will be amortized on a straight-line basis over the remaining useful
period of approximately 19 years. For the three and nine month periods
ended September 30, 2005, the Consolidated Corporation recorded amortization
expense of $1.6 and $4.8 which compares to $1.7 and $5.2 for the same periods
of the prior year. At September 30, 2005 and December 31, 2004, the
unamortized carrying value of the agent relationships asset was $111.9 and
$122.0, respectively. The agent relationships asset is recorded net of
accumulated amortization of $44.2 and $41.4 at September 30, 2005 and
December 31, 2004, respectively.
Future cancellation of agents included in the agent relationships intangible
asset or a diminution of certain former Great American agents' estimated
future revenues or profitability is likely to cause further impairment losses
beyond the quarterly amortization of the remaining asset value over the
remaining useful lives.
NOTE VI - INTERNALLY DEVELOPED SOFTWARE
In accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," the Consolidated
Corporation capitalizes costs incurred during the application development
stage for the development of internal-use software. These costs primarily
relate to payroll and payroll-related costs for employees along with costs
incurred for external consultants who are directly associated with the
internal-use software project. Costs such as maintenance, training, data
conversion, overhead and general and administrative are expensed as incurred.
Management believes the expected future value of the asset exceeds the
carrying value. Management evaluates the asset on an annual basis for
impairment. The costs associated with the software are amortized on a
straight-line basis over an estimated useful life of 10 years commencing when
the software is substantially complete and ready for its intended use.
Capitalized software costs and accumulated amortization amounts included in
the consolidated balance sheets were $57.2 and $14.8 at September 30, 2005
and $55.2 and $11.4 at December 31, 2004, respectively.
NOTE VII - DEBT
On March 19, 2002, the Corporation issued $201.3 aggregate principal amount
of 5.00% Convertible Notes due March 19, 2022 (Old Notes). On March 22, 2005
the Corporation exchanged $65.6 of its Old Notes for $65.6 of new 5.00%
Convertible Notes due March 19, 2022 (New Notes and collectively the
Convertible Notes). The only change in the New Notes was the incorporation
of a net share settlement feature. The Corporation paid a premium to the
holders electing the exchange to the New Notes. Also on this date, the
Corporation announced its intention to fully redeem before maturity the
Convertible Notes at their regular redemption price of 102% of the principal
amount plus accrued interest to, but excluding, the redemption date of May 2,
2005. In connection with this announced redemption, holders of the
Convertible Notes could
12
elect to convert their Convertible Notes into shares of the Corporation's
common stock. Upon conversion of the Old Notes, the Corporation delivered
44.2112 of its common stock for each $1,000 principal amount of Old Notes
surrendered for conversion. Upon conversion of the New Notes, the
Corporation paid the principal amount in cash and any conversion consideration
in excess of the principal amount in the Corporation's common stock. The
above transactions impacted the Consolidated Corporation's results of
operations and balance sheets as follows:
2005
Loss on retirement
of Convertible Debt, Impact on
Old New including debt Shareholders'
Notes Notes conversion expenses Equity
------------------------------------------------------
Initial Issuance $201.3 $ - $ - $ -
Repurchases in unsolicited
negotiated transactions (a) (52.8) - (2.5) -
Impact of exchange offer
and related exchange
premium (65.6) 65.6 (0.3) -
Call Elections:
Cash redemption (b) (53.9) (55.0) (5.7) -
Equity conversion (c) (29.0) (10.6) (0.5) 28.5
- -------------------------------------------------------------------------------------
September 30, 2005 $ - $ - $(9.0) $28.5
=====================================================================================
(a) These repurchases were completed in the following periods: $35.8 in the
second quarter of 2005, $4.5 in the first quarter of 2005 and $12.5 in
the fourth quarter of 2004. As a result of these repurchases, the
Corporation wrote off a proportionate amount of unamortized debt
issuance costs of $1.2 in the second quarter of 2005, $0.1 in the first
quarter of 2005 and $0.4 in the fourth quarter of 2004, which was
included in the 2004 results of operations. In addition, the Corporation
paid a premium on the repurchases of $0.8 in the second quarter of 2005,
$0.4 in first quarter 2005 and $0.6 in the fourth quarter of 2004, which
was also included in the 2004 results of operations. The loss on
retirement of debt attributable to 2004 relating to the repurchase
transactions are not included in the above table.
(b) In connection with the cash redemption, the Corporation paid a call
premium in the amount of $2.2 and wrote off the proportionate amount of
unamortized debt issuance costs in the amount of $3.5 in the second
quarter of 2005.
(c) In connection with the equity conversion, the Corporation issued
1,282,123 shares of its common stock for conversion of the Old Notes,
issued 23,462 shares of its common stock for conversion of the New Notes,
recognized $0.5 in debt conversion expenses related to the New Notes,
which represents the conversion price of $22.62 multiplied by 23,462
shares issued, and increased shareholders' equity by $28.5 in the second
quarter of 2005. The increase in shareholders' equity consists
principally of the conversion of the principal amount of Old Notes
$(29.0) and accrued interest through the date of conversion $(0.2)
offset by the write-off of the proportionate amount of unamortized
debt issuance cost $(1.4).
On June 29, 2004, the Corporation issued $200.0 of 7.3% Senior Notes due
June 15, 2014 (Senior Notes) and received net proceeds after related fees
and discount of $198.0. The Corporation used a substantial majority of the
net proceeds to repurchase and redeem the Convertible Notes as discussed
above. Interest is payable on the Senior Notes on June 15 and December 15.
The Senior Notes are reported on the consolidated balance sheets net of
unamortized issuance-related costs and discount totaling $2.3 at September 30,
2005. The Convertible Notes and Senior Notes were reported on the
consolidated balance sheets net of unamortized issuance-related costs and
discount totaling $8.7 ($6.3 related to the Convertible Notes and $2.4 related
to the Senior Notes) at December 31, 2004. The Corporation uses the effective
interest rate method to record interest expense, amortization of
issuance-related costs and amortization of the discount.
13
The impact of the Convertible Notes on diluted earnings per share is based
upon the "if-converted" method. In accordance with EITF 04-8, all diluted
earnings per share amounts have been restated since the issuance of the
Convertible Notes in March 2002. See Note III - Earnings Per Share of this
Quarterly Report on Form 10-Q and Item 15, Notes to Consolidated Financial
Statements, Footnote 10 on pages 66 and 67 of the Corporation's 2004 Annual
Report on Form 10-K for further discussion.
On July 31, 2002, the Corporation entered into a revolving credit agreement
with an expiration date of March 15, 2005. In February 2005, the revolving
credit agreement was renewed, under substantially the same terms and
conditions, and will expire on March 15, 2006. Under the terms of the
revolving credit agreement, the lenders agreed to make loans to the
Corporation in an aggregate amount up to $80.0 for general corporate purposes.
Interest is payable in arrears, and the interest rate on borrowings under the
revolving credit agreement is based on a margin over LIBOR or the LaSalle Bank
Prime Rate, at the option of the Corporation. The Corporation is obligated
to pay agency fees and facility fees of up to $0.2 annually. These fees are
expensed when incurred by the Corporation. The revolving credit agreement
requires the Corporation to maintain minimum net worth of $800.0. The credit
agreement also includes a minimum statutory surplus for the Company of
$650.0. Additionally, other financial covenants and other customary
provisions, as defined in the agreement, exist. At September 30, 2005, the
Corporation was in compliance with all financial covenants and other
provisions of this agreement. There were no amounts outstanding under this
revolving credit agreement at either September 30, 2005 or December 31,
2004.
Interest expense incurred for the nine month period ending September 30, 2005
and 2004 was $14.1 and $11.4, respectively. Interest expense incurred for
the three month period ending September 30, 2005 and 2004 was $3.7 and $6.2,
respectively. The increase in interest expense incurred in the nine month
period ending September 30, 2005 is related to the issuance of the Senior
Notes on June 29, 2004, while the decline in interest expense for the three
months ended September 30, 2005 relates to the repurchase, redemption and
conversion of all outstanding Convertible Notes during the second quarter
2005.
NOTE VIII - CONTINGENCIES
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 contract stipulated that a premiums-to-surplus ratio of
2.5 to 1 must be maintained on the transferred business during the period
March 2002 through December 2004. If this criteria was not met, OCNJ would
have to pay up to a maximum cumulative amount of $15.6 to Proformance to
maintain this premiums-to-surplus ratio. Based on data provided by
Proformance, OCNJ paid $6.8 in July, 2004 to Proformance in settlement of
this obligation through December 31, 2003. At December 31, 2004, based
upon information provided by Proformance, OCNJ had accrued $8.8 to cover this
estimated additional liability. Late in the first quarter of 2005, OCNJ,
based on revised information provided by Proformance subsequent to the
Corporation filing its 2004 Annual Report on Form 10-K, reduced its estimated
liability and related accrual to $4.4 at March 31, 2005. In June 2005, OCNJ
reached a settlement with Proformance for the final payment related to this
obligation in the amount of $3.7 and in return received from Proformance a
release from any and all future obligations related to this surplus guarantee.
Accordingly, at September 30, 2005, no additional amounts are recorded on the
Consolidated Balance Sheets pursuant to this surplus guarantee. The total
amount paid by OCNJ pursuant to the surplus guarantee was $10.5, compared to
the maximum cumulative exposure of $15.6.
A proceeding entitled Carol Murray v. the Corporation, the Company, Avomark
Insurance Company (Avomark), Ohio Security Insurance Company (Ohio Security),
West American Insurance Company (West American), American Fire and Casualty
Insurance Company (American Fire), and OCNJ was filed in the United States
District Court for the District of Columbia on February 5, 2004. A motion
to change venue was granted on May 25, 2004 with the proceeding assigned to
the U.S. District Court for the Southern District of Ohio, Eastern Division,
Columbus, Ohio. The plaintiff, a former automobile physical damage claim
adjuster, originally sought to certify a nationwide collective action
consisting of all current and former salaried employees since February 5,
2001 who are/were employed to process claims by policyholders and other
persons for automobile property damage. The plaintiff also filed motions
to expand the definition to include claim specialists, representative
trainees, and representatives performing claims adjusting services. The
complaint sought overtime compensation for the plaintiff and the class of
persons plaintiff sought to represent. The U.S. District Court dismissed the
complaint against Avomark, Ohio Security, West
14
American, American Fire, and OCNJ on September 27, 2005. The U.S. District
Court also granted the motion for summary judgment of the Corporation and the
Company on September 27, 2005. The proceeding was ordered closed with
judgment in favor of the defendants. The decision has been appealed by
plaintiff to the U.S. Sixth Circuit Court of Appeals.
A proceeding entitled Carol Lazarus v. the Group was brought against West
American in the Court of Common Pleas Cuyahoga County, Ohio on October 25,
1999. The Court ordered the case to proceed solely against West American on
July 10, 2003. The complaint alleges West American improperly charged for
uninsured motorists coverage following an October 1994 decision of the Supreme
Court of Ohio in Martin v. Midwestern Insurance Company. The Martin decision
was overruled legislatively in September 1997. West American filed a motion
for summary judgment on December 16, 2003. Plaintiff filed a motion for
class certification on February 23, 2004. West American has responded to the
motion for class certification stating the motion is untimely (filed more
than four years after the initial complaint) and that Carol Lazarus failed
to provide sufficient evidence to satisfy the requirements for class
certification.
A proceeding entitled Douglas and Carla Scott v. the Company, West American,
American Fire, and Ohio Security was filed in the District Court of Tulsa
County, State of Oklahoma and served on January 3, 2005. The proceeding
challenges the use of a certain vendor in valuing total loss automobiles.
Plaintiff alleges that use of the database results in valuations to the
detriment of the insureds. Plaintiff is seeking class status and alleges
breach of contract, fraud and bad faith. The lawsuit is in its early stages
and will be vigorously defended.
The proceedings described above and various other legal and regulatory
proceedings are currently pending that involve the Consolidated Corporation
and specific aspects of the conduct of its business. The outcome of these
proceedings is currently unpredictable. However, at this time, based on
their present status, it is the opinion of management that the ultimate
liability, if any, in one or more of these proceedings in excess of amounts
currently reserved is not expected to have a material adverse effect on the
financial condition, liquidity or results of operation of the Consolidated
Corporation.
NOTE IX - EMPLOYEE BENEFITS
The Consolidated Corporation has a non-contributory defined benefit
retirement plan and a contributory health care plan. The net periodic pension
cost as of September 30 is determined as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
- --------------------------------------------------------------------------------------
Service cost earned during the
period $ 1.8 $ 1.9 $ 5.4 $ 5.9
Interest cost on projected benefit
obligation 4.3 4.1 12.9 12.7
Expected return on plan assets (5.5) (5.4) (16.3) (16.1)
Amortization of accumulated losses 1.0 0.6 2.7 2.0
Amortization of unrecognized prior
service cost (0.5) (0.6) (1.7) (1.3)
Curtailment cost - - - 0.1
- ---------------------------------------------------------------------------------------
Net periodic pension cost $ 1.1 $ 0.6 $ 3.0 $ 3.3
=======================================================================================
The Consolidated Corporation contributed approximately $4.2 and $8.1 in the
three and nine month periods ended September 30, 2005, respectively, to the
defined benefit retirement plan, and approximately $7.5 in the first nine
months of 2004. The Consolidated Corporation contributed $11.0 in October
2005.
In March 2004, the Consolidated Corporation announced changes to the defined
benefit retirement plan which were effective June 30, 2004, which freezes
accrued benefits under the plan's current formula and incorporates a new
benefit formula beginning July 2004. As a result of these changes and staff
reductions announced in the first nine months of 2004, the Consolidated
Corporation recognized a curtailment charge of $0.1 in 2004.
15
The components of the Consolidated Corporation's net periodic postretirement
benefit cost as of September 30:
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
- --------------------------------------------------------------------------------------
Service cost $ - $ - $ 0.2 $ 0.7
Interest cost 0.7 0.9 2.2 3.2
Amortization of accumulated losses 0.1 - 0.1 0.2
Amortization of unrecognized prior
service cost (1.5) (1.5) (4.5) (3.5)
Curtailment cost - - - 0.1
- --------------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $(0.7) $(0.6) $(2.0) $ 0.7
======================================================================================
In March 2004, the Consolidated Corporation announced changes related to the
postretirement health care plan effective July 1, 2004 that limits
eligibility for subsidized retiree medical and dental coverage to then current
retirees and employees with 25 or more years of service. Other employees are
eligible for access to unsubsidized retiree dental coverage and medical
coverage up to age 65. As a result of these changes and staff reductions, the
Consolidated Corporation recognized a curtailment charge of $0.1 in 2004.
NOTE X - INCOME TAX
At December 31, 2004, the Consolidated Corporation disclosed it had been
examined by the Internal Revenue Service (IRS) for tax years 1997 to 2001 and
was then in the process of finalizing a settlement. On August 25, 2005, the
IRS issued notification to the Consolidated Corporation that a settlement
agreement concerning its examination of these tax years was approved. This
settlement results in a $2.7 net tax benefit related to realized capital gains,
and interest income, before tax, of $0.9. In conjunction with the IRS
settlement, the Consolidated Corporation is reversing $9.1 ($8.0 related to
realized capital gains and $1.1 related to operations) of book tax reserves.
Additionally, on September 28, 2005, the IRS advised the Consolidated
Corporation that it accepted a protective claim for refund for the 1996 tax
year related to adjustments resulting from the 2003 settlement of the IRS
examination of the 1995 tax year. The acceptance of this protective refund
claim results in a $3.4 net tax benefit related to operations, and interest
income, before tax, of $1.6 million.
In the aggregate, when considering all of the above referenced items, net
income for the three and nine months ended September 30, 2005, was favorably
impacted by $16.8, comprised of a $15.2 net tax benefit ($4.5 related to
operations and $10.7 related to capital gains) and $1.6 after-tax interest
income. This net tax benefit has the effect of lowering the Consolidated
Corporation's effective income tax rate for the nine months ended September
30, 2005 by 6.6%.
NOTE XI - SHARE REPURCHASE
During the third quarter of 2005, the Corporation's Board of Directors
authorized the repurchase of up to four million shares of common stock of the
Corporation to be made in the open market or in privately negotiated
transactions. The Corporation has repurchased 570,115 shares at an average
cost of $25.61 during the third quarter of 2005. The number of shares
that remain authorized for repurchases is 3,429,885 at September 30, 2005.
For the period from October 1, 2005 to and including October 24, 2005,
the Corporation has repurchased an additional 618,270 shares at an average
cost of $25.95.
NOTE XII - RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB finalized Statement 123(R), "Share- Based Payment."
On April 14, 2005, the Securities and Exchange Commission (SEC) announced a
phased-in implementation process that would allow the Consolidated
Corporation to defer the implementation of the statement no later than the
beginning of the first fiscal year beginning after June 15, 2005. For the
Consolidated Corporation this would mean January 1, 2006. Statement 123(R)
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and amends FASB Statement No. 95, "Statement of Cash Flows." FASB 123(R)
requires all
16
share-based payments to employees, including grants of employee stock
options, to be recognized as compensation expense in the income statement at
fair value. Pro forma disclosure is no longer an alternative. The
Consolidated Corporation currently intends to adopt the provisions of FASB
123(R) effective January 1, 2006.
FASB 123(R) permits public companies to adopt its requirements using one of
two ethods: (1) modified prospective or (2) modified retrospective. The
Consolidated Corporation currently intends to adopt using the modified
prospective method in which compensation expense would be recognized
beginning January 1, 2006 (a) based on the requirements of FASB 123(R) for
all share-based payments granted after the January 1, 2006 and (b) based
on the requirements of FASB 123 for all awards granted to employees prior
to January 1, 2006 that remain unvested on that date.
The adoption of FASB 123(R) fair value method is expected to increase the
Consolidated Corporation's compensation expense by approximately $3.0 to
$4.0 in 2006. These impacts could change materially from these estimates
based upon the Consolidated Corporation's use of equity-based awards
granted in the future. Had the Consolidated Corporation adopted FASB
123(R) in \prior periods, the impact of that standard would have approximated
the impact of FASB 123 as described in the disclosure of pro forma net
income and earnings per share in Note II.
FASB 123(R) also requires the benefits of tax deductions in excess of
recognized compensation expense to be reported as a financing cash flow,
rather than as an operating cash flow as required under current accounting
literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the adoption.
In March 2004, the FASB approved the consensus reached on the EITF Issue No.
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments." The objective of this consensus is to provide
guidance for identifying impaired investments. EITF 03-1 also provides
new disclosure requirements for investments that are deemed to be
temporarily impaired. Originally, the accounting provisions of EITF 03-1
were effective for all reporting periods beginning after June 15, 2004,
while the disclosure requirements are effective only for annual periods
ending after June 15, 2004. In September 2004, the FASB issued two FASB
Staff Positions (FSP), FSP EITF 03-1-a and FSP EITF 03-1-1, which delayed
the measurement and recognition paragraphs of the consensus for further
discussion. The disclosure requirements remain effective as originally
issued under EITF 03-1 and have been adopted by the Consolidated
Corporation. In June 2005, the FASB issued a final FSP EITF 03-1-a
(retitled FSP FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments") which will replace the guidance set
forth in paragraphs 10-18 of Issue 03-1 and clarifies when an investor should
recognize an impairment loss. The provisions of FSP FAS 115-1 are effective
for other-than-temporary impairment analysis conducted in periods beginning
after December 15, 2005. The Consolidated Corporation has evaluated the
provisions of FSP FAS 115-1 and believes the impact will be immaterial on
its overall results of operations or financial position.
In May 2005, the FASB issued FASB Statement 154 "Accounting Changes and Error
Corrections" which replaces APB Opinion No. 20 "Accounting Changes" and
FASB Statement 3 "Reporting Accounting Changes in Interim Financial
Statements." This statement changes the requirements for the accounting for
and reporting of a change in accounting principle. This statement applies to
all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This
statement requires voluntary changes in accounting principles be recognized
retrospectively to prior periods' financial statements, rather than
recognition in the net income of the current period. Retrospective
application requires restatements of prior period financial statements as
if that accounting principle had always been used. This statement carries
forward without change the guidance contained in Opinion 20 for reporting
the correction of an error in previously issued financial statements and a
change in accounting estimate. The provisions of FASB Statement 154 are
effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
17
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Ohio Casualty Corporation (the Corporation) is the holding company of The Ohio
Casualty Insurance Company (the Company), which is one of six
property-casualty insurance companies that make up the Ohio Casualty Group
(the Group), collectively the "Consolidated Corporation". All dollar
amounts in this Management Discussion and Analysis (MD&A) are in millions
unless otherwise noted.
RESULTS OF OPERATIONS
Net income
The Consolidated Corporation reported net income of $135.4, or $2.02 per share
for the nine months ending September 30, 2005, compared with $71.5, or $1.07
per share in the same period of 2004. For the third quarter of 2005, net
income was $55.5, or $0.85 per share, compared with net income of $19.6, or
$0.30 per share in the same quarter of 2004.
Management of the Consolidated Corporation believes the significant
volatility of realized investment gains and losses limits the usefulness of
net income as a measure of current operating performance. Therefore,
management uses the non-GAAP financial measure of operating income to
further evaluate current operating performance. Operating income is
reconciled to net income in the table below:
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
- --------------------------------------------------------------------------------------
Operating income $32.7 $22.4 $103.6 $ 71.4
After-tax net realized
gains/(losses) 22.8 (2.8) 31.8 1.7
Cumulative effect of accounting
change - - - (1.6)
- --------------------------------------------------------------------------------------
Net income $55.5 $19.6 $135.4 $ 71.5
======================================================================================
Operating income per share - diluted $0.50 $ 0.34 $1.55 $ 1.07
After-tax net realized gains/(losses)
per share - diluted 0.35 (0.04) 0.47 0.02
Cumulative effect of accounting
change per share - diluted - - - (0.02)
- ---------------------------------------------------------------------------------------
Net income per share - diluted $0.85 $0.30 $2.02 $ 1.07
=======================================================================================
During the third quarter 2005, the Consolidated Corporation favorably
concluded settlements with the Internal Revenue Service (IRS) for tax years
1996 through 2001. As a result of the IRS settlement, net income was
favorably impacted for the three and nine months ended September 30, 2005
by $16.8 ($0.26 per share for the three months and $0.25 per share for the
nine months) and operating income for the periods was favorably impacted by
$6.1 ($0.09 per share for the three and nine months). For additional
information regarding this IRS settlement, see Note X in the Notes to the
Consolidated Financial Statements on page 16 of this Quarterly Report on
Form 10-Q.
Investment Results
Third quarter 2005 and 2004 consolidated before-tax investment income was
$51.4 ($36.5 after tax) and $44.9 ($31.4 after tax), respectively. The
effective tax rate on investment income in the third quarter was 29.0%,
compared with 30.0% for the same period of 2004. For the nine months ended
September 30, 2005 and 2004, consolidated before-tax net investment income
was $148.4 ($107.1 after tax) and $144.0 ($98.8 after tax), respectively.
The effective tax rate on investment income for the first nine months of
2005 was 27.8%, compared with 31.4% for the same period of 2004. Included
in 2005's third quarter pre-tax investment income is $2.5 of interest
income on favorable tax settlements with the IRS. See Note X in the Notes
to the Consolidated Financial Statements on page 16 of this Quarterly
Report on Form10-Q for additional information. Before-tax investment
income for the three and nine month periods ending September 30, 2005,
prior to giving consideration to the interest income from the IRS
settlements, was slightly higher than the same periods of the prior year,
as the impact of growth of our investment portfolio
18
resulting from positive operating cash flows was only partially offset by
lower before-tax investment yields in 2005 and our increased tax-exempt
securities holdings. Tax-exempt securities generally have lower before-tax
yields, but generate higher after-tax investment income. As a result of
the Consolidated Corporation's increased tax-exempt securities holdings,
the Consolidated Corporation's effective tax rate on investment income is
lower in the current year when compared to prior periods.
For the three and nine months ended September 30, 2005, net realized gains
were $22.4 and $36.2, compared to net realized losses of $4.3 for the three
months ended September 30, 2004 and net realized gains of $2.6 for the nine
months then ended in 2004. During the third quarter of 2005 as part of a
portfolio reallocation, the Group reduced its holdings in certain common
stock securities, which had appreciated in value and had become a
significant percentage of the Group's total common stock portfolio. These
disposals accounted for $24.0 of the net realized gain recognized during
the quarter. In the third quarter of 2005 and 2004, there were no material
losses on the disposal of any specific security or sector of securities.
Invested assets comprise a majority of the consolidated assets.
Consequently, accounting policies related to investments are critical. For
further discussion of investment accounting policies, see the "Critical
Accounting Policies" section on pages 31 and 32 of the Corporation's 2004
Annual Report on Form 10-K. Investments are continually evaluated based on
current economic conditions, credit loss experience and other developments.
The difference between the cost/amortized cost and estimated fair value of
investments is continually evaluated to determine whether a decline in
value is temporary or other than temporary in nature. This determination
involves a degree of uncertainty. If a decline in the fair value of a
security is determined to be temporary, the decline is recorded as an
unrealized loss in shareholders' equity. If a decline in a security's fair
value is considered to be other than temporary, the security is written
down to the estimated fair value with a corresponding realized loss
recognized in the current consolidated statement of income.
The assessment of whether a decline in fair value is considered temporary
or other than temporary includes management's judgment as to the financial
position and future prospects of the entity issuing the security. It is
not possible to accurately predict when it may be determined that a
specific security will become impaired. Future impairment charges could be
material to the results of operations. The before-tax impairment charge
recorded in the third quarter of 2005 and 2004 was $0.9 and $2.3,
respectively, and $0.9 and $7.5 for the nine months ended September 30,
2005 and 2004, respectively.
Management believes that it will recover the cost basis in the securities
held with unrealized losses as it has both the intent and ability to hold
the securities until they mature or recover in value. Securities are sold
to achieve management's investment goals, which include the diversification
of credit risk, the maintenance of adequate portfolio liquidity, the
generation of a competitive investment yield, the management of interest
rate risk and statutory surplus volatility. In order to achieve these
goals, sales of investments are based upon current market conditions,
liquidity needs and estimates of the future market value of the individual
securities.
The following table summarizes, for all available-for-sale securities and
held-to-maturity securities, the total gross unrealized losses, excluding
gross unrealized gains, by investment category and length of time the
securities have continuously been in an unrealized loss position as of
September 30, 2005:
19
Available-for-sale with unrealized losses:
Less than 12 months 12 months or longer Total
---------------------- ----------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------------------- ----------------------- -------------------------
Fixed securities:
U.S. government $ 13.9 $(0.1) $ - $ - $ 13.9 $ (0.1)
States, municipalities
and political subdivisions 469.7 (3.3) 3.1 - 472.8 (3.3)
Corporate securities 298.1 (5.6) 18.1 (0.6) 316.2 (6.2)
Mortgage-backed
securities 275.6 (2.2) 8.3 (0.4) 283.9 (2.6)
- ---------------------------------------------------------------------------------------------------------
Total fixed maturities 1,057.3 (11.2) 29.5 (1.0) 1,086.8 (12.2)
Equity securities 22.8 (1.4) - - 22.8 (1.4)
- ---------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $1,080.1 $(12.6) $29.5 $(1.0) $1,109.6 $(13.6)
=========================================================================================================
Held-to-maturity with unrealized losses:
Less than 12 months 12 months or longer Total
---------------------- ----------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------------------- ----------------------- -------------------------
Fixed securities:
Corporate securities $ 73.4 $(1.2) $50.9 $(1.6) $124.3 $(2.8)
Mortgage-backed
securities 69.0 (1.2) 15.4 (0.3) 84.4 (1.5)
- ----------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $142.4 $(2.4) $66.3 $(1.9) $208.7 $(4.3)
==========================================================================================================
As part of the evaluation of the entire $17.9 aggregate unrealized loss on
the investment portfolio, management performed a more intensive review of
securities with a relatively higher degree of unrealized loss. Based on a
review of each security, management believes that unrealized losses on
these securities were temporary declines in value at September 30, 2005.
In the tables above, there are approximately 400 securities represented.
Of this total, 14 securities have unrealized loss positions greater than 5%
of their book values at September 30, 2005, with none exceeding 20%. This
group represents $3.1, or 17.3% of the total unrealized loss position. Of
this group, eleven securities, representing approximately $2.7 in
unrealized losses, have been in an unrealized loss position for less than
twelve months. Of the remaining three securities, which have been in an
unrealized loss position for longer than twelve months and total $0.4,
management believes that it is probable that all contract terms of the
security will be satisfied; the unrealized loss position is due to the
changes in the interest rate environment; and that it has positive intent
and the ability to hold the securities until they mature or recover in
value.
All securities are monitored by portfolio managers who consider many
factors such as an issuer's degree of financial flexibility, management
competence and industry fundamentals in evaluating whether the decline in
fair value is temporary. In addition, management considers whether it is
probable that all contract terms of the security will be satisfied and
whether the unrealized loss position is due to changes in the interest rate
environment. Should management subsequently conclude the decline in fair
value is other than temporary, the book value of the security is written
down to fair value with the realized loss being recognized in the then
current consolidated statement of income.
The amortized cost and estimated fair value of available-for-sale and held-
to-maturity fixed maturity securities in an unrealized loss position at
September 30, 2005, 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.
20
Available-for-sale: Amortized Estimated Unrealized
Cost Fair Value Loss
- ----------------------------------------------------------------------------------
Due in one year or less $ 5.0 $ 5.0 $ -
Due after one year through five years 183.0 180.3 (2.7)
Due after five years through ten years 277.0 273.1 (3.9)
Due after ten years 347.5 344.5 (3.0)
Mortgage-backed securities 286.5 283.9 (2.6)
- ----------------------------------------------------------------------------------
Total $1,099.0 $1,086.8 $(12.2)
==================================================================================
Held-to-maturity: Amortized Estimated Unrealized
Cost Fair Value Loss
- ----------------------------------------------------------------------------------
Due in one year or less $ 2.0 $ 2.0 $ -
Due after one year through five years 22.9 22.3 (0.6)
Due after five years through ten years 99.0 96.9 (2.1)
Due after ten years 3.2 3.1 (0.1)
Mortgage-backed securities 85.9 84.4 (1.5)
- ----------------------------------------------------------------------------------
Total $213.0 $208.7 $(4.3)
==================================================================================
For additional discussion relative to the Consolidated Corporation's
investment portfolio, see the "Investment Portfolio" section under
"Liquidity and Capital Resources" on pages 26-28 of this MD&A.
Agent Relationships
The agent relationships asset is an identifiable intangible asset
representing the excess of cost over fair value of net assets acquired in
connection with the acquisition of the commercial lines business from Great
American Insurance Company (GAI) in 1998. Generally Accepted Accounting
Principles (GAAP) requires the Consolidated Corporation to perform periodic
reviews for possible impairment. These reviews consist of a comparison of
estimated future cash flows to the carrying value of the intangible asset.
If the estimated future cash flows are less than the carrying value for any
individual agent included in the asset, that portion of the asset must be
written down to its estimated fair value. The calculation of impairment
follows accounting guidelines that do not permit increasing the intangible
value for agents who are projected to generate more profit than was
expected at the time of the initial assignment of the intangible value to
each agent. The determination of impairment involves the use of management
estimates and assumptions. Due to the inherent uncertainties and judgments
involved in developing assumptions for each agent and the fact that the
asset cannot be increased for any agent, further reductions in the
valuation of the agent relationships asset are likely to occur in the
future. These reductions could be significant if actual agent revenue
production or profitability, or both, differ materially from current
assumptions. Management has considered these and other factors in
determining the remaining useful life of approximately 19 years for this
asset. Overall, the estimated future cash flows for the remaining acquired
agents assigned an intangible value exceed the remaining asset book value
of $111.9 recorded at September 30, 2005. For additional information
regarding agent relationships asset, please refer to Note V in the Notes to
the Consolidated Financial Statements on page 12 in this Quarterly Report
on Form 10-Q.
Operating Results
Insurance industry regulators require the Group to report its financial
condition and results of operations, among other things, using statutory
accounting principles. Management uses industry standard financial
measures determined on a statutory basis, as well as those determined on a
GAAP basis to analyze the Group's property and casualty operations. These
insurance industry financial measures include loss and loss adjustment
expense (LAE) ratios, underwriting expense ratio, combined ratio, net
premiums written and net premiums earned. The combined ratio is a commonly
used gauge of underwriting performance measuring the percentage of premium
dollars used to pay insurance losses and related expenses. The combined
ratio is the sum of the loss, LAE and underwriting expense ratios. All
references to combined ratio or its components in this MD&A are calculated
on a GAAP basis, unless otherwise indicated, and are calculated on a
calendar year basis unless specified as calculated on an accident year
basis. Insurance industry financial measures are included in the next
several sections of this MD&A that discuss results of operations. A
discussion of the differences between statutory accounting and generally
accepted accounting principles in the United States is included in Item 15,
page 69 of the Corporation's 2004 Annual Report on Form 10-K.
21
At September 30, 2005 and December 31, 2004, statutory surplus, a financial
measure that is required by insurance regulators and used to monitor
financial strength, was $937.0 and $972.0, respectively. The ratio of
twelve months ended net premiums written to statutory surplus as of
September 30, 2005 was 1.6 to 1.0 compared to 1.5 to 1.0 at December 31,
2004. The decrease in statutory surplus during the first nine months of
2005 is primarily a result of dividend declarations by the Company to the
Corporation in the amount of $136.6, of which $111.6 were paid by September
30, 2005 and the balance was paid on October 3, 2005.
Premium Revenue Results
Premium revenue reflects premiums earned by the Group. The Group's
premiums are earned principally on a monthly pro rata basis over the term
of the policy. Management analyzes premium revenues primarily by premiums
written in the current period. Net premiums written differs from gross
premiums written by premiums ceded to reinsurers.
The table below summarizes property and casualty premium on a gross and net
basis compared with the same period of the prior year:
Three months ended Nine months ended
September 30, September 30,
2005 2004 % Chg 2005 2004 % Chg
---- ---- ----- ---- ---- -----
Gross Premiums Written
- ----------------------
Commercial Lines $212.5 $210.5 1.0% $ 647.7 $ 656.8 (1.4)%
Specialty Lines 53.0 65.5 (19.1)% 160.4 194.1 (17.4)%
Personal Lines 125.3 130.7 (4.1)% 363.4 377.2 (3.7)%
------ ------ -------- --------
All Lines $390.8 $406.7 (3.9)% $1,171.5 $1,228.1 (4.6)%
====== ====== ======== ========
Three months ended Nine months ended
September 30, September 30,
2005 2004 % Chg 2005 2004 % Chg
---- ---- ----- ---- ---- -----
Net Premiums Written
- --------------------
Commercial Lines $207.1 $203.3 1.9% $ 634.5 $ 635.8 (0.2)%
Specialty Lines 38.0 28.7 32.4% 116.8 102.6 13.8%
Personal Lines 123.9 128.7 (3.7)% 361.1 373.0 (3.2)%
------ ------ -------- --------
All Lines $369.0 $360.7 2.3% $1,112.4 $1,111.4 0.1%
====== ====== ======== ========
All Lines gross premiums written are down for the three and nine month
periods ended September 30, 2005, due primarily to all three operating
segments experiencing declines in new business premium productions as a
result of an increase in competition partially offset by slightly better
retention rates. For Commercial Lines, the decline in new business premium
production for the three months ended September 30, 2005 was partially
offset by improved retention rates during the quarter and average renewal
price increases in the low single digits. For Specialty Lines, net
premiums written increased during the three and nine month periods ended
September 30, 2005 as a result of a decline in ceded premiums primarily
related to higher reinsurance retention limits, as previously disclosed and
a third quarter 2004 increased accrual for ceded premium of $6.1 on a
commercial umbrella product line reinsurance treaty for the years 1999
through 2001, which reduced net written premiums in 2004. Without the
effect of this additional ceded premium accrual in 2004, Specialty Lines
net premiums written for the three and nine months ended September 30, 2005
increased 9.2% and 7.5%, respectively, over the same periods of the prior
year. To offset the impact of an increasingly competitive environment, the
Group continues to devote more attention to identifying opportunities to
enhance premium growth by working to increase utilization of the Personal
and Commercial Lines service centers, improved sales force effectiveness
and improved agency management.
Commercial Lines renewal price increases averaged 1.5% in the third quarter
2005 compared to 2.9% in the third quarter 2004. This decrease period over
period is the result of a broad market trend of increased competitive
pricing pressure. Renewal price increase means the average increase in
premium for policies renewed by the Group. The average increase in premium
for each renewed policy is calculated by comparing the total expiring
premium for the policy with the total renewal premium for the same policy.
Renewal price increases include, among other things, the effects of rate
increases and changes in the underlying insured exposures of the policy.
Only policies issued by the Group in the previous policy term with the same
policy identification codes are included. Therefore, renewal price
increases do not include any effects of reinsurance.
22
All Lines Discussion
The following table provides key financial measures for All Lines:
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
---- ---- ---- ----
All Lines
- ---------
Loss ratio 56.4% 57.7% 53.9% 55.7%
Loss adjustment expense ratio 11.7% 10.7% 11.5% 10.8%
Underwriting expense ratio 31.4% 31.9% 31.5% 34.6%
----- ------ ----- ------
Combined ratio 99.5% 100.3% 96.9% 101.1%
===== ====== ===== ======
The All Lines combined ratio for the three and nine months ended September
30, 2005 improved 0.8 and 4.2 points, respectively. The improvement was
primarily driven by a lower loss ratio as a result of lower claim
frequency, improved pricing levels and the Group's continued focus on
underwriting quality. In addition, the loss ratio improvement reflects
lower catastrophe losses for both the quarter and year to date, as
described more fully below, despite the impact of Hurricanes Katrina and
Rita. These improvements were partially offset in the third quarter by
adverse development on prior years' loss and LAE reserves, primarily in
accident years prior to 2001. The underwriting expense ratio improvement is
described below and includes the full impact of staff reductions related to
the 2004 Cost Structure Efficiency (CSE) Initiative.
The table below summarizes the impact of changes in provision for all prior
accident year losses and LAE:
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
---- ---- ---- ----
Statutory net liabilities,
beginning of period $2,228.2 $2,168.8 $2,183.8 $2,128.9
Increase/(decrease) in
provision for prior
accident year claims $3.1 $(3.1) $(3.6) $(15.8)
Increase/(decrease) in
provision for prior
accident year claims
as % of premiums earned 0.9% (0.9)% (0.3)% (1.5)%
Catastrophe losses for the third quarter 2005 were $17.9 or 4.9 points
compared to $23.3 or 6.4 points in the third quarter 2004, a decrease of
1.5 points. For the nine months ended September 30, 2005, catastrophe
losses were $26.0 or 2.4 points compared to $38.0 or 3.5 points compared to
the same period last year. The effect of future catastrophes on the
Group's results of operations cannot be accurately predicted. As such,
severe weather patterns, acts of war or terrorist activities could have a
material adverse impact on the Group's results of operations, reinsurance
pricing and availability of reinsurance. During the third quarter of 2005,
there were seven catastrophes with the largest catastrophe (Hurricane Rita)
generating $14.9 in incurred losses as compared with eight catastrophes in
the third quarter of 2004 with the largest catastrophe generating $8.0 in
incurred losses. For additional disclosure of catastrophe losses, refer to
Item 15, Losses and LAE Reserves in the Notes to the Consolidated Financial
Statements on page 66 of the Corporation's 2004 Annual Report on Form 10-K.
The deterioration of the LAE ratio for the three and nine months ended
September 30, 2005 is attributable to a reduction in favorable prior years'
reserve development period over period ($3.7 and $14.1 favorable
development for the three and nine months periods of 2004, respectively,
compared to no development and $1.6 favorable development for the current
quarter and year to date periods, respectively).
The improvement in the underwriting expense ratio for the three and nine
months ended September 30, 2005 is related to the reduction in staff costs
related to the CSE initiative. In addition, the nine month underwriting
expense ratio was favorably impacted by a $5.1 reduction to the surplus
guarantee accrual related to the sale of the Group's New Jersey private
passenger auto business to Proformance Insurance Company (Proformance),
reducing the 2005 underwriting expense ratio by 0.5 points. The
underwriting expense ratio for the three and nine months ended September
30, 2004 was impacted by an increase to the surplus guarantee accrual of
0.3 points and 0.9 points, respectively. In addition, the underwriting and
LAE ratios for the three and nine month periods of 2005 were impacted by an
additional 1.2 points and 0.7 points, respectively, when compared to the
same periods in 2004 due to increased incentive accruals resulting from
improved profitability.
23
The respective periods of 2004 were adversely impacted by $0.9 and $10.0,
respectively, in severance and other restructuring costs related to the CSE
initiative. See Note VIII - Contingencies on pages 14 and 15 of this
Quarterly Report on Form 10-Q.
The employee count declined slightly when compared to December 31, 2004.
As of September 30, 2005, the employee count was 2,138, compared with 2,190
at December 31, 2004 and 2,206 at September 30, 2004.
In both the third quarter 2005 and 2004, underwriting expenses included
$0.8 of software amortization expense before tax, related to the rollout of
P.A.R.I.S.sm. On a GAAP accounting basis, the new application is being
amortized over a ten-year period. This amortization expense is expected to
be offset in part by reduced labor costs related to underwriting and policy
processing.
In 2001, the Group introduced into operation, P.A.R.I.S.(sm) for Commercial
Lines. At the end of 2004, P.A.R.I.S.(sm) was deployed for the Specialty
Lines commercial umbrella excess capacity product line. Further
implementation for other Specialty and Personal Lines products is expected
during the balance of 2005 and 2006.
The P.A.R.I.S.(sm) system provides the policy administration environment used
internally by the Group's associates. An extension of P.A.R.I.S.(sm) called
P.A.R.I.S. Express(sm) leverages the P.A.R.I.S.(sm) system to provide
underwriting, rating, inquiry and policy processing functionality to our
agents. P.A.R.I.S. Express(sm) is a proprietary internet interface that uses
the P.A.R.I.S.(sm) system to provide real-time functionality through a web
browser to our agents. In addition, the Group is simultaneously introducing
P.A.R.I.S. Connect(tm) which allows agents to transact with the Group
directly from their agency management system without requiring re-entering
of customer or agency information.
For selected Commercial Lines agents, P.A.R.I.S. Express(sm) and P.A.R.I.S.
Connect(tm) provides on-line quoting capability. In February of 2005,
P.A.R.I.S. Express(sm) was extended to support issuance and endorsement
processing for selected pilot agents; nationwide rollout will commence in
2005 and extend into 2006. Personal Lines currently offers on-line and
real time quoting and issuance for new business and endorsements through
existing (non- P.A.R.I.S.(sm)) systems.
Agents want a cost effective, timely and simple system for issuing and
maintaining insurance policies. P.A.R.I.S. Express(sm) and P.A.R.I.S.
Connect(tm) are the cornerstone in the Group's strategy of focusing on
superior agent service. The success of this strategic plan depends in part
on the ability to provide agents with the technological advantages of these
tools. If they do not work as expected, or fail to satisfy agents' needs,
the Group may lose business to insurers with preferred technologies.
Segment Discussion
The Consolidated Corporation's organizational structure consists of three
operating units: Commercial, Specialty and Personal Lines. The
Consolidated Corporation also has an all other segment, which derives its
revenue from investment income. The following tables provide key financial
measures for each of the property and casualty reportable segments:
Commercial Lines Segment
Three Months Ended Nine Months Ended
September 30 September 30
Commercial Lines Segment 2005 2004 2005 2004
- ------------------------ ---- ---- ---- ----
Net premiums written $207.1 $203.3 $634.5 $635.8
Net premiums earned 206.1 201.7 618.4 601.9
Loss ratio 63.5% 57.8% 58.8% 54.4%
Loss adjustment expense ratio 15.3% 12.1% 14.5% 12.4%
Underwriting expense ratio 32.4% 31.9% 33.4% 35.4%
------ ------ ------ ------
Combined ratio 111.2% 101.8% 106.7% 102.2%
The deterioration in the combined ratio for the three months ended
September 30, 2005 compared to the same period last year is primarily due
to adverse loss and LAE reserve development concentrated in the workers'
compensation and commercial multiple peril (CMP) product lines, somewhat
offset by favorable
24
development in the commercial auto product line. The adverse prior year
reserve development added 6.1 points to the third quarter 2005 loss and LAE
ratios compared to favorable development of 1.7 points in the third quarter
2004. For the first nine months of 2005, Commercial Lines loss and LAE
reserves were adversely impacted by prior year development of 4.8 points
compared to favorable development of 2.0 points in 2004. The adverse
development on the workers' compensation product line for both periods is
related to the ongoing review of lifetime and other severe claims. Also
impacting the loss and LAE ratios for these periods were assessments for
the National Workers' Compensation Pool (NWCP), which improved the
Commercial Lines loss and LAE ratios by 0.6 points in the third quarter
2005, compared with increased assessments in the same period of 2004 which
added 0.5 points to the loss and LAE ratios. Year-to-date the NWCP added
0.8 points to the loss and LAE ratios in 2005 and 1.2 points for the same
period in 2004. The Group continues to focus on improving profitability in
the workers' compensation product line. The Group has restricted writings
in states where the workers' compensation product line has historically
been unprofitable and is focused on growing this product line in profitable
states and classes. The adverse prior year development in the CMP product
line is partially related to increased asbestos and environmental (A&E)
reserves resulting from the annual A&E reserve study completed in the
quarter. See Losses and Loss Adjustment Expense section within Liquidity
and Capital Resources. The three and nine months ended September 30, 2005
Commercial Lines loss ratio included 8.2 and 3.4 points, respectively,
related to catastrophe losses compared to 7.7 and 3.1 points during the
same period in 2004, respectively. The catastrophe loss impact on the CMP
product line loss ratio was 19.7 points and 7.9 points for the three and
nine months ended September 30, 2005, respectively, compared to 17.7 points
and 7.2 points during the comparative periods in 2004, respectively.
Specialty Lines Segment
Three Months Ended Nine Months Ended
September 30 September 30
Specialty Lines Segment 2005 2004 2005 2004
- ------------------------ ---- ---- ---- ----
Net premiums written $38.0 $28.7 $116.8 $102.6
Net premiums earned 36.3 32.0 107.8 114.5
Loss ratio 49.1% 47.6% 44.6% 44.2%
Loss adjustment expense ratio 5.4% 7.0% 7.7% 4.5%
Underwriting expense ratio 40.7% 53.4% 43.3% 48.2%
----- ------ ----- -----
Combined ratio 95.2% 108.0% 95.6% 96.9%
The Specialty Lines combined ratio improved for the three and nine month
periods ended September 30, 2005, primarily driven by decreases in the
underwriting expense ratios, partially offset by increases in the loss
ratio for both periods presented. The 2004 loss and underwriting expense
ratios for the three and nine month periods were adversely impacted by a
$6.1 ceded premium accrual, which reduced net premiums written and earned,
putting upward pressure on these ratios. Removing the effect of the ceded
premium accrual, the loss ratio for the three and nine months ended
September 30, 2004 would be 40.0% and 41.9%, respectively. The
underwriting expense ratio would be 44.9% and 45.8% for the same respective
periods. The increase in the loss ratio for the three and nine month
periods of 2005 relates to increased retention on commercial umbrella risks
partially offset by favorable prior year reserve development of 8.2 points
and 6.8 points, respectively. For the comparable periods in 2004, the
favorable prior year reserve development lowered the loss and LAE ratios by
6.9 points and 6.5 points, respectively.
Personal Lines Segment
Three Months Ended Nine Months Ended
September 30 September 30
Personal Lines Segment 2005 2004 2005 2004
- ------------------------ ---- ---- ---- ----
Net premiums written $123.9 $128.7 $361.1 $373.0
Net premiums earned 120.1 122.8 364.1 368.4
Loss ratio 46.4% 60.1% 48.2% 61.0%
Loss adjustment expense ratio 7.5% 9.5% 7.7% 10.1%
Underwriting expense ratio 26.9% 26.2% 24.7% 29.4%
----- ----- ----- ------
Combined ratio 80.8% 95.8% 80.6% 100.5%
The combined ratio for the three months ended September 30, 2005 improved
15.0 points when compared to the same period of the prior year, primarily
driven by improvements to both the loss and LAE ratios, partially offset by
an increase in the underwriting expense ratio. The loss ratio for the
third quarter 2005 improved 13.7 points when compared to third quarter
2004, while the LAE ratio improved 2.0 points. The
25
loss ratio improvement was driven by lower catastrophe losses, favorable
development on prior years' reserves, increased pricing and favorable
claims frequency trends. In the third quarter 2005, favorable development
on prior year reserves lowered the loss and LAE ratio by 5.5 points
compared to 2.1 points of adverse prior year reserve development in 2004.
The third quarter 2005 Personal Lines loss ratio included 0.8 points of
catastrophe losses, compared to 6.3 points in the third quarter of 2004.
During the first nine months of 2005, the Personal Lines loss ratio was
impacted by 1.3 points related to catastrophe losses compared to 5.2 points
during the same period in 2004. The first nine months of 2005 underwriting
expense ratio included a 1.4 point reduction related to the Proformance
surplus guarantee, compared to a 2.7 point increase in the same period last
year.
<CAPION>
Statutory Earned Premium and Combined Ratios
Combined Ratios
----------------------------------------------------
Earned
Premium Calendar Year Accident Year
Year to Date Year to Date Year to Date Calendar Accident
September 30, September 30, September 30, Year Year
(By operating segment) 2005 2005 2005(a) 2004 2004(a)
- -------------------------------------------------------------------------------------------
Commercial Lines $ 618.4 106.4% 101.6% 99.3% 100.0%
Specialty Lines 107.8 89.7% 96.5% 97.2% 103.3%
Personal Lines 364.1 81.1% 88.3% 97.6% 95.1%
- -------------------------------------------------------------------------------------------
Total All Lines $1,090.3 96.4% 96.7% 98.4% 98.5%
===========================================================================================
(a) The loss and LAE ratio component of the accident year combined ratio
measures losses and LAE arising from insured events that occurred in the
respective accident year. The current accident year excludes losses and
LAE for insured events that occurred in prior accident years. The
measurement date for accident year data is September 30, 2005. Partial and
complete accident periods may not be comparable due to seasonality, claim
reporting and development patterns, claim settlement rates and other
factors.
LIQUIDITY AND CAPITAL RESOURCES
Investment Portfolio
The following table sets forth the distribution and other data of
investments at September 30, 2005 and December 31, 2004, respectively.
September 30, 2005 December 31, 2004
------------------ -----------------
Average Amortized Carrying % of Amortized Carrying % of
Rating Cost Value Total Cost Value Total
-------------------------------------------------------------------------
U.S Government:
Available-for-sale AAA $ 23.6 $ 23.9 0.6 $ 31.9 $ 33.4 0.8
States, municipalities,
and political
subdivisions:
Investment grade:
Available-for-sale AAA 1,215.5 1,223.6 29.0 1,018.4 1,034.6 24.4
Corporate securities:
Investment grade:
Available-for-sale A 1,602.7 1,680.4 39.7 1,562.8 1,686.4 39.7
Held-to-maturity A+ 162.9 162.9 3.9 164.7 164.7 3.9
Below Investment grade:
Available-for-sale BB 79.0 81.0 1.9 51.6 58.4 1.4
---------------------------------------------------------------
Total corporate
securties 1,844.6 1,924.3 45.5 1,779.1 1,909.5 45.0
---------------------------------------------------------------
Mortgage-backed securities:
Investment grade:
Available-for-sale AAA 530.8 542.7 12.8 505.2 524.7 12.4
Held-to-maturity AAA 110.9 110.9 2.6 136.7 136.7 3.2
Below Investment grade:
Available-for-sale B 1.9 1.9 - 6.9 8.6 0.2
---------------------------------------------------------------
Total mortgage-backed
securities 643.6 655.5 15.4 648.8 670.0 15.8
---------------------------------------------------------------
Total fixed maturities 3,727.3 3,827.3 90.5 3,478.2 3,647.5 86.0
Equity securities 120.2 352.2 8.3 98.9 357.4 8.4
Short-term investments 48.4 48.4 1.2 239.9 239.1 5.6
---------------------------------------------------------------
Total investment portfolio $3,895.9 $4,227.9 100.0 $3,817.0 $4,244.0 100.0
===============================================================
26
The fixed maturity portfolio is allocated between investment grade and
below investment grade as follows:
September 30, 2005 December 31, 2004
Amortized Carrying % of Amortized Carrying % of
Cost Value Fixed Cost Value Fixed
-------------------------------------------------------------
Total investment grade $3,646.4 $3,744.4 97.8 $3,419.7 $3,580.5 98.2
Total below investment grade 80.9 82.9 2.2 58.5 67.0 1.8
The fixed maturity portfolio is allocated between available-for-sale
and held-to-maturity as follows:
Total available-for-sale
fixed securities $3,453.5 $3,553.5 92.8 $3,176.8 $3,346.1 91.7
Total held-to-maturity
securities 273.8 273.8 7.2 301.4 301.4 8.3
The excess of carrying value over cost was $332.0 at September 30, 2005,
compared with $427.0 at December 31, 2004. The decrease in 2005 was
attributable to an increase in interest rates for fixed maturity securities
and the sale of certain highly appreciated equity securities. This decline
in the excess of carrying value over cost during the nine months ended
September 30, 2005 decreased the Consolidated Corporation's book value by
$1.00 per share, which was offset by the improved profitability of the
Consolidated Corporation. See page 30 for reconciliation of book value per
share from December 31, 2004 to September 30, 2005.
The consolidated fixed maturity portfolio, including short-term securities,
has an intermediate duration and a laddered maturity structure. The
duration of the fixed maturity portfolio was approximately 5.1 years at both
September 30, 2005 and December 31, 2004. The Consolidated Corporation
remains fully invested and does not time markets.
Fixed maturity securities are classified as investment grade or non-investment
grade based upon the higher of the ratings provided by S&P and Moody's. When
a security is not rated by either S&P or Moody's, the classification is based
on other rating services, including the Securities Valuation Office of the
National Association of Insurance Commissioners. The market value of
available-for-sale split-rated fixed maturity securities (i.e., those having
an investment grade rating from one rating agency and a below investment
grade rating from another rating agency) was $28.0 and $31.5 at September 30,
2005 and December 31, 2004, respectively.
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.
Following is a table displaying available-for-sale non-investment grade and
non-rated securities in an unrealized loss position at September 30, 2005 and
December 31, 2004:
Amortized Fair Unrealized
Cost Value Loss
- ------------------------------------------------------------------------
September 30, 2005 $19.7 $18.7 $(1.0)
December 31, 2004 1.5 1.4 (0.1)
Equity securities are carried at fair market value on the consolidated
balance sheets. As a result, shareholders' equity and statutory surplus
fluctuate with changes in the value of the equity portfolio. As of September
30, 2005, the equity portfolio consisted of stocks in a total of 55 separate
entities covering all ten major S&P industry sectors. Of this total, 26.4%
were invested in five companies and the largest single position was 5.7% of
the equity portfolio. At December 31, 2004, the equity portfolio consisted
of stocks in 50 separate entities in nine different industries. Of this
total, 31.2% were invested in five companies and the largest single position
was 7.3% of the equity portfolio.
In June 2004, the Corporation invested the proceeds of the Senior Note
offering in short-term investments. Short-term investments are carried at
fair market value on the consolidated balance sheets and produce a lower
yield. In the second quarter of 2005, these investments were liquidated to
fund the redemption of the Corporation's 5.00% Convertible Notes, see
Liquidity and Capital Resources - Debt for additional information regarding
this transaction.
27
The investment portfolio also includes non-publicly traded securities such as
private placements, non-exchange traded equities and limited partnerships
which are carried at fair value. Fair values are based on valuations from
pricing services, brokers and other methods as determined by management to
provide the most accurate price. The carrying value of this portfolio at
September 30, 2005, was $297.1 compared to $310.8 at December 31, 2004.
The Consolidated Corporation uses assumptions and estimates when valuing
certain investments and related income. These assumptions include
estimations of cash flows and interest rates. Although the Consolidated
Corporation believes the values of its investments represent fair value,
certain cash flow and interest rate estimates could change and lead to
changes in fair values.
Losses and Loss Adjustment Expenses
The Group's largest liabilities are reserves for losses and LAE. Loss and LAE
reserves are established for all incurred claims without discounting for the
time value of money and before credit for reinsurance recoverable. Loss and
LAE reserves are adjusted upward or downward as new information is received.
These reserves amounted to $2.9 billion at September 30, 2005 and $2.8 billion
at December 31, 2004. As of September 30, 2005, the reserves by operating
segment were as follows: $1.8 billion in Commercial Lines, $0.7 billion in
Specialty Lines and $0.4 billion in Personal Lines.
The Group's actuaries conduct a reserve study using generally accepted
actuarial methods each quarter from which point estimates of ultimate losses
and LAE by product line or coverage within product line are selected. In
selecting the point estimates, thousands of data points are reviewed and the
judgment of the actuaries is applied broadly. Each quarter management records
its best estimate of the liability for loss and LAE reserves by considering
the actuaries' point estimates. Management's best estimate recognizes that
there is uncertainty underlying the actuarial point estimates.
Estimating the ultimate cost of claims is a complex process. This estimation
process is based largely on the assumption that actuarial reserving methods,
using historical loss experience applied by experienced reserving actuaries,
produces reasonable estimates of future losses on prior insured events. Reserve
estimates can change over time because of unexpected changes in the internal
and/or external environment. Assumptions internal to company operations
include: recording of premium and loss statistics in the appropriate detail
is accurate and consistent; claims handling, including the recording of
claims, payment and closure rates, and case reserving is consistent; the
quality of business written and the mix of business (e.g. states, limits,
coverages and deductibles) have been consistent; rate changes and changes in
policy provisions have been measured accurately; reinsurance coverage has
been consistent and reinsured losses are collectible. Assumptions related to
the external environment include: tort law and the legal environment have
been and remain consistent; coverage interpretation by the courts has been
and remains consistent; regulations regarding coverage provisions have
been consistent; and loss inflation is relatively stable. To the extent any
of the above factors have changed over time, attempts are made to adjust for
the changes.
Changes to losses and LAE for prior accident years adversely impacted results
of operations for the three months ended September 30, 2005 by $3.1 and
favorably impacted results of operations for the same three month period of
2004 by $3.1. For the nine months ended September 30, 2005 and 2004, changes
to losses and LAE for prior accident years favorably impacted the results of
operations by $3.6 and $15.8, respectively. These amounts and those stated
below are net of reinsurance, including the allowance for uncollectible
reinsurance recoverables. The following table provides the before-tax amount
of prior accident years' loss and LAE reserve development by reportable
segment:
Three Months Ended Nine Months Ended
September 30 September 30 Year
2005 2004 2005 2004 2004
------------------ ----------------- ----
(Favorable)/Unfavorable
- -----------------------
Commercial Lines $12.7 $(3.5) $ 29.9 $(12.2) $(15.0)
Specialty Lines (3.0) (2.2) (7.3) (7.4) (9.4)
Personal Lines (6.6) 2.6 (26.2) 3.8 2.6
------ ------ ------- ------- -------
All Lines Prior Accident
Year Development $ 3.1 $(3.1) $ (3.6) $(15.8) $(21.8)
====== ====== ======== ======= =======
28
For the third quarter 2005, adverse development occurred in the workers'
compensation, CMP and general liability product lines. Adverse workers'
compensation development of $8.2 is mostly attributable to the review of
permanent cases begun in the first quarter to re-assess life expectancy and
increased medical costs. CMP and general liability were adversely impacted
by increased A&E incurred loss and LAE of $4.1 resulting from the annual
A&E reserve study completed in the quarter as well as approximately $3.0 of
case increases from business exited over ten years ago. Partially
offsetting these were favorable development for automobile liability
claims, both personal and commercial, as well as commercial umbrella.
For the nine months ended September 30, 2005, the principal reason for
favorable development is less severity than expected for automobile
liability claims, both personal and commercial, spread across accident
years 1996 through 2004. For Commercial Lines the favorable development in
the commercial auto product line was more than offset by adverse
development from the workers' compensation product line concentrated in
accident years 2000 and prior. This adverse workers' compensation
development is mostly attributable to a review of permanent cases to re-
assess life expectancy and increased medical costs. The third quarter was
also adversely impacted by asbestos and environmental losses and case
increases from exited business, as described above.
The following table provides prior accident years' development for loss and
LAE by accident year:
Three Months Ended Nine Months Ended
September 30 September 30 Year
2005 2004 2005 2004 2004
------------------ ----------------- ----
(Favorable)/Unfavorable
- -----------------------
Accident Year 2004 $(3.2) $ - $(19.1) $ - $ -
Accident Year 2003 (8.5) (9.1) (25.8) (31.3) (36.9)
Accident Year 2002 and Prior 14.8 6.0 41.3 15.5 15.1
------ ------ ------- ------- -------
Total Prior Accident Years'
Development $ 3.1 $(3.1) $ (3.6) $(15.8) $(21.8)
====== ====== ======= ======= =======
In the opinion of management, the reserves recorded at September 30, 2005
represent the Group's best estimate of its ultimate liability for losses
and LAE. However, due to the complexity of the estimation process and the
potential variability of the assumptions used, final claim settlements may
vary significantly from the amounts recorded. Furthermore, the timing,
frequency and extent of adjustments to the estimated liabilities cannot be
predicted since conditions and events which established loss and LAE
reserve development and which serve as the basis for estimating ultimate
claim costs may not occur in exactly the same manner in the future, if at
all.
Cash Flow
Net cash generated from operations was $205.9 for the first nine months of
2005, compared with $186.6 for the same period in 2004. Net cash used in
investing was $233.7 in the first nine months of 2005 compared with $209.1
during the first nine months of 2004. The increase in net cash used for
investing is primarily related to a decrease in net proceeds from sales and
maturities of investments when compared to the same period in 2004. Cash
used by financing operations was $170.6 in the first nine months of 2005
compared with cash provided of $207.9 in the first nine months of 2004.
Repurchases and the redemption of the convertible debt attributed to the
decline in cash used in financing activities. Also contributing to the
increased use of cash for financing activities is the repurchase of the
Corporation's common stock under a recently announced share repurchase
program, see Part II, Item 2, for additional information regarding the
share repurchase program. Liquidity needs of the Group are expected to be
met by net cash generated from operations, maturities of investments,
interest and dividend receipts and current cash balances. For additional
information regarding Liquidity of the Corporation, please see below.
Debt
For a discussion regarding Debt of the Corporation, please refer to Note
VII in the Notes to the Consolidated Financial Statements on pages 12-14
of this Quarterly Report on Form 10-Q.
At September 30, 2005, the Corporation had cash and marketable securities,
totaling $266.7, which compared to $327.5 at December 31, 2004. In
addition to investment income, the Corporation is dependent on dividend
payments from the Company for additional liquidity. Insurance regulatory
authorities impose
29
various restrictions on the payment of dividends by insurance companies.
During 2005, dividend payments from the Company to the Corporation are
limited to approximately $138.3 without prior approval of the Ohio
Insurance Department. During the first nine months of 2005, the Company
declared dividends of $136.6, of which $111.6 were paid by September 30,
2005 and the balance was paid on October 3, 2005, to the Corporation
resulting in a dividend payment limitation of $1.7 for the remainder of
2005.
Book Value Per Share
At September 30, 2005, the book value per share of the Consolidated
Corporation increased $0.93 per share from $20.82 per share to $21.75 per
share when compared to book value at December 31, 2004. This increase is
principally the result of improved profitability. At September 30, 2005
and December 30, 2004, there were 64,037,865 and 62,209,129 actual shares
outstanding, respectively. Below is a table reconciling the changes in
book value per share from December 31, 2004 to September 30, 2005.
Book
Value
-----
December 31, 2004 $20.82
Activity for the nine months ended
September 30, 2005:
Net income 2.18
Change in unrealized gains (1.00)
Impact of convertible notes and other
additional paid-in capital transactions 0.27
Dividends to shareholders (0.12)
Impact of share repurchase program (0.03)
Impact of net increase in actual shares
outstanding (0.37)
-------
September 30, 2005 $21.75
=======
Rating Agencies
Regularly the financial condition of the Consolidated Corporation and the
Group is reviewed by four independent rating agencies, A. M. Best Company
(A.M. Best), Fitch, Inc. (Fitch), Moody's and S&P. These agencies assign
ratings and rating outlooks reflecting the agencies' opinions of the
Group's financial strength and the ability of the Corporation to meet its
financial obligations to its debt security holders. Following are the
Consolidated Corporation's current ratings and rating outlooks.
A.M. Best Fitch Moody's S&P
--------- ----- ------- ---
Financial strength rating A- A- A3 BBB+
Senior unsecured debt rating bbb- BBB- Baa3 BB+
Rating outlook Stable Positive Stable Stable
For more information on the rating agency actions, please refer to Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Corporation's 2004 Annual Report on Form 10-K for the
year ended December 31, 2004.
Forward Looking Statements
Ohio Casualty Corporation publishes forward-looking statements relating to
such matters as anticipated financial performance, business prospects and
plans, regulatory developments and similar matters. The statements
contained in this Management's Discussion and Analysis that are not
historical information, are forward-looking statements within the meaning
of The Private Securities Litigation Reform Act of 1995. The operations,
performance and development of the Consolidated Corporation's business are
subject to risks and uncertainties which may cause actual results to differ
materially from those contained in or supported by the forward looking
statements. The risks and uncertainties that may affect the operations,
performance, development and results of the Consolidated 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
30
proceedings; rating agency actions; acts of war and terrorist activities;
ability to achieve targeted expense savings; ability to appoint and retain
agents; ability to achieve premium targets and profitability goals; and
general economic and market conditions.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the information about market risk
set forth in the Corporation's 2004 Annual Report on Form 10-K.
ITEM 4. Controls and Procedures
(a) The Corporation's Chief Executive Officer and Chief Financial
Officer evaluated the disclosure controls and procedures (as
defined under Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) as of the end of the period
covered by this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that
the Corporation's disclosure controls and procedures are
effective.
(b) There were no significant changes in the Corporation's internal
control over financial reporting identified in connection with the
foregoing evaluation that occurred during the Corporation's last
fiscal quarter that have affected, or are reasonably likely to
materially affect, the Corporation's internal control over
financial reporting.
PART II Other Information
ITEM 1. Legal Proceedings
Reference is made to the first paragraph of Part I, Item 3 Legal Proceedings
to the Corporation's Form 10-K for the fiscal year ended December 31, 2004
regarding the matter captioned Carol Murray v. Ohio Casualty Corporation, et
al. The U.S. District Court for the Southern District of Ohio, Eastern
Division, dismissed the complaint against Avomark Insurance Company, Ohio
Security Insurance Company, West American Insurance Company, American Fire &
Casualty Insurance Company and Ohio Casualty of New Jersey, Inc. on September
27, 2005. The U.S. District Court also granted the motion for summary
judgment of the Corporation and The Ohio Casualty Insurance Company on
September 27, 2005. The proceeding was ordered closed with Judgment in favor
of the Defendants. The decision has been appealed by plaintiff to the U.S.
Sixth Circuit Court of Appeals.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 18, 2005, the Corporation's Board of Directors authorized the
repurchase of up to four million shares of the Corporation's common stock.
The repurchases may be made in the open market or in privately negotiated
transactions from time to time and are funded from available working
capital. The table below summarizes the status of this program from
inception to September 30, 2005.
ISSUER PURCHASES OF EQUITY SECURITIES
- ----------------------------------------------------------------------------
(c) Total
Number (d) Maximum
of Shares Number of
Purchased Shares that
as Part of May Yet Be
(a) Total Publicly Purchased
Number of (b) Average Announced Under the
Shares Price Paid Plans or Plans or
Period Purchased per Share Programs Programs
- ----------------------------------------------------------------------------
August 18-31, 2005 136,247 $24.83 136,247 3,863,753
September 1-30, 2005 433,868 25.85 433,868 3,429,885
------- -------
Total 570,115 $25.61 570,115 3,429,885
======= =======
31
For the period October 1, 2005 to and including October 24, 2005, the
Corporation has repurchased an additional 618,270 shares at an average cost
of $25.95. This brings the total shares repurchased through October 24,
2005 to 1,188,385 and reduces the number of shares that may yet be repurchased
to 2,811,615.
ITEM 6. Exhibits
Exhibits:
31.1 Certification of Chief Executive Officer of Ohio Casualty
Corporation in accordance with SEC Rule 13(a) and Rule 15(d)
31.2 Certification of Chief Financial Officer of Ohio Casualty
Corporation in accordance with SEC Rule 13(a) and Rule 15(d)
32.1 Certification of Chief Executive Officer of Ohio Casualty
Corporation in accordance with Section 1350 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief Financial Officer of Ohio Casualty
Corporation in accordance with Section 1350 of the Sarbanes-Oxley
Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO CASUALTY CORPORATION
-------------------------
(Registrant)
October 25, 2005 /s/Michael A. Winner
------------------------------------------
Michael A. Winner, Executive Vice President
and Chief Financial Officer
32