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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, 2003.
-------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-05544
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) 603-2400
(Registrant's telephone number)
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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
The aggregate market value as of August 1, 2003 of the voting stock held
by non-affiliates of the registrant was $807,152,615.
On August 1, 2003, there were 60,888,913 shares outstanding.
Page 1 of 26
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INDEX
Page
----
PART I
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 25
Item 4. Controls and Procedures 25
PART II
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and reports on Form 8-K 25
Signature 26
Exhibit 31.1 Certification of Chief Executive Officer of Ohio
Casualty Corporation in accordance with Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer of Ohio
Casualty Corporation in accordance with Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer of Ohio
Casualty Corporation in accordance with Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer of Ohio
Casualty Corporation in accordance with Section 906
of the Sarbanes-Oxley Act of 2002
PART I
ITEM 1. FINANCIAL STATEMENTS
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share June 30, December 31,
data) (Unaudited) 2003 2002
- ---------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(amortized cost: $2,678.3 and $2,967.5) $2,911.4 $3,139.8
Held-to-maturity, at amortized cost
(fair value: $378.3) 372.6 -
Equity securities, at fair value
(cost: $84.1 and $92.6) 307.7 312.5
Short-term investments, at fair value 21.2 49.8
- --------------------------------------------------------------------------------
Total investments 3,612.9 3,502.1
Cash 19.7 12.4
Premiums and other receivables, net of
allowance for bad debts of $5.0 and $4.3,
respectively 359.0 324.7
Deferred policy acquisition costs 179.5 181.3
Property and equipment, net of accumulated
depreciation of $147.5 and $145.9, respectively 93.2 97.8
Reinsurance recoverable 486.4 419.9
Agent relationships, net of accumulated amortization
of $35.8 and $34.1, respectively 148.9 161.3
Interest and dividends due or accrued 43.3 46.0
Deferred income taxes - 2.4
Other assets 62.6 31.1
- --------------------------------------------------------------------------------
Total assets $5,005.5 $4,779.0
================================================================================
Liabilities
Insurance reserves:
Losses $2,046.5 $1,978.8
Loss adjustment expenses 466.0 454.9
Unearned premiums 706.8 668.7
Debt 198.2 198.3
Deferred income taxes 30.0 -
Other liabilities 416.7 419.6
- --------------------------------------------------------------------------------
Total liabilities 3,864.2 3,720.3
Shareholders' Equity
Common stock, $.125 par value
Authorized: 150,000,000
Issued shares: 72,418,344; 72,418,344 9.0 9.0
Common stock purchase warrants 21.1 21.1
Accumulated other comprehensive income 296.1 246.2
Retained earnings 967.5 936.7
Treasury stock, at cost:
(Shares: 11,546,981; 11,692,976) (152.4) (154.3)
- --------------------------------------------------------------------------------
Total shareholders' equity 1,141.3 1,058.7
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $5,005.5 $4,779.0
================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 57-70 of the Corporation's 2002 Form 10-K.
2
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended June 30,
(Dollars in millions, except share data) (Unaudited) 2003 2002
- ------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 351.2 $ 364.7
Investment income less expenses 51.4 50.7
Investment gains realized, net 6.8 9.5
- ------------------------------------------------------------------------------------------
Total revenues 409.4 424.9
Losses and benefits for policyholders 213.7 223.9
Loss adjustment expenses 41.4 53.6
General operating expenses 29.3 24.5
Amortization of agent relationships 1.9 2.7
Write-down of agent relationships 5.8 2.4
Amortization of deferred policy acquisition costs 96.7 92.9
Depreciation and amortization expense 3.4 4.3
- -----------------------------------------------------------------------------------------
Total expenses 392.2 404.3
- -----------------------------------------------------------------------------------------
Income before income taxes 17.2 20.6
Income tax expense:
Current 2.8 4.2
Deferred 3.4 3.3
- -----------------------------------------------------------------------------------------
Total income tax expense 6.2 7.5
- -----------------------------------------------------------------------------------------
Net income $ 11.0 $ 13.1
=========================================================================================
Average shares outstanding - basic 60,835,215 60,441,597
=========================================================================================
Earnings per share - basic:
Net income, per share $ 0.18 $ 0.22
=========================================================================================
Average shares outstanding - diluted 61,169,556 61,495,531
=========================================================================================
Earnings per share - diluted:
Net income, per share $ 0.18 $ 0.21
=========================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 57-70 of the Corporation's 2002 Form 10-K.
3
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Six Months
Ended June 30,
(Dollars in millions, except share data) (Unaudited) 2003 2002
- ------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 700.5 $ 725.7
Investment income less expenses 104.6 101.6
Investment gains realized, net 26.1 32.3
- ------------------------------------------------------------------------------------------
Total revenues 831.2 859.6
Losses and benefits for policyholders 422.5 435.7
Loss adjustment expenses 88.8 105.0
General operating expenses 59.5 50.7
Amortization of agent relationships 3.8 5.5
Write-down of agent relationships 8.7 7.6
Amortization of deferred policy acquisition costs 194.2 185.1
Depreciation and amortization expense 6.7 8.3
- -----------------------------------------------------------------------------------------
Total expenses 784.2 797.9
- -----------------------------------------------------------------------------------------
Income before income taxes 47.0 61.7
Income tax expense:
Current 10.5 5.5
Deferred 5.6 16.3
- -----------------------------------------------------------------------------------------
Total income tax expense 16.1 21.8
- -----------------------------------------------------------------------------------------
Net income $ 30.9 $ 39.9
=========================================================================================
Average shares outstanding - basic 60,782,147 60,314,333
=========================================================================================
Earnings per share - basic:
Net income, per share $ 0.51 $ 0.66
=========================================================================================
Average shares outstanding - diluted 61,067,946 61,287,100
=========================================================================================
Earnings per share - diluted:
Net income, per share $ 0.51 $ 0.65
=========================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 57-70 of the Corporation's 2002 Form 10-K.
4
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Accumulated
Additional Common other Total
(Dollars in millions, except Common paid-in stock purchase comprehensive Retained Treasury shareholders'
share data) (Unaudited) Stock capital warrants income earnings stock equity
- --------------------------------------------------------------------------------------------------------------------------
Balance
January 1, 2002 $11.8 $ 4.1 $21.1 $274.4 $1,221.4 $(452.9) $1,079.9
Net income 39.9 39.9
Net change in unrealized gain
net of deferred income tax
benefit of $15.0 (27.9) (27.9)
---------
Comprehensive income 12.0
Net issuance of treasury
stock (503,668 shares) (0.1) (0.2) 6.6 6.3
Retirement of treasury
stock (22,000,000 shares) (2.8) (4.0) (283.6) 290.4 -
- -------------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 2002 $ 9.0 $ - $21.1 $246.5 $ 977.5 $(155.9) $1,098.2
=========================================================================================================================
Balance
January 1, 2003 $ 9.0 $ - $21.1 $246.2 $ 936.7 $(154.3) $1,058.7
Net income 30.9 30.9
Net change in unrealized gain
net of deferred income tax
expense of $(26.8) 49.9 49.9
----------
Comprehensive income 80.8
Net issuance of treasury
stock (145,995 shares) (0.1) 1.9 1.8
- --------------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 2003 $ 9.0 $ - $21.1 $296.1 $ 967.5 $(152.4) $1,141.3
==========================================================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
57-70 of the Corporation's 2002 Form 10-K.
5
Ohio Casualty Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months
Ended June 30,
(Dollars in millions) (Unaudited) 2003 2002
- --------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Operations
Net income $ 30.9 $ 39.9
Adjustments to reconcile net income to cash
from operations:
Changes in:
Insurance reserves 116.9 117.3
Income taxes 2.2 25.5
Premiums and other receivables (34.3) (28.1)
Deferred policy acquisition costs 1.8 (9.1)
Reinsurance recoverable (66.5) (70.3)
Other assets 2.1 1.2
Other liabilities (13.5) (32.1)
Amortization and write-down of agent relationships 12.4 13.1
Depreciation and amortization 7.5 7.8
Investment gains (26.1) (32.3)
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 33.4 32.9
- --------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of securities:
Fixed maturity, available-for-sale (564.2) (651.7)
Fixed maturity, held-to-maturity (6.0) -
Equity (5.9) -
Proceeds from sales of securities:
Fixed maturity, available-for-sale 434.6 482.6
Equity 31.6 66.4
Proceeds from maturities and calls of securities:
Fixed maturity, available-for-sale 49.1 27.8
Fixed maturity, held-to-maturity 0.8 -
Equity 6.8 -
Property and equipment
Purchases (3.9) (12.2)
Sales 1.3 0.2
- --------------------------------------------------------------------------------------
Net cash used from investing activities (55.8) (86.9)
- --------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Debt:
Proceeds from the issuance of convertible notes - 201.3
Payments (0.3) (205.3)
Payments of issuance costs - (7.3)
Proceeds from exercise of stock options 1.4 6.2
- --------------------------------------------------------------------------------------
Net cash generated (used) in financing activities 1.1 (5.1)
- --------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (21.3) (59.1)
Cash and cash equivalents, beginning of period 62.2 92.3
- --------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 40.9 $ 33.2
======================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 57-70 of the Corporation's 2002 Form 10-K.
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
We prepared the Consolidated Balance Sheet as of June 30, 2003, the
Consolidated Statements of Income for the three and six months ended June 30,
2003 and 2002, the Consolidated Statements of Shareholders' Equity for the
six months ended June 30, 2003 and 2002, and the Consolidated Statements of
Cash Flows for the six months ended June 30, 2003 and 2002, without an audit.
In the opinion of management, all adjustments necessary to fairly present the
financial position, results of operations and cash flows at June 30, 2003 and
for all periods presented have been made.
We prepared the accompanying unaudited Consolidated Financial Statements in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to the Quarterly
Report on Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted. We recommend that you read
these unaudited Consolidated Financial Statements together with the financial
statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2002. The results of operations for the period
ended June 30, 2003 are not necessarily indicative of the results of
operations for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE II - STOCK OPTIONS
The Corporation accounts for stock options issued to employees and directors
in accordance with Accounting Principles Board Opinion (APB) No. 25,"
Accounting for Stock Issued to Employees." Under APB 25, the Corporation
recognizes expense based on the intrinsic value of options. Had the
Corporation adopted FAS 123 "Accounting for Stock Based Compensation," the
Corporation's net income and earnings per share would have been reduced to
the pro forma amounts disclosed below:
7
Three months ended Six months ended
June 30 June 30
($ in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------
Net income
As reported $11.0 $13.1 $30.9 $39.9
Add: Stock-based employee
compensation reported in
net income, net of related
tax effect - 0.1 0.1 0.1
Deduct: Total stock-based employee
compensation, net of related
tax effects 1.4 1.2 2.9 2.5
----- ----- ----- -----
Pro forma $ 9.6 $12.0 $28.1 $37.5
Basic EPS
As reported $.18 $.22 $.51 $.66
Pro Forma $.16 $.20 $.46 $.62
Diluted EPS
As reported $.18 $.21 $.51 $.65
Pro Forma $.16 $.19 $.46 $.61
NOTE III - EARNINGS PER SHARE
Basic and diluted earnings per share are summarized as follows (in millions,
except per share data):
Three months ended Six months ended
June 30 June 30
($ in millions) 2003 2002 2003 2002
- --------------- ---- ---- ---- ----
Net income $ 11.0 $ 13.1 $ 30.9 $ 39.9
Weighted average common
shares outstanding - basic
(thousands) 60,835 60,442 60,782 60,314
Basic earnings per weighted
average share $ 0.18 $ 0.22 $ 0.51 $ 0.66
==================================================================================
Weighted average common shares
outstanding (thousands) 60,835 60,442 60,782 60,314
Effect of dilutive securities
(thousands) 335 1,054 286 973
- ----------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted (thousands) 61,170 61,496 61,068 61,287
Diluted earnings per weighted
average share $ 0.18 $ 0.21 $ 0.51 $ 0.65
==================================================================================
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 Commercial Lines, Specialty Lines, and Personal Lines.
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 investment income and premium
financing.
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
statutory loss and loss adjustment expense ratios, statutory combined ratio,
premiums written, premiums earned and statutory underwriting gain/loss. The
following tables present this information by segment as it is reported
internally to management. Asset information by reportable segment is not
reported, since the Corporation does not produce such information internally.
8
Six Months Ended June 30
($ in millions)
Commercial Lines Segment 2003 2002
- ---------------------------------------------------------------------------
Net premiums written $415.1 $399.0
% Change 4.0% 9.5%
Net premiums earned 381.1 353.3
% Change 7.9% (1.7)%
Underwriting loss (before tax) (55.6) (40.3)
Loss ratio 62.3% 55.6%
Loss expense ratio 13.1% 16.4%
Underwriting expense ratio 36.0% 34.9%
Combined ratio 111.4% 106.9%
Specialty Lines Segment 2003 2002
- --------------------------------------------------------------------------
Net premiums written $ 76.1 $84.8
% Change (10.3)% 26.5%
Net premiums earned 79.0 68.7
% Change 15.0% 6.9%
Underwriting gain (before tax) 14.1 1.0
Loss ratio 22.2% 37.5%
Loss expense ratio 15.5% 9.0%
Underwriting expense ratio 46.1% 42.2%
Combined ratio 83.8% 88.7%
Personal Lines Segment 2003 2002
- --------------------------------------------------------------------------
Net premiums written $236.9 $266.3
% Change (11.1)% (19.2)%
Net premiums earned 240.4 303.7
% Change (20.8)% (9.6)%
Underwriting loss (before tax) (20.5) (25.9)
Loss ratio 69.4% 70.2%
Loss expense ratio 11.1% 13.5%
Underwriting expense ratio 28.4% 28.3%
Combined ratio 108.9% 112.0%
Total Property & Casualty 2003 2002
- --------------------------------------------------------------------------
Net premiums written $728.1 $750.1
% Change (2.9)% (1.4)%
Net premiums earned 700.5 725.7
% Change (3.5)% (4.5)%
Underwriting loss (before tax) (62.0) (65.2)
Loss ratio 60.2% 60.0%
Loss expense ratio 12.7% 14.5%
Underwriting expense ratio 34.6% 33.3%
Combined ratio 107.5% 107.8%
Impact of catastrophe losses
on combined ratio 3.6% 1.8%
All other 2003 2002
- --------------------------------------------------------------------------
Revenues $ 2.4 $ (.2)
Expenses 5.9 5.1
- --------------------------------------------------------------------------
Net loss before income taxes $(3.5) $(5.3)
Reconciliation of Revenues 2003 2002
- --------------------------------------------------------------------------
Net premiums earned for
reportable segments $700.5 $725.8
Investment income 102.3 101.1
Realized gains 24.4 33.7
- --------------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 827.2 860.6
Property and casualty statutory
to GAAP adjustment 1.6 (.8)
- --------------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 828.8 859.8
Other segment revenues (expenses) 2.4 (.2)
- --------------------------------------------------------------------------
Total revenues $831.2 $859.6
==========================================================================
Reconciliation of Underwriting
loss (before tax) 2003 2002
- --------------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(Statutory basis) $(62.0) $(65.2)
Statutory to GAAP adjustment (3.3) 11.2
- --------------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(GAAP basis) (65.3) (54.0)
Net investment income 104.6 101.6
Realized gains 26.1 32.3
Write-down and amortization of
agent relationships (12.5) (13.1)
Other losses (5.9) (5.1)
- --------------------------------------------------------------------------
Income before income taxes $ 47.0 $ 61.7
==========================================================================
9
Three Months Ended June 30
($ in millions)
Commercial Lines Segment 2003 2002
- --------------------------------------------------------------------------
Net premiums written $209.9 $206.2
% Change 1.8% 11.1%
Net premiums earned 191.3 179.2
% Change 6.8% 1.2%
Underwriting loss (before tax) (28.8) (19.1)
Loss ratio 63.4% 57.1%
Loss expense ratio 12.8% 14.7%
Underwriting expense ratio 35.4% 33.8%
Combined ratio 111.6% 105.6%
Specialty Lines Segment 2003 2002
- --------------------------------------------------------------------------
Net premiums written $43.2 $45.3
% Change (4.6)% 22.6%
Net premiums earned 40.6 38.7
% Change 4.9% 16.9%
Underwriting gain (before tax) 8.7 -
Loss ratio 20.6% 38.3%
Loss expense ratio 13.3% 12.1%
Underwriting expense ratio 42.1% 42.3%
Combined ratio 76.0% 92.7%
Personal Lines Segment 2003 2002
- --------------------------------------------------------------------------
Net premiums written $122.8 $123.7
% Change (.7)% (25.8)%
Net premiums earned 119.3 146.8
% Change (18.7)% (11.6)%
Underwriting loss (before tax) (10.1) (18.4)
Loss ratio 70.5% 72.8%
Loss expense ratio 9.6% 15.3%
Underwriting expense ratio 27.6% 29.0%
Combined ratio 107.7% 117.1%
Total Property & Casualty 2003 2002
- --------------------------------------------------------------------------
Net premiums written $375.9 $375.2
% Change .2% (3.6)%
Net premiums earned 351.2 364.7
% Change (3.7)% (3.1)%
Underwriting loss (before tax) (30.2) (37.5)
Loss ratio 60.8% 61.4%
Loss expense ratio 11.8% 14.7%
Underwriting expense ratio 33.6% 33.2%
Combined ratio 106.2% 109.3%
Impact of catastrophe losses
on combined ratio 4.0% 2.8%
All other 2003 2002
- --------------------------------------------------------------------------
Revenues $ .6 $ .2
Expenses 3.0 2.8
- --------------------------------------------------------------------------
Net loss before income taxes $(2.4) $(2.6)
Reconciliation of Revenues 2003 2002
- -------------------------------------------------------------------------
Net premiums earned for
reportable segments $351.2 $364.7
Investment income 50.8 50.4
Realized gains 8.0 11.2
- --------------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 410.0 426.3
Property and casualty statutory
to GAAP adjustment (1.2) (1.7)
- --------------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 408.8 424.6
Other segment revenues .6 .3
- --------------------------------------------------------------------------
Total revenues $409.4 $424.9
Reconciliation of Underwriting
loss (before tax) 2003 2002
- --------------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(Statutory basis) $(30.2) $(37.5)
Statutory to GAAP adjustment (.1) 5.8
- --------------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(GAAP basis) (30.3) (31.7)
Net investment income 51.4 50.7
Realized gains 6.8 9.5
Write-down and amortization of
agent relationships (7.7) (5.1)
Other losses (3.0) (2.8)
- --------------------------------------------------------------------------
Income before income taxes $ 17.2 $ 20.6
==========================================================================
10
NOTE V - AGENT RELATIONSHIPS
The agent relationships asset is an identifiable intangible asset acquired in
connection with the 1998 Great American Insurance Company (GAI) commercial
lines acquisition. The Corporation follows the practice of allocating
purchase price to specifically identifiable intangible assets based on their
estimated values as determined by appropriate valuation methods. In the GAI
acquisition, the purchase price was allocated to agent relationships and
deferred policy acquisition costs. Periodically, agent relationships are
evaluated as events or circumstances indicate a possible inability to recover
their carrying amount. In the second quarter of 2003, the Corporation wrote
off the agent relationships asset by $5.8 million for agency cancellations
and impairment. The second quarter 2002 included a write-down of $2.4
million to the agent relationships asset for agency cancellations and
impairment. The remaining portion of the agent relationships asset will be
amortized on a straight-line basis over the remaining useful period of
approximately 21 years. Amortization expense for the periods 2003 through
2007 is expected to approximate $8.0 million before tax per year.
Based on historical data the remaining agents have been profitable. Future
cancellation of agents included in the agent relationships intangible asset
or a diminution of certain former Great American agents' estimated future
revenues or profitability is likely to cause further impairment losses beyond
the quarterly amortization of the remaining asset value over the remaining
useful lives.
NOTE VI - INTERNALLY DEVELOPED SOFTWARE
In accordance with SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," the Corporation capitalizes costs
incurred during the application development stage for the development of
internal-use software. These costs primarily relate to payroll and payroll-
related costs for employees along with costs incurred for external
consultants who are directly associated with the internal-use software
project. Costs such as maintenance, training, data conversion, overhead and
general and administrative are expensed as incurred. Management believes the
expected future cash flows of the asset exceed the carrying value. The
expected future cash flows are determined using various assumptions and
estimates, changes in these assumptions could result in an impairment of the
asset and a corresponding charge to net income. The costs associated with
the software are amortized on a straight-line basis over an estimated useful
life of 10 years commencing when the software is substantially complete and
ready for its intended use. Unamortized software costs and accumulated
amortization in the consolidated balance sheet were $50.7 million and $5.1
million at June 30, 2003, and $50.3 million and $3.7 million at December 31,
2002, respectively.
NOTE VII - CONVERTIBLE DEBT
In 2002, the Corporation completed an offering of 5.00% convertible notes, in
an aggregate principal amount of $201.3 million, due March 19, 2022 and
generated net proceeds of $194.0 million. The net proceeds of the offering,
along with $10.5 million of cash, were used to pay off the balance and
terminate an outstanding credit facility. The issuance and related costs are
amortized over the life of the bonds and are recorded as related fees. The
Corporation uses the effective interest rate method to record the interest
and related fee amortization. Interest is payable on March 19 and September
19 of each year, and began September 19, 2002. The notes may be converted
into shares of the Corporation's common stock under certain conditions,
including: if the sale price of the Corporation's common stock reaches
specific thresholds; if the credit rating of the notes is below a specified
level or withdrawn, or if the notes have no credit rating during any period;
or if specified corporate transactions have occurred. The conversion rate is
44.2112 shares per each one thousand dollar principal amount of notes,
subject to adjustment in certain circumstances. The convertible debt impact
on earnings per share is based on the "if-converted" method. The impact on
diluted earnings per share is contingent on whether or not certain criteria
have been met for conversion. As of June 30, 2003, the common share price
criterion had not been met and, therefore, no adjustment to the number of
diluted shares in the earnings per share calculation was made for the
convertible debt. On or after March 23, 2005, the Corporation has the option
to redeem all or a portion of the notes that have not been previously
converted at the following redemption prices (expressed as a percentage of
principal amount):
11
During the twelve months commencing Redemption Price
- ----------------------------------- ----------------
March 23, 2005 102%
March 19, 2006 101%
March 19, 2007 until maturity of the notes 100%
The holders of the notes have the option to require the Corporation to
purchase all or a portion of their notes on March 19 of 2007, 2012 and 2017
at 100% of the principal amount of the notes. In addition, upon a change in
control of the Corporation occurring anytime prior to maturity, holders may
require the Corporation to purchase for cash all or a portion of their notes
at 100% of the principal amount plus accrued interest.
On July 31, 2002, the Corporation entered into a revolving credit agreement.
Under the terms of the credit agreement, the lenders agreed to make loans to
the Corporation in an aggregate amount up to $80.0 million for general
corporate purposes. Interest is payable in arrears, and the interest rate on
borrowings under the credit agreement is based on a margin over LIBOR or the
LaSalle Bank Prime Rate, at the option of the Corporation. The Corporation
has capitalized approximately $0.4 million in fees related to establishing
the line of credit and amortizes the fees over the term of the agreement. In
addition, the Corporation is obligated to pay agency fees and facility fees
of up to $0.2 million annually. These fees are expensed when incurred by the
Corporation. The agreement requires the Corporation to maintain minimum net
worth of $800.0 million. The credit facility agreement also includes a
minimum statutory surplus for The Ohio Casualty Insurance Company of $625.0
million through September 30, 2003, increasing to $650.0 million thereafter.
The credit agreement will expire on March 15, 2005. Additionally, financial
covenants and other customary provisions, as defined in the agreement, exist.
The outstanding loan amount of the revolving line of credit was zero at June
30, 2003.
During 1999, the Corporation signed a $6.5 million low interest loan with the
state of Ohio used in conjunction with the home office purchase. The Ohio
Casualty Insurance Company granted a mortgage on its home office property as
security for the loan. As of June 30, 2003, the loan bears a fixed interest
rate of 2%, increasing to the maximum rate of 3% in December 2004. The loan
requires annual principal payments of approximately $0.6 million and expires
in November 2009. The remaining balance at June 30, 2003 was $4.2 million.
NOTE VIII - CONTINGENCIES
In the fourth quarter of 2001, Ohio Casualty of New Jersey, Inc. (OCNJ), a
Group member, entered into an agreement to transfer its obligations to renew
private passenger auto business in New Jersey to Proformance Insurance
Company (Proformance). The transaction effectively exited the Group from the
New Jersey private passenger auto market. The Group continues to write
private passenger auto in other markets. Under the terms of the transaction,
OCNJ agreed to pay Proformance $40.6 million to assume its renewal
obligations. Payments were made over the course of twelve months beginning
in early 2002 with final payment made during the first quarter of 2003. The
contract stipulates that a premiums-to-surplus ratio of 2.5 to 1 must be
maintained on the transferred business during the next three years. If this
criteria is not met, OCNJ will have a contingent liability of up to $15.6
million to be paid to Proformance to maintain this premiums-to-surplus ratio.
As of June 30, 2003, the Group has evaluated the contingency based upon
financial data provided by Proformance. The Group has concluded that it is
not probable the liability will be incurred and, therefore, has not
recognized a liability in the financial statements. The Group will continue
to monitor the contingency for any future liability recognition.
In the normal course of business, the Corporation and its subsidiaries are
involved in lawsuits related to their operations. In each of the matters,
the Corporation believes the ultimate resolution of such litigation will not
result in any material adverse impact to operations or financial condition of
the Corporation.
NOTE IX - INVESTMENTS
During the first quarter of 2003, the Corporation and the Group transferred
$368.8 million of its fixed maturity securities from the available-for-sale
classification into the held-to-maturity classification. This transfer was
made as the Corporation and the Group have both the ability to hold the
securities to maturity and the positive intent to do so.
12
NOTE X - RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities an
Interpretation of Accounting Research Bulletin (ARB) No. 51 which states
certain criteria for use in consolidating another entity. The Corporation
has evaluated Interpretation No. 46 and does not believe it will have a
material impact on the financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (FAS 150),
effective for interim reporting periods beginning after June 15, 2003. Under
the new rules, certain financial instruments classified as equity will be
required to be presented as liabilities. The Corporation has evaluated FAS
150 and does not believe it will have a material impact on the financial
statements.
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
Net income
The Corporation reported net income of $30.9 million, or $0.51 per share for
the six months ending June 30, 2003, compared with net income of $39.9
million, or $0.65 per share in the same period of 2002. For the second
quarter of 2003, the net income was $11.0 million, or $0.18 per share,
compared with net income of $13.1 million, or $0.21 per share in the same
quarter of 2002.
Investment Results
Year-to-date 2003 consolidated before-tax investment income was $104.6
million increasing from $101.6 million for the same period last year. The
investment income effective tax rate for the first six months of 2003 and
2002 was 33.4%. Second quarter consolidated before-tax investment income was
$51.4 million, compared with $50.7 million for the same period last year.
The investment income effective tax rate for the second quarter of 2003 was
33.7%, compared with 33.9% in the second quarter of 2002.
Year-to-date 2003 consolidated before-tax realized gains were $26.1 million,
compared with $32.3 million for the same period in 2002. For the second
quarter 2003, consolidated before-tax realized gains were $6.8 million
compared with $9.5 million for the second quarter of 2002. During 2002 and
first quarter of 2003, the Corporation and the Group continued to reduce
equity holdings in favor of investment grade fixed maturity investments in
order to reduce the effect on statutory surplus of future stock market
volatility. Management of the Corporation believes the significant
volatility of realized investment gains and losses limits the usefulness of
net income as a measure of current operating performance. Management uses
the non-GAAP financial measure of net income before realized gains and losses
to further evaluate current operating performance. Net income before
realized gains and losses is reconciled to net income in the table below:
Three months ended Six months ended
June 30 June 30
($ in millions) 2003 2002 2003 2002
- --------------- ---- ---- ---- ----
Net income before realized gains
losses $ 6.6 $ 6.9 $13.9 $18.9
After-tax realized gains and losses 4.4 6.2 17.0 21.0
----- ----- ----- -----
Net income $11.0 $13.1 $30.9 $39.9
13
For the second quarter 2003, consolidated after-tax realized gains positively
impacted net income by $4.4 million compared with $6.2 million for the second
quarter of 2002. The Corporation and the Group did not realize a material
loss on any securities sold during the second quarter of 2003. During the
second quarter of 2002, the Corporation and the Group recognized $4.3 million
in realized losses on the sale of securities in the communication industry.
These losses are attributable to the sale of Worldcom and Adelphia fixed
maturity securities.
In the first quarter of 2003, management decided to transfer a portion of its
fixed maturity securities from the available-for-sale classification into the
held-to-maturity classification. This transfer was made as the Corporation
and the Group have both the ability to hold the securities to maturity and
the positive intent to do so. At June 30, 2003, the amortized cost of the
held to maturity portfolio was $372.6 million.
Invested assets are a majority of the assets of the Corporation and the
Group. Consequently, accounting policies related to investments are
critical. See further discussion of investment accounting policies in the
"Critical Accounting Policies" section on page 37 of the Corporation's 2002
Form 10-K. The Corporation and the Group continually evaluate all of their
investments based on current economic conditions, credit loss experience and
other developments. The Corporation and the Group evaluate the difference
between the cost/amortized cost and estimated fair value of their investments
to determine whether a decline in value is temporary or other than temporary
in nature. This determination involves a degree of uncertainty. If a
decline in the fair value of a security is determined to be temporary, the
decline is recorded as an unrealized loss in shareholders' equity. If a
decline in a security's fair value is considered to be other than temporary,
the security is written down to the estimated fair value with a corresponding
realized loss recognized in the consolidated statements of income.
The assessment of whether a decline in fair value is considered temporary or
other than temporary includes management's judgement as to the financial
position and future prospects of the entity issuing the security. It is not
possible to accurately predict when it may be determined that a specific
security will become impaired. Future impairment charges could be material
to the results of operations of the Corporation and the Group. The amount of
impairment charge before tax was $2.5 million in the second quarter of 2003,
compared to $6.8 million in the second quarter of 2002, and $8.1 million and
$11.5 million for year to date 2003 and 2002, respectively.
Management believes that it will recover the cost basis in the securities
held with unrealized losses as it has both the intent and ability to hold the
securities until they mature or recover in value. Securities are sold to
achieve management's investment goals, which include the diversification of
credit risk, the maintenance of adequate portfolio liquidity and the
management of interest rate risk. In order to achieve these goals, sales of
investments are based upon current market conditions, liquidity needs and
estimates of the future market value of the individual securities.
The following table summarizes, for all available-for-sale securities, the
total gross unrealized losses, not including gross unrealized gains, by
investment category as of June 30, 2003 and December 31, 2002:
($ in millions) June 30, 2003 Dec 31, 2002
- -----------------------------------------------------------------
Fixed maturities $(15.2) $(32.7)
Equities (2.7) (10.2)
- -----------------------------------------------------------------
Total unrealized loss $(17.9) $(42.9)
As part of the evaluation of the entire $17.9 million aggregate unrealized
loss on the investment portfolio, management performed a more intensive
review of those securities which had a relatively high degree of unrealized
loss, which is the difference between cost/amortized cost and estimated fair
value. At June 30, 2003, 8 securities with an aggregate unrealized loss of
$4.9 million were determined to be in this category. Management concluded
that all of these securities were suffering temporary declines in fair
value. Of this unrealized loss amount, $2.2 million represented unrealized
losses in the securities of Delta Airlines, Inc. All securities are
monitored by portfolio managers who consider many factors such as a company's
degree of financial flexibility, management competence and industry
fundamentals in evaluating whether the decline in fair value is temporary.
Should management subsequently conclude the decline in fair value is
14
other than temporary, the book value of the security is written down to
fair value with the realized loss recognized in the consolidated statements
of income.
For all available-for-sale securities in an unrealized loss position, the
following table summarizes the length of time the securities have
continuously been in an unrealized loss position at June 30, 2003:
Amortized Fair Unrealized
($ in millions) Cost Value Loss
- --------------------------------------------------------------------
Fixed maturities
0-6 months $135.5 $130.6 $ 4.9
7-12 months 46.3 41.2 5.1
Greater than 12 months 61.9 56.7 5.2
- ---------------------------------------------------------------------
Total $243.7 $228.5 $15.2
Fair Unrealized
($ in millions) Cost Value Loss
- ---------------------------------------------------------------------
Equity
0-6 months $ 4.1 $ 3.7 $ .4
7-12 months 13.3 12.1 1.2
Greater than 12 months 11.8 10.7 1.1
- ---------------------------------------------------------------------
Total $ 29.2 $ 26.5 $ 2.7
Of the securities in an unrealized loss position as of June 30, 2003, the
only material concentration by industry segment was in the airline industry.
The amount of unrealized loss in this industry as of June 30, 2003, was $3.1
million.
The amortized cost and estimated fair value of available-for-sale fixed
maturity securities in an unrealized loss position at June 30, 2003, by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Estimated Unrealized
($ in millions) Cost Fair Value Loss
- --------------------------------------------------------------------------
Due in one year or less $ 4.0 $ 3.9 $ .1
Due after one year through
five years 16.9 14.2 2.7
Due after five years through
ten years 67.3 61.4 5.9
Due after ten years 155.5 149.0 6.5
- --------------------------------------------------------------------------
Total $243.7 $228.5 $ 15.2
Agent Relationships
The agent relationships asset is an identifiable intangible asset
representing the excess of cost over fair value of net assets acquired in
connection with the acquisition of the commercial lines business from Great
American Insurance Company in 1998. Generally Accepted Accounting Principles
(GAAP) require the Corporation to perform a periodic comparison of estimated
future cash flows to the carrying value of the intangible asset. If the
estimated future cash flows are less than the carrying value for any
individual agent included in the asset, that portion of the asset must be
written down to its estimated fair value. For the second quarter of 2003,
the agent relationship impairment was $5.8 million, compared to second
quarter 2002 impairment of $2.4 million. The calculation of impairment
follows accounting guidelines that do not permit increasing the intangible
value for agents who are projected to generate more profit than was expected
at the time of the initial assignment of the intangible value to each agent.
Overall, the estimated future cash flows for the remaining acquired agents
assigned an intangible value exceed the remaining current asset book value of
$148.9 million. The determination of impairment involves the use of
management estimates and assumptions. Due to the inherent uncertainties and
judgments involved in developing assumptions for each agent and the fact that
the asset cannot be increased for any agent,
15
further reductions in the valuation of the agent relationships asset are
likely to occur in the future. These reductions could be significant if
actual agent revenue production or profitability differ materially from
current assumptions.
Statutory Results
Management uses statutory financial criteria to analyze the Group's property
and casualty results and insurance industry regulators require the Group to
report statutory financial measures. Management analyzes statutory results
through the use of insurance industry financial measures including statutory
loss and loss adjustment expense ratios, statutory underwriting expense
ratio, statutory combined ratio, net premiums written and net premiums
earned. The statutory combined ratio is a commonly used gauge of
underwriting performance measuring the percentages of premium dollars used to
pay insurance losses and related expenses. The combined ratio is the sum of
the loss ratio, the loss adjustment expense ratio and the underwriting
expense ratio. All references to combined ratio or its components in the
MD&A are calculated on a statutory accounting basis and are calculated on a
calendar year basis unless specified as calculated on an accident year basis.
A discussion of the differences between statutory accounting and generally
accepted accounting principles in the United States is included in Item 15
pages 67 and 68 of the Corporation's Form 10-K for the year ended December
31, 2002.
At June 30, 2003 and 2002, statutory surplus, a financial measure that is
required by insurance regulators and used to monitor financial strength, was
$782.7 million and $763.2 million, respectively. The ratio of twelve months
ended net premiums written to statutory surplus as of June 30, 2003 was 1.8
to 1 compared to 1.9 to 1 at June 30, 2002.
Premium Revenue Results
Premium revenue reflects premiums earned by the Group. The Group's premiums
are earned principally on a monthly pro rata basis over the term of the
policy. Management analyzes premium revenues primarily by premiums written
in the current period. Net premiums written differs from gross premiums
written by premiums ceded to reinsurers.
The table below summarizes the increase (decrease) in property and casualty
premium results on a gross and net basis compared with same period prior year
results:
2003 increase (decrease) from 2002 ($ in millions)
Gross Premiums Written Net Premiums Written
Second Year Second Year
Quarter To Date Quarter To Date
------- ------- ------- -------
Operating Segment
- -----------------
Commercial Lines $ 4.3 $ 17.5 $ 3.7 $ 16.1
Specialty Lines 11.3 17.8 (2.2) (8.7)
Personal Lines (1.5) (31.7) (.8) (29.4)
------- ------- ------ -------
All Lines $ 14.1 $ 3.6 $ .7 $(22.0)
For the six months ended June 30, 2003, net premiums written declined 2.9%
due to agency cancellations and withdrawals from certain states, more than
offsetting premium growth in active states. Personal Lines net premiums
written declined .7% from the second quarter 2002 and 11.1% from six months
ended 2002. The quarter over quarter decrease is the result of management
decisions to cancel certain agents and withdraw from other selected markets.
These withdrawal decisions impacted Personal Lines premiums by approximately
$10.0 million in the second quarter 2003. The Commercial Lines increase was
driven by renewal price increases and new business production offset in part
by the Group's restriction and non-renewal of certain classes of business as
well as by increased competition. Commercial Lines renewal price increases
averaged 10.9% in the second quarter 2003 compared to 14.5% in the second
quarter 2002. For the first six months, average prices increased 11.5% and
15.5% in 2003 and 2002, respectively. Increased reinsurance costs on
commercial umbrella business drove the decline in net premiums written for
Specialty Lines. Specialty Lines premiums on a gross basis, before
reinsurance, increased 19.1% over second quarter 2002 and increased 16.1%
over the six months ended June 2002. Commercial umbrella,
16
the largest Specialty Lines product, recognized a 22.4% average renewal price
increase for the second quarter 2003, compared to 41.7% in the same period in
2002. Average renewal price increases were 22.7% for the six months ended
June 30, 2003, compared to 44.1% in the same period of 2002. Renewal price
increase means the average increase in premium for policies renewed by the
Group. The average increase in premium for each renewed policy is calculated
by comparing the total expiring premium for the policy with the total renewal
premium for the same policy. Renewal price increases include, among other
things, the effects of rate increases and changes in the underlying insured
exposures of the policy. Only policies issued by the Group in the previous
policy term with the same policy identification codes are included.
Therefore, renewal price increases do not include changes in premiums for
newly issued policies or business assumed through reinsurance agreements.
Renewal price increases also do not reflect the cost of any reinsurance
purchased on the policies issued.
All Lines Discussion
The combined ratio for the second quarter was 106.2%, a decrease of 3.1
points from the second quarter 2002 combined ratio of 109.3%. The combined
ratio was 107.5% compared to 107.8% for the six months ended June 30, 2003
and 2002, respectively. Catastrophe losses negatively impacted the second
quarter 2003 combined ratio by 1.2 points more than the second quarter 2002
ratio. New Jersey personal auto results positively impacted the second
quarter All Lines combined ratio by .3 points and for the first six months
negatively impacted the ratio by .6 points. New Jersey personal auto results
negatively impacted the All Lines combined ratio by 3.8 points in the second
quarter 2002 and 2.5 points for the full year 2002. Commercial auto had a
combined ratio for the quarter of 101.7%, a 4.8 point improvement over the
same period last year, despite the negative effects of an increase in large
losses. The underwriting expense ratio increased .4 points as explained
later in this MD&A.
The loss adjustment expense ratio for the second quarter of 2003 was 11.8%.
The ratio was 2.9 points lower than the second quarter 2002 loss adjustment
expense ratio of 14.7%. The year-to-date loss adjustment expense ratio was
12.7% for 2003 compared to 14.5% for 2002. The decrease was primarily the
result of efforts to more effectively manage claims legal expenses. During
the first quarter of 2003, the Group announced a reorganization of its claims
operations, including a reduction in staff, which was effective in March
2003. The reduction will result in a net savings of approximately $1.8
million in 2003, after a first quarter 2003 charge of approximately $1.0
million for severance pay and other related expenses.
The second quarter catastrophe losses were $13.9 million and accounted for
4.0 points on the combined ratio. This compares with $10.3 million and a 2.8
point catastrophe impact on the combined ratio for the same period in 2002.
The year-to-date catastrophe losses were $25.0 million and accounted for 3.6
points on the statutory combined ratio. 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 2003, there were 4 catastrophes with the largest
catastrophe generating $9.4 million in incurred losses as compared with 8
catastrophes in the second quarter of 2002 with the largest catastrophe
generating $6.1 million in incurred losses. For additional disclosure of
catastrophe losses, refer to Item 15, Losses and Loss Reserves in the Notes
to the Consolidated Financial Statements on page 65 of the Corporation's 2002
Form 10-K.
The loss and loss adjustment expense (LAE) ratios, which measure losses and
LAE as a percentage of net earned premiums, were negatively impacted by .5
points in the second quarter of 2003 by adjustments to estimated losses
related to prior years' business. In the second quarter 2002, the negative
impact was 2.5 points. The loss and LAE ratio component of the accident year
combined ratio measures losses and LAE arising from insured events that
occurred in the respective accident year. The current accident year excludes
losses and LAE for insured events that occurred in prior accident years. In
total, this increase in provisions for prior accident years' losses and LAE
recognized during the second quarter of 2003 was $1.8 million before tax
compared to $9.1 million in the second quarter of 2002.
17
The table below summarizes the impact of changes in provision for all prior
accident year losses and LAE:
Three Months Six Months
Ended June 30 Ended June 30
($ in millions) 2003 2002 2003 2002
- --------------- ---- ---- ---- ----
Statutory net liabilities, beginning
of period $2,095.8 $1,985.0 $2,078.7 $1,982.0
Increase in provision for prior
accident year claims $1.8 $9.1 $4.5 $13.0
Increase in provision for prior accident
year claims as % of premiums earned 0.5% 2.5% 0.6% 1.8%
The second quarter 2003 underwriting expense ratio, which measures
underwriting expenses as a percentage of net written premiums, was 33.6% or
..4 points higher than 33.2% for the second quarter of 2002 and 1.3 points
lower than the full year 2002 ratio of 34.9%. Management's focus on
personnel related expenses decreased the ratio by .9 points compared to
second quarter 2002. The total underwriting expense ratio increased in the
current quarter due to higher expenses related to investment in technology,
and increased sales related expenses. Total sales related expenses were near
normal levels in the second quarter 2003, but the premium related taxes and
assessments component was low in the second quarter of 2002 due to unusually
low tax assessment expenses.
The Group's internally developed software for policy administration and
rating, known as P.A.R.I.S.sm, is expected to be rolled out for all Commercial
Lines products by the end of 2003. Information systems personnel costs were
incurred during the second quarter 2003 to maintain the software and were
expensed as incurred. During the second quarter of 2002, similar costs were
capitalized as the software was in the application development phase. This
shift from development to maintenance caused the majority of the increase in
software expenses. This higher expense plus amortization of expenses
capitalized in prior years totaled $2.9 million. This increase in expenses
related to investment in technology increased the second quarter 2003
underwriting expense ratio by .8 points over the second quarter 2002.
The table below summarizes the variance between the second quarter 2002 and
the second quarter 2003 expense ratio:
Variance from
Second Qtr 2002
---------------
Underwriting expense ratio - second quarter 2002 33.2%
Additional expenses related to investment in technology .8%
Change in sales related expenses .5%
Change in personnel related expenses (.9)%
-----
Underwriting expense ratio - second quarter 2003 33.6%
The employee count continues to decline. As of June 30, 2003, the employee
count was approximately 2,800, compared with 3,127 at June 30, 2002 and
approximately 3,000 at December 31, 2002.
Segment Discussion
The Corporation's organizational structure consists of three operating units:
Commercial Lines, Specialty Lines and Personal Lines.
Commercial Lines Segment
Commercial Lines combined ratio for the second quarter of 2003 increased 6.0
points to 111.6% from 105.6% in the second quarter of 2002. The year-to-date
combined ratio was 111.4% compared with 106.9% for 2002. The increase in the
2003 combined ratio was due to a higher frequency of catastrophes and other
large property losses. The second quarter 2003 Commercial Lines loss ratio
of 63.4% increased 6.3 points from the loss ratio of 57.1% in the second
quarter of 2002. The Commercial Lines average renewal price increases for
direct premiums written was 10.9% in the current quarter compared to 14.5% in
the second quarter of 2002.
18
The commercial multi-peril combined ratio increased in the second quarter of
2003 to 112.6%, from 88.9% in the same period of 2002. In the first half of
2003, the combined ratio for commercial multi-peril was 106.9%, up 16.5
points from 90.4% in 2002. Catastrophe losses for the first half of the year
were 5.7 points above last year's level. This line of business was also
impacted by additional large non-catastrophe losses in the first half of the
year as well as adverse development on prior accident years. The 2003
accident year combined ratio for commercial multi-peril was 105.2%, 1.7
points lower than the calendar year results.
The general liability combined ratio increased in the second quarter of 2003
to 128.8%, from 118.5% in the same period of 2002. In the first half of
2003, the combined ratio for general liability was 127.0%, down 4.1 points
from 131.1% in 2002. This line of business was impacted in 2003 and 2002 by
additions to construction defect related reserves and increased estimates of
legal costs on claims from prior years. Construction defect claims filed
under general liability insurance policies involve allegations of defective
work on construction projects, such as condominiums, apartment complexes,
housing developments and office buildings. These claims usually involve
multiple parties and carriers. The loss estimates for these claims are based
on currently available information. However, given the expansion of coverage
and liability by the courts and legislatures, there is uncertainty as to the
ultimate liability. The 2003 accident year combined ratio for general
liability was 115.7%, 11.3 points lower than the calendar year results.
Workers' compensation combined ratio for the second quarter of 2003 was
113.3%, compared with 130.1% during the same period last year. The year-to-
date 2003 combined ratio was 124.1% compared to 130.7% in 2002. Although the
Group has taken actions to improve workers' compensation results, assessments
for the National Workers' Compensation Pool contributed to the unfavorable
results in both 2003 and 2002. The impact of the National Workers'
Compensation residual market pool added 8.3 points to the workers'
compensation combined ratio for six months ended June 30, 2003 and added 4.9
points in the same period of 2002.
Specialty Lines Segment
Specialty Lines combined ratio for the second quarter of 2003 was 76.0%,
compared with 92.7% in the same period of 2002. The combined ratio for the
first six months was 83.8% compared to 88.7% in 2002. The Specialty Lines
combined ratio decreased 16.7 points in the second quarter 2003 compared to
the same period last year due to favorable development of prior accident year
losses. Renewal price increases in the umbrella line of business averaged
22.4% in the second quarter of 2003, compared with 41.7% for the same quarter
in 2002. Net premiums written for the second quarter 2003 for Specialty
Lines were $43.2 million, compared to $45.3 million in the same period of
2002. Increased reinsurance costs on commercial umbrella business drove the
decline in net premiums written as Specialty Lines premiums before
reinsurance increased 19.1% in the second quarter of 2003 compared to the
same period in 2002. The inclusion of ceding commissions in 2003 and
increased reinsurance rates caused the higher reinsurance costs. The 2002
commercial umbrella reinsurance contract did not include the ceding
commission feature.
Personal Lines Segment
The Personal Lines combined ratio decreased to 107.7% in the second quarter
of 2003 from 117.1% in the second quarter of 2002. The year-to-date 2003
combined ratio was 108.9% compared to 112.0% in 2002. The second quarter's
improvement was primarily related to the withdrawal from New Jersey private
passenger auto which added 8.5 points to last year's second quarter Personal
Lines combined ratio compared to a .9 point favorable impact in the second
quarter of 2003.
The combined ratio for homeowners decreased to 113.0% from 119.5% in the
second quarter 2002. The decrease in the homeowners combined ratio resulted
from a restructuring of homeowner deductible programs as well as recently
implemented rate increases and insurance scoring. Catastrophe losses added
17.9 points to the second quarter of 2003 homeowners combined ratio compared
to 14.3 points for the second quarter 2002, and 13.5 points to the June 2003
year-to-date homeowners combined ratio, compared to 11.3 points in the same
period in 2002.
19
Private passenger auto recorded a 2003 second quarter combined ratio of
108.9% decreasing from 117.1% in the second quarter of 2002. The second
quarter's improvement was primarily related to the withdrawal from New Jersey
private passenger auto markets which adversely impacted second quarter 2002
by 13.1 points compared to favorable impact of 1.4 points in the second
quarter of 2003. The second quarter included 7.2 points of adverse
development on prior accident years for states other than New Jersey. The
year-to-date 2003 private passenger auto combined ratio decreased 3.1 points
to 108.5% from 111.6% in the same period in 2002. The product line's results
continue to benefit from the implementation of insurance scoring, elimination
of unprofitable business, the withdrawal from the New Jersey market and
targeted underwriting. The accident year combined ratio for personal auto
other than New Jersey decreased 3.6 points year to date compared to the same
period last year.
The following table presents combined ratios for both calendar year and
accident year 2003 and 2002 as of June 30, 2003:
Statutory Combined Ratios
Calendar Year Accident Year
Year to Date Year to Date Calendar Accident
(By operating segment, including June 30, June 30, Year Year
selected major product lines) 2003 2003(a) 2002 2002(a)
- ---------------------------------------------------------------------------------------------
Commercial Lines Segment 111.4% 108.7% 115.1% 102.6%
Workers' compensation 124.1% 119.7% 129.2% 119.3%
Commercial auto 103.8% 104.2% 110.2% 99.9%
General liability 127.0% 115.7% 171.3% 113.6%
CMP, fire & inland marine 106.9% 105.2% 95.8% 93.5%
Specialty Lines Segment 83.8% 96.8% 94.0% 92.2%
Commercial umbrella 91.8% 100.7% 97.7% 98.4%
Fidelity & surety 60.4% 82.7% 81.7% 74.6%
Personal Lines Segment 108.9% 107.1% 114.1% 111.0%
New Jersey personal auto 274.1% 211.9% 154.8% 138.4%
Other personal lines 107.2% 105.8% 107.9% 106.9%
Other personal auto 105.6% 102.8% 107.1% 106.4%
Homeowners 113.6% 116.7% 110.3% 111.1%
- ---------------------------------------------------------------------------------------------
Total All Lines 107.5% 106.9% 112.8% 105.1%
=============================================================================================
(a) The loss and LAE ratio component of the accident year combined ratio
measures losses and LAE arising from insured events that occurred in the
respective accident year. The current accident year excludes losses and
LAE for insured events that occurred in prior accident years. The
measurement date for accident year data is June 30, 2003. Partial and
complete accident periods may not be comparable due to seasonality, claim
reporting and development patterns, claim settlement rates and other
factors.
LIQUIDITY AND FINANCIAL STRENGTH
Investments
At June 30, 2003, the available-for-sale fixed maturity portfolio of the
Corporation and the Group had a market value of $2.9 billion, which consisted
of 96.6% investment grade securities. The available-for-sale fixed maturity
portfolio includes non-investment grade securities and non-rated securities
that had a fair value of $98.6 million and comprised 3.4% of the available-
for-sale fixed maturity portfolio. This compares to a fair value of $105.3
million at December 31, 2002. These securities comprised 3.4% of the
available-for-sale fixed maturity portfolio at December 31, 2002. The held-
to-maturity fixed maturity portfolio of the Corporation and the Group is
accounted for at amortized cost, which was $372.6 million at June 30, 2003
and consists entirely of investment grade securities.
The Corporation and the Group classify securities as investment grade or non-
investment grade based upon the higher of the ratings provided by Standard &
Poor's Ratings Group (S&P) and Moody's Investors Service (Moody's). When a
security is not rated by either S&P or Moody's, the Corporation and the Group
20
base the classification on other rating agencies, including the National
Association of Insurance Commissioners. The market value of available-for-
sale split-rated fixed maturity securities (i.e., those having an investment
grade rating from one rating agency and a below investment grade rating from
another rating agency) was $30.7 million at June 30, 2003 and $45.8 million
at December 31, 2002.
Investments in below investment grade securities have greater risks than
investments in investment grade securities. The risk of default by borrowers
that issue below investment grade securities is significantly greater because
these borrowers are often highly leveraged and more sensitive to adverse
economic conditions, including a recession or a sharp increase in interest
rates. Additionally, investments in below investment grade securities are
generally unsecured and subordinate to other debt. Investment grade
securities are also subject to significant risks, including additional
leveraging, changes in control of the issuer or worse than previously
expected operating results. In most instances, investors are unprotected
with respect to these risks, the effects of which can be substantial.
Following is a table displaying non-investment grade and non-rated available-
for-sale securities in an unrealized loss position at June 30, 2003 and
December 31, 2002:
Amortized Fair Unrealized
(in millions) Cost Value Loss
- ----------------------------------------------------------------------
June 30, 2003 $56.8 $49.9 $ 6.9
December 31, 2002 $73.0 $60.9 $12.1
The investment portfolio of the Corporation and the Group include non-
publicly traded securities such as private placements, non-exchange traded
equities and limited partnerships which are carried at fair value. Fair
values are based on valuations from pricing services, brokers and other
methods as determined by management to give the most accurate price. The
carrying value of this portfolio at June 30, 2003 was $311.8 million compared
to $319.4 million at December 31, 2002.
The consolidated fixed maturity portfolio of the Corporation and the Group
has an intermediate duration and a laddered maturity structure. The duration
of the fixed maturity portfolio is approximately 4 years as of June 30, 2003.
The Corporation and the Group always remain fully invested and do not time
markets. The Corporation and the Group also have no off-balance sheet
investments or arrangements as defined by section 401(a) of the Sarbanes-
Oxley Act of 2002.
At June 30, 2003, the Corporation and the Group's equity portfolios were
8.5%, or $307.7 million, of the total investment portfolio. The Corporation
and the Group mark the value of their equity portfolios to fair market value
on their balance sheets. As a result, shareholders' equity and statutory
surplus fluctuate with changes in the value of the equity portfolio. As of
June 30, 2003, the equity portfolio consisted of stocks in 46 separate
entities in 36 different industries. As of June 30, 2003, 32.5% of the
Corporation's equity portfolio was invested in five companies and the largest
single position was 9.0% of the equity portfolio.
For further discussion of the Corporation's investments, see Item 1 pages 8
through 10 of the Corporation's Form 10-K for the year ended December 31,
2002.
Loss and Loss Adjustment Expenses
The Group's largest liabilities are reserves for losses and loss adjustment
expenses. The accounting policies related to the loss and loss adjustment
expense reserves are considered critical. Loss and loss adjustment expense
reserves are established for all incurred claims and are carried on an
undiscounted basis before any credits for reinsurance recoverable. Actual
losses and loss adjustment expenses may change with further developments.
These reserves amounted to $2.5 billion at June 30, 2003 and $2.4 billion at
December 31, 2002. As of June 30, 2003, the reserves by operating segment
were as follows: $1.6 billion in Commercial Lines, $.4 billion in Specialty
Lines and $.5 billion in Personal Lines.
21
Results for the three months and six months periods of 2003 and 2002 were
impacted by losses and loss adjustment expenses for prior accident years as
shown in the table below:
Three Months Six Months
Ended Ended
June 30 June 30 Year
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Prior Accident Year Loss & LAE
by Segment (in millions)
- ------------------------------
Commercial Lines $ 7.6 $ 8.4 $ 10.4 $14.2 $73.9
Specialty Lines (6.3) (2.9) (10.2) (7.1) (2.2)
Personal Lines 0.5 3.6 4.3 5.9 12.7
------ ------ ------- ------ ------
Total All Lines Accident
Year Development $ 1.8 $ 9.1 $ 4.5 $13.0 $84.4
Prior Accident Year Loss & LAE
(in millions)
- ------------------------------
Accident Year 2002 $ (5.5) $(26.2)
Accident Year 2001 (1.6) $(14.5) 7.3 $(34.9) $(15.8)
Accident Year 2000 and Prior 8.9 23.6 23.4 47.9 100.2
------- ------- ------- ------- -------
Total Accident Year
Development $ 1.8 $ 9.1 $ 4.5 $ 13.0 $ 84.4
For the Commercial Lines operating segment, the losses and loss adjustment
expenses for prior accident years recorded during the first half of 2003 were
concentrated in the commercial multiple peril and general liability product
lines. Comparable Commercial Lines amounts for the first half of 2002 were
concentrated in the workers' compensation and general liability product
lines.
For the Specialty Lines operating segment, the reduction in losses and loss
adjustment expenses for prior accident years recorded during the first half
of 2003 and 2002 occurred in the bond and commercial umbrella product lines.
For the Personal Lines operating segment the losses and loss adjustment
expenses for prior accident years recorded during the first half of 2003 and
2002 were concentrated in the private passenger auto product line.
The losses and loss adjustment expenses on prior accident years totaling $1.8
million for the second quarter 2003 reflect an update to estimates for
reserves based on new information during the second quarter of 2003,
resulting in recognition during 2003. Each quarter a thorough loss reserve
study is conducted using data and other information updated and available as
of the end of each quarter. Based on these studies, liabilities for loss and
loss adjustment expenses are established for the estimated ultimate costs of
settling claims for insured events, for both reported claims and incurred but
not reported claims. As more information becomes available and claims are
settled in subsequent periods, the estimated liabilities are adjusted upward
or downward.
Losses and loss adjustment expenses for prior accident years were recognized
during the year 2003 due to new information that caused a revision to prior
estimates for loss and loss reserves as described above. There is
considerable uncertainty in these estimates for reasons such as: the
external environment including coverage litigation, judicial decisions,
legislative changes, claimants and juries attitudes with respect to
settlements; claim frequency and severity; the emergence of unusual types or
sizes of claims; changes in underwriting quality of the book of business over
time; and changes in claims handling which affects the payment rate or case
reserve adequacy.
Because of the inherent uncertainties in estimating ultimate costs of claims,
actual loss and loss adjustment expenses may deviate substantially from the
amounts recorded. Furthermore, the timing, frequency and extent of
adjustments to the estimated liabilities cannot be predicted since conditions
and events which established historical loss and loss adjustment expense
development and which serve as the basis for estimating ultimate claim cost
may not occur in exactly the same manner, if at all.
22
Cash Flow
Net cash generated by operations was $33.4 million for the first six months
of the year compared with $32.9 million for the same period in 2002. Net
cash used in investing was $55.8 million in 2003 compared with $86.9 million
during the first six months of 2002. Current operational liquidity needs of
the Group are expected to be met by scheduled maturities of investments,
dividend payments, interest payments and cash balances. Cash provided by
financing operations was $1.1 million in the first six months of 2003
compared with cash used of $5.1 million in the first six months of 2002. The
2002 cash used included the repayment of the Corporation's $205.0 million
credit facility and issuance of new convertible debt with net proceeds of
$194.0 million.
Debt
As of June 30, 2003, the Corporation had $205.5 million of principal
outstanding on debt, including a $4.2 million low interest loan with the
state of Ohio. During the year 2002, the Corporation completed an offering
of 5.00% convertible notes, in an aggregate principal amount of $201.3
million, due March 19, 2022 that generated net proceeds of $194.0 million.
The issuance and related costs are amortized over the life of the notes and
are recorded as related fees. The liability for debt is reported on the
balance sheet net of the unamortized fees. The Corporation uses the
effective interest rate method to record the interest and related fee
amortization. Interest is payable on March 19 and September 19 of each year,
beginning September 19, 2002. The notes may be converted into shares of the
Corporation's common stock under certain conditions, including: if the price
per share of the Corporation's common stock reaches specific thresholds; if
the credit rating of the notes is below a specified level or withdrawn, or if
the notes have no credit rating during any period; or if specified corporate
transactions have occurred. The conversion rate is 44.2112 shares per each
$1,000 principal amount of notes, subject to adjustment in certain
circumstances. If all outstanding notes were converted, the total
outstanding common shares would increase by 8.9 million shares. The
convertible debt impact on earnings per share is based on the "if-converted"
method. The impact on diluted earnings per share is contingent on whether or
not certain criteria have been met for conversion. As of June 30, 2003, the
common share price criterion had not been met and, therefore, no adjustment
to the number of diluted shares on the earnings per share calculation was
made for the convertible debt. On or after March 23, 2005, the Corporation
has the option to redeem all or a portion of the notes that have not been
previously converted at the following redemption prices (expressed as a
percentage of principal amount):
During the twelve Redemption
months commencing Price
- ----------------- ----------
March 23, 2005 102%
March 19, 2006 101%
March 19, 2007 until maturity of the notes 100%
The holders of the notes have the option to require the Corporation to
purchase all or a portion of their notes on March 19 of 2007, 2012 and 2017
at 100% of the principal amount of the notes. In addition, if a change in
control of the Corporation occurs anytime prior to maturity, holders may
require the Corporation to purchase for cash all or a portion of their notes
at 100% of the principal amount plus accrued interest.
On July 31, 2002, the Corporation also entered into a revolving credit
agreement. Under the terms of the credit agreement, the lenders agreed to
make loans to the Corporation in an aggregate amount up to $80.0 million for
general corporate purposes. The agreement requires the Corporation to
maintain minimum net worth of $800.0 million. The credit agreement also
includes a minimum statutory surplus requirement for The Ohio Casualty
Insurance Company of $625.0 million through September 30, 2003, increasing to
$650.0 million thereafter. Additionally, other covenants and customary
provisions are included in the agreement. The credit agreement expires on
March 15, 2005. The Corporation has not drawn on the revolver as of June 30,
2003.
As of June 30, 2003, the Corporation had cash and marketable fixed maturity
investments totaling $45.5 million available for operating expenses, debt
service and other purposes. In addition to its investment income, the
Corporation is dependent on dividend payments from the Company for additional
liquidity.
23
Insurance regulatory authorities impose various restrictions and prior
approval requirements on the payment of dividends by insurance companies .
Dividend payments to the Corporation from the Company are limited to
approximately $112.5 million during 2003 without prior approval of the Ohio
Insurance Department based on 100% of the Company's net income for the year
ended December 31, 2002. Additional restrictions may result from the minimum
surplus requirements contained in the credit agreement.
Rating Agencies
Regularly the Group's financial strength is reviewed by independent rating
agencies. These agencies may upgrade, downgrade, or affirm their previous
ratings of the Group. These agencies may also place an outlook on the
Group's rating.
On September 6, 2002, A.M. Best Company affirmed the Group's financial
strength rating of "A-" and assigned a positive outlook. In addition, A.M.
Best Company assigned an initial rating of "bbb" to Ohio Casualty
Corporation's convertible notes.
On March 13, 2002, Moody's Investor Services assigned its "Baa2" rating to
the Corporation's convertible notes. On November 27, 2002, Moody's
downgraded the Group's "A2" financial strength rating to "A3" and placed a
stable outlook on the Group's rating. Moody's also announced that it placed
a "Baa3" rating on the Corporation's convertible notes. On June 16, 2003,
Moody's Investor Services (Moody's) affirmed its "Baa3" rating on the
convertible notes and affirmed the "A3" insurance financial strength ratings
on the Group's intercompany pool. Moody's also placed a stable outlook on
its rating. In addition, Moody's also assigned prospective ratings to the
$500 million universal shelf registration filed on May 8, 2003. The
prospective ratings for senior unsecured debt, subordinate debt and preferred
stock were "Baa3", "Ba1" and "Ba2", respectively.
On March 14, 2002, Fitch, Inc. (Fitch) assigned its "BBB-" rating to the
Corporation's convertible notes and placed a stable outlook on its rating.
On November 5, 2002, Fitch, affirmed its "BBB-" rating on the Corporation's
convertible notes and placed a stable outlook on its rating.
On March 11, 2002, Standard & Poor's Rating Services (S&P) removed its
negative outlook and placed a stable outlook on the Group's "BBB" financial
strength rating. S&P also announced that it assigned its "BB" senior debt
rating to the Corporation's convertible notes. Following the Corporation's
announcement of third quarter 2002 results, S&P revised its outlook to
negative from stable and indicated that the Group's financial strength rating
would be reviewed for possible downgrade. On April 30, 2003, S&P affirmed
its "BBB" financial strength rating for the Group and maintained its negative
outlook. On May 13, 2003 S&P assigned prospective ratings to Ohio Casualty's
universal shelf. The prospective ratings for senior unsecured debt,
subordinate debt and preferred stock were "BB", "B+" and "B", respectively.
Forward Looking Statements
Ohio Casualty Corporation publishes 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 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. The operations, performance and development of the Corporation's
business are subject to risks and uncertainties which may cause actual
results to differ materially from those contained in or supported by the
forward looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Corporation'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; rating agency actions; acts of war and terrorist activities;
ability of Ohio Casualty to retain business
24
acquired from the Great American Insurance Company; ability to achieve
targeted expense savings; changes in estimated future cash flows and related
impairment charges for the agent relationships intangible asset; ability to
achieve premium targets and profitability goals; and general economic and
market conditions.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the information about market
risk set forth in the Corporation's Annual Report on Form 10-K.
ITEM 4. Controls and Procedures
(a) The Company's Chief Executive Officer and Chief Financial Officer
evaluated the disclosure controls and procedures (as defined
under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended) as of the end of the period covered by
this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective.
(b) There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
PART II
ITEM 1. Legal Proceedings
There are no material pending legal proceedings against the
Corporation or its subsidiaries other than litigation arising in
connection with settlement of insurance claims as described on
page 11 in the Corporation's 2002 Form 10-K.
ITEM 2. Changes in Securities and Use of Proceeds - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and reports on Form 8-K
I. Reports on Form 8-K:
The Corporation filed a Form 8-K on April 25, 2003 to report under
Item 9, the filing of a press release announcing an expected range
of first quarter 2003 earnings. Exhibits to the Form 8-K consisted
of the press release dated April 25, 2003.
The Corporation filed a Form 8-K on May 8, 2003 to report under
Item 9, the filing of a press release announcing the Corporation's
first quarter 2003 results and certain supplemental financial
information. Exhibits to the Form 8-K consisted of the press
release dated May 8, 2003.
The Corporation filed a Form 8-K on May 8, 2003 to report under
Items 5 and 12, the filing of the non-GAAP financial measures
reconciliation to GAAP basis data on the Corporation's consolidated
statement of income. Also reported under Item 5, the filing of a
press release announcing a Universal Shelf Registration on Form S-3.
Exhibits to the Form 8-K consisted of Consent of Independent Auditors
and the press release dated May 8, 2003.
25
The Corporation filed a Form 8-K on May 15, 2003 to report under
Item 5, the filing of a press release announcing an estimated net
catastrophe loss impact on second quarter earnings. Exhibits to
the Form 8-K consisted of the press release dated May 15, 2003.
II. Exhibits:
31.1 Certification of Chief Executive Officer of Ohio Casualty
Corporation in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of Ohio Casualty
Corporation in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer of Ohio Casualty
Corporation in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer of Ohio Casualty
Corporation in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002
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 12, 2003 /s/Donald F. McKee
---------------------------------
Donald F. McKee, Executive Vice
President and Chief Financial Officer
(on behalf of Registrant and as
Principal Accounting Officer)
26