<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 June 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)
45025
(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 August 1, 2000 of the voting stock held by
non-affiliates of the registrant was $483,283,677.
On August 1, 2000 there were 60,074,679 shares outstanding.
Page 1 of 17
==============================================================================
<PAGE>
<TABLE>
PART I
ITEM 1. FINANCIAL STATEMENTS
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED BALANCE SHEET
<CAPTION>
June 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: $2,420,376 and $2,408,201) $ 2,394,865 $ 2,376,973
Equity securities, at fair value
(cost: $191,345 and $161,498) 660,479 698,129
Short-term investments, at fair value
(cost: $67,152 and $104,446) 67,152 104,398
----------------------------------------------------------------------------------
Total investments 3,122,496 3,179,500
Cash 47,228 45,559
Premiums and other receivables, net of allowance
for bad debts of $9,030 and $9,338,
respectively 406,913 366,202
Deferred policy acquisition costs 180,983 177,745
Property and equipment, net of accumulated
depreciation of $116,998 and $113,541,
respectively 94,882 94,670
Reinsurance recoverable 149,723 139,021
Agent relationships, net of accumulated amortization
of $19,185 and $13,298, respectively 273,011 293,565
Other assets 98,655 180,182
----------------------------------------------------------------------------------
Total assets $ 4,373,891 $ 4,476,444
==================================================================================
Liabilities
Insurance reserves:
Unearned premiums $ 750,808 $ 725,399
Losses 1,586,335 1,544,967
Loss adjustment expenses 368,433 363,488
Notes payable 221,121 241,446
California Proposition 103 reserve 51,707 50,486
Deferred income taxes 18,660 62,843
Other liabilities 359,484 336,828
----------------------------------------------------------------------------------
Total liabilities 3,356,548 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 4,204 4,286
Common stock purchase warrants 21,138 21,138
Accumulated other comprehensive income:
Unrealized gain on investments, net of applicable
income taxes 300,136 329,354
Retained earnings 1,139,224 1,243,463
Treasury stock, at cost:
(Shares: 34,343; 34,335) (453,260) (453,155)
----------------------------------------------------------------------------------
Total shareholders' equity 1,017,343 1,150,987
----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 4,373,891 $ 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 June 30,
(in thousands, except per share data) (Unaudited) 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Premiums and finance charges earned $ 369,874 $ 374,309
Investment income less expenses 49,275 41,013
Investment gains (losses) realized, net (2,387) 167,340
-----------------------------------------------------------------------------------
Total revenues 416,762 582,662
Losses and benefits for policyholders 276,618 257,724
Loss adjustment expenses 40,579 44,861
General operating expenses 38,242 42,303
Amortization of agent relationships 2,818 3,094
Amortization of deferred policy acquisition costs 98,590 100,074
Restructuring charge 0 2
California Proposition 103 reserve, including
interest 611 611
-----------------------------------------------------------------------------------
Total expenses 457,458 448,669
-----------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (40,696) 133,993
Income tax (benefit) expense:
Current (12,098) 34,981
Deferred (20,400) 2,339
-----------------------------------------------------------------------------------
Total income tax (benefit) expense (32,498) 37,320
-----------------------------------------------------------------------------------
Income (loss) before discontinued operations (8,198) 96,673
Income from discontinued operations, net of taxes of
$0 and $150, respectively 0 104
-----------------------------------------------------------------------------------
Net income (loss) $ (8,198) $ 96,777
===================================================================================
Other comprehensive income (loss), net of taxes:
Net decrease in unrealized gains, net decrease
in tax expense of $(5,458) and $(60,684),
respectively (10,138) (112,696)
-----------------------------------------------------------------------------------
Comprehensive income (loss) $ (18,336) $ (15,919)
===================================================================================
Average shares outstanding - basic* 60,075 61,376
===================================================================================
Earnings per share - basic:*
Income (loss) from continuing operations, per share $ (0.14) $ 1.58
Income from discontinued operations, per share 0.00 0.00
-----------------------------------------------------------------------------------
Net income (loss), per share $ (0.14) $ 1.58
Average shares outstanding - diluted* 60,075 61,400
===================================================================================
Earnings per share - diluted:*
Income (loss) from continuing operations, per share $ (0.14) $ 1.58
Income from discontinued operations, per share 0.00 0.00
-----------------------------------------------------------------------------------
Net income (loss), per share $ (0.14) $ 1.58
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.
*1999 adjusted for 2 for 1 stock split effective July 22, 1999
3
<PAGE>
<TABLE>
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED INCOME
<CAPTION>
Six Months
Ended June 30,
(in thousands, except per share data) (Unaudited) 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Premiums and finance charges earned $ 757,062 $ 758,854
Investment income less expenses 101,068 82,822
Investment gains (losses) realized, net (8,695) 168,243
-----------------------------------------------------------------------------------
Total revenues 849,435 1,009,919
Losses and benefits for policyholders 571,255 489,477
Loss adjustment expenses 87,729 78,922
General operating expenses 80,449 85,092
Amortization of agent relationships 5,886 6,188
Write-down of agent relationships 42,169 0
Amortization of deferred policy acquisition costs 197,449 200,043
Restructuring charge 22 200
California Proposition 103 reserve, including interest 1,222 1,222
-----------------------------------------------------------------------------------
Total expenses 986,181 861,144
-----------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (136,746) 148,775
Income tax (benefit) expense:
Current (25,084) 37,218
Deferred (28,451) 3,167
-----------------------------------------------------------------------------------
Total income tax (benefit) expense (53,535) 40,385
-----------------------------------------------------------------------------------
Income (loss) before discontinued operations (83,211) 108,390
Income from discontinued operations, net of taxes of
$0 and $(352), respectively 0 1,899
Cumulative effect of accounting change, net of taxes 0 (2,255)
-----------------------------------------------------------------------------------
Net income (loss) $ (83,211) $ 108,034
===================================================================================
Other comprehensive income (loss), net of taxes:
Net decrease in unrealized gains, net decrease
in tax expense of $(15,732) and $(75,528),
respectively (29,218) (140,265)
-----------------------------------------------------------------------------------
Comprehensive income (loss) $ (112,429) $ (32,231)
===================================================================================
Average shares outstanding - basic* 60,077 61,830
===================================================================================
Earnings per share - basic:*
Income (loss) from continuing operations, per share $ (1.39) $ 1.75
Income from discontinued operations, per share 0.00 0.03
Effect of change in accounting principle (net of taxes) 0.00 (0.03)
-----------------------------------------------------------------------------------
Net income (loss), per share $ (1.39) $ 1.75
Average shares outstanding - diluted* 60,077 61,860
===================================================================================
Earnings per share - diluted:*
Income (loss) from continuing operations, per share $ (1.39) $ 1.75
Income from discontinued operations, per share 0.00 0.03
Effect of change in accounting principle (net of taxes) 0.00 (0.03)
-----------------------------------------------------------------------------------
Net income (loss), per share $ (1.39) $ 1.75
Cash dividends, per share $ 0.35 $ 0.46
===================================================================================
</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.
*1999 adjusted for 2 for 1 stock split effective July 22, 1999
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 $ 5,850 $ 4,186 $ 21,138 $ 511,816 $ 1,185,349 $ (407,358) $ 1,320,981
Unrealized loss (215,793) (215,793)
Deferred income tax benefit on
net unrealized loss 75,528 75,528
Net issuance of treasury
stock under stock option
plan (18 shares)* 126 212 338
Repurchase of treasury
stock (1,478 shares)* (29,389) (29,389)
Net income 108,034 108,034
Cash dividends paid
($.46 per share)* (28,466) (28,466)
--------------------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 1999 $ 5,850 $ 4,312 $ 21,138 $ 371,551 $ 1,264,917 $ (436,535) $ 1,231,233
================================================================================================================================
Balance
January 1, 2000 $ 5,901 $ 4,286 $ 21,138 $ 329,354 $ 1,243,463 $ (453,155) $ 1,150,987
Unrealized loss (44,950) (44,950)
Deferred income tax benefit on
net unrealized loss 15,732 15,732
Net forfeiture of stock
under stock award
plan (8 shares) (82) (105) (187)
Net loss (83,211) (83,211)
Cash dividends paid
($.35 per share) (21,028) (21,028)
--------------------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 2000 $ 5,901 $ 4,204 $ 21,138 $ 300,136 $ 1,139,224 $ (453,260) $ 1,017,343
================================================================================================================================
</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.
*Adjusted for 2 for 1 stock split effective July 22, 1999
5
<PAGE>
<TABLE>
Ohio Casualty Corporation and Subsidiaries
STATEMENT OF CONSOLIDATED CASH FLOWS
<CAPTION>
Six Months
Ended June 30,
(in thousands) (Unaudited) 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from:
Operations
Net income (loss) $ (83,211) $ 108,034
Adjustments to reconcile net income to cash
from operations:
Changes in:
Insurance reserves 71,722 21,350
Income taxes (39,524) 36,820
Premiums and other receivables (40,711) (66,528)
Deferred policy acquisition costs (3,238) (1,414)
Reinsurance recoverable (20,141) 14,217
Other assets 74,345 (17,204)
Other liabilities 19,396 (31,747)
California Proposition 103 reserves 1,222 1,222
Amortization and write-down of agent
relationships 48,055 6,188
Depreciation and amortization 7,840 15,896
Investment (gains) losses 8,695 (169,443)
Cumulative effect of an accounting change 0 2,255
-------------------------------------------------------------------------------------
Net cash generated (used) by operating
activities 44,450 (80,354)
-------------------------------------------------------------------------------------
Investments
Purchase of investments:
Fixed income securities - available for sale (527,636) (701,362)
Equity securities (30,119) (7,881)
Proceeds from sales:
Fixed income securities - available for sale 451,693 502,982
Equity securities 17,186 262,836
Proceeds from maturities and calls:
Fixed income securities - available for sale 43,604 61,857
Equity securities 10,200 3,000
Property and equipment
Purchases (5,381) (21,232)
Sales 1,712 257
-------------------------------------------------------------------------------------
Net cash generated (used) from investing
activities (38,741) 100,457
-------------------------------------------------------------------------------------
Financing
Notes payable:
Repayments (20,325) (10,000)
Proceeds from exercise of stock options 67 106
Purchase of treasury stock 0 (29,389)
Dividends paid to shareholders (21,028) (28,466)
-------------------------------------------------------------------------------------
Net cash used in financing activities (41,286) (67,749)
-------------------------------------------------------------------------------------
Net change in cash and cash equivalents (35,577) (47,646)
Cash and cash equivalents, beginning of period 149,957 305,002
-------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 114,380 $ 257,356
=====================================================================================
</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.
All per share amounts adjusted for July 22, 1999 2 for 1 stock dividend.
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 Six months ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations $ (8,198) $96,673 $(83,211) $108,390
Weighted average common shares
outstanding - basic 60,075 61,376 60,077 61,830
Basic income (loss) from continuing
operations - per average share $ (0.14) $ 1.58 $ (1.39) $ 1.75
===================================================================================
Weighted average common shares
outstanding 60,075 61,376 60,077 61,830
Effect of dilutive securities 0 24 0 30
-----------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 60,075 61,400 60,077 61,860
Diluted income (loss) from continuing
operations - per average share $ (0.14) $ 1.58 $ (1.39) $ 1.75
===================================================================================
1999 adjusted for July 22, 1999 2 for 1 stock split
</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>
Six months ended June 30
(in thousands)
<CAPTION>
Private Passenger Auto - Agency 2000 1999
-----------------------------------------------------------------------
<S> <C> <C>
Net premiums written $232,584 $285,496
% Increase (decrease) (18.5)% 12.2%
Net premiums earned 230,840 259,541
% Increase (decrease) (11.1)% 4.8%
Underwriting gain/(loss)
(before tax) (40,586) (9,935)
Loss ratio 79.4% 65.9%
Loss expense ratio 13.0% 11.1%
Underwriting expense ratio 25.0% 24.4%
Combined ratio 117.4% 101.4%
Impact of catastrophe losses on
combined ratio 1.3% 0.9%
</TABLE>
<TABLE>
<CAPTION>
Private Passenger Auto - Direct 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $5,936 $9,559
% Increase (decrease) (37.9)% N/A
Net premiums earned 7,484 5,404
% Increase (decrease) 38.5% N/A
Underwriting gain (loss)
(before tax) (9,262) (6,729)
Loss ratio 133.9% 129.0%
Loss expense ratio 19.2% 16.3%
Underwriting expense ratio 89.0% 44.8%
Combined ratio 242.1% 190.1%
Impact of catastrophe losses on
combined ratio 1.0% N/A
</TABLE>
<TABLE>
<CAPTION>
CMP, Fire, Inland Marine 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $163,227 $150,896
% Increase (decrease) 8.2% 38.7%
Net premiums earned 155,623 148,306
% Increase (decrease) 4.9% 42.6%
Underwriting gain (loss)
(before tax) (30,561) (43,887)
Loss ratio 66.0% 76.1%
Loss expense ratio 11.5% 10.6%
Underwriting expense ratio 40.2% 42.2%
Combined ratio 117.7% 128.9%
Impact of catastrophe losses on
combined ratio 6.0% 9.7%
</TABLE>
<TABLE>
<CAPTION>
General Liability 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $41,836 $45,785
% Increase (decrease) (8.6)% 13.3%
Net premiums earned 39,591 34,966
% Increase (decrease) 13.2% (8.5)%
Underwriting gain (loss)
(before tax) (15,852) (13,856)
Loss ratio 64.4% 57.2%
Loss expense ratio 24.1% 16.8%
Underwriting expense ratio 48.8% 50.1%
Combined ratio 137.3% 124.1%
</TABLE>
<TABLE>
<CAPTION>
Umbrella 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $33,868 $26,645
% Increase (decrease) 27.1% 174.9%
Net premiums earned 31,941 27,209
% Increase (decrease) 17.4% 196.8%
Underwriting gain (loss)
(before tax) 4,216 20,420
Loss ratio 45.9% (2.9)%
Loss expense ratio 4.0% (8.3)%
Underwriting expense ratio 34.8% 36.9%
Combined ratio 84.7% 25.7%
</TABLE>
<TABLE>
<CAPTION>
Workers' Compensation 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $101,390 $84,601
% Increase (decrease) 19.8% 70.8%
Net premiums earned 96,366 87,755
% Increase (decrease) 9.8% 83.1%
Underwriting gain (loss)
(before tax) (41,345) (8,911)
Loss ratio 97.6% 59.8%
Loss expense ratio 11.7% 11.9%
Underwriting expense ratio 31.9% 39.9%
Combined ratio 141.2% 111.6%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Commercial Auto 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $94,748 $89,852
% Increase (decrease) 5.4% 24.6%
Net premiums earned 86,919 85,436
% Increase (decrease) 1.7% 25.0%
Underwriting gain (loss)
(before tax) (23,614) (13,055)
Loss ratio 76.9% 66.2%
Loss expense ratio 10.3% 11.4%
Underwriting expense ratio 36.7% 35.8%
Combined ratio 123.9% 113.4%
Impact of catastrophe losses
on combined ratio 0.4% 1.1%
</TABLE>
<TABLE>
<CAPTION>
Homeowners 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $83,405 $88,600
% Increase(decrease) (5.9)% 1.0%
Net premiums earned 89,040 91,528
% Increase (decrease) (2.7)% 4.3%
Underwriting gain (loss)
(before tax) (22,756) (28,175)
Loss ratio 81.4% 87.7%
Loss expense ratio 7.7% 9.6%
Underwriting expense ratio 38.9% 34.6%
Combined ratio 128.0% 131.9%
Impact of catastrophe losses
on combined ratio 14.3% 14.9%
</TABLE>
<TABLE>
<CAPTION>
Fidelity & Surety 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $19,860 $19,387
% Increase (decrease) 2.4% 4.1%
Net premiums earned 18,658 18,488
% Increase (decrease) 0.9% 4.3%
Underwriting gain (loss)
(before tax) 4,124 4,741
Loss ratio 8.4% 3.4%
Loss expense ratio 2.9% 4.7%
Underwriting expense ratio 62.6% 63.2%
Combined ratio 73.9% 71.3%
</TABLE>
<TABLE>
<CAPTION>
Total Property & Casualty 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $776,854 $800,821
% Increase (decrease) (3.0)% 24.9%
Net premiums earned 756,462 758,633
% Increase (decrease) (0.3)% 22.2%
Underwriting gain (loss)
(before tax) (175,636) (99,387)
Loss ratio 75.5% 65.9%
Loss expense ratio 11.6% 10.4%
Underwriting expense ratio 35.2% 34.9%
Combined ratio 122.3% 111.2%
Impact of catastrophe losses
on combined ratio 3.4% 4.1%
</TABLE>
<TABLE>
<CAPTION>
All other 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 2,423 $7,985
Expenses 8,155 8,649
------------------------------------------------------------------------
Net income (loss) $(5,732) $ (664)
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Revenues 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums earned for
reportable segments $756,462 $758,633
Investment income 99,112 84,730
Realized gains (losses) (469) 158,010
Miscellaneous income 341 93
------------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 855,446 1,001,466
Property and casualty statutory
to GAAP adjustment (8,434) 468
------------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 847,012 1,001,934
Other segment revenues 2,423 7,985
------------------------------------------------------------------------
Total revenues $849,435 $1,009,919
========================================================================
</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) $(175,636) $(99,387)
Statutory to GAAP adjustment (42,438) 5,734
------------------------------------------------------------------------
Property and casualty under-
writing gain (loss) (before tax)
(GAAP basis) (218,074) (93,653)
Net investment income 101,068 82,822
Realized gains (losses) (8,695) 168,243
Other income (losses) (11,045) (8,637)
------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $(136,746) $148,775
========================================================================
</TABLE>
9
<PAGE>
<TABLE>
Three months ended June 30
(in thousands)
<CAPTION>
Private Passenger Auto - Agency 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $111,834 $137,585
% Increase (decrease) (18.7)% 6.8%
Net premiums earned 109,744 129,640
% Increase (decrease) (15.3)% 2.9%
Underwriting gain (loss)
(before tax) (16,892) (9,807)
Loss ratio 77.5% 69.2%
Loss expense ratio 11.5% 11.6%
Underwriting expense ratio 25.9% 25.2%
Combined ratio 114.9% 106.0%
Impact of catastrophe losses on
combined ratio 2.4% 1.6%
</TABLE>
<TABLE>
<CAPTION>
Private Passenger Auto - Direct 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $1,812 $4,322
% Increase (decrease) (58.1)% N/A
Net premiums earned 3,596 3,316
% Increase (decrease) 8.4% N/A
Underwriting gain (loss)
(before tax) (4,220) (2,551)
Loss ratio 128.0% 106.3%
Loss expense ratio 26.2% 13.1%
Underwriting expense ratio 125.2% 44.1%
Combined ratio 279.4% 163.5%
Impact of catastrophe losses on
combined ratio 2.0% N/A
</TABLE>
<TABLE>
<CAPTION>
CMP, Fire, Inland Marine 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $82,683 $75,971
% Increase (decrease) 8.8% 35.2%
Net premiums earned 78,349 74,513
% Increase (decrease) 5.1% 42.4%
Underwriting gain (loss)
(before tax) (16,798) (29,144)
Loss ratio 68.5% 82.4%
Loss expense ratio 10.7% 13.2%
Underwriting expense ratio 40.0% 42.7%
Combined ratio 119.2% 138.3%
Impact of catastrophe losses on
combined ratio 9.8% 15.0%
</TABLE>
<TABLE>
<CAPTION>
General Liability 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $21,139 $25,881
% Increase (decrease) (18.3)% 22.7%
Net premiums earned 18,474 13,114
% Increase (decrease) 40.9% (30.1)%
Underwriting gain (loss)
(before tax) (10,257) (16,231)
Loss ratio 78.1% 89.3%
Loss expense ratio 21.4% 40.7%
Underwriting expense ratio 49.0% 47.5%
Combined ratio 148.5% 177.5%
</TABLE>
<TABLE>
<CAPTION>
Umbrella 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $17,200 $14,387
% Increase (decrease) 19.6% 193.0%
Net premiums earned 16,703 18,178
% Increase (decrease) (8.1)% 290.3%
Underwriting gain (loss)
(before tax) 2,491 16,917
Loss ratio 40.1% (10.7)%
Loss expense ratio 6.4% (9.4)%
Underwriting expense ratio 37.5% 34.1%
Combined ratio 84.0% 14.0%
</TABLE>
<TABLE>
<CAPTION>
Workers' Compensation 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $44,555 $37,475
% Increase (decrease) 18.9% 54.0%
Net premiums earned 46,761 37,327
% Increase (decrease) 25.3% 60.5%
Underwriting gain (loss)
(before tax) (15,996) (12,922)
Loss ratio 89.3% 75.2%
Loss expense ratio 13.5% 16.4%
Underwriting expense ratio 33.0% 42.8%
Combined ratio 135.8% 134.4%
</TABLE>
<TABLE>
<CAPTION>
Commercial Auto 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $46,920 $46,728
% Increase (decrease) 0.4% 27.9%
Net premiums earned 43,149 42,934
% Increase (decrease) 0.5% 26.6%
Underwriting gain (loss)
(before tax) (14,468) (6,006)
Loss ratio 83.5% 65.3%
Loss expense ratio 9.9% 10.5%
Underwriting expense ratio 36.8% 35.1%
Combined ratio 130.2% 110.9%
Impact of catastrophe losses on
combined ratio 0.6% 1.5%
</TABLE>
<TABLE>
<CAPTION>
Homeowners 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $45,306 $51,122
% Increase (decrease) (11.4)% 7.2%
Net premiums earned 43,531 45,874
% Increase (decrease) (5.1)% 5.2%
Underwriting gain (loss)
(before tax) (11,386) (18,472)
Loss ratio 79.6% 92.7%
Loss expense ratio 7.0% 10.5%
Underwriting expense ratio 37.9% 33.3%
Combined ratio 124.5% 136.5%
Impact of catastrophe losses on
combined ratio 18.2% 21.9%
</TABLE>
<TABLE>
<CAPTION>
Fidelity & Surety 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $10,762 $9,986
% Increase (decrease) 7.8% 1.3%
Net premiums earned 9,439 9,214
% Increase (decrease) 2.4% 3.8%
Underwriting gain (loss)
(before tax) 3,217 2,269
Loss ratio (3.4)% 4.0%
Loss expense ratio (0.5)% 4.8%
Underwriting expense ratio 61.2% 61.4%
Combined ratio 57.3% 70.2%
</TABLE>
<TABLE>
<CAPTION>
Total Property & Casualty 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $382,211 $403,457
% Increase (decrease) (5.3)% 22.5%
Net premiums earned 369,746 374,110
% Increase (decrease) (1.2)% 20.1%
Underwriting gain (loss)
(before tax) (84,309) (75,947)
Loss ratio 74.8% 70.4%
Loss expense ratio 11.0% 12.0%
Underwriting expense ratio 35.8% 35.2%
Combined ratio 121.6% 117.6%
Impact of catastrophe losses on
combined ratio 5.0% 6.3%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
All other 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 1,264 $8,361
Expenses 3,532 3,676
------------------------------------------------------------------------
Net income (loss) $(2,268) $4,685
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Revenues 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net premiums earned for
reportable segments $369,746 $374,110
Investment income 48,339 42,263
Realized gains (losses) (701) 156,932
Miscellaneous income (3) 50
------------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 417,381 573,355
Property and casualty statutory to
GAAP adjustment (1,883) 946
------------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 415,498 574,301
Other segment revenues 1,264 8,361
------------------------------------------------------------------------
Total revenues $416,762 $582,662
========================================================================
</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) $(84,309) $(75,947)
Statutory to GAAP adjustment 1,381 5,657
------------------------------------------------------------------------
Property and casualty under-
writing gain (loss) (before tax)
(GAAP basis) (82,928) (70,290)
Net investment income 49,275 41,013
Realized gains (losses) (2,387) 167,340
Other income (4,656) (4,070)
------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $(40,696) $133,993
========================================================================
</TABLE>
NOTE V - AGENT RELATIONSHIPS
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 agent relationship is the identified
intangible asset acquired in connection with the Great American Insurance
Company commercial lines acquisition. The Managing General Agents accounted
for $48.0 million in commercial lines premium written, of which $29.0 million
was workers' compensation. This business is being non-renewed as permitted by
law and contractual agreements. The Group believes this termination of the
Managing General Agents will give it better control of its underwriting and
pricing practices. The remaining portion of the agent relationships will be
amortized on a straight line basis over the balance of the twenty-five year
period.
In the second quarter of 2000, the Corporation announced 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 will be added to the agent relationships
asset for the acquisition and amortized over the remaining 23.5 years.
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 its 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 in 2000. Through the second quarter of 2000, the
Corporation further reduced $1.6 million of the liability. Of the $1.6
million, $.02 million related to changes in assumptions used to establish the
initial reserve. The balance in the restructuring reserve was $3.1 million at
June 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).
Property and casualty pre-tax underwriting losses for the six months ended
June 30, 2000 were $218.1 million, $3.63 per share, compared with $93.7
million, $1.51 per share for the same period in 1999. The June 30, 2000
results include the effects of the agent relationships write-down taken in the
first quarter. The agent relationships write-down amounted to $42.2 million
before tax. Additional ceded premiums on experience rated reinsurance
covering losses casualty exceeding $1.0 million adversely impacted the
underwriting loss by $17.0 million during the period ending June 30, 2000.
Gross premiums for the first six months of 2000 decreased 2.8% for all lines
of business compared with 1999. Commercial lines increased 10.6% compared to
the same period 1999. This increase was a result of a 5.7% increase in the
average renewal price and more opportunity for new business in the commercial
lines market. Personal lines decreased 16.1% from the same period last year.
This decrease can be attributed to extremely competitive pricing and a
decline in New Jersey personal auto premiums written.
Property and casualty net premiums dropped 5.3% for second quarter 2000 and
3.0% year to date compared to 1999. Year-to-date 1999 premiums were higher
due to the effects of the New Jersey private passenger automobile annual
policy conversion and a New Jersey private passenger automobile rate rollback
mandated in mid 1999. Also contributing significantly to the decrease in net
premiums written was additional ceded premium on experience rated reinsurance
of $17.0 million. Excluding these effects, second quarter 2000 net premiums
increased approximately 0.9% against 1999.
Premium from Key Agents grew 4.9% over the same period of 1999. Key Agents
work closely with the Group to establish goals to increase profitability,
growth and retention. Premiums from non-key active agents fell 2.2% from
1999. Together with new appointments, the year-to-date growth rate for all
active agencies was 4.9%.
New Jersey is the Group's largest state with 15.4% 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.
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 a reduction in medical expense benefits, limitations on lawsuits and
enhanced fraud prevention provisions. All new policies written on or after
that date 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. As of June 30,
2000, the Group had personal auto net premium written of $51.7 million, or
43.1% of total premium that the Group writes in New Jersey, compared with
$124.4 million or 49.5% at year-end 1999.
In 1999, the state of New Jersey began to require insurance companies to write
a portion of their 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 June 30,
2000, the Group has written $3.2 million year to date in UEZ premiums, with
$3.9 million in additional assigned premiums. As of June 30, 2000, the loss
ratio on the UEZ premiums is 157.2% and the loss ratio on the assigned
business is 199.3%.
12
<PAGE>
The combined ratio for the first six months increased 11.1 points to 122.3%
from 111.2% from the same period last year. The poor combined ratio is a
result of continued price inadequacy, frequent storms, and additional premium
cessions on experience rated contracts. The additional premium cessions added
2.7 points to the overall combined ratio.
The year-to-date June 30, 2000 accident year loss ratio is 70.2%. Adverse
loss development on prior accident years accounted for the difference between
the current accident year-to-date loss ratio and the calendar year-to-date
loss ratio of 75.5%.
The underwriting expense ratio through June 30, 2000 was 35.2%, compared with
34.9% in the same period in 1999. Excluding the effects of the additional
reinsurance premiums ceded, the expense ratio was 34.4%. This decrease is
directly related to the expense reduction efforts. The most significant
category of expense improvement is salary expense. Improvement is evident
in the second quarter, where salary expense decreased by $4.4 million, or
10.3%, compared to the same quarter of 1999. The employee count as of June
30, 2000 was 3,499, a decrease of 390 employees from the December 31, 1999
employee count of 3,889. The year-to-date 2000 loss adjustment expense ratio
increased to 11.6% from 10.4% 1999.
The six-month combined ratio for homeowners decreased 3.9 points to 128.0%
from 131.9% in the same period last year. The Group continues to review its
exposure to underinsured homeowner properties to maintain adequate replacement
cost values on its homeowners book of business. Selected homeowners policies
are reviewed upon renewal for a replacement cost valuation and any necessary
premium increases are implemented at that time.
Private passenger automobile-agency, the Group's largest line, recorded a 2000
six-month combined ratio of 117.4% increasing from 101.4% in 1999. Private
passenger automobile-agency combined ratio rose in part to the effects of the
the New Jersey rate rollback and annual policy conversion. The private
passenger automobile-agency loss ratio increased 13.5 points to 79.4% from
65.9% in 1999.
Commercial automobile reported a year-to-date combined ratio of 123.9%, an
increase of 10.5 points over the year-to-date 1999 combined ratio of 113.4%.
Inadequate pricing contributed to this increase. For this line, as well as
other commercial lines, price increases are being implemented. However, since
price increases apply to policies as they renew over time, the full effect
will be realized over the next several quarters in earned premiums.
Workers' compensation combined ratio for the first six months of 2000
increased 29.6 points to 141.2% from 111.6% during the same period last year.
The increase in the workers' compensation ratio is due to adverse loss reserve
development, especially in prior year loss reserves, which has caused incurred
losses to increase significantly. Workers' compensation loss ratio increased
37.8 points to 97.6% from 59.8% in the same period last year.
The general liability combined ratio increased during the year 2000 to 137.3%
from 124.1% in 1999. Umbrella combined ratio for the first six months of 2000
increased to 84.7% from 25.7% in 1999. These increases are largely due to
adverse development in the first half of 2000. The combined ratio for CMP,
fire and inland marine decreased 11.2 points to 117.7% from 128.9% during the
first six months of 2000.
The second quarter catastrophe losses were $18.6 million and accounted for 5.0
points on the combined ratio. This compares with $23.8 million and 6.3 points
for the same period in 1999. Year-to-date catastrophe losses decreased $5.7
million from $31.3 million in 1999 to $25.6 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 second quarter of 2000 there were 10
catastrophes compared with 13 catastrophes in the second quarter of 1999. The
largest catastrophe in each quarter was $4.2 million and $9.6 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 51 and 52 of the
Corporation's 1999 Form 10-K.
13
<PAGE>
For the quarter, property and casualty before-tax investment income was $48.3
million, $.80 per share, increasing from $42.3 million, $.70 per share, for
the same period last year. The effective tax rate on investment income for
the second quarter of 2000 was 31.0% compared with 24.4% for the comparable
period in 1999. The increase in effective tax rate reflects a decreasing tax
exempt municipal bond portfolio.
For the second quarter, property and casualty after-tax realized losses were
$1.7 million, compared with an after-tax realized gain of $103.9 million for
the same period of 1999. The 1999 gain reflects the asset reallocation
completed by the Corporation in the second quarter.
Net cash generated by operations was $44.5 million for the first six months of
the year compared with net cash used of $80.4 million for the same period in
1999. This change is due to payment received in 2000 as part of the
commutation of a reinsurance treaty in the fourth quarter of 1999. Also, 1999
cash used reflected a large payment for the purchase price of the Great
American Insurance Company commercial lines division. Shareholder dividend
payments were $21.0 million in the first six months of 2000 compared with
$28.5 million for the same period in 1999. This decrease was a result of the
Corporation's decision to reduce second quarter dividend payments by 47.8%, to
$.12 per share, in order to strengthen the financial position of the
Corporation.
Ohio Casualty Corporation did not repurchase any of its shares during the
second quarter. The Corporation has remaining authorization to repurchase
1,649,824 additional shares.
As of June 30, 2000, the Corporation had $221.1 million of outstanding notes
payable. Of the $221.1 million, $215.0 related to the 1997 credit facility
that made a $300.0 million revolving line of credit available to the
Corporation. The credit 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
June 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
Codification, might lead to violations which could ultimately result in
default. 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.
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) and unrated securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Below investment grade securities:
Carrying value $147.9 $175.2
Amortized cost 167.6 187.1
Unrated securities:
Carrying value $266.3 $303.2
Amortized cost 271.2 310.0
</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>
June 30, December 31,
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Below investment grade securities at
carrying value $147.9 $175.2
Other rating agencies categorizing unrated
securities as below investment grade 39.0 8.7
------ ------
Below investment grade securities at
carrying value $186.9 $213.9
</TABLE>
14
<PAGE>
The securities in the Corporation's below investment grade portfolio have been
issued by 76 corporate borrowers in approximately 49 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.
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, in addition to
sound investment, liquidity, reserves, and risk management. All three rating
agencies recognized the shift in management focus to improve underwriting.
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 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. Her ruling
was sent to the California Commissioner of Insurance to be accepted, rejected
or modified. The Group expected the commissioner to rule sometime after the
election in November 1998. To date, there has been no ruling. 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 Group 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 Group's Constitutional argument that this rollback is
confiscatory. The Group does not believe it is possible to pinpoint a
specific rollback that may be required that is the most probable. The Group
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 $51.7 million at June 30, 2000.
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, subsidiary American Fire and Casualty remains in the state to wind
down the affairs of the Group.
15
<PAGE>
During the second quarter of 2000, the Corporation restructured its Avomark
Insurance Company 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 canceling the Company's obligations with its former
lease. This restructuring also eliminated 114 budgeted positions. The total
annual savings is approximately $7.5 million.
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.
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 through June 30, 2000. The Corporation expects that Year
2000 project costs incurred in 2000, if any, will be immaterial.
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 - 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
16
<PAGE>
Item 6. Exhibits and reports on Form 8-K -
(a) 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)
August 14, 2000 /s/ Elizabeth M. Riczko
------------------------------------------
Elizabeth M. Riczko, Senior Vice President
(on behalf of Registrant and as Principal
Accounting Officer)
17
