[Ohio Casualty Corporation letterhead]
Michael A. Winner, CPA
Executive Vice President & Chief Financial Officer
March 8, 2006
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Mail Stop 6010
Washington DC 20549
Re: Ohio Casualty Corporation
Form 10-K for Fiscal Year Ended December 31, 2004
File No. 0-05544
Dear Mr. Rosenberg:
The Ohio Casualty Corporation ("Corporation") represents the following in
response to a telephone conversation with the staff of the Securities and
Exchange Commission (the "Staff" or "Commission") on March 1, 2006: (For
this purpose, the terms "Loss Reserve" and "Group" are defined in the
Corporation's Annual Report of Form 10-K for the year ended December 31,
2005.)
The Group, in an effort to make the content of our quantitative
disclosure more robust as encouraged by FR-72, agrees to undertake an
assessment to evaluate the sensitivity or variability of changes in
significant assumptions related to our estimate of Loss Reserves in the
aggregate and/or by product line, to the extent material. Upon
completion of such sensitivity or variability assessment, and to the
extent that Management believes the information to be reasonably
accurate and credible and would be beneficial, in the opinion of
Management, to the understanding of the Group's financial statements,
the Corporation will include the outcome of this
sensitivity/variability analysis either in the aggregate or by product
line, as appropriate, in the first practicable periodic filing of the
Corporation that follows the completion of this assessment and
continuing thereafter.
Further, pursuant to an additional request of the Staff in the above
referenced telephone conversation, the Corporation is providing to the
Staff, as an attachment to this letter, additional proposed language for
inclusion in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2005. This additional proposed language is included
within the subsection "Reserve Variability and Uncertainty" of the section
"Loss and Loss Adjustment Expenses" of Critical Accounting Policies of
Management's Discussion and Analysis.
9450 Seward Road, Fairfield, OH 45014 Telephone: 513-603-2400
Fax: 513-603-7900 www.ocas.com
In response to your previous request to include the following, please be
advised the Corporation reconfirms and acknowledges:
- that it is responsible for the adequacy and accuracy of the disclosure
in the filing;
- that staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action with
respect to the filing; and that the Corporation may not assert staff
comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
You may contact Debra K. Crane, Senior Vice President, General Counsel and
Secretary, by telephone at (513) 603-2213 or via fax at (513) 603-2208 or
email at Debra.Crane@ocas.com if you have questions or comments on the
responses of the Corporation.
Sincerely,
/s/ Michael A. Winner
Michael A. Winner
Executive Vice President and
Chief Financial Officer
Attachment
ATTACHMENT
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Reserve variability and uncertainty
- -----------------------------------
There is a great deal of uncertainty in the loss reserve estimates and
unforeseen events can have unfavorable impacts on the loss reserve
estimates. Reinsurance is purchased to mitigate the impact of large losses
and catastrophic events. The estimate of reinsurance recoverables is
considered a critical accounting estimate and discussed on pages 41 and 42
of this Annual Report on Form 10-K.
Loss reserve uncertainty is illustrated by the variability in reserve
development presented in the Analysis of Development of Loss and LAE
Liabilities schedule which appears on pages 11 and 12 under Item 1 of this
Annual Report on Form 10-K. This schedule shows cumulative loss reserve
development for each of the past ten years through December 31, 2005 on a
gross and net of reinsurance basis. The development on a net of
reinsurance basis as a percent of the original estimates ranges from
adverse development of 17.2% of original estimates for loss reserves at
year-end 2000 to favorable development of 0.9% of original estimates for
loss reserves at year-end 2004. The oldest period shown, 1995, shows
adverse development of 1.9% of original loss reserves ten years after the
original estimates.
To illustrate the uncertainty by operating segment, the following table
provides the before-tax amount of prior accident years' loss reserve
development by operating segment on a net of reinsurance basis for the
years ended December 31, 2005, 2004 and 2003, respectively:
Operating Segment 2005 2004 2003
- ----------------- ---- ---- ----
Commercial Lines $ 29.1 $(15.0) $ 41.0
Specialty Lines (12.3) (9.4) (21.3)
Personal Lines (36.9) 2.6 14.4
------- ------- -------
Total Prior Accident Years' Development $(20.1) $(21.8) $ 34.1
======= ======= =======
This table illustrates that favorable development can occur for one
operating segment while adverse development occurs for another, and that
development from year to year can be either favorable or adverse for an
operating segment.
Within each operating segment, development can also be favorable or adverse
by product line within the same period. For example, for the Commercial
Lines operating segment in 2005, the workers' compensation product line had
adverse development of $42.0 while the commercial auto product line had
favorable development of $30.6.
Reserve estimates are also uncertain by accident period. To illustrate
this, the following table provides the before-tax amount of prior accident
years' loss and LAE reserve development by accident year on a net of
reinsurance basis for all lines combined:
Accident Period 2005 2004 2003
- ------------------------------------------------------------------------------
Accident Year 2004 $(30.8) $ - $ -
Accident Year 2003 (32.0) (36.9) -
Accident Year 2002 (28.2) (10.4) (39.0)
Accident Year 2001 (7.6) (0.9) 8.0
Accident Year 2000 & prior 78.5 26.4 65.1
- ------------------------------------------------------------------------------
Total Prior Accident Years' Development $(20.1) $(21.8) $ 34.1
======= ======= =======
This table illustrates that recent accident periods have developed
favorably while the older periods have developed adversely. More than half
of the $78.5 of adverse development for accident years 2000 & prior in
calendar period 2005 is attributed to our review of workers' compensation
permanent cases which is discussed in more detail below. We do not believe
that older accident years will always develop adversely while more recent
years develop favorably. However, it should be understood that the "prior"
accident years' category includes claims covering many decades, many of
which are complex. Conversely, the recent accident years include a mix of
claims of varying degrees of difficulty for which many are relatively
straight-forward to establish loss reserves.
The Group does not prepare loss reserve ranges, nor does it project future
variability, when determining its best estimate, although the above
examples of actual historical changes in loss reserve estimates provide a
measure of the uncertainty underlying the current loss reserve estimates.
The Loss Reserve process takes all risk factors, as previously disclosed,
into account, but no one risk factor has been bifurcated to perform a
sensitivity or variability analysis because the risk factors were
considered in the aggregate. As a result, the Group is not in a position
to quantify the impact of reasonably likely changes to significant
assumptions at this time. Nevertheless, the Group plans to undertake an
assessment to evaluate the sensitivity or variability of changes in
significant assumptions related to the Group's estimate of loss reserves in
the aggregate and/or by product line, to the extent material. Upon
completion of such sensitivity or variability assessment, and to the extent
that management believes the information to be reasonably accurate and
credible and would be beneficial, in the opinion of management, to the
understanding of the Group's financial statements, the Corporation will
include the outcome of this sensitivity/variability analysis either in the
aggregate or by product line, as appropriate, in the first practicable
periodic filing of the Corporation that follows the completion of this
assessment and continuing thereafter.
The Group has four categories of loss reserves that it considers highly
uncertain, and therefore, could have a material impact on future financial
results: workers' compensation, asbestos and environmental liability,
construction defect exposures and commercial umbrella. These categories
are described below with relevant historical data.
Workers' compensation represents the Group's largest product line as
measured by the magnitude of loss reserves, representing approximately 30%
of the total on a net of reinsurance basis. The coverage provided includes
indemnity and medical benefits generally defined by state regulation.
Indemnity benefits compensate the injured worker for wage replacement,
while the medical benefits generally provide unlimited coverage for a work-
related accident for the life of the claimant. Many workers' compensation
claims are small and are settled within a year or two of the accident date.
However, some of the claims are serious, resulting in costs that can extend
for decades. For workers' compensation loss reserves net of reinsurance at
year-end 2005, approximately 60% are related to claims over five years old,
and approximately 35% are related to claims over ten years old.
During 2005, in response to industry wide development, the Group's claims
department reviewed permanent workers' compensation cases to re-assess life
expectancy and medical costs. The review resulted in increases to loss
reserves on approximately 25% of the inventory of approximately 1,200
permanent cases. These adjustments comprise a substantial part of the $42.0
adverse development for this product line in 2005. The Group will continue
to monitor these types of claims in the future.
In recent years, asbestos and environmental liability claims have expanded
greatly in the insurance industry. Historically, the Group has written
small commercial accounts with a focus on contracting business. Within the
manufacturing category, the Group has concentrated on light manufacturers,
thus the Group's exposure to asbestos is related to installers and
distributors as opposed to the large manufacturers. Consequently, the
Group believes it has minimal exposure to the primary defendants involved
in major asbestos litigation. The Group's exposure to
environmental liability is due to policies written prior to the introduction
of the absolute pollution endorsement in the mid-80's and to underground
storage tanks, mostly from New Jersey homeowner's policies in recent years.
The Group has limited exposures to the national priority list, a list of known
or threatened releases of hazardous substances, pollutants, or contaminants
throughout the United States. The Group also has limited asbestos and
environmental exposures related to assumed reinsurance business written
prior to 1980 with small policy limits.
In 2005 and 2004, respectively, the Group paid loss and LAE of $7.3 and
$7.0 for asbestos and environmental claims on a net of reinsurance basis.
At year-end 2005 and 2004, asbestos and environmental reserves net of
reinsurance were $95.8 and $82.6, respectively.
The Group defines construction defect exposure as liability for allegations
of defective work and completed operations losses from general, commercial
multiple peril and umbrella liability policies involving multiple-units
(condos/townhouses/apartments/tracts of single family homes), multiple
defendants (e.g. developers, sub-contractors), usually with multiple defect
issues, and often involving multiple insurance carriers. Loss reserves are
difficult to estimate for this exposure because of the complexity of the
claims and the late reporting which often occurs many years after the
policy term. The Group excludes from this definition claims related to
individual single family homes, apartments/townhomes or other residential
properties if the defect issues are limited in scope and volume.
Paid losses for construction defect claims, net of reinsurance, were $19.2
in 2005, compared to $9.9 in 2004 and $16.5 in 2003. Paid claims legal
related LAE, net of reinsurance, for construction defect claims were $6.1
in 2005, compared with $5.1 in 2004 and $4.3 in 2003. Loss and legal
related LAE reserves were $56.4, $78.3 and $86.7 at year-end 2005, 2004 and
2003, respectively. These totals exclude construction defect losses from
the state of California because the Group stopped writing in that state in
1993 and the remaining claims are minimal.
The Group writes commercial umbrella business with large policy limits.
The period of time between the loss occurrence, the reporting of the claim
to the insurer, and the settlement of the claim can extend over many years.
The large policy limits, complexity of claims and the lengthy time period
required to reach settlement increase the uncertainty of loss estimates.
Reinsurance is purchased to mitigate the impact of these large losses. For
2005 and 2004, commercial umbrella loss reserves prior to reinsurance were
$718.4 and $637.1, respectively, while loss reserves net of reinsurance
were $272.3 and $236.1, respectively.