<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, 2000.
------------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------- --------------
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
31-0783294
(I.R.S. Employer Identification No.)
9450 Seward Road, Fairfield, Ohio
(Address of principal executive offices)
45014
(Zip Code)
(513) 867-3000
(Registrant's telephone number)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Par Value $.125 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The aggregate market value as of November 1, 2000 of the voting stock
held by non-affiliates of the registrant was $456,480,056.
On November 1, 2000 there were 60,072,519 shares outstanding.
Page 1 of 18
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<PAGE>
<TABLE>
PART I
ITEM 1. FINANCIAL STATEMENTS
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED BALANCE SHEET
<CAPTION>
September 30, December 31,
(In thousands, except per share data) (Unaudited) 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,427,158 and $2,408,201) $ 2,421,425 $ 2,376,973
Equity securities, at fair value
(cost: $172,911 and $161,498) 729,187 698,129
Short-term investments, at fair value
(cost: $77,204 and $104,446) 77,204 104,398
---------------------------------------------------------------------------------------
Total investments 3,227,816 3,179,500
Cash 50,169 45,559
Premiums and other receivables, net of allowance for bad
debts of $10,189 and $9,338, respectively 376,537 366,202
Deferred policy acquisition costs 180,957 177,745
Property and equipment, net of accumulated depreciation of
$119,706 and $113,541, respectively 94,256 94,670
Reinsurance recoverable 147,814 139,021
Agent relationships, net of accumulated amortization of
$22,099 and $13,298, respectively 269,013 293,565
Other assets 119,766 180,182
---------------------------------------------------------------------------------------
Total assets $ 4,466,328 $ 4,476,444
=======================================================================================
Liabilities
Insurance reserves:
Unearned premiums $ 739,316 $ 725,399
Losses 1,602,362 1,544,967
Loss adjustment expenses 371,607 363,488
Notes payable 220,958 241,446
California Proposition 103 reserve 17,500 50,486
Deferred income taxes 56,481 62,843
Other liabilities 374,954 336,828
----------------------------------------------------------------------------------------
Total liabilities 3,383,178 3,325,457
Shareholders' Equity
Common stock, $.0625 par value 5,901 5,901
Authorized: 150,000 shares
Issued: 94,418
Additional paid-in capital 4,192 4,286
Common stock purchase warrants 21,138 21,138
Accumulated other comprehensive income:
Unrealized gain on investments, net of applicable
income taxes 358,635 329,354
Retained earnings 1,146,565 1,243,463
Treasury stock, at cost:
(Shares: 34,344; 34,335) (453,281) (453,155)
-----------------------------------------------------------------------------------------
Total shareholders' equity 1,083,150 1,150,987
-----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 4,466,328 $ 4,476,444
=========================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
45-58 of the Corporation's 1999 Form 10-K, Item 14.
2
<PAGE>
<TABLE>
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED INCOME
<CAPTION>
Three Months
Ended September 30,
(in thousands, except per share data) (Unaudited) 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and finance charges earned $ 394,015 $ 384,274
Investment income less expenses 49,673 49,679
Investment gains (losses) realized, net 1,395 (2,269)
-----------------------------------------------------------------------------------------
Total revenues 445,083 431,684
Losses and benefits for policyholders 276,099 248,502
Loss adjustment expenses 45,042 46,998
General operating expenses 35,286 46,304
Amortization of agent relationships 2,915 3,066
Write-down of agent relationships 1,083 0
Amortization of deferred policy acquisition costs 98,941 102,118
Restructuring charge 0 (2,891)
California Proposition 103 reserve, including interest (34,208) 610
-----------------------------------------------------------------------------------------
Total expenses 425,158 444,707
-----------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 19,925 (13,023)
Income tax (benefit) expense:
Current (948) (26,179)
Deferred 6,323 20,138
-----------------------------------------------------------------------------------------
Total income tax (benefit) expense 5,375 (6,041)
-----------------------------------------------------------------------------------------
Income (loss) before discontinued operations 14,550 (6,982)
Income from discontinued operations, net of taxes of
$0 and $105, respectively 0 117
-----------------------------------------------------------------------------------------
Net income (loss) $ 14,550 $ (6,865)
=========================================================================================
Other comprehensive income (loss), net of taxes:
Net increase/(decrease) in unrealized gains, net
increase/(decrease)in tax expense of $31,499
and $(29,127), respectively 58,499 (54,095)
-----------------------------------------------------------------------------------------
Comprehensive income (loss) $ 73,049 $ (60,960)
=========================================================================================
Average shares outstanding - basic 60,074 60,784
=========================================================================================
Earnings per share - basic:
Income (loss) from continuing operations, per share $ 0.24 $ (0.11)
Income from discontinued operations, per share 0.00 0.00
-----------------------------------------------------------------------------------------
Net income (loss), per share $ 0.24 $ (0.11)
Average shares outstanding - diluted 60,074 60,784
=========================================================================================
Earnings per share - diluted:
Income (loss) from continuing operations, per share $ 0.24 $ (0.11)
Income from discontinued operations, per share 0.00 0.00
-----------------------------------------------------------------------------------------
Net income (loss), per share $ 0.24 $ (0.11)
Cash dividends, per share $ 0.12 $ 0.23
=========================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
45-58 of the Corporation's 1999 Form 10-K, Item 14.
3
<PAGE>
<TABLE>
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED INCOME
<CAPTION>
Nine Months
Ended September 30,
(in thousands, except per share data) (Unaudited) 2000 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and finance charges earned $ 1,151,077 $ 1,143,128
Investment income less expenses 150,741 132,500
Investment gains (losses) realized, net (7,300) 165,974
-----------------------------------------------------------------------------------------
Total revenues 1,294,518 1,441,602
Losses and benefits for policyholders 847,355 737,978
Loss adjustment expenses 132,771 125,920
General operating expenses 115,734 131,395
Amortization of agent relationships 8,801 9,254
Write-down of agent relationships 43,252 0
Amortization of deferred policy acquisition costs 296,390 302,161
Restructuring charge 22 (2,691)
California Proposition 103 reserve, including interest (32,986) 1,832
-----------------------------------------------------------------------------------------
Total expenses 1,411,339 1,305,849
-----------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (116,821) 135,753
Income tax (benefit) expense:
Current (26,032) 11,039
Deferred (22,128) 23,306
-----------------------------------------------------------------------------------------
Total income tax (benefit) expense (48,160) 34,345
-----------------------------------------------------------------------------------------
Income (loss) before discontinued operations and
accounting change (68,661) 101,408
Income from discontinued operations, net of taxes of
$0 and $(247), respectively 0 2,016
Cumulative effect of accounting change, net of taxes 0 (2,255)
-----------------------------------------------------------------------------------------
Net income (loss) $ (68,661) $ 101,169
=========================================================================================
Other comprehensive income (loss), net of taxes:
Net increase/(decrease) in unrealized gains, net
increase/(decrease) in tax expense of $15,767
and $(104,655), respectively 29,281 (194,360)
-----------------------------------------------------------------------------------------
Comprehensive loss $ (39,380) $ (93,191)
=========================================================================================
Average shares outstanding - basic 60,076 61,478
=========================================================================================
Earnings per share - basic:
Income (loss) from continuing operations, per share $ (1.14) $ 1.65
Income from discontinued operations, per share 0.00 0.04
Effect of change in accounting principle (net of taxes) 0.00 (0.04)
-----------------------------------------------------------------------------------------
Net income (loss), per share $ (1.14) $ 1.65
Average shares outstanding - diluted 60,076 61,498
=========================================================================================
Earnings per share - diluted:
Income (loss) from continuing operations, per share $ (1.14) $ 1.65
Income from discontinued operations, per share 0.00 0.04
Effect of change in accounting principle (net of taxes) 0.00 (0.04)
-----------------------------------------------------------------------------------------
Net income (loss), per share $ (1.14) $ 1.65
Cash dividends, per share $ 0.47 $ 0.69
=========================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
45-58 of the Corporation's 1999 Form 10-K, Item 14.
4
<PAGE>
<TABLE>
Ohio Casualty Corporation and Subsidiaries
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
<CAPTION>
Accumulated
Additional Common other Total
(in thousands, except per Common paid-in stock purchase comprehensive Retained Treasury shareholders'
share data) (Unaudited) Stock capital warrants income earnings stock equity
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1999 $ 5,901 $ 4,135 $ 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 (24 shares) 151 290 441
Repurchase of treasury
stock (2,478 shares) (46,087) (46,087)
Net income 101,169 101,169
Cash dividends paid
($.69 per share) (42,410) (42,410)
---------------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1999 $ 5,901 $ 4,286 $ 21,138 $ 317,456 $ 1,244,108 $ (453,155) $ 1,139,734
=================================================================================================================================
Balance
January 1, 2000 $ 5,901 $ 4,286 $ 21,138 $ 329,354 $ 1,243,463 $ (453,155) $ 1,150,987
Unrealized gain 45,048 45,084
Deferred income tax expense on
net unrealized gain (15,767) (15,767)
Net forfeiture of stock
under stock award
plan (10 shares) (94) (126) (220)
Net loss (68,661) (68,661)
Cash dividends paid
($.47 per share) (28,237) (28,237)
---------------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 2000 $ 5,901 $ 4,192 $ 21,138 $ 358,635 $ 1,146,565 $ (453,281) $ 1,083,150
=================================================================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
45-58 of the Corporation's 1999 Form 10-K, Item 14.
5
<PAGE>
<TABLE>
Ohio Casualty Corporation and Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
<CAPTION>
Nine Months
Ended September 30,
(in thousands) (Unaudited) 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from:
Operations
Net income (loss) $ (68,661) $ 101,169
Adjustments to reconcile net income to cash from
operations:
Changes in:
Insurance reserves 79,431 30,177
Income taxes (36,455) 1,884
Premiums and other receivables (10,335) (73,521)
Deferred policy acquisition costs (3,212) (7,227)
Reinsurance recoverable (18,231) (11,499)
Other assets 81,488 (262)
Other liabilities 22,666 (41,496)
California Proposition 103 reserves (32,986) 1,832
Amortization and write-down of agent relationships 52,053 9,254
Depreciation and amortization 12,200 23,384
Investment (gains) losses 7,300 (167,174)
Cumulative effect of an accounting change 0 2,255
-------------------------------------------------------------------------------------
Net cash generated (used) by
operating activies 85,258 (131,224)
-------------------------------------------------------------------------------------
Investments
Purchase of investments:
Fixed income securities - available for sale (878,846) (1,136,182)
Equity securities (54,188) (10,339)
Proceeds from sales:
Fixed income securities - available for sale 771,715 835,654
Equity securities 44,028 280,972
Proceeds from maturities and calls:
Fixed income securities - available for sale 53,658 103,038
Equity securities 10,200 3,000
Property and equipment
Purchases (7,560) (27,691)
Sales 1,809 769
-------------------------------------------------------------------------------------
Net cash generated (used) from
investing activities (59,184) 49,221
-------------------------------------------------------------------------------------
Financing
Notes payable:
Repayments (20,488) (23,500)
Proceeds from exercise of stock options 67 211
Purchase of treasury stock 0 (46,087)
Dividends paid to shareholders (28,237) (42,410)
-------------------------------------------------------------------------------------
Net cash used in financing activities (48,658) (111,786)
-------------------------------------------------------------------------------------
Net change in cash and cash equivalents (22,584) (193,789)
Cash and cash equivalents, beginning of period 149,957 305,002
-------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 127,373 $ 111,213
=====================================================================================
</TABLE>
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
45-85 of the Corporation's 1999 Form 10-K, Item 14.
6
<PAGE>
Ohio Casualty Corporation & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Ohio Casualty Corporation (the Corporation) is the holding company of The Ohio
Casualty Insurance Company (the Company), which is one of six property-
casualty companies that make up the Ohio Casualty Group (the Group).
NOTE I - INTERIM ADJUSTMENTS
It is believed that all material adjustments necessary to present a fair
statement of the results of the interim period covered are reflected in this
report. The operating results for the interim periods are not necessarily
indicative of the results to be expected for the full year. These statements
should be read in conjunction with the financial statements and notes thereto
in the Corporation's 1999 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 accrued a 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 (FASB) issued Statement
of Financial Accounting Standard (SFAS) 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement standardizes the
accounting for derivative instruments by requiring those items to be
recognized as assets or liabilities with changes in fair value reported in
earnings or other comprehensive income in the current period. Based on
current estimates, the Corporation expects the adoption of SFAS 133 to have an
immaterial impact on financial results. In June 1999, the FASB issued SFAS
137 which deferred the effective date of adoption of SFAS 133 for fiscal
quarters of fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Corporation).
NOTE III - EARNINGS PER SHARE
Basic and diluted earnings per share are summarized as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations $14,550 $(6,982) $(68,661) $101,408
Weighted average common shares
outstanding - basic 60,074 60,784 60,076 61,478
Basic income (loss) from
continuing operations - per
average share $ 0.24 $ (0.11) $ (1.14) $ 1.65
==============================================================================
Weighted average common shares
outstanding 60,074 60,784 60,076 61,478
Effect of dilutive securities 0 0 0 20
------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 60,074 60,784 60,076 61,498
Diluted income (loss) from
continuing operations - per
average share $ 0.24 $ (0.11) $ (1.14) $ 1.65
==============================================================================
</TABLE>
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 private passenger auto - agency, private passenger auto
- direct, CMP, fire, inland marine, general liability, umbrella, workers'
compensation, commercial auto, homeowners, fidelity and surety. These
segments generate revenues by selling a wide variety of personal, commercial
and surety insurance products. The Corporation also has an all other segment
which derives its revenues from premium financing, investment income, royalty
income and discontinued life insurance operations.
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 it is reported
internally to management. In 1999, the Group began managing the private
passenger auto - direct segment separately from private passenger auto -
agency and umbrella segment separately from general liability. As a result,
prior year results for general liability and private passenger auto - agency
have been restated to reflect this change. Asset information by reportable
segment is not reported, since the Corporation does not produce such
information internally.
<TABLE>
Nine months ended September 30
(in thousands)
<CAPTION>
Private Passenger Auto - Agency 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $349,248 $412,321
% Increase (decrease) (15.3)% 6.8%
Net premiums earned 347,852 386,491
% Increase (decrease) (10.0)% 3.1%
Underwriting gain/(loss)
(before tax) (46,240) (20,436)
Loss ratio 76.1% 67.3%
Loss expense ratio 12.2% 11.6%
Underwriting expense ratio 24.9% 24.7%
Combined ratio 113.2% 103.6%
Impact of catastrophe losses on
combined ratio 0.9% 1.0%
</TABLE>
<TABLE>
<CAPTION>
Private Passenger Auto - Direct 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $ 7,894 $12,901
% Increase (decrease) (38.8)% 315.0%
Net premiums earned 10,683 9,152
% Increase (decrease) 16.7% 1,046.9%
Underwriting gain (loss)
(before tax) (9,848) (10,983)
Loss ratio 115.6% 128.8%
Loss expense ratio 18.9% 17.3%
Underwriting expense ratio 78.0% 52.4%
Combined ratio 212.5% 198.5%
Impact of catastrophe losses on
combined ratio 0.7% 0.2%
</TABLE>
<TABLE>
<CAPTION>
CMP, Fire, Inland Marine 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $240,443 $224,722
% Increase (decrease) 7.0% 38.2%
Net premiums earned 237,938 220,998
% Increase (decrease) 7.7% 40.4%
Underwriting gain (loss)
(before tax) (32,410) (75,623)
Loss ratio 62.1% 77.3%
Loss expense ratio 10.9% 12.0%
Underwriting expense ratio 40.2% 44.2%
Combined ratio 113.2% 133.5%
Impact of catastrophe losses on
combined ratio 5.8% 10.1%
</TABLE>
<TABLE>
<CAPTION>
General Liability 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $63,989 $63,913
% Increase (decrease) 0.1% 7.8%
Net premiums earned 62,379 58,778
% Increase (decrease) 6.1% 2.1%
Underwriting gain (loss)
(before tax) (21,488) (16,735)
Loss ratio 60.2% 49.7%
Loss expense ratio 26.0% 17.4%
Underwriting expense ratio 47.0% 56.4%
Combined ratio 133.2% 123.5%
</TABLE>
<TABLE>
<CAPTION>
Umbrella 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $51,859 $50,622
% Increase (decrease) 2.4% 256.5%
Net premiums earned 49,290 45,652
% Increase (decrease) 8.0% 230.8%
Underwriting gain (loss)
(before tax) 5,059 28,446
Loss ratio 48.6% 10.4%
Loss expense ratio 5.0% (7.3)%
Underwriting expense ratio 34.3% 31.2%
Combined ratio 87.9% 34.3%
</TABLE>
<TABLE>
<CAPTION>
Workers' Compensation 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $148,651 $126,677
% Increase (decrease) 17.3% 83.9%
Net premiums earned 147,250 127,553
% Increase (decrease) 15.4% 83.8%
Underwriting gain (loss)
(before tax) (72,201) (18,867)
Loss ratio 104.4% 62.8%
Loss expense ratio 12.8% 11.2%
Underwriting expense ratio 31.5% 41.1%
Combined ratio 148.7% 115.1%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Commercial Auto 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $137,528 $131,991
% Increase (decrease) 4.2% 25.0%
Net premiums earned 133,628 127,967
% Increase (decrease) 4.4% 24.5%
Underwriting gain (loss)
(before tax) (29,071) (26,428)
Loss ratio 74.2% 69.6%
Loss expense ratio 10.1% 12.3%
Underwriting expense ratio 36.4% 37.6%
Combined ratio 120.7% 119.5%
Impact of catastrophe losses
on combined ratio 0.3% 1.1%
</TABLE>
<TABLE>
<CAPTION>
Homeowners 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $131,662 $138,913
% Increase(decrease) (5.2)% 0.4%
Net premiums earned 133,021 137,155
% Increase (decrease) 3.0% 3.6%
Underwriting gain (loss)
(before tax) (33,186) (47,582)
Loss ratio 79.8% 89.1%
Loss expense ratio 7.8% 10.5%
Underwriting expense ratio 37.7% 34.6%
Combined ratio 125.3% 134.2%
Impact of catastrophe losses
on combined ratio 11.7% 17.3%
</TABLE>
<TABLE>
<CAPTION>
Fidelity & Surety 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $29,096 $28,751
% Increase (decrease) 1.2% 1.6%
Net premiums earned 28,290 27,763
% Increase (decrease) 1.9% 4.2%
Underwriting gain (loss)
(before tax) 7,502 6,449
Loss ratio 7.0% 4.5%
Loss expense ratio 3.0% 5.3%
Underwriting expense ratio 61.7% 64.7%
Combined ratio 71.7% 74.5%
</TABLE>
<TABLE>
<CAPTION>
Total Property & Casualty 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $1,160,370 $1,190,811
% Increase (decrease) (2.6)% 23.2%
Net premiums earned 1,150,331 1,141,509
% Increase (decrease) 0.8% 22.0%
Underwriting gain (loss)
(before tax) (231,883) (181,759)
Loss ratio 73.7% 67.4%
Loss expense ratio 11.5% 11.0%
Underwriting expense ratio 34.7% 35.9%
Combined ratio 119.9% 114.3%
Impact of catastrophe losses
on combined ratio 2.9% 4.5%
</TABLE>
<TABLE>
<CAPTION>
All other 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 3,297 $12,412
Expenses 13,370 15,738
-------------------------------------------------------------------------
Net income (loss) $(10,073) $ (3,326)
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Revenues 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums earned for
reportable segments $1,150,331 $1,141,509
Investment income 148,106 130,367
Realized gains (losses) 7,379 154,011
Miscellaneous income 357 (772)
-------------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 1,306,173 1,425,115
Property and casualty statutory
to GAAP adjustment (14,952) 4,075
-------------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 1,291,221 1,429,190
Other segment revenues 3,297 12,412
-------------------------------------------------------------------------
Total revenues $1,294,518 $1,441,602
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Underwriting
gain (loss) (before tax) 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Property and casualty under-
writing gain (loss) (before tax)
(Statutory basis) $(231,883) $(181,759)
Statutory to GAAP adjustment (13,231) 36,033
-------------------------------------------------------------------------
Property and casualty under-
writing gain (loss) (before tax)
(GAAP basis) (245,114) (145,726)
Net investment income 150,741 132,500
Realized gains (losses) (7,300) 165,974
Other income (losses) (15,148) (16,995)
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $(116,821) $ 135,753
=========================================================================
</TABLE>
9
<PAGE>
<TABLE>
Three months ended September 30
(in thousands)
<CAPTION>
Private Passenger Auto - Agency 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $116,817 $126,835
% Increase (decrease) (7.9)% (4.7)%
Net premiums earned 117,165 126,963
% Increase (decrease) (7.7)% (0.2)%
Underwriting gain (loss)
(before tax) (5,502) (10,484)
Loss ratio 69.4% 70.2%
Loss expense ratio 10.7% 12.8%
Underwriting expense ratio 24.7% 25.3%
Combined ratio 104.8% 108.3%
Impact of catastrophe losses on
combined ratio 0.0% 1.2%
</TABLE>
<TABLE>
<CAPTION>
Private Passenger Auto - Direct 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $1,805 $3,332
% Increase (decrease) (45.8)% 77.8%
Net premiums earned 3,045 3,736
% Increase (decrease) (18.5)% 594.4%
Underwriting gain (loss)
(before tax) (740) (4,271)
Loss ratio 76.6% 129.2%
Loss expense ratio 19.1% 18.7%
Underwriting expense ratio 48.3% 74.5%
Combined ratio 144.0% 222.4%
Impact of catastrophe losses on
combined ratio (0.1)% 0.5%
</TABLE>
<TABLE>
<CAPTION>
CMP, Fire, Inland Marine 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $77,218 $73,826
% Increase (decrease) 4.6% 37.2%
Net premiums earned 82,316 72,692
% Increase (decrease) 13.2% 36.0%
Underwriting gain (loss)
(before tax) (1,993) (31,736)
Loss ratio 54.7% 79.8%
Loss expense ratio 9.9% 14.9%
Underwriting expense ratio 40.3% 48.2%
Combined ratio 104.9% 142.9%
Impact of catastrophe losses on
combined ratio 1.5% 10.9%
</TABLE>
<TABLE>
<CAPTION>
General Liability 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $22,153 $18,128
% Increase (decrease) 22.2% (4.2)%
Net premiums earned 22,788 23,813
% Increase (decrease) (4.3)% 22.8%
Underwriting gain (loss)
(before tax) (5,636) (2,877)
Loss ratio 52.9% 38.6%
Loss expense ratio 29.4% 18.2%
Underwriting expense ratio 43.6% 72.6%
Combined ratio 125.9% 129.4%
</TABLE>
<TABLE>
<CAPTION>
Umbrella 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $17,991 $23,977
% Increase (decrease) (25.0)% 431.8%
Net premiums earned 17,349 18,443
% Increase (decrease) (5.9)% 297.9%
Underwriting gain (loss)
(before tax) 843 8,027
Loss ratio 53.7% 29.9%
Loss expense ratio 6.8% (5.9)%
Underwriting expense ratio 33.4% 24.9%
Combined ratio 93.9% 48.9%
</TABLE>
<TABLE>
<CAPTION>
Workers' Compensation 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $47,260 $42,076
% Increase (decrease) 12.3% 117.0%
Net premiums earned 50,884 39,798
% Increase (decrease) 27.9% 85.3%
Underwriting gain (loss)
(before tax) (30,855) (9,956)
Loss ratio 117.3% 69.5%
Loss expense ratio 14.9% 9.7%
Underwriting expense ratio 30.6% 43.3%
Combined ratio 162.8% 122.5%
</TABLE>
<TABLE>
<CAPTION>
Commercial Auto 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $42,780 $42,139
% Increase (decrease) 1.5% 25.8%
Net premiums earned 46,709 42,530
% Increase (decrease) 9.8% 23.4%
Underwriting gain (loss)
(before tax) (5,456) (13,373)
Loss ratio 69.1% 76.4%
Loss expense ratio 9.8% 14.0%
Underwriting expense ratio 35.7% 41.4%
Combined ratio 114.6% 131.8%
Impact of catastrophe losses on
combined ratio 0.1% 1.3%
</TABLE>
<TABLE>
<CAPTION>
Homeowners 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $48,257 $50,313
% Increase (decrease) (4.1)% (0.5)%
Net premiums earned 43,982 45,627
% Increase (decrease) (3.6)% 2.3%
Underwriting gain (loss)
(before tax) (10,287) (19,409)
Loss ratio 76.6% 92.0%
Loss expense ratio 7.7% 12.2%
Underwriting expense ratio 35.6% 34.8%
Combined ratio 119.9% 139.0%
Impact of catastrophe losses on
combined ratio 6.4% 22.2%
</TABLE>
<TABLE>
<CAPTION>
Fidelity & Surety 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $9,235 $9,364
% Increase (decrease) (1.4)% (3.2)%
Net premiums earned 9,631 9,275
% Increase (decrease) 3.8% 4.0%
Underwriting gain (loss)
(before tax) 3,379 1,708
Loss ratio 4.2% 6.8%
Loss expense ratio 3.4% 6.6%
Underwriting expense ratio 59.8% 67.5%
Combined ratio 67.4% 80.9%
</TABLE>
<TABLE>
<CAPTION>
Total Property & Casualty 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $383,516 $389,990
% Increase (decrease) (1.7)% 19.9%
Net premiums earned 393,869 382,876
% Increase (decrease) 2.9% 21.7%
Underwriting gain (loss)
(before tax) (56,247) (82,372)
Loss ratio 70.1% 70.4%
Loss expense ratio 11.4% 12.2%
Underwriting expense ratio 33.6% 38.2%
Combined ratio 115.1% 120.8%
Impact of catastrophe losses on
combined ratio 1.0% 5.3%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
All other 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 874 $4,428
Expenses 5,215 7,089
-------------------------------------------------------------------------
Net income (loss) $(4,341) $2,661
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Revenues 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Net premiums earned for
reportable segments $393,869 $382,876
Investment income 49,084 45,637
Realized gains (losses) 7,848 (3,999)
Miscellaneous income 16 (865)
-------------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 450,817 423,649
Property and casualty statutory to
GAAP adjustment (6,608) 3,607
-------------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 444,209 427,256
Other segment revenues 874 4,428
-------------------------------------------------------------------------
Total revenues $445,083 $431,684
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Underwriting
gain (loss) (before tax) 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Property and casualty under-
writing gain (loss) (before
tax) (Statutory basis) $(56,247) $(82,372)
Statutory to GAAP adjustment 29,207 30,300
-------------------------------------------------------------------------
Property and casualty under-
writing gain (loss) (before
tax) (GAAP basis) (27,040) (52,072)
Net investment income 49,673 49,679
Realized gains (losses) 1,395 (2,269)
Other income (4,103) (8,359)
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $19,925 $(13,023)
=========================================================================
</TABLE>
NOTE V - AGENT RELATIONSHIPS
The agent relationship asset is the identifiable intangible asset acquired in
connection with the Great American Insurance Company commercial lines
acquisition. Agent relationships are evaluated periodically as events or
circumstances indicate a possible inability to recover their carrying amount.
During the first quarter of 2000, the Group made the strategic decision to
discontinue its relationship with Managing General Agents. The result was a
write-down of the agent relationships asset by $42.2 million, with an after-
tax impact of $.55 per share. The Managing General Agents accounted for $48
million in commercial lines premium written, of which $29 million was
workers' compensation. This business is being non-renewed as permitted by law
and contractual agreements. The Group believes the termination of Managing
General Agents will give it better control of its underwriting and pricing
practices. In addition, during the third quarter, the Corporation further
wrote down the agent relationship asset $1.1 million as a result of agent
cancellations. The remaining portion of the agent relationships will be
amortized on a straight line basis over the remaining amortization period.
In the second quarter of 2000, the Company determined the final payment to
American Financial Group for the December 1, 1998 acquisition of the
Commercial Lines Division of Great American Insurance Company to be
approximately $27.5 million. The purchase agreement called for an additional
payment of up to $40.0 million if annualized revenue production of the
transferred agents equaled or exceeded production for the twelve months prior
to the acquisition. This amount was added to the agent relationships asset
for the acquisition and will be amortized over the remaining 23.5 years. As
of September 30, 2000, the Company has paid $25.0 million of the payment,
while the remaining $2.5 million is in final negotiation. Additional
information related to agent relationships is included in Item 14, Note 1G,
Accounting Policies on page 45 of the Corporation's 1999 Form 10-K.
NOTE VI - RESTRUCTURING CHARGE
During December 1998, the Group adopted a plan to restructure its branch
operations. To continue in the Corporation's efforts to reduce expenses,
personal lines business centers were reduced from five to three locations.
Underwriting branch locations were reduced from seventeen to eight locations
and claims branches were reduced from thirty-eight to six locations in 1999.
As part of this plan, the Corporation established a $10.0 million liability
for future expenses related to its branch office consolidation plan, resulting
in a one-time charge of $10.0 million being reflected in the 1998 income
statement. These expenses consisted solely of future contractual lease
payments related to abandoned facilities. During 1999, the Corporation
reduced $5.3 million of the liability, of which $2.9 million was due to
payments under leases and $2.4 million was due to changes in assumptions used
to establish the initial reserve. The activities under the plan were
completed in 1999, but due to leases still in effect, the balance in the
restructuring reserve, $4.7 million at December 31, 1999, will continue to
remain as leases expire. Through the third quarter of 2000, the Corporation
further reduced $2.0 million of the liability. Of the $2.0 million, $.02
million related to changes in assumptions used to establish the initial
reserve. The balance in the restructuring reserve was $2.7 million at
September 30, 2000.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------------
Ohio Casualty Corporation (the Corporation) is the holding company of The Ohio
Casualty Insurance Company (the Company), which is one of six property-
casualty companies that make up the Ohio Casualty Group (the Group).
Results of Operations
Property and casualty pre-tax underwriting losses, excluding California
Proposition 103 and restructuring charges, for the nine months ended September
30, 2000 were $278.1 million, $4.63 per share, compared with $146.6 million,
$2.38 per share for the same period in 1999. The September 30, 2000 results
include the effects of the $42.2 million before-tax agent relationships write-
down taken in the first quarter. Additional ceded premiums on experience
rated reinsurance covering casualty losses exceeding $1.0 million adversely
impacted the underwriting loss by $17.0 million during the second quarter.
The nine-month underwriting loss was also negatively impacted by inadequate
pricing and adverse development primarily in workers' compensation and general
liability. For the third quarter, property and casualty pre-tax underwriting
losses, excluding the effects of California Proposition 103 and restructuring
charges, were $61.2 million, or $1.02 per share, compared with $54.4 million,
or $.90 per share, for the third quarter 1999.
In order to improve underwriting results, the Corporation has taken action to
cancel its most unprofitable agents who on average have a loss ratio
approximately 20 points higher than the average agent. This action is
estimated to result in an annual premium volume decrease of up to $100
million. This is in addition to the cancellation of Managing General Agents
with annual premium volume of $48.0 million.
Property and casualty gross premiums for the first nine months of 2000
decreased 2.0% for all lines of business compared with 1999. Commercial lines
increased 7.1% compared to the same period 1999. This increase was a result
of strong policy renewal rates and a 7.7% year-to-date increase in the average
renewal price. Personal lines decreased 11.5% year to date from the same
period last year. This decrease can be attributed to intense competition and
a decline in New Jersey personal auto premiums written which were affected by
a New Jersey private passenger automobile rate rollback mandated in early
1999. Also, year-to-date 1999 premiums were higher due to the effects of New
Jersey private passenger automobile conversion from a six-month policy basis
to an annual policy basis.
Property and casualty gross premiums for the third quarter of 2000 decreased
3.6% for all lines compared to third quarter 1999. Commercial lines increased
.2% in the third quarter of 2000 compared to the same period in 1999. The
Corporation achieved a 9.2% renewal price increase on the Group's commercial
lines book of business in the third quarter of 2000. This was partially
offset by a decrease in premium volume related to the cancellation of
Managing General Agents. Personal lines decreased 7.7% for third quarter
2000 compared to third quarter 1999. Third quarter results were affected by
intense competition, while the New Jersey rate rollback and annual policy
conversion had minimal impact.
Property and casualty net premiums dropped 1.7% for third quarter 2000 and
2.6% year to date compared to 1999. Contributing to the decrease in year-to-
date net premiums written was additional ceded premium on experience rated
reinsurance of $17.0 million in the second quarter, and the effects of the
cancellation of Managing General Agents.
New Jersey is the Group's largest state with 15.3% 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 Group 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 Group has paid $3.3 million in 2000 for
fiscal year 2001 assessments and paid $3.4 million in 1999 for fiscal year
2000 assessments. The Corporation anticipates future assessments will not
materially effect the Corporation's results of operations, financial position
or liquidity.
12
<PAGE>
Year-to-date consolidated before-tax investment income was $150.7 million, or
$2.51 per share, increasing from $132.5 million, or $2.16 per share, for the
same period last year. The year-to-date increase was a result of a
reallocation from equity securities to investment grade taxable securities in
the second quarter of 1999. The effective tax rate year-to-date 2000 was
31.3%, compared with 24.7% for year-to-date 1999. For the quarter,
consolidated before-tax investment income was $49.7 million, equaling the
amount reported for the third quarter 1999. The effective tax rate for the
third quarter of 2000 was 31.8% compared with 24.7% for the comparable period
in 1999. The increase in effective tax rates reflect a reallocation of
investments from tax exempt municipal bonds to taxable bonds.
Year-to-date consolidated after-tax realized loss was $4.7 million, or $.08
per share, compared with an after-tax realized gain of $109.1 million, or
$1.76 per share, for year-to-date 1999. The 1999 gain includes the effects of
a strategic reallocation in the second quarter that resulted in a sale of
approximately $200 million in equity securities. For the third quarter,
consolidated after-tax realized gain was $.9 million, or $.01 per share,
compared with an after-tax realized loss of $1.5 million, or $.02 per share,
for the same period of 1999.
Statutory Results
The combined ratio for the first nine months increased 5.6 points to 119.9%
from 114.3% from the same period last year. The poor combined ratio is a
result of inadequate pricing, additional premium cessions on experience rated
contracts, and adverse loss development, particularly in the workers'
compensation and general liability lines of business.
The year-to-date September 30, 2000 accident year loss ratio is 68.9% compared
to the calendar year-to-date loss ratio of 73.7%. The difference between
accident year and calendar year loss results are concentrated in the workers'
compensation and general liability lines of business. The calendar year-to-
date 2000 loss adjustment expense ratio increased to 11.5% from 11.0% in 1999.
The third quarter catastrophe losses were $4.1 million and accounted for 1.0
point on the combined ratio. This compares with $20.2 million and a 5.3 point
catastrophe impact for the same period in 1999. Year-to-date catastrophe
losses decreased $18.5 million from $51.4 million in 1999 to $32.9 million in
2000. The effect of future catastrophes on the Corporation's results cannot
be accurately predicted. Severe weather patterns can have a material adverse
impact on the Corporation's results. During the third quarter of 2000, there
were 3 additional catastrophes with the largest catastrophe generating $.3
million in incurred losses as compared with 7 additional catastrophes in the
third quarter of 1999 with the largest catastrophe generating $17.9 million 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 51 and 52 of the Corporation's 1999 Form 10-K.
The underwriting expense ratio through September 30, 2000 was 34.7%, compared
with 35.9% in the same period in 1999. For the third quarter of 2000, the
underwriting expense ratio was 33.6%, a decrease of 4.6 points from the same
period in 1999. These decreases are directly related to the expense reduction
efforts. The Corporation expects to achieve $30 million in annualized savings
as a result of the expense reduction efforts implemented in 2000. The most
significant improvements have been salary expense and advertising.
Improvement is evident in the third quarter, where salary, payroll taxes, and
employee benefit expenses decreased by $8.8 million, or 16%, compared to the
same quarter of 1999. The employee count as of September 30, 2000 was 3,479,
a decrease of 410 employees from the December 31, 1999 employee count of
3,889. The Group's more focused advertising strategy has led to a decrease of
$3.5 million in expenses for the third quarter of 2000 compared with third
quarter 1999.
Line of Business Discussion
The nine-month combined ratio for homeowners decreased 8.9 points to 125.3%
from 134.2% in the same period last year. The Group continues the "insurance-
to-value" program in which it reviews exposure to underinsured homeowner
properties to maintain adequate replacement cost values on the homeowners book
of business. Selected homeowners policies are reviewed upon renewal for a
replacement cost
13
<PAGE>
valuation and any necessary premium increases are implemented at that time.
Including the effect of the "insurance-to-value" program, the Group has
implemented rate changes in 21 states effective during 2000 for a total price
increase of 12.7% for the homeowners line of business.
Private passenger automobile-agency, the Group's largest line, recorded a 2000
nine-month combined ratio of 113.2% increasing from 103.6% in 1999. Private
passenger automobile-agency combined ratio rose due to the effects of the New
Jersey rate rollback, and additional reinsurance premium cessions. The
private passenger automobile-agency loss ratio increased 8.8 points to 76.1%
from 67.3% in 1999.
The New Jersey State Senate passed an auto insurance reform bill effective
March 22, 1999, that mandated a 15% rate reduction for personal auto policies
based on legal reform intended to provide a reduction in medical expense
benefits, limitations on lawsuits and enhanced fraud prevention. All new
policies written on or after March 22, 1999 and all renewal policies written
on or after April 27, 1999 reflect the 15% rate reduction. The anticipated
impact on the Group is a tradeoff of lower premium rates on personal auto
policies for presumably lower losses, but the degree of offset, if any, is
uncertain at present.
In 1999, the state of New Jersey began to require insurance companies to write
a portion of their personal auto premiums in Urban Enterprise Zones (UEZ).
These zones are urban areas frequently having high loss ratios. The Group is
assigned premiums if it does not write the required amount on its own. As of
September 30, 2000, the Group has written $4.7 million year to date in UEZ
premiums, with $3.9 million in additional assigned premiums. As of September
30, 2000, the loss ratio on the UEZ premiums is 148.5% and the loss ratio on
the assigned business is 193.4%.
Private passenger automobile-direct combined ratio for the first nine months
of 2000 increased to 212.5% from 198.5% in 1999. During the second quarter of
2000, the Corporation restructured its Avomark operations with an
internet-only strategy. As part of this restructuring, the Company completed
an asset purchase agreement for the sale of the Avomark Call Center. Under
this agreement, the buyer purchased certain assets used in the call operation
and entered into a new lease on the Call Center property, thereby replacing
the Company as lessee. This restructuring also eliminated 114 budgeted
employee positions. The total anticipated annual savings is approximately
$7.5 million. As a result of the restructuring, year-to-date net premiums
written dropped from $12.9 million in 1999 to $7.9 million in 2000. The
Corporation believes that this restructuring should produce better business
at significantly reduced costs.
Commercial automobile reported a year-to-date combined ratio of 120.7%, an
increase of 1.2 points over the year-to-date 1999 combined ratio of 119.5%.
Additional reinsurance premium cessions in the second quarter of 2000 added
1.6 points to the year-to-date combined ratio. Inadequate pricing continues
to be an issue in this line. For this line, as well as other commercial
lines, price increases are being implemented. The full effect of these price
increases will be realized over the next several quarters in earned premiums.
Workers' compensation combined ratio for the first nine months of 2000
increased 33.6 points to 148.7% from 115.1% during the same period last year.
The increase is a result of deterioration in the underwriting results for the
current accident year and adverse loss reserve development in prior year
reserves. Workers' compensation loss ratio increased 41.6 points to 104.4%
from 62.8% in the same period last year. In response to the deteriorating
results in workers' compensation the Group is implementing price increases.
In addition to the cancellation of the Managing General Agents during 2000,
the Corporation is non-renewing its most unprofitable workers' compensation
policies which amount to approximately $50 million in annual premium volume.
The general liability year-to-date combined ratio increased in 2000 to 133.2%
from 123.5% in 1999. Umbrella combined ratio for the first nine months of
2000 increased to 87.9% from 34.3% in 1999. These increases are largely due
to adverse loss reserve development and continued price inadequacy.
The combined ratio for CMP, fire and inland marine decreased 20.3 points to
113.2% from 133.5% during the first nine months of 2000. The line has
experienced an improved combined ratio partially driven by better catastrophe
experience.
14
<PAGE>
Investments
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) 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
Below investment grade securities:
Carrying value $123.6 $175.2
Amortized cost 140.7 187.1
Unrated securities:
Carrying value $254.4 $303.2
Amortized cost 253.1 310.0
</TABLE>
Utilizing ratings provided by other agencies, such as the NAIC, the
Corporation 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,
(in millions) 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
Below investment grade securities at
carrying value $123.6 $175.2
Other rating agencies categorizing
unrated securities as below
investment grade 35.7 38.7
------ ------
Below investment grade securities at
carrying value $159.3 $213.9
</TABLE>
The securities in the Corporation's below investment grade portfolio have been
issued by 84 corporate borrowers in approximately 48 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, dividend payments, interest payments, and cash
balances. 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 1999 Form 10-K for the year ended December 31,
1999.
Liquidity and Financial Strength
Net cash generated by operations was $85.3 million for the first nine months
of the year compared with net cash used of $131.2 million for the same period
in 1999. This change is due in part to payment received in 2000 as part of
the commutation of a reinsurance treaty in the fourth quarter of 1999, a
refund of prior year taxes paid, a reduction in paid losses and paid loss
adjustment expenses paid, and a reduction in paid underwriting expenses as a
result of the expense management efforts.
Shareholder dividend payments were $28.2 million in the first nine months of
2000 compared with $42.4 million for the same period in 1999. This decrease
was a result of the Corporation's decision to reduce second and third quarter
dividend payments by 47.8% compared with second and third quarter 1999
dividend payments, to $.12 per share, in order to strengthen the financial
position of the Corporation.
15
<PAGE>
Ohio Casualty Corporation did not repurchase any of its shares during the
first nine months of the year. The Corporation has remaining authorization to
repurchase 1,649,824 additional shares. Through September 30, 1999, the
Corporation had used cash of $46.1 million to repurchase approximately 2.5
million shares.
As of September 30, 2000, the Corporation had $221.0 million of outstanding
notes payable. Of the $221.0 million, $215.0 million related to the 1997
credit facility that made a $300.0 million revolving line of credit available
to the Corporation. The credit facility agreement contains financial
covenants and provisions customary for such arrangements. The most
restrictive covenants include a maximum permissible consolidated funded debt
that cannot exceed 30% of consolidated tangible net worth and a minimum
statutory surplus that must exceed $750.0 million. The Corporation continues
to review its financial covenants in the credit agreement in light of its
operating losses. As of September 30, 2000, the Corporation is in compliance
with these covenants. However, further deterioration of operating results,
reductions in the equity portfolio valuation, or other changes in surplus,
including the effects of adopting new statutory accounting principles
(Codification), might lead to violations which could ultimately result in
default. The remaining $6.0 million relates to a low interest loan
outstanding with the state of Ohio used in conjunction with the 1999 home
office acquisition. Additional information related to bank notes payable
is included in Item 14, Note 17 Bank Note Payable on page 56 of the
Corporation's 1999 Form 10-K.
Regularly the Group's financial strength is reviewed by independent rating
agencies. These agencies may upgrade, downgrade, or affirm their previous
rating of the Group. During the second quarter of 2000, A. M. Best and
Standard and Poor's (S&P) Rating Services downgraded the Group's financial
strength ratings. The Group's A.M. Best rating moved from "A+" (superior) to
"A" (excellent) and the S&P rating moved from "A" to "BBB+". S&P also
downgraded the Group in the first quarter from "A+" to "A". A. M. Best cited
earnings deterioration, increased operating leverage, and significant
management changes as reasons for the rating change. S&P focused on poor
underwriting results, earnings volatility due to catastrophe losses, and an
aggressive investment strategy. A. M. Best and S&P both recognized the
Group's strong capitalization and expense reduction efforts as positive
attributes. Moody's Investors Service affirmed the Group's "A2" rating based
on capitalization and expense reduction measures. All three rating
agencies recognized the shift in management focus to improve underwriting.
Legal Proceedings
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 for the
Group in California have been less than what would be considered "fair" by any
reasonable standard. During the fourth quarter of 1994, the state of
California assessed the Group $59.9 million for Proposition 103. In February
1995, California revised this billing to $47.3 million. 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. The Group
had established a contingent liability for Proposition 103 rollback at $24.4
million plus simple interest at 10% from May 8, 1989. This brought the total
reserve to $52.3 million at September 30, 2000. On October 25, 2000, the
Group announced a settlement agreement for California Proposition 103 that was
approved by the Commissioner of Insurance of the state of California. Under
the terms of the settlement, members of the Group will pay $17.5 million in
refund premiums to eligible 1989 California policyholders. The Corporation
expects the payments to be made over the course of the next six months. With
this recent development, the total reserve was decreased to $17.5 million as
of September 30, 2000. When the refund payments occur, the remaining $17.5
million liability will be extinguished. This decrease in the reserve resulted
in an increase in operating income and net income for the third quarter 2000,
and had no effect on the combined ratio reported.
16
<PAGE>
In December 1992, the Group 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, Group member American Fire and Casualty remains in the state to
wind down the affairs of the Group.
Discontinued Operations
In 1995, the Company reinsured substantially all of its life insurance and
related businesses to Employer's Reassurance Corporation and entered into an
administrative and marketing agreement with Great Southern Life Insurance
Company. During 1999, Great Southern Life Insurance Company replaced
Employers' Reassurance Corporation on the 100% coinsurance treaty. On
December 31, 1999, the Company completed the sale of the Ohio Life shell,
thereby transferring all remaining assets and liabilities, as well as
reinsurance treaty obligations, to the Buyer. Additional information related
to the discontinued life insurance operations is included in Item 14, Note 20
Discontinued Operations on page 57 of the Corporation's 1999 Form 10-K.
Year 2000
The Corporation successfully moved into the Year 2000 without impact or
interruption to the business as a result of Year 2000 computer problems.
Though no Year 2000 problems have occurred or are anticipated, the Corporation
continues to monitor the situation in order to be able to address any future
issues in a timely fashion. The total related cost of the Year 2000 project
was $2.8 million. The Corporation expects that Year 2000 project costs
incurred in 2000, if any, will be immaterial.
Forward Looking Statements
From time to time, the Company may publish forward looking statements relating
to such matters as anticipated financial performance, business prospects and
plans, regulatory developments and similar matters. The statements contained
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations that are not historical information, are forward looking
statements. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor under The Securities Act of 1933 and The Securities Exchange Act
of 1934 for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the Company's business include the following:
changes in property and casualty reserves; catastrophe losses; premium and
investment growth; product pricing environment; availability of credit;
changes in government regulation; performance of financial markets;
fluctuations in interest rates; availability and pricing of reinsurance;
litigation and administrative proceedings; Year 2000 issues; ability of Ohio
Casualty to integrate and to retain the business acquired from the Great
American Insurance Company; and general economic and market conditions.
PART II
Item 1. Legal Proceedings - Refer to Management's Discussion and Analysis of
Legal Proceedings as described on Pages 16 and 17 regarding California
Proposition 103.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
17
<PAGE>
Item 6. Exhibits and reports on Form 8-K -
(a) Exhibits:
10.1 Employment Agreement with William L. Woodall dated
February 17, 2000
10.2 Agreement with Howard L. Sloneker III, as Amended,
dated July 24, 2000
10.3 Information regarding Omitted Exhibits
27 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 14, 2000 /s/Elizabeth M. Riczko
------------------------------------------
Elizabeth M. Riczko, Senior Vice President
(on behalf of Registrant and as Principal
Accounting Officer)
18
