<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1999.
-------------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------- -----------------
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-0783294
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
136 North Third Street, Hamilton, Ohio 45025
(Address of principal executive offices) (Zip Code)
(513) 867-3000
(Registrant's telephone number)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Par Value $.125 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The aggregate market value as of November 1, 1999 of the voting stock
held by non-affiliates of the registrant was $844,296,436.
On November 1, 1999 there were 60,083,484 shares outstanding.
Page 1 of 19
==============================================================================
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,474,637 and $2,307,734) $ 2,477,338 $ 2,415,904
Equity securities, at fair value
(cost: $157,330 and $245,129) 642,033 924,906
Short-term investments, at fair value
(cost: $59,457 and $262,939) 59,472 262,863
------------ ------------
Total investments 3,178,843 3,603,673
Cash 51,741 42,139
Premiums and other receivables, net of
allowance for bad debts of $9,139 and
$8,739, respectively 375,464 301,943
Deferred policy acquisition costs 183,832 176,606
Property and equipment, net of accumulated
depreciation of $110,071 and $97,991,
respectively 94,907 80,065
Reinsurance recoverable 198,359 186,861
Agent relationships, net of accumulated
amortization of $10,285 and $1,031,
respectively 298,265 308,206
Other assets 154,779 102,771
- -------------------------------------------------------------------------------
Total assets $ 4,536,190 $ 4,802,264
===============================================================================
Liabilities
Insurance reserves:
Unearned premiums $ 735,491 $ 668,550
Losses 1,552,883 1,580,599
Loss adjustment expenses 371,928 376,340
Future policy benefits 20,883 25,518
Note payable 241,500 265,000
California Proposition 103 reserve 49,875 48,043
Deferred income taxes 58,195 140,730
Other liabilities 365,701 376,503
------------ ------------
Total liabilities 3,396,456 3,481,283
Shareholders' equity
Common stock, $.125 par value 11,802 5,850
Authorized: 150,000,000 shares
Issued: 94,418,344; 46,803,872 shares
Additional paid-in capital 4,337 4,186
Common stock purchase warrants 21,138 21,138
Accumulated other comprehensive income:
Unrealized gain on investments, net of
applicable income taxes 317,456 511,816
Retained earnings 1,238,156 1,185,349
Treasury stock, at cost:
(Shares: 34,334,860; 15,535,089) (453,155) (407,358)
------------ ------------
Total shareholders' equity 1,139,734 1,320,981
- -------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 4,536,190 $ 4,802,264
===============================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
48-61 of the Corporation's 1998 Form 10-K, Item 14.
2
<PAGE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Premiums and finance charges earned $ 384,274 $ 314,956
Investment income less expenses 49,679 42,231
Investment gains/(losses) realized, net (2,269) 3,537
------------ ------------
Total revenues 431,684 360,724
Losses and benefits for policyholders 248,502 193,233
Loss adjustment expenses 46,998 28,533
General operating expenses 43,413 30,349
Amortization of agent relationships 3,066 0
California Proposition 103 reserve, including
interest 610 896
Amortization of deferred policy acquisition cost 102,118 79,255
------------ ------------
Total expenses 444,707 332,266
Income/(loss) from continuing operations
before income taxes (13,023) 28,458
Income taxes
Current (26,179) 4,663
Deferred 20,138 892
------------ ------------
Total income taxes (6,041) 5,555
- -------------------------------------------------------------------------------
Income/(loss) from continuing operations (6,982) 22,903
Income from discontinued operations net of
taxes of $105 and $177, respectively 117 278
- -------------------------------------------------------------------------------
Net income/(loss) $ (6,865) $ 23,181
===============================================================================
Other comprehensive loss, net of tax:
Net change in unrealized gains, net of
income tax benefit of $29,127 and $36,665,
respectively (54,095) (68,093)
------------ ------------
Comprehensive loss $ (60,960) $ (44,912)
===============================================================================
Average shares outstanding - basic 60,784 65,506
Average shares outstanding - diluted 60,788 65,548
===============================================================================
Earnings per share (basic and diluted):
Income/(loss) from continuing operations,
per share $ (0.11) $ 0.35
Income from discontinued operations, per share 0.00 0.00
------------ ------------
Net income/(loss), per share $ (0.11) $ 0.35
Cash dividends, per share $ 0.23 $ 0.22
===============================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
48-61 of the Corporation's 1998 Form 10-K, Item 14.
All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend.
3
<PAGE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Premiums and finance charges earned $ 1,143,128 $ 936,246
Investment income less expenses 132,500 128,164
Investment gains realized, net 165,974 15,770
------------ -----------
Total revenues 1,441,602 1,080,180
Losses and benefits for policyholders 737,978 597,901
Loss adjustment expenses 125,920 85,001
General operating expenses 128,704 88,527
Amortization of agent relationships 9,254 0
California Proposition 103 reserve, including
interest 1,832 2,689
Amortization of deferred policy acquisition costs 302,161 228,112
------------ ------------
Total expenses 1,305,849 1,002,230
Income from continuing operations
before income taxes 135,753 77,950
Income taxes
Current 11,039 11,926
Deferred 23,306 2,218
------------ ------------
Total income taxes 34,345 14,144
- ---------------------------------------------------------------------------------
Income from continuing operations 101,408 63,806
Income from discontinued operations net of taxes
of $(247) and $514, respectively 2,016 903
Cumulative effect of accounting change, net of
taxes (2,255) 0
- ---------------------------------------------------------------------------------
Net income $ 101,169 $ 64,709
=================================================================================
Other comprehensive loss, net of tax:
Net change in unrealized gains, net of income
tax benefit of $104,655 and $3,250, respectively (194,360) (6,035)
------------ ------------
Comprehensive income/(loss) $ (93,191) $ 58,674
=================================================================================
Average shares outstanding - basic 61,478 66,526
Average shares outstanding - diluted 61,498 66,602
=================================================================================
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 1.65 $ 0.96
Income from discontinued operations, per share 0.04 0.01
Effect of change in accounting principle (net
of tax) (0.04) 0.00
------------ ------------
Net income, per share $ 1.65 $ 0.97
Cash dividends, per share $ 0.69 $ 0.66
=================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
48-61 of the Corporation's 1998 Form 10-K, Item 14.
All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend.
4
<PAGE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Common other Total
Common paid-in stock purchase comprehensive Retained Treasury shareholders'
Stock capital warrants income earnings stock equity
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1998 $ 5,850 $ 3,923 $ 0 $ 454,241 $ 1,158,308 $(307,493) $ 1,314,829
Unrealized loss (9,285) (9,285)
Deferred income tax benefit
on net unrealized loss 3,250 3,250
Net issuance of treasury
stock under stock option
plan and by charitable
donation (10,051 shares) 263 126 389
Repurchase of treasury
stock (1,327,000 shares) (58,878) (58,878)
Net income 64,709 64,709
Cash dividends paid
($1.32 per share) (44,013) (44,013)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1998 $ 5,850 $ 4,186 $ 0 $ 448,206 $ 1,179,004 $(366,245) $ 1,271,001
===================================================================================================================================
Balance
January 1, 1999 $ 5,850 $ 4,186 $ 21,138 $ 511,816 $ 1,185,349 $(407,358) $ 1,320,981
Unrealized loss (299,015) (299,015)
Deferred income tax benefit
on net unrealized loss 104,655 104,655
Net issuance of treasury
stock under stock option
plan and by charitable
donation (23,918 shares) 151 290 441
Repurchase of treasury
stock (2,478,000 shares) (46,087) (46,087)
Net income 101,169 101,169
Cash dividends paid
($.69 per share) (42,410) (42,410)
Stock dividend 5,952 (5,952) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1999 $ 11,802 $ 4,337 $ 21,138 $ 317,456 $ 1,238,156 $(453,155) $ 1,139,734
===================================================================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
48-61 of the Corporation's 1998 Form 10-K, Item 14.
5
<PAGE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from:
Operations
Net income $ 101,169 $ 64,709
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves 30,177 6,855
Income taxes 1,884 (7,322)
Premiums and other receivables (73,521) (36,900)
Deferred policy acquisition costs (7,227) (10,820)
Reinsurance recoverable (11,499) (18,145)
Other assets (262) 2,135
Other liabilities (41,496) 26,533
Amortization of agent relationships 9,254 0
Depreciation and amortization 23,384 12,092
Investment gains (167,174) (15,905)
Cumulative effect of an accounting change 2,255 0
California Proposition 103 1,832 2,689
------------ ------------
Net cash generated (used) by operations (131,224) 25,921
Investing
Purchase of investments:
Fixed income securities - available for sale (1,136,182) (223,077)
Equity securities (10,339) (19,158)
Proceeds from sales:
Fixed income securities - available for sale 835,654 189,480
Equity securities 280,972 42,003
Proceeds from maturities and calls:
Fixed income securities - available for sale 103,038 91,392
Equity securities 3,000 4,601
Property and equipment
Purchases (27,691) (12,227)
Sales 769 399
------------ ------------
Net cash from investing activities 49,221 73,413
Financing
Note payable (23,500) (5,000)
Proceeds from exercise of stock options 211 1
Purchase of treasury stock (46,087) (59,100)
Dividends paid to shareholders (42,410) (44,013)
------------ ------------
Net cash used in financing activity (111,786) (108,112)
Net change in cash and cash equivalents (193,789) (8,778)
Cash and cash equivalents, beginning of period 305,002 120,055
- -------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 111,213 $ 111,277
=====================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
48-61 of the Corporation's 1998 Form 10-K, Item 14.
6
<PAGE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - INTERIM ADJUSTMENTS
It is believed that all material adjustments necessary to present a fair
statement of the results of the interim period covered are reflected in this
report. The operating results for the interim periods are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with the financial statements and notes thereto
in the Corporation's 1998 Form 10-K, Item 14.
NOTE II - RECENTLY ISSUED ACCOUNTING STANDARDS
During the first quarter of 1999, the Corporation adopted Statement of
Position 97-3 "Accounting by Insurance and Other Enterprises for Insurance-
Related Assessments". This statement provides guidance on accounting for
insurance related assessments and required disclosure information. In
accordance with SOP 97-3, the Corporation has accrued a total liability for
insurance assessments of $2.3 million net of tax, as of January 1, 1999. This
was recorded as a change in accounting method.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133 "Accounting for Derivative Instruments and
Hedging Activities". This statement standardizes the accounting for
derivative instruments by requiring those items to be recognized as assets or
liabilities with changes in fair value reported in earnings or other
comprehensive income in the current period. The Corporation expects the
adoption of FAS 133 to have an immaterial impact on the financial results due
to its limited use of derivative instruments. This statement is effective for
fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001
for the Corporation).
NOTE III - EARNINGS PER SHARE
Basic earnings per share is computed using weighted average number of common
shares outstanding. Diluted earnings per share is computed similar to basic
earnings per share except that the weighted average number of shares
outstanding is increased to include the number of additional common shares
that would have been issued if all dilutive outstanding stock options would
have been exercised. Basic and diluted earnings per share are summarized as
follows (all per share amounts adjusted for July 22, 1999 2 for 1 stock
dividend):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
(In thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income/(loss) from
continuing operations $(6,982) $22,903 $101,408 $63,806
Weighted average common
shares outstanding -
basic 60,784 65,506 61,478 66,526
Basic income/(loss) from
continuing operations
- per average share $ (0.11) $ 0.35 $ 1.65 $ 0.96
=============================================================================
Weighted average common
shares outstanding 60,784 65,506 61,478 66,526
Effect of dilutive
securities 4 42 20 76
- -----------------------------------------------------------------------------
Weighted average common
shares outstanding
- diluted 60,788 65,548 61,498 66,602
Diluted income/(loss)
from continuing
operations - per
average share $ (0.11) $ 0.35 $ 1.65 $ 0.96
=============================================================================
7
<PAGE>
NOTE IV -- SEGMENT INFORMATION
The Corporation has determined its reportable segments based upon its method
of internal reporting which is organized by product line. The property and
casualty segments are personal automobile, direct automobile, commercial
automobile, homeowners, workers' compensation, fidelity and surety, general
liability and commercial property. These segments generate revenues by
selling a wide variety of personal, commercial and surety insurance products.
The Corporation also has an all other segment which derives its revenues from
premium financing, investment income, royalty income and discontinued life
insurance operations. The Corporation writes business in over 40 states in
conjunction with the independent agency system.
Each segment of the Corporation is managed separately. The property and
casualty segments are managed by assessing the performance and profitability
of the segments through analysis of industry financial measurements including
loss and loss adjustment expense ratios, combined ratio, premiums written,
underwriting gain/loss and the effect of catastrophe losses on the segment.
The following tables present this information by segment as of September 30,
1999 and 1998 as it is reported internally to management. Asset information
by reportable segment is not reported, since the Corporation does not produce
such information internally.
Nine months ended September 30
(In thousands)
</TABLE>
<TABLE>
<CAPTION>
Private Passenger Auto 1999 1998
- ----------------------------------------------------------
<S> <C> <C>
Net premiums written $412,321 $386,185
% Increase 6.8% 10.7%
Net premiums earned 386,491 374,697
% Increase 3.1% 8.1%
Underwriting loss
(before tax) (24,521) (8,779)
Loss ratio 67.3% 67.8%
Loss expense ratio 11.6% 10.0%
Underwriting expense ratio 25.7% 23.8%
Combined ratio 104.6% 101.6%
Impact of catastrophe
losses on combined ratio 1.0% 1.5%
Direct Auto 1999 1998
- ----------------------------------------------------------
Net premiums written $12,901 $3,110
% Increase 315.0% N/A
Net premiums earned 9,152 798
% Increase 1,046.9% N/A
Underwriting loss
(before tax) (10,983) (1,930)
Loss ratio 128.8% 110.5%
Loss expense ratio 17.3% 19.2%
Underwriting expense ratio 52.4% 54.4%
Combined ratio 198.5% 184.1%
Impact of catastrophe
losses on combined ratio 1.9% 0.3%
CMP, Fire, Inland Marine 1999 1998
- ----------------------------------------------------------
Net premiums written $224,722 $162,660
% Increase 38.2% 4.7%
Net premiums earned 220,998 157,456
% Increase 40.4% 5.4%
Underwriting loss
(before tax) (74,160) (20,852)
Loss ratio 77.3% 63.5%
Loss expense ratio 12.0% 5.2%
Underwriting expense ratio 43.5% 43.1%
Combined ratio 132.8% 111.8%
Impact of catastrophe
losses on combined ratio 10.1% 5.9%
General Liability 1999 1998
- ------------------------------------------------------------
Net premiums written $114,535 $73,513
% Increase(decrease) 55.8% (3.8)%
Net premiums earned 104,430 71,392
% Increase(decrease) 46.3% (4.8)%
Underwriting gain
(before tax) 12,575 1,050
Loss ratio 32.5% 31.9%
Loss expense ratio 6.6% 15.6%
Underwriting expense ratio 44.5% 49.6%
Combined ratio 83.6% 97.1%
Impact of catastrophe
losses on combined ratio N/A N/A
Workers' Compensation 1999 1998
- ------------------------------------------------------------
Net premiums written $126,677 $ 68,910
% Increase(decrease) 83.9% (5.9)%
Net premiums earned 127,553 69,407
% Increase(decrease) 83.8% (9.9)%
Underwriting loss
(before tax) (15,481) (9,453)
Loss ratio 62.8% 73.2%
Loss expense ratio 11.2% 8.6%
Underwriting expense ratio 38.4% 32.0%
Combined ratio 112.4% 113.8%
Impact of catastrophe
losses on combined ratio N/A N/A
Commercial Auto 1999 1998
- -----------------------------------------------------------
Net premiums written $131,991 $105,618
% Increase(decrease) 25.0% (4.5)%
Net premiums earned 127,967 102,838
% Increase(decrease) 24.5% (2.5)%
Underwriting loss
(before tax) (24,377) (6,470)
Loss ratio 69.6% 62.6%
Loss expense ratio 12.3% 8.1%
Underwriting expense ratio 36.0% 34.7%
Combined ratio 117.9% 105.4%
Impact of catastrophe
losses on combined ratio 1.1% 0.8%
8
<PAGE>
Homeowners 1999 1998
- -----------------------------------------------------------
Net premiums written $138,913 $138,337
% Increase 0.4% 8.9%
Net premiums earned 137,155 132,364
% Increase 3.6% 6.4%
Underwriting loss
(before tax) (49,901) (34,387)
Loss ratio 89.1% 79.0%
Loss expense ratio 10.5% 9.1%
Underwriting expense ratio 36.3% 36.2%
Combined ratio 135.9% 124.3%
Impact of catastrophe
losses on combined ratio 17.3% 17.8%
Fidelity & Surety 1999 1998
- -----------------------------------------------------------
Net premiums written $28,751 $28,297
% Increase 1.6% 9.7%
Net premiums earned 27,763 26,640
% Increase 4.2% 2.1%
Underwriting gain
(before tax) 5,089 3,717
Loss ratio 4.5% 12.1%
Loss expense ratio 5.3% 5.2%
Underwriting expense ratio 69.4% 64.7%
Combined ratio 79.2% 82.0%
Impact of catastrophe
losses on combined ratio N/A N/A
Total Property & Casualty 1999 1998
- -----------------------------------------------------------
Net premiums written $1,190,811 $966,630
% Increase 23.2% 4.8%
Net premiums earned 1,141,509 935,592
% Increase 22.0% 3.3%
Underwriting loss
(before tax) (181,759) (77,104)
Loss ratio 67.4% 64.2%
Loss expense ratio 11.0% 9.1%
Underwriting expense ratio 35.9% 33.8%
Combined ratio 114.3% 107.1%
Impact of catastrophe
losses on combined ratio 4.5% 4.2%
All other 1999 1998
- -----------------------------------------------------------
Revenues $12,412 $6,418
Expenses 15,738 4,567
- -----------------------------------------------------------
Net income/(loss) $ (3,326) $1,851
Reconciliation of Revenues 1999 1998
- -----------------------------------------------------------
Net premiums earned for
reportable segments $1,141,509 $ 935,592
Investment income 130,367 122,575
Realized gains 154,011 23,857
Miscellaneous income/(loss) (772) 147
- -----------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 1,425,115 1,082,171
Property and casualty
statutory to GAAP adjustment 4,075 (8,409)
- -----------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 1,429,190 1,073,762
Other segment revenues 12,412 6,418
- -----------------------------------------------------------
Total revenues $1,441,602 $1,080,180
===========================================================
Reconciliation of Underwriting
loss (before tax) 1999 1998
- -----------------------------------------------------------
Property and casualty
underwriting loss (before
tax) (Statutory basis) $(181,759) $(77,104)
Statutory to GAAP
adjustment 36,033 15,162
- -----------------------------------------------------------
Property and casualty
underwriting loss (before
tax) (GAAP basis) (145,726) (61,942)
Net investment income 132,500 128,164
Realized gains 165,974 15,770
Other income/(loss) (16,995) (4,042)
- -----------------------------------------------------------
Income from continuing
operations before income
taxes $ 135,753 $ 77,950
===========================================================
</TABLE>
9
<PAGE>
Three months ended September 30
(In thousands)
<TABLE>
<CAPTION>
Private Passenger Auto 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Net premiums written $126,835 $133,088
% Increase(decrease) (4.7)% 14.0%
Net premiums earned 126,963 127,268
% Increase (0.2)% 9.6%
Underwriting loss
(before tax) (12,523) (2,406)
Loss ratio 70.2% 67.6%
Loss expense ratio 12.8% 9.6%
Underwriting expense ratio 26.9% 23.6%
Combined ratio 109.9% 100.8%
Impact of catastrophe
losses on combined ratio 1.2% 0.7%
Direct Auto 1999 1998
- -----------------------------------------------------------
Net premiums written $3,332 $1,874
% Increase 77.8% N/A
Net premiums earned 3,736 538
% Increase 594.4% N/A
Underwriting loss
(before tax) (4,271) (893)
Loss ratio 129.2% 81.6%
Loss expense ratio 18.7% 10.5%
Underwriting expense ratio 74.5% 49.9%
Combined ratio 222.4% 142.0%
Impact of catastrophe
losses on combined ratio N/A N/A
CMP, Fire, Inland Marine 1999 1998
- ----------------------------------------------------------
Net premiums written $73,825 $53,830
% Increase 37.2% 6.0%
Net premiums earned 72,692 53,463
% Increase 36.0% 6.1%
Underwriting loss
(before tax) (31,162) (10,604)
Loss ratio 79.8% 68.8%
Loss expense ratio 14.9% 6.7%
Underwriting expense ratio 47.4% 44.0%
Combined ratio 142.1% 119.5%
Impact of catastrophe
losses on combined ratio 10.9% 5.8%
General Liability 1999 1998
- ---------------------------------------------------------
Net premiums written $42,105 $23,422
% Increase 79.8% 4.4%
Net premiums earned 42,255 24,029
% Increase(decrease) 75.9% (0.9)%
Underwriting gain
(before tax) 5,409 1,837
Loss ratio 34.9% 23.8%
Loss expense ratio 7.7% 18.2%
Underwriting expense ratio 44.8% 51.7%
Combined ratio 87.4% 93.7%
Impact of catastrophe
losses on combined ratio N/A N/A
Workers' Compensation 1999 1998
- ---------------------------------------------------------
Net premiums written $42,076 $19,387
% Increase(decrease) 117.0% (7.3)%
Net premiums earned 39,798 21,482
% Increase(decrease) 85.3% (11.3)%
Underwriting loss
(before tax) (8,303) (1,083)
Loss ratio 69.5% 62.3%
Loss expense ratio 9.7% 9.8%
Underwriting expense ratio 39.4% 36.5%
Combined ratio 118.6% 108.6%
Impact of catastrophe
losses on combined ratio N/A N/A
Commercial Auto 1999 1998
- ---------------------------------------------------------
Net premiums written $42,139 $33,519
% Increase 25.8% 1.5%
Net premiums earned 42,530 34,479
% Increase(decrease) 23.4% (0.9)%
Underwriting gain/(loss)
(before tax) (12,821) 2,255
Loss ratio 76.4% 52.6%
Loss expense ratio 14.0% 6.3%
Underwriting expense ratio 40.1% 35.5%
Combined ratio 130.5% 94.4%
Impact of catastrophe
losses on combined ratio 1.3% 0.4%
Homeowners 1999 1998
- ---------------------------------------------------------
Net premiums written $50,314 $50,559
% Increase(decrease) (0.5)% 14.0%
Net premiums earned 45,627 44,611
% Increase 2.3% 7.3%
Underwriting loss
(before tax) (20,010) (9,965)
Loss ratio 92.0% 74.3%
Loss expense ratio 12.2% 8.1%
Underwriting expense ratio 36.0% 35.2%
Combined ratio 140.2% 117.6%
Impact of catastrophe
losses on combined ratio 22.2% 18.9%
Fidelity & Surety 1999 1998
- ---------------------------------------------------------
Net premiums written $9,364 $9,670
% Increase(decrease) (3.2)% 21.3%
Net premiums earned 9,275 8,920
% Increase 4.0% 3.6%
Underwriting gain
(before tax) 1,308 1,905
Loss ratio 6.8% 4.8%
Loss expense ratio 6.6% 4.0%
Underwriting expense ratio 71.8% 64.4%
Combined ratio 85.2% 73.2%
Impact of catastrophe
losses on combined ratio N/A N/A
Total Property & Casualty 1999 1998
- ---------------------------------------------------------
Net premiums written $389,990 $325,349
% Increase 19.9% 9.8%
Net premiums earned 382,876 314,790
% Increase 21.7% 5.0%
Underwriting loss
(before tax) (82,373) (18,954)
Loss ratio 70.4% 61.7%
Loss expense ratio 12.2% 9.1%
Underwriting expense ratio 38.2% 34.1%
Combined ratio 120.8% 104.9%
Impact of catastrophe
losses on combined ratio 5.3% 4.0%
All other 1999 1998
- ---------------------------------------------------------
Revenues $4,428 $3,322
Expenses 7,089 1,212
- ---------------------------------------------------------
Net income $2,661 $2,110
10
<PAGE>
Reconciliation of Revenues 1999 1998
- ---------------------------------------------------------
Net premiums earned for
reportable segments $382,876 $314,790
Investment income 45,637 39,339
Realized gains/(loss) (3,999) 6,318
Miscellaneous income/(loss) (865) 1
- ---------------------------------------------------------
Total property and
casualty revenues (Statutory
basis) 423,649 360,448
Property and casualty
statutory to GAAP
adjustment 3,607 (3,046)
- ---------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 427,256 357,402
Other segment revenues 4,428 3,322
- ---------------------------------------------------------
Total revenues $431,684 $360,724
=========================================================
Reconciliation of Underwriting
loss (before tax) 1999 1998
- ---------------------------------------------------------
Property and casualty
underwriting loss (before
tax) (Statutory basis) $(82,372) $(18,954)
Statutory to GAAP
adjustment 30,300 2,688
- ---------------------------------------------------------
Property and casualty
underwriting loss (before
tax) (GAAP basis) (52,072) (16,266)
Net investment income 49,679 42,231
Realized gains/(loss) (2,269) 3,537
Other income/(loss) (8,359) (1,044)
- ---------------------------------------------------------
Income/(loss) from
continuing operations
before income taxes $(13,023) $ 28,458
=========================================================
</TABLE>
NOTE V - ACQUISITION OF COMMERCIAL LINES BUSINESS
On December 1, 1998, the Corporation acquired substantially all of the
Commercial Lines Division of Great American Insurance Company ("GAI"), an
insurance subsidiary of the American Financial Group, Inc. As part of the
transaction, the Corporation assumed responsibility for 650 employees of GAI's
Commercial Lines Division, as well as relationships with 1,700 agents. The
major lines of business included in the sale were workers' compensation,
commercial multi-peril, umbrella and commercial auto. Four commercial
operations as well as all California business and all pre-1987 environmental
claims were excluded from the transaction.
The transaction was accounted for using the purchase method of accounting.
The following table presents the unaudited quarterly pro forma results of
operations had the acquisition occurred on January 1, 1998.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
(Unaudited)(In thousands) 1998 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Revenues $444,244 $1,341,696
Net income 21,460 37,882
Diluted earnings per share 0.33 0.57
Average shares outstanding-
diluted 65,548 66,662
</TABLE>
NOTE VI - RESTRUCTURING CHARGE
During December 1998, the Corporation adopted a plan to restructure its branch
operations. To continue in the Corporation's efforts to reduce expenses,
personal lines business centers will be reduced from five to three locations.
Underwriting branch locations will be reduced from seventeen to eight
locations and claims branches will be reduced from thirty-eight to six
locations. The Corporation recognized $10.0 million in expenses in its income
statement to reflect one-time charges related to its branch office
consolidation plan. These charges consisted solely of future contractual
lease payments related to abandoned facilities. During the third quarter of
1999, the Corporation released $4.3 million of liability due to payments under
leases, resulting in a total year-to-date release of $4.9 million of
liability. The restructuring activity is expected to be completed by the end
of 1999 and the restructuring reserve will continue to be decreased as the
leases expire or subleases are obtained.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Property and casualty pre-tax underwriting losses for the nine months ended
September 30, 1999 were $145.7 million, $2.37 per share, compared with $61.9
million, $.93 per share for the same period in 1998. Gross premiums for the
first nine months of 1999 increased 4.8% for all lines of business excluding
the effect of $246.8 million in gross premium written from the GAI
acquisition. Commercial lines increased 0.5% and personal lines increased
7.9% from the same period last year excluding the effects of the GAI
acquisition. Property and casualty net premiums decreased 1.9% for the third
quarter of 1999 and have increased 2.9% year-to-date from the same period a
year ago excluding $70.8 and $196.3 million respectively in net premiums
related to the GAI acquisition.
Premium from Key Agents grew 4.4% year to date. Key Agents work closely with
the Corporation to establish goals to increase profitability, growth and
retention. Non-key active agents grew 4.5% over 1998. Including new
appointments, total active agent premium growth is 7.6% for 1999.
New Jersey is our largest state with 16.3% of total net premiums written
during the year. Legislation passed in 1992 requires automobile insurers
operating in the state to accept all risks that meet underwriting guidelines
regardless of risk concentration. This leads to a greater risk concentration
in the state than the Corporation would otherwise accept. New Jersey also
requires assessments to be paid for the New Jersey Unsatisfied Claim and
Judgment Fund (UCJF). This assessment is based upon estimated future direct
premium written in that state. The Corporation has paid $3.4 million in 1999
for fiscal year 2000 assessment and has paid $3.2 million in 1998. The
Corporation anticipates future assessments will not materially affect the
Corporation's results of operations, financial position or liquidity.
Recently, the New Jersey State Senate passed an auto insurance reform bill
that mandates a 15% rate reduction for personal auto policies for drivers who
agree not to sue for "pain and suffering" unless they suffer permanent injury
in an accident. The reform bill became effective on March 22, 1999, and all
new policies and renewal policies written on or after that date reflect the
15% rate reduction. The anticipated impact on the Corporation is a tradeoff
of lower premium rates on personal auto policies for presumably lower losses
on these policies but the degree of offset, if any, is uncertain at present.
As of September 30, 1999, the Corporation had personal auto net premium
written of $103.3 million or 53.1% of total premium that the Corporation
writes in New Jersey compared with $114.5 million or 53.1% at year-end 1998.
The projected impact of this reform bill on the Corporation would have been a
decrease in premium of $17.2 million for the year ended December 31, 1998.
The state of New Jersey has also begun to require insurance companies to write
a portion of their premiums in Urban Enterprise Zones (UEZ). These zones are
urban areas normally having high loss ratios. The Corporation is assigned
premiums if it does not write the required amount on its own. As of September
30, 1999, the Corporation has written $4.8 million year-to-date in UEZ
premiums, with $5.7 million in additional assigned premiums. As of September
30, 1999, the loss ratio on the UEZ premiums is 121.5%. and the loss ratio on
the assigned business is 167.4%.
The combined ratio for the first nine months increased 7.2 points to 114.3%
from 107.1% for the same period last year. The ratio was inflated due to the
effects of weather related losses and the effects of $12.3 million in non-
recurring reorganization expenses that had not been previously accrued. The
nine-month combined ratio for homeowners increased 11.6 points to 135.9% from
124.3% in the same period last year. This is primarily due to an increase in
weather related and catastrophe related losses in 1999 compared with the same
period of 1998. The Corporation is reviewing its exposure to underinsured
homeowner properties to maintain adequate replacement cost values on our
homeowners book of business. Selected homeowners accounts will be reviewed
upon renewal for a replacement cost valuation and any necessary premium
increases will be implemented at that time.
Personal automobile, the Corporation's largest line, recorded a 1999 nine-
month combined ratio of 104.6% increasing from 101.6% in 1998. Direct auto
combined ratio for the first nine months of 1999 increased 14.4 points to
198.5% from 184.1% for the same period in 1998. The high combined ratio is
related to the extreme volatility associated with start-up businesses. The
combined ratio will become normal as
12
<PAGE>
operations are developed. Commercial auto combined ratio increased 12.5
points to 117.9% for the first nine months of 1999 from 105.4%. The change is
due to increasing amounts of large claims.
Workers' compensation combined ratio for the first nine months of 1999
decreased 1.4 points to 112.4% from 113.8% during the same period last year.
The gross results, however, appear to be deteriorating due to tremendous
competitive pricing pressures.
The general liability combined ratio decreased during the first nine months of
1999 to 83.6% from 97.1% in 1998. This reduction is a result of the nature of
general liability being a volatile segment and having favorable loss
developments during the first nine months of 1999. The combined ratio for
CMP, fire and inland marine increased 21.0 points for the first nine months of
1999 to 132.8% from 111.8% in 1998. This increase is primarily due to large
weather related and catastrophe related losses due to the Cincinnati and
Oklahoma tornadoes and Hurricane Floyd. These catastrophes also increase the
catastrophe reserves, increasing the total reserves.
The third quarter catastrophe losses were $20.2 million and accounted for 5.3
points on the combined ratio. This compares with $12.7 million and 4.0 points
for the same period in 1998. Year-to-date catastrophe losses increased $11.9
million from $39.5 in 1998 to $51.4 million in 1999. The effect of
catastrophes on the Corporation's future results cannot be accurately
predicted. Severe weather patterns can have a material adverse impact on the
Corporation's results. During the third quarter of 1999 there were 7
catastrophes compared with 8 catastrophes in the third quarter of 1998. The
largest catastrophe in each quarter was $17.9 million and $2.1 million,
respectively, in incurred losses. For additional disclosure of catastrophe
losses, refer to Item 14, Note 9, Losses and Loss Reserves in the Notes to the
Consolidated Financial Statements on pages 54 and 55 of the Corporation's 1998
Form 10-K.
During the quarter, the Corporation adjusted the return premium on a
reinsurance treaty resulting in a 1.0 point impact on the third quarter 1999
underwriting expense ratio. This adjustment, along with restructuring related
increases for salaries and benefits and consulting fees, as well as a
Hurricane Floyd related wind pool assessment in North Carolina increased the
underwriting expense ratio to 38.2% for the quarter, from 34.1% in the same
period of 1998.
For the quarter, property and casualty after tax investment income was $34.4
million, $0.57 per share, increasing from $29.1 million, $.45 per share, for
the same period last year. The effective tax rate on investment income for
the third quarter of 1999 was 24.7% compared with 25.9% for the comparable
period in 1998. Year to date property and casualty after tax investment
income was $98.2 million, $1.60 per share, up from $91.9 million, $1.38 per
share, for the same period of 1998. The effective tax rate on investment
income for year to date was 24.7% compared with 25.0% for the prior year
period.
For the first nine months of the year, property and casualty after tax
realized capital gains were $102.9 million against $10.3 million in capital
gains for the same period of 1998. Third quarter recognized realized after
tax losses of $1.6 million compared to a realized after tax gain of $2.2
million for the third quarter of 1998. As previously reported in our 8-K
filing on July 13, 1999, the Corporation completed a strategic asset
reallocation of its investment portfolio in the second quarter. A combination
of share repurchases and outstanding growth in the equity portfolio caused the
relationship of asset classes to fall outside the Corporation's long standing
guidelines. The Corporation responded by selling approximately $200 million
in equity securities, recognizing a gain of $145 million before tax or $1.53
per share after tax. The after tax proceeds have been invested in fixed
income instruments which we anticipate will increase investment income in
subsequent quarters. As a result of this sale, unrealized gains and
corresponding deferred taxes thereon were ratably reduced.
Net cash used by operations was $131.2 million for the first nine months of
the year compared with net cash generated of $25.9 million for the same period
in 1998. This change is largely due to the increase in the underwriting loss
which increased from $61.9 million in 1998 to $145.7 million in 1999 before
taxes, an increase in agents balances receivable, largely caused by a shift
from a six month billing period to a twelve month billing period and payment
of $40.0 million for other liabilities assumed from GAI. Shareholder dividend
payments were $42.4 million for the nine month period of 1999 compared with
$44.0 million for the same period in 1998.
13
<PAGE>
In 1995, the Ohio Life Insurance Company, a subsidiary of the Corporation,
reinsured substantially all of its life insurance and related businesses to
Great Southern Life Insurance Company. At December 31, 1998, Great Southern
had assumed 95% of the life insurance policies subject to the 1995 agreement.
As a result, the Corporation recognized an additional amount of unamortized
ceding commission of $1.1 million before tax during the fourth quarter of
1998. There remains approximately $1.0 million in unamortized ceding
commission. This will continue to be amortized over the remaining life of the
underlying policies or recognized in full at the time of sale. On July 21,
1999, the Corporation executed a stock purchase agreement for the sale of 100%
of the stock of the Ohio Life Insurance Company. The buyer filed on August
24th its Form A with the Ohio Department of Insurance. The closing is
anticipated in December 1999. The final gain on the sale has not yet been
determined by the Corporation. Additional information related to the
discontinued life insurance operations is included in Item 14, Note 20
Discontinued Operations on page 60 of the Corporation's 1998 Form 10-K.
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) and unrated securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(In millions) 1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Below investment grade securities:
Carrying value $181.0 $207.3
Amortized cost 189.8 208.8
Unrated securities:
Carrying value $298.8 $281.8
Amortized cost 298.6 264.8
</TABLE>
Utilizing ratings provided by other agencies, such as the NAIC, the Company
categorizes additional unrated securities into below investment grade ratings.
The following summarizes the additional unrated securities that are rated in
the below investment grade category by other rating agencies:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Below investment grade securities at
carrying value $181.0 $207.3
Other rating agencies categorizing
unrated securities as below
investment grade 25.7 7.7
Below investment grade securities at
carrying value $206.7 $215.0
</TABLE>
All of the Corporation's below investment grade securities are performing in
accordance with contractual terms and are making principal and interest
payments as required. The securities in the Corporation's below investment
grade portfolio have been issued by 108 corporate borrowers in approximately
59 industries.
Investments in below investment grade securities have greater risks than
investments in investment grade securities. The risk of default by borrowers
which issue securities rated below investment grade is significantly greater
because these securities are generally unsecured and often subordinated to
other debt and these borrowers are often highly leveraged and are more
sensitive to adverse economic conditions such as a recession or a sharp
increase in interest rates. Current liquidity needs are expected to be met by
scheduled bond maturities, even if the below investment grade and unrated
securities are excluded. Investment grade securities are also subject to
significant adverse risks including the risks of re-leveraging and changes in
control of the issuer. In most instances, investors are unprotected with
respect to such risks, the effects of which can be substantial.
For further discussion of the Corporation's investments, see Item 1 pages 6
through 9 of the Corporation's 1998 Form 10-K for the year ended December 31,
1998.
14
<PAGE>
In 1994, the National Association of Insurance Commissioners developed a risk-
based capital model to establish standards which will compare insurance
company statutory surplus to required minimum capital based on risks of
operations and assist regulators in determining solvency requirements. The
model is based on four risk factors in two categories: asset risk consisting
of investment risk and credit risk; and underwriting risk composed of loss
reserve and premiums written risks. Based on calculations performed at
December 31, 1998, all of the Ohio Casualty Group companies are in excess of
the necessary capital to conform with the risk-based capital model.
Proposition 103 was passed in the State of California in 1988 in an attempt to
legislate premium rates for that state. As construed by the California
Supreme Court, the proposition requires premium rate rollbacks for 1989
California policyholders while allowing for a "fair" return for insurance
companies. Even after considering investment income, total returns in
California were less than what would be considered "fair" by any reasonable
standard. During the fourth quarter of 1994, the State of California assessed
the Corporation $59.9 million for Proposition 103. In February 1995,
California revised this billing to $47.3 million due to California Senate Bill
905 which permitted reduction of the rollback due to actual commissions and
premium taxes paid. The assessment was revised again in August 1995 to $42.1
million plus interest. In December 1997, during Administrative Law hearings,
the California Department of Insurance filed two revised rollback
calculations. These calculations indicated rollback liabilities of either
$35.9 million or $39.9 million plus interest.
In 1998, the Administrative Law Judge finally issued a proposed ruling with a
rollback liability of $24.4 million plus interest. Her ruling was sent to the
California Commissioner of Insurance to be accepted, rejected or modified.
The Corporation expected the commissioner to rule sometime after the election
in November 1998, but he has so far failed to do so. In light of this failure
to rule, the Corporation consulted extensively with outside counsel to
determine the range of liability asserted by the Department. The asserted
rollbacks to date have ranged from $24.4 million to $61.2 million. The
Administrative Law Judge indicates clearly in her ruling, that by her
calculation, the Corporation would have lost approximately $1.0 million on
1989 operations if a rollback of $24.4 million were imposed. Given that
conclusion, it is clear that any assessment greater than $24.4 million would
strengthen the Corporation's Constitutional argument that this rollback is
confiscatory. Since the Corporation does not believe it is possible to
pinpoint a specific rollback within the California Department of Insurance's
asserted range that is the most probable, the Corporation has established a
contingent liability for Proposition 103 rollback at $24.4 million plus simple
interest at 10% from May 8, 1989. This brings the total reserve to $49.9
million at September 30, 1999.
In December 1992, the Corporation stopped writing business in California due
to a lack of profitability and a difficult regulatory environment. In April
1995, the California Department of Insurance gave final approval for
withdrawal. Currently, subsidiary American Fire and Casualty remains in the
state to wind down the affairs of the group.
During the third quarter, Ohio Casualty continued its share repurchase
program. The total number of shares acquired during the quarter was 1,000,000
at an average market price of $16.70. Year to date, the Company has
repurchased 2,478,000 shares, at an average market price of $18.60. The
Company has remaining authorization to repurchase 1,649,824 additional shares.
The Corporation is proceeding on schedule in its phased approach to convert
its computer systems to be Year 2000 compliant. The four phases included in
this approach are: awareness, planning, execution/testing and compliance. All
phases, including awareness, planning, execution/testing and compliance
verification are complete; however, we continue testing to ensure utmost
preparedness.
The Corporation began the awareness phase early in the 1990s, recognizing that
its systems and applications would need significant changes. From that time
forward all system development and major enhancements to existing systems
took Year 2000 processing requirements into consideration. This approach
resulted in some of our systems being converted and compliant long before
there was any business requirement or exposure to processing problems.
15
<PAGE>
During 1995, the Information Systems Department (I/S) began the planning
phase. At that time Year 2000 compliance became a priority project with
Project Managers assigned specifically for converting our systems to be
compliant. A comprehensive inventory of our systems was completed,
identifying the critical date that each system must be compliant and an action
plan was put together to ensure that the conversion was completed on time.
As a result of the planning phase, dedicated staff and resources were assigned
to work on the Year 2000 project. This began our execution/testing phase of
the project which includes addressing the remediation of Year 2000 problems
identified in the planning phase and logical partition (LPAR) compliance
testing. LPAR compliance testing requires an isolated partition within the
computer that runs independently. Essentially it can be considered an
entirely separate computer. The Corporation's LPAR has a dedicated processor,
disk and tape storage. In this environment, data can be migrated forward and
tested as the internal date in the computer is changed to critical dates in
1999 and 2000. This provides an excellent environment to test applications,
system software and hardware. This involves individual and integrated
compliance testing. The first step verifies that the systems are compliant
when they run independently. The second step verifies compliance when they
are integrated with all other systems with which they interface. Testing was
performed throughout 1998 focusing initially on systems critical to the daily
business operation and followed by all others. The Corporation has six major
system areas: commercial lines, claims, auto, personal property,
management/financial reporting and human resources. All of these areas have
completed LPAR compliance testing.
All systems have undergone integrated testing of the production environment.
Contingency plans, which included compliance reverification of this integrated
test during third quarter 1999, were completed as scheduled. Contingency
plans again call for compliance reverification of this integrated test early
in the fourth quarter of 1999.
As a result of the Corporation's efforts early in the 1990s to begin making
changes to systems and existing hardware and software, the Corporation to date
has not had to make an expensive effort to identify and remedy its Year 2000
issues and does not anticipate that it will be required to make substantial
expenditures to address Year 2000 compliance in the future. As of September
30, 1999, the total amount spent to date for I/S related costs on the Year
2000 project is $2.6 million and the Corporation anticipates minimal
additional I/S related expenses. These amounts do not include any costs
associated with efforts made to contact third parties or related to
contingency planning.
During 1997, the Corporation began the compliance phase. The Year 2000 team
has identified all significant vendors, suppliers and agents of the
Corporation and has completed the initial contact to obtain written statements
of their readiness and commitment to a date for their Year 2000 compliance.
The Corporation will continue to monitor the Year 2000 status of these
entities and develop contingency plans to reduce the possible disruption in
business operations that may result from the failure of third parties with
which the Corporation has business relationships to address their Year 2000
issues. Should a third-party with whom the Corporation transacts business
have a system failure due to not being Year 2000 compliant, the Corporation
believes this could result in a delay in processing or reporting transactions
of the Corporation, or a potential disruption in service to its customers,
notwithstanding the Corporation's intention to develop contingency plans to
respond to these potential system failures by such third parties.
The Corporation is also addressing non information technology (non-IT) to
ensure Year 2000 compliance. The Year 2000 team has completed an assessment
of the non-IT assets; and, identified the material items that have a risk
involving the safety of individuals, or that may cause damage to property or
the environment, or affect revenues. The team reported on the identified non-
IT assets in December 1998 to the Corporation's Executive Management Team.
Remediation and contingency planning is ongoing throughout 1999 with regular
updates required to be given to the Executive Management Team.
The Corporation is currently assessing the status of Year 2000 readiness of
the business and assets that it acquired in the acquisition of substantially
all the Commercial Lines Division of Great American Insurance Company on
December 1, 1998. For a period of at least 24 months from the date of the
acquisition, GAI will provide computer processing and communication services
to the Corporation in connection with the
16
<PAGE>
acquired business pursuant to an Information Systems Agreement. Thus, the
Corporation will be dependent on GAI to address and remediate Year 2000 issues
with respect to the information technology systems utilized for the business
being acquired by the Corporation. The failure of GAI to satisfactorily
correct a material Year 2000 problem in the computer processing systems being
used to provide services to the Corporation in connection with the acquired
business could result in a material adverse effect on the ability of the
Corporation to integrate the acquired business and to operate it on a
profitable basis.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, the normal business operations of the
Corporation including the disruption or delay in premium or claim processing
and the disruption in service to its customers. Also the inability to be Year
2000 compliant of significant third-party providers of the Corporation could
result in an interruption in the normal business operations. Due to the
general uncertainty inherent in the Year 2000 problem, such failures could
materially and adversely affect the Corporation's financial position, results
of operations or liquidity.
The Year 2000 issue is also a concern from an underwriting standpoint
regarding the extent of liability for coverage under various general
liability, property and directors and officers liability products and
policies. The Corporation is taking various steps to manage this concern
including providing educational information on Year 2000 to agents; adding
clarification and exclusionary language to certain policies; and by evaluating
underwriting practices. The Corporation believes that no coverage exists;
however, minimal coverage may be interpreted to exist under some current
liability and product policies. The Corporation has historically avoided
manufacturing risks which produce computer or computer-dependent products.
The Insurance Services Office (ISO) recently developed policy language that
clarifies that there is no coverage for certain Year 2000 occurrences. The
liability exclusion has been accepted in over 40 states and a companion filing
for property has been accepted in at least 20 states at this time. Several
states have not adopted or approved the property exclusion form citing
specifically that there is no coverage under the current property contracts
and therefore, there is no reason to accept a clarifying endorsement. The
Corporation is currently addressing the year 2000 issue by attaching the ISO
exclusionary language, where approved by regulators, to general liability
policies with a rating classification the Corporation believes could
potentially have Year 2000 losses. The ISO exclusionary language endorsement
is included on all property policies where approved by regulators. These
actions should minimize the Corporation's exposure to Year 2000 underwriting
losses.
Directors and officers could be held liable if a company in their control
fails to take necessary actions to address any Year 2000 problems and that
failure results in a material financial loss to the Company. The Corporation
has written directors' and officers' liability policies since 1995, with
approximately $.5 million in premiums written in 1998. The Corporation is
managing its D&O Year 2000 exposure through a combination of underwriting
guidelines which address Year 2000 issues in the application process and
reinsurance policies which provide coverage for any loss in excess of $.3
million.
The Corporation's management believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be "worst-case scenarios" in which the
Corporation could experience interruptions in normal business operations.
These "worst-case scenarios" include: disruption or delay in premium and claim
processing; disruption in service to customers; litigation for Year 2000
related claims, adverse affects on the Corporation's ability to integrate the
acquired business from Great American and loss of electrical, water and other
utility services which could result in a disruption in the Corporation's
services. The amount of potential liability and lost revenue cannot be
reasonably estimated.
From time to time, the Company may publish forward looking statements relating
to such matters as anticipated financial performance, business prospects and
plans, regulatory developments and similar matters. The statements contained
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations that are not historical information, are forward looking
statements. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor under The Securities Act of 1933 and The Securities Exchange Act
of 1934 for forward-looking
17
<PAGE>
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's business include the following: changes in property
and casualty reserves; catastrophe losses; premium and investment growth;
product pricing environment; availability of credit; changes in government
regulation; performance of financial markets; fluctuations in interest rates;
availability and pricing of reinsurance; litigation and administrative
proceedings; Year 2000 issues; ability of Ohio Casualty to integrate and to
retain the acquired insurance business; and general economic and market
conditions.
18
<PAGE>
PART II
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K -
Attached hereto as Exhibit No. 27 is the Financial Data Schedule.
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)
November 15, 1999 /s/ Barry S. Porter
---------------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 2536809876
<DEBT-CARRYING-VALUE> 2536809876
<DEBT-MARKET-VALUE> 2536809876
<EQUITIES> 642033395
<MORTGAGE> 0
<REAL-ESTATE> 43008228
<TOTAL-INVEST> 3221851499
<CASH> 51741446
<RECOVER-REINSURE> 198358827
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