10-Q 1 f10q3.txt OCG FORM 10-Q 09/30/00 ============================================================================= 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 ============================================================================= PART I ITEM 1. FINANCIAL STATEMENTS Ohio Casualty Corporation & Subsidiaries CONSOLIDATED BALANCE SHEET
September 30, December 31, (In thousands, except per share data) (Unaudited) 2000 1999 ---------------------------------------------------------------------------------------- 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 =========================================================================================
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 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED INCOME
Three Months Ended September 30, (in thousands, except per share data) (Unaudited) 2000 1999 ----------------------------------------------------------------------------------------- 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 =========================================================================================
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 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED INCOME
Nine Months Ended September 30, (in thousands, except per share data) (Unaudited) 2000 1999 ----------------------------------------------------------------------------------------- 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 =========================================================================================
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 Ohio Casualty Corporation and Subsidiaries STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
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 --------------------------------------------------------------------------------------------------------------------------------- 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 =================================================================================================================================
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 Ohio Casualty Corporation and Subsidiaries STATEMENT OF CONSOLIDATED CASH FLOWS
Nine Months Ended September 30, (in thousands) (Unaudited) 2000 1999 ------------------------------------------------------------------------------------- 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 =====================================================================================
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 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):
Three months ended Nine months ended September 30 September 30 2000 1999 2000 1999 ---- ---- ---- ---- 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 ==============================================================================
7 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. Nine months ended September 30 (in thousands)
Private Passenger Auto - Agency 2000 1999 ------------------------------------------------------------------------- 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%
Private Passenger Auto - Direct 2000 1999 ------------------------------------------------------------------------- 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%
CMP, Fire, Inland Marine 2000 1999 ------------------------------------------------------------------------- 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%
General Liability 2000 1999 ------------------------------------------------------------------------- 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%
Umbrella 2000 1999 ------------------------------------------------------------------------- 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%
Workers' Compensation 2000 1999 ------------------------------------------------------------------------- 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%
8
Commercial Auto 2000 1999 ------------------------------------------------------------------------- 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%
Homeowners 2000 1999 ------------------------------------------------------------------------- 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%
Fidelity & Surety 2000 1999 ------------------------------------------------------------------------- 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%
Total Property & Casualty 2000 1999 ------------------------------------------------------------------------- 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%
All other 2000 1999 ------------------------------------------------------------------------- Revenues $ 3,297 $12,412 Expenses 13,370 15,738 ------------------------------------------------------------------------- Net income (loss) $(10,073) $ (3,326)
Reconciliation of Revenues 2000 1999 ------------------------------------------------------------------------- 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 =========================================================================
Reconciliation of Underwriting gain (loss) (before tax) 2000 1999 ------------------------------------------------------------------------- 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 =========================================================================
9 Three months ended September 30 (in thousands)
Private Passenger Auto - Agency 2000 1999 ------------------------------------------------------------------------- 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%
Private Passenger Auto - Direct 2000 1999 ------------------------------------------------------------------------- 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%
CMP, Fire, Inland Marine 2000 1999 ------------------------------------------------------------------------- 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%
General Liability 2000 1999 ------------------------------------------------------------------------- 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%
Umbrella 2000 1999 ------------------------------------------------------------------------- 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%
Workers' Compensation 2000 1999 ------------------------------------------------------------------------- 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%
Commercial Auto 2000 1999 ------------------------------------------------------------------------- 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%
Homeowners 2000 1999 ------------------------------------------------------------------------- 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%
Fidelity & Surety 2000 1999 ------------------------------------------------------------------------- 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%
Total Property & Casualty 2000 1999 ------------------------------------------------------------------------- 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%
10
All other 2000 1999 ------------------------------------------------------------------------- Revenues $ 874 $4,428 Expenses 5,215 7,089 ------------------------------------------------------------------------- Net income (loss) $(4,341) $2,661
Reconciliation of Revenues 2000 1999 ------------------------------------------------------------------------- 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 =========================================================================
Reconciliation of Underwriting gain (loss) (before tax) 2000 1999 ------------------------------------------------------------------------- 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) =========================================================================
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 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 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 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 Investments Investments in below investment grade securities (Standard and Poor's rating below BBB-) and unrated securities are summarized as follows:
September 30, December 31, (in millions) 2000 1999 --------------------------------------------------------------------------- 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
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:
September 30, December 31, (in millions) 2000 1999 --------------------------------------------------------------------------- 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
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 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 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 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