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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 September 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 November 3, 2003 of the voting stock
held by non-affiliates of the registrant was $862,476,600.
On November 3, 2003, there were 60,932,788 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
September 30, December 31,
(Dollars in millions, except share data) (Unaudited) 2003 2002
- -------------------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(amortized cost: $2,772.8 and $2,967.5) $ 2,971.7 $ 3,139.8
Held-to-maturity, at amortized cost
(fair value: $358.9) 358.6 -
Equity securities, at fair value
(cost: $82.6 and $92.6) 309.7 312.5
Short-term investments, at fair value 66.5 49.8
- -------------------------------------------------------------------------------------------
Total investments 3,706.5 3,502.1
Cash 17.9 12.4
Premiums and other receivables, net of allowance for bad
debts of $5.0 and $4.3, respectively 362.2 324.7
Deferred policy acquisition costs 175.0 181.3
Property and equipment, net of accumulated depreciation of
$150.6 and $145.9, respectively 93.1 97.8
Reinsurance recoverable 518.8 419.9
Agent relationships, net of accumulated amortization of
$37.4 and $34.1, respectively 145.9 161.3
Interest and dividends due or accrued 39.6 46.0
Deferred income taxes - 2.4
Other assets 29.1 31.1
- -------------------------------------------------------------------------------------------
Total assets $ 5,088.1 $ 4,779.0
===========================================================================================
Liabilities
Insurance reserves:
Losses $ 2,096.5 $ 1,978.8
Loss adjustment expenses 455.4 454.9
Unearned premiums 723.0 668.7
Debt 198.1 198.3
Deferred income taxes 27.7 -
Other liabilities 448.1 419.6
- -------------------------------------------------------------------------------------------
Total liabilities 3,948.8 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 276.6 246.2
Retained earnings 984.6 936.7
Treasury stock, at cost:
(Shares: 11,514,466; 11,692,976) (152.0) (154.3)
- -------------------------------------------------------------------------------------------
Total shareholders' equity 1,139.3 1,058.7
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,088.1 $ 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 September 30,
(Dollars in millions, except share data) (Unaudited) 2003 2002
- -------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 360.4 $ 357.0
Investment income less expenses 51.0 51.7
Investment gains realized, net 5.9 (5.5)
- -------------------------------------------------------------------------------------------
Total revenues 417.3 403.2
Losses and benefits for policyholders 220.0 250.3
Loss adjustment expenses 39.4 73.6
General operating expenses 28.0 31.5
Amortization of agent relationships 1.8 2.7
Write-down of agent relationships 1.1 54.0
Amortization of deferred policy acquisition costs 97.3 94.3
Depreciation and amortization expense 3.8 4.5
- -------------------------------------------------------------------------------------------
Total expenses 391.4 510.9
- -------------------------------------------------------------------------------------------
Income before income taxes 25.9 (107.7)
Income tax expense:
Current 0.6 (17.1)
Deferred 8.1 (20.7)
- -------------------------------------------------------------------------------------------
Total income tax expense 8.7 (37.8)
- -------------------------------------------------------------------------------------------
Net income $ 17.2 $ (69.9)
===========================================================================================
Average shares outstanding - basic 60,889,649 60,642,919
===========================================================================================
Earnings per share - basic:
Net income, per share $ 0.28 $ (1.15)
===========================================================================================
Average shares outstanding - diluted 61,413,662 60,642,919
===========================================================================================
Earnings per share - diluted:
Net income, per share $ 0.28 $ (1.15)
===========================================================================================
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
Nine Months
Ended September 30,
(Dollars in millions, except share data) (Unaudited) 2003 2002
- -------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 1,060.9 $ 1,082.7
Investment income less expenses 155.6 153.3
Investment gains realized, net 32.0 26.8
- -------------------------------------------------------------------------------------------
Total revenues 1,248.5 1,262.8
Losses and benefits for policyholders 642.5 686.0
Loss adjustment expenses 128.2 178.6
General operating expenses 87.5 82.2
Amortization of agent relationships 5.6 8.2
Write-down of agent relationships 9.8 61.6
Amortization of deferred policy acquisition costs 291.5 279.4
Depreciation and amortization expense 10.5 12.8
- -------------------------------------------------------------------------------------------
Total expenses 1,175.6 1,308.8
- -------------------------------------------------------------------------------------------
Income before income taxes 72.9 (46.0)
Income tax expense:
Current 11.1 (11.6)
Deferred 13.7 (4.4)
- -------------------------------------------------------------------------------------------
Total income tax expense 24.8 (16.0)
- -------------------------------------------------------------------------------------------
Net income $ 48.1 $ (30.0)
===========================================================================================
Average shares outstanding - basic 60,818,375 60,425,065
===========================================================================================
Earnings per share - basic:
Net income, per share $ 0.79 $ (0.50)
===========================================================================================
Average shares outstanding - diluted 61,181,263 60,425,065
===========================================================================================
Earnings per share - diluted:
Net income, per share $ 0.79 $ (0.50)
===========================================================================================
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 and Subsidiaries
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Common Accumulated
Additional stock other Total
(Dollars in millions, except Common paid-in 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 (30.0) (30.0)
Net change in unrealized gain
net of deferred income tax
benefit of $6.4 (11.8) (11.8)
---------
Comprehensive income (41.8)
Net issuance of treasury
stock (550,918 shares) (0.1) (0.1) 7.3 7.1
Retirement of treasury stock
(22,000,000 shares) (2.8) (4.0) (283.6) 290.4 -
- --------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 2002 $ 9.0 $ - $ 21.1 $ 262.6 $ 907.7 $ (155.2) $1,045.2
==========================================================================================================================
Balance
January 1, 2003 $ 9.0 $ - $ 21.1 $ 246.2 $ 936.7 $ (154.3) $1,058.7
Net income 48.1 48.1
Net change in unrealized gain
net of deferred income tax
expense of $16.4 30.4 30.4
---------
Comprehensive income 78.5
Net issuance of treasury
stock (178,510 shares) (0.2) 2.3 2.1
- --------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 2003 $ 9.0 $ - $ 21.1 $ 276.6 $ 984.6 $ (152.0) $1,139.3
==========================================================================================================================
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
Nine Months
Ended September 30,
(Dollars in millions) (Unaudited) 2003 2002
- -----------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Operations
Net income $ 48.1 $ (30.0)
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves 172.5 190.7
Income taxes 19.5 (12.3)
Premiums and other receivables (37.5) 9.2
Deferred policy acquisition costs 6.3 (12.8)
Reinsurance recoverable (98.9) (74.3)
Other assets (0.2) 5.8
Other liabilities 15.2 (26.0)
Amortization and write-down of agent relationships 15.4 69.8
Depreciation and amortization 15.3 11.9
Investment gains (32.0) (26.8)
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 123.7 105.2
- -----------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of securities:
Fixed maturity, available-for-sale (906.6) (923.8)
Fixed maturity, held-to-maturity (6.8) -
Equity (6.0) (3.2)
Proceeds from sales of securities:
Fixed maturity, available-for-sale 687.2 667.6
Equity 35.6 66.9
Proceeds from maturities and calls of securities:
Fixed maturity, available-for-sale 72.2 40.3
Fixed maturity, held-to-maturity 14.8 -
Equity 11.8 -
Property and equipment:
Purchases (6.6) (16.0)
Sales 1.5 0.2
- -----------------------------------------------------------------------------------------
Net cash used from investing activities (102.9) (168.0)
- -----------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Debt:
Proceeds from the issuance of convertible notes - 201.3
Payments (0.4) (205.5)
Payments of deferred financing costs - (0.4)
Payments of issuance costs - (7.3)
Proceeds from exercise of stock options 1.8 6.7
- -----------------------------------------------------------------------------------------
Net cash generated (used) in financing activities 1.4 (5.2)
- -----------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 22.2 (68.0)
Cash and cash equivalents, beginning of period 62.2 92.3
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 84.4 $ 24.3
=========================================================================================
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.
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 September 30, 2003, the
Consolidated Statements of Income for the three and nine months ended
September 30, 2003 and 2002, the Consolidated Statements of Shareholders'
Equity for the nine months ended September 30, 2003 and 2002, and the
Consolidated Statements of Cash Flows for the nine months ended September 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 September 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. The unaudited Consolidated
Financial Statements should be read 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
September 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 Nine months ended
September 30 September 30
($ in millions) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------
Net income (loss)
As reported $17.2 $(69.9) $48.1 $(30.0)
Add: Stock-based employee
compensation reported in net
income, net of related tax effect 0.0 0.1 0.1 0.2
Deduct: Total stock-based employee
compensation, net of related tax
effects 1.6 1.1 4.5 3.6
----- ------- ----- -------
Pro forma $15.6 $(70.9) $43.7 $(33.4)
Basic EPS
As reported $0.28 $(1.15) $0.79 $(0.50)
Pro Forma $0.26 $(1.17) $0.72 $(0.55)
Diluted EPS
As reported $0.28 $(1.15) $0.79 $(0.50)
Pro Forma $0.25 $(1.17) $0.71 $(0.55)
========================================================================================
NOTE III - EARNINGS PER SHARE
Basic and diluted earnings per share are summarized as follows (in millions,
except per share data):
Three months ended Nine months ended
September 30 September
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 17.2 $ (69.9) $ 48.1 $ (30.0)
Weighted average common shares
outstanding - basic (thousands) 60,890 60,643 60,818 60,425
Basic earnings per weighted
average share $ 0.28 $ (1.15) $ 0.79 $ (0.50)
=========================================================================================
Weighted average common shares
outstanding (thousands) 60,890 60,643 60,818 60,425
Effect of dilutive securities
(thousands) 524 - 363 -
- -----------------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted (thousands) 61,414 60,643 61,181 60,425
Diluted earnings per weighted
average share $ 0.28 $ (1.15) $ 0.79 $ (0.50)
==========================================================================================
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
Nine Months Ended September 30
($ in millions)
Commercial Lines Segment 2003 2002
- --------------------------------------------------------------------
Net premiums written $611.9 $ 579.9
% Change 5.5% 9.7%
Net premiums earned 578.8 535.3
% Change 8.1% 0.3%
Underwriting loss (before tax) (70.4) (112.9)
Loss ratio 61.6% 61.6%
Loss expense ratio 12.4% 19.9%
Underwriting expense ratio 36.1% 36.5%
Combined ratio 110.1% 118.0%
Specialty Lines Segment 2003 2002
- ---------------------------------------------------------------------
Net premiums written $124.5 $132.7
% Change (6.2)% 25.8%
Net premiums earned 120.6 111.3
% Change 8.4% 12.3%
Underwriting gain (loss)
(before tax) 18.8 (10.7)
Loss ratio 26.7% 43.2%
Loss expense ratio 12.9% 14.8%
Underwriting expense ratio 43.4% 43.4%
Combined ratio 83.0% 101.4%
Personal Lines Segment 2003 2002
- ----------------------------------------------------------------------
Net premiums written $364.0 $388.2
% Change (6.2)% (21.4)%
Net premiums earned 361.6 436.0
% Change (17.1)% (12.9)%
Underwriting loss (before tax) (31.4) (40.9)
Loss ratio 70.0% 70.5%
Loss expense ratio 11.3% 12.8%
Underwriting expense ratio 27.1% 29.3%
Combined ratio 108.4% 112.6%
Total Property & Casualty 2003 2002
- ----------------------------------------------------------------------
Net premiums written $1,100.4 $1,100.8
% Change 0.0% (2.5)%
Net premiums earned 1,061.0 1,082.6
% Change (2.0)% (4.5)%
Underwriting loss (before tax) (83.0) (164.5)
Loss ratio 60.5% 63.3%
Loss expense ratio 12.1% 16.5%
Underwriting expense ratio 34.0% 34.8%
Combined ratio 106.6% 114.6%
Impact of catastrophe losses
on combined ratio 3.9% 1.6%
All other 2003 2002
- ---------------------------------------------------------------------
Revenues $ 4.7 $ .6
Expenses 9.4 8.6
- ---------------------------------------------------------------------
Net loss before income taxes $(4.7) $(8.0)
Reconciliation of Revenues 2003 2002
- ----------------------------------------------------------------------
Net premiums earned for reportable
segments $1,061.0 $1,082.6
Investment income 152.5 152.6
Realized gains 27.7 27.3
- ---------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 1,241.2 1,262.5
Property and casualty statutory
to GAAP adjustment 2.6 (.3)
- ---------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 1,243.8 1,262.2
Other segment revenues 4.7 .6
- ---------------------------------------------------------------------
Total revenues $1,248.5 $1,262.8
=====================================================================
Reconciliation of Underwriting
loss (before tax) 2003 2002
- ----------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(Statutory basis) $(83.0) $(164.5)
Statutory to GAAP adjustment (7.5) 16.0
- ----------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(GAAP basis) (90.5) (148.5)
Net investment income 155.6 153.3
Realized gains 32.0 26.8
Write-down and amortization of
agent relationships (15.4) (69.8)
Other losses (8.8) (7.8)
- ---------------------------------------------------------------------
Income (loss) before income taxes $ 72.9 $ (46.0)
=====================================================================
9
Three Months Ended September 30
($ in millions)
Commercial Lines Segment 2003 2002
- ----------------------------------------------------------------------
Net premiums written $196.8 $180.9
% Change 8.8% 9.8%
Net premiums earned 197.7 181.9
% Change 8.7% 4.3%
Underwriting loss (before tax) (14.7) (72.1)
Loss ratio 60.2% 73.2%
Loss expense ratio 11.1% 26.4%
Underwriting expense ratio 36.3% 40.2%
Combined ratio 107.6% 139.9%
Specialty Lines Segment 2003 2002
- ----------------------------------------------------------------------
Net premiums written $48.4 $ 47.9
% Change 1.0% 24.5%
Net premiums earned 41.6 42.7
% Change (2.6)% 22.1%
Underwriting gain (loss)
(before tax) 4.7 (11.7)
Loss ratio 35.3% 52.3%
Loss expense ratio 8.0% 23.9%
Underwriting expense ratio 38.9% 45.7%
Combined ratio 82.2% 121.9%
Personal Lines Segment 2003 2002
- ----------------------------------------------------------------------
Net premiums written $127.1 $121.9
% Change 4.3% (26.0)%
Net premiums earned 121.2 132.3
% Change (8.4)% (19.7)%
Underwriting loss (before tax) (10.9) (15.5)
Loss ratio 71.3% 71.2%
Loss expense ratio 11.7% 11.6%
Underwriting expense ratio 24.8% 31.4%
Combined ratio 107.8% 114.2%
Total Property & Casualty 2003 2002
- ----------------------------------------------------------------------
Net premiums written $372.3 $350.7
% Change 6.2% (4.7)%
Net premiums earned 360.4 356.9
% Change 1.0% (4.6)%
Underwriting loss (before tax) (20.9) (99.3)
Loss ratio 61.1% 70.0%
Loss expense ratio 10.9% 20.6%
Underwriting expense ratio 32.7% 37.9%
Combined ratio 104.7% 128.5%
Impact of catastrophe losses
on combined ratio 4.5% 1.0%
All other 2003 2002
- ----------------------------------------------------------------------
Revenues $ 2.3 $ 0.8
Expenses 2.9 3.1
- ----------------------------------------------------------------------
Net loss before income taxes $ (.6) $ (2.3)
Reconciliation of Revenues 2003 2002
- ----------------------------------------------------------------------
Net premiums earned for
reportable segments $360.4 $356.9
Investment income 50.4 51.4
Realized gains (losses) 3.3 (6.4)
- ----------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 414.1 401.9
Property and casualty statutory
to GAAP adjustment 1.0 .5
- ---------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 415.1 402.4
Other segment revenues 2.2 .8
- ---------------------------------------------------------------------
Total revenues $417.3 $403.2
=====================================================================
Reconciliation of Underwriting
loss (before tax) 2003 2002
- ----------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(Statutory basis) $(20.9) $ (99.3)
Statutory to GAAP adjustment (4.3) 4.8
- ----------------------------------------------------------------------
Property and casualty under-
writing loss (before tax)
(GAAP basis) (25.2) (94.5)
Net investment income 51.0 51.7
Realized gains (losses) 5.9 (5.5)
Write-down and amortization of
agent relationships (2.9) (56.7)
Other losses (2.9) (2.7)
- ---------------------------------------------------------------------
Income (loss) before income taxes $ 25.9 $(107.7)
=====================================================================
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 allocated the 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. Quarterly, agent relationships are evaluated as events or
circumstances indicate a possible inability to recover their carrying amount.
In the third quarter of 2003, the Corporation wrote off the agent
relationships asset by $1.1 million for agency cancellations and impairment.
The third quarter 2002 included a write-down of $54.0 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 20 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 $51.2 million and $6.1
million at September 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 September 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
September 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 September 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 September 30, 2003 was
$4.1 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 September 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 effective for
financial statements issued for the first period ending after December 15,
2003 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 provisions of FAS 150 do not
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 $48.1 million, or $0.79 per share for
the nine months ending September 30, 2003, compared with a net loss of $30.0
million, or $.50 per share in the same period of 2002. For the third quarter
of 2003, the net income was $17.2 million, or $0.28 per share, compared with
a net loss of $69.9 million, or $1.15 per share in the same quarter of 2002.
Investment Results
Year-to-date 2003 consolidated before-tax investment income was $155.6
million increasing from $153.3 million for the same period last year. The
investment income effective tax rate for the first nine months of 2003 was
33.9%, compared with 33.3% in 2002. Third quarter consolidated before-tax
investment income was $51.0 million, compared with $51.7 million for the same
period last year. Investment income for the quarter included $5.3 million of
interest received on a federal income tax settlement, largely offset by a
$4.9 million change in accounting estimate for amortization relating
primarily to interest only mortgage-backed securities and asset-backed
securities. This change in accounting estimate is part of a conversion to a
new investment accounting system. The investment income effective tax rate
for the third quarter of 2003 was 35.1%, compared with 33.1% in the third
quarter of 2002.
Year-to-date 2003 consolidated before-tax realized gains were $32.0 million,
compared with $26.8 million for the same period in 2002. For the third
quarter 2003, consolidated before-tax realized gains were $5.9 million,
compared with a realized loss of $5.5 million for the third quarter of 2002.
Management of the Corporation believes the significant volatility of realized
investment gains and losses limits the usefulness of net income as a measure
of current operating performance. Therefore, management uses the non-GAAP
financial measure of net income before realized gains and losses to further
evaluate current operating performance. Net income before realized gains and
losses is reconciled to net income in the table below:
Three months ended Nine months ended
September 30 September 30
($ in millions) 2003 2002 2003 2002
- --------------- ---- ---- ---- ----
Net income before realized gains losses $13.4 $(66.3) $27.3 $(47.4)
After-tax realized gains and losses 3.8 (3.6) 20.8 17.4
----- ------- ----- -------
Net income (loss) $17.2 $(69.9) $48.1 $(30.0)
13
For the third quarter 2003, consolidated after-tax realized gains positively
impacted net income by $3.8 million compared with a negative impact of $3.6
million for the third quarter of 2002. The Corporation and the Group did not
realize a material loss on any securities sold during the third quarter of
2003. During the third quarter of 2002, the Corporation and the Group
recognized $3.1 million in realized losses on the sale of securities in the
communication industry. These losses were largely attributable to the sale
of Qwest Communications 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 September 30, 2003, the amortized cost of
the held to maturity portfolio was $358.6 million.
Invested assets comprise 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, reported earnings 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 the other comprehensive income component of
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 $2.0 million in the third quarter of 2003,
compared to $5.3 million in the third quarter of 2002, and $11.4 million and
$16.8 million for year to date 2003 and 2002, respectively.
Management believes that it will recover the cost basis in the securities
held with unrealized losses as it has both the intent and ability to hold the
securities until they mature or recover in value. Securities are sold to
achieve management's investment goals, which include the diversification of
credit risk, the maintenance of adequate portfolio liquidity and the
management of interest rate risk. In order to achieve these goals, sales of
investments are based upon current market conditions, liquidity needs and
estimates of the future market value of the individual securities.
The following table summarizes, for all available-for-sale securities, the
total gross unrealized losses, not including gross unrealized gains, by
investment category as of September 30, 2003 and December 31, 2002:
($ in millions) Sept. 30, 2003 Dec 31, 2002
- ----------------------------------------------------------------------
Fixed maturities $(16.7) $(32.7)
Equities (.6) (10.2)
- --------------------------------------------------------------------
Total unrealized loss $(17.3) $(42.9)
As part of the evaluation of the entire aggregate unrealized loss on the
investment portfolio, management performed a more intensive review of those
securities which had a relatively high degree of unrealized loss, which is
the difference between cost/amortized cost and estimated fair value.
Management concluded that all of these securities were suffering temporary
declines in fair value. All securities are monitored by portfolio managers
who consider many factors such as a company's degree of financial
flexibility, management competence and industry fundamentals in evaluating
whether the decline in fair value is
14
temporary. Should management subsequently conclude the decline in fair value
is other than temporary, the book value of the security is written down to
fair value with the realized loss recognized in the consolidated statements
of income.
For all available-for-sale securities in an unrealized loss position, the
following table summarizes the length of time the securities have
continuously been in an unrealized loss position at September 30, 2003:
Amortized Fair Unrealized
($ in millions) Cost Value Loss
- -------------------------------------------------------------------------
Fixed maturities
0-6 months $316.6 $306.2 $ (10.4)
7-12 months 31.2 28.6 (2.6)
Greater than 12 months 45.3 41.6 (3.7)
- -------------------------------------------------------------------------
Total $393.1 $376.4 $(16.7)
Fair Unrealized
($ in millions) Cost Value Loss
- -------------------------------------------------------------------------
Equity
0-6 months $1.1 $1.0 $(.1)
7-12 months - - -
Greater than 12 months 5.5 5.0 (.5)
- -------------------------------------------------------------------------
Total $6.6 $6.0 $(.6)
The amortized cost and estimated fair value of available-for-sale fixed
maturity securities in an unrealized loss position at September 30, 2003, by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Estimated Unrealized
($ in millions) Cost Fair Value Loss
- ------------------------------------------------------------------------------
Due in one year or less $ 4.0 $ 3.1 $ (.9)
Due after one year through
five years 13.3 12.2 (1.1)
Due after five years through
ten years 62.8 60.6 (2.2)
Due after ten years 313.0 300.5 (12.5)
- ------------------------------------------------------------------------------
Total $393.1 $376.4 $(16.7)
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) requires 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 third quarter of 2003, the
agent relationship impairment was $1.1 million, compared to third quarter
2002 impairment of $54.0 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
$145.9 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, 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. Management has
considered these and other factors in determining the remaining useful life
of the asset.
15
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 September 30, 2003 and 2002, statutory surplus, a financial measure that
is required by insurance regulators and used to monitor financial strength,
was $813.9 million and $679.9 million, respectively. The ratio of twelve
months ended net premiums written to statutory surplus as of September 30,
2003 was 1.8 to 1 compared to 2.1 to 1 at September 30, 2002.
Premium Revenue Results
Premium revenue reflects premiums earned by the Group. The Group's premiums
are earned principally on a monthly pro rata basis over the term of the
policy. Management analyzes premium revenues primarily by premiums written
in the current period. Net premiums written differs from gross premiums
written by premiums ceded to reinsurers.
The table below summarizes the increase (decrease) in property and casualty
premium results on a gross and net basis compared with same period prior year
results:
2003 increase (decrease) from 2002 ($ in millions)
Gross Premiums Written Net Premiums Written
Third Year Third Year
Quarter To Date Quarter To Date
------- ------- ------- -------
Operating Segment
Commercial Lines $11.3 $ 28.7 $15.9 $ 32.0
Specialty Lines 9.7 27.5 0.5 (8.2)
Personal Lines 2.3 (29.3) 5.2 (24.2)
----- ------- ----- -------
All Lines $23.3 $ 26.9 $21.6 $ (0.4)
For the nine months ended September 30, 2003, net premiums written were flat
compared to the comparable period. Agency cancellations and withdrawals from
certain states essentially offset premium growth in active states. Personal
Lines net premiums written increased 4.3% from the third quarter 2002 but
declined 6.2% from nine months ended 2002. The Personal Lines increase in
the third quarter was due to rate increases, increased renewal rates and
higher new business production. The decline for the nine month period is the
result of management decisions to cancel certain agents and withdraw from
other selected markets. These decisions impacted Personal Lines premiums by
approximately $52.5 million in 2003 and $12.1 million in third 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 10.1% in the third quarter
2003 compared to 14.8% in the third quarter 2002. For the first nine months,
average renewal prices increased 11.8% and 16.4% in 2003 and 2002,
respectively. Specialty Lines increased slightly in the third quarter 2003
despite increased reinsurance costs on commercial umbrella business.
Specialty Lines premiums on a gross basis, before reinsurance, increased
14.7% over third quarter 2002 and increased 15.6% over the nine months ended
September 2002. Commercial umbrella, the largest Specialty Lines product,
recognized a 15.7% average renewal price increase for the third quarter 2003,
compared to 42.2% in the same period in 2002. Average renewal price
increases were
16
19.5% for the nine months ended September 30, 2003, compared to 44.4% 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 third quarter was 104.7%, a decrease of 23.8
points from the third quarter 2002 combined ratio of 128.5%. The combined
ratio was 106.6% compared to 114.6% for the nine months ended September 30,
2003 and 2002, respectively. The improvement in combined ratio for the
quarter and year to date is largely related to less adverse development for
prior years' losses and loss adjustment expenses (LAE). Catastrophe losses
negatively impacted the third quarter 2003 combined ratio by 3.5 points more
than the third quarter 2002 ratio.
The LAE ratio for the third quarter of 2003 was 10.9%. The ratio was 9.7
points lower than the third quarter 2002 loss adjustment expense ratio of
20.6%. The year-to-date loss adjustment expense ratio was 12.1% for 2003
compared to 16.5% for 2002. The prior year LAE ratio included reserve
adjustments for prior years' losses, primarily related to construction defect
claims. In addition to last year's adjustment, 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 is expected to 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 third quarter catastrophe losses were $16.2 million and accounted for 4.5
points on the combined ratio. This compares with $3.7 million and a 1.0
point catastrophe impact on the combined ratio for the same period in 2002.
The year-to-date catastrophe losses were $41.2 million and accounted for 3.9
points on the combined ratio. The effect of Hurricane Isabel was $9.4
million for the third quarter of 2003, which added 2.6 points to the combined
ratio. The effect of future catastrophes, especially severe weather
patterns, on the Corporation's results cannot be accurately predicted and can
have a material adverse impact on the Corporation's results. During the
third quarter of 2003, there were 9 catastrophes with the largest catastrophe
generating $9.4 million in incurred losses as compared with 7 catastrophes in
the third quarter of 2002 with the largest catastrophe generating $1.1
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 LAE ratio, which measures losses and LAE as a percentage of net
earned premiums, was negatively impacted in the third quarter of 2003 by
adjustments to estimated losses related to prior years' business. 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 third quarter
of 2003 was $5.2 million before tax, compared to $62.2 million before tax in
the third quarter of 2002.
17
The table below summarizes the impact of changes in provision for all prior
accident year losses and LAE:
Three Months Nine Months
Ended September 30 Ended September 30
($ in millions) 2003 2002 2003 2002
- --------------- ---- ---- ---- ----
Statutory net liabilities,
beginning of period $2,102.9 $2,002.9 $2,078.7 $1,982.0
Increase in provision for prior
accident year claims $5.2 $62.2 $9.7 $75.2
Increase in provision for prior
accident year claims as % of
premiums earned 1.4% 17.4% 0.9% 6.9%
The third quarter 2003 underwriting expense ratio, which measures
underwriting expenses as a percentage of net written premiums, was 32.7%
compared with 37.9% for the third quarter of 2002, and 2.1 points lower than
the full year 2002 ratio of 34.8%. Management's focus on personnel related
expenses decreased the ratio by 1.7 points compared to third quarter 2002.
Lower commission expense and other sales related expenses decreased the ratio
by 3.1 points and lower agent or premium balances charged off decreased the
ratio by 1.2 points. Similar to previous quarters in 2003, the total
underwriting expense ratio included higher expenses related to investment in
technology.
The Group's internally developed software for policy administration and
rating, known as P.A.R.I.S.sm, has been rolled out for the Commercial Lines
segment. Information systems personnel costs were incurred during the third
quarter 2003 to maintain the software and were expensed as incurred. During
the third 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 for the quarter. This increase in expenses related to
investment in technology increased the third quarter 2003 underwriting
expense ratio by .8 points over the third quarter 2002.
The table below summarizes the variance between the third quarter 2002 and
the third quarter 2003 expense ratio:
Variance from
Third Qtr 2002
Underwriting expense ratio - third quarter 2002 37.9%
Additional expenses related to investment in technology 0.8%
Lower sales related expenses (3.1)%
Lower agent/premium balances charged off (1.2)%
Reduction in personnel related expenses (1.7)%
-------
Underwriting expense ratio - third quarter 2003 32.7%
The employee count continues to decline. As of September 30, 2003, the
employee count was 2,757, compared with 3,034 at September 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
The Commercial Lines combined ratio for the third quarter of 2003 decreased
32.3 points to 107.6% from 139.9% in the third quarter of 2002. The year-to-
date combined ratio was 110.1% compared with 118.0% in the same period of
2002. The 2002 combined ratio included adverse reserve development on prior
years losses, primarily related to construction defect risks and was
concentrated in the Commercial Lines general liability and commercial multi-
peril product lines as well as in the Specialty Lines commercial umbrella
product line. The third quarter 2003 Commercial Lines loss ratio included
3.2 points related to catastrophe losses compared to 0.6 points in the third
quarter of 2002 and included higher than expected large non-
18
catastrophe losses compared to last year. Catastrophe losses for the first
nine months of the year were 2.6 points above last year's level. The
Commercial Lines average renewal price increases for direct premiums written
was 10.1% in the current quarter compared to 14.8% in the third quarter of
2002.
The commercial multi-peril, businessowners, fire and inland marine combined
ratio increased in the third quarter of 2003 to 107.8%, from 106.0% in the
same period of 2002. In the first nine months of 2003, the combined ratio
for commercial multi-peril related product lines was 107.2%, up 11.4 points
from 95.8% in 2002. These product lines were also impacted by additional
large non-catastrophe losses in the first nine months of the year as well as
adverse development on prior accident years. The 2003 accident year combined
ratio for the commercial multi-peril related product lines was 104.7%, 2.5
points lower than the calendar year results.
The general liability combined ratio decreased in the third quarter of 2003
to 108.9%, from 325.4% in the same period of 2002. In the first nine months
of 2003, the combined ratio for general liability was 120.8%, down 74.9
points from 195.7% in 2002. This product line was negatively impacted in
2002 by additions to construction defect related reserves and increased
estimates of legal costs on claims from prior years. The 2003 accident year
combined ratio for general liability was 111.5%, 9.3 points lower than the
calendar year results.
The workers' compensation product line combined ratio for the third quarter
of 2003 was 106.7%, compared with 126.8% during the same period last year.
The year-to-date 2003 combined ratio was 118.4% compared to 129.3% in 2002.
Although the Group has taken actions to improve workers' compensation
results, assessments for the National Workers' Compensation Pool negatively
impacted results in both 2003 and 2002. The impact of the National Workers'
Compensation residual market pool added 5.4 points to the workers'
compensation combined ratio for nine months ended September 30, 2003 and
added 2.4 points in the same period of 2002.
Specialty Lines Segment
The Specialty Lines combined ratio for the third quarter of 2003 was 82.2%, a
39.7 point decrease compared with 121.9% in the same period of 2002. The
combined ratio for the first nine months was 83.0%, compared to 101.4% in
2002. The third quarter 2002 results included increased reserves related to
construction defect risks in the commercial umbrella product line. Renewal
price increases in the commercial umbrella product line averaged 15.7% in the
third quarter of 2003, compared with 42.2% for the same quarter in 2002. Net
premiums written for the third quarter 2003 for Specialty Lines increased to
$48.4 million, from $47.9 million in the same period of 2002 despite
increased reinsurance costs on commercial umbrella business. Specialty Lines
premiums before reinsurance increased 14.7% in the third quarter of 2003
compared to the same period in 2002.
Personal Lines Segment
The Personal Lines combined ratio improved to 107.8% in the third quarter of
2003 from 114.2% in the third quarter of 2002. This improvement is notable
given the high volume of catastrophe losses in the quarter which added 8.2
points to the combined ratio in third quarter 2003, compared to 1.9 points in
the prior year. The improvement in the combined ratio was driven by the
withdrawal from New Jersey private passenger auto (NJPPA), a significant
improvement in the non-catastrophe experience for homeowners, and a decline
in the underwriting expense ratio. These improvements were partially offset
by adverse development for personal auto other than New Jersey which added
2.4 points to the combined ratio for Personal Lines for the third quarter
2003. The year-to-date 2003 combined ratio was 108.4% compared to 112.6% in
2002.
The homeowners product line combined ratio improved to 116.1% from 118.8% in
the third quarter 2002. The 2.7 point decline in the combined ratio resulted
from improved operating costs as well as the impact of premium rate
increases. Catastrophe losses added 23.2 points to the third quarter of 2003
homeowners combined ratio compared to 5.3 points for the third quarter 2002,
and 16.6 points to the September 2003 year-to-date homeowners combined ratio,
compared to 9.3 points in the same period in 2002.
19
The personal auto 2003 third quarter combined ratio was 107.8% decreasing
from 113.0% in the third quarter of 2002. The current quarter's improvement
for this product line was primarily related to the withdrawal from NJPPA
markets which adversely impacted third quarter 2002 by 15.5 points compared
to an adverse impact of 1.2 points in the third quarter of 2003. The third
quarter 2003 included 3.8 points of adverse development on prior accident
years for states other than New Jersey for personal auto. The year-to-date
2003 private passenger auto combined ratio decreased 3.5 points to 108.3%
from 111.8% 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 4.2 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 September 30, 2003:
Statutory Combined Ratios
Calendar Year Accident Year
Year to Date Year to Date Calendar Accident
(By operating segment, including Sept 30, Sept 30, Year Year
selected major product lines) 2003 2003(a) 2002 2002(a)
- ----------------------------------------------------------------------------------------
Commercial Lines Segment 110.1% 107.7% 118.0% 101.8%
Workers' compensation 118.4% 117.5% 129.3% 117.2%
Commercial auto 104.6% 104.5% 109.7% 99.1%
General liability 120.8% 111.5% 195.7% 112.1%
CMP, BOP, fire & inland marine 107.2% 104.7% 95.8% 93.4%
Specialty Lines Segment 83.0% 93.0% 101.4% 91.8%
Commercial umbrella 89.0% 96.3% 102.3% 97.8%
Fidelity & surety 66.0% 82.4% 96.8% 74.7%
Personal Lines Segment 108.4% 106.3% 112.6% 110.9%
New Jersey personal auto 449.6% 237.9% 150.1% 136.4%
Other personal lines 107.1% 105.8% 105.9% 107.1%
Other personal auto 106.0% 102.7% 101.3% 106.9%
Homeowners 114.3% 116.7% 114.9% 110.7%
- --------------------------------------------------------------------------------------
Total All Lines 106.6% 105.7% 114.6% 104.6%
======================================================================================
(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 September 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 September 30, 2003, the available-for-sale fixed maturity portfolio of the
Corporation and the Group had a market value of $3.0 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 $100.5 million and comprised 3.4% of the available-
for-sale fixed maturity portfolio and 3.0% of the consolidated fixed maturity
portfolio of the Corporation and the Group. 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 $358.6 million at September 30,
2003 and consists entirely of investment grade securities.
20
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
base the classification on other rating services, including the Securities
Valuation Office of 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 $32.5 million
at September 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 negative 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 September 30, 2003 and
December 31, 2002:
Amortized Fair Unrealized
(in millions) Cost Value Loss
- ------------------------------------------------------------------------
September 30, 2003 $53.4 $50.1 $ (3.3)
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 provide the most accurate price. The
carrying value of this portfolio at September 30, 2003 was $300.3 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 4.5 years as of September
30, 2003. The Corporation and the Group 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 September 30, 2003, the Corporation and the Group's equity portfolios were
$309.7 million, or 8.4% 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
September 30, 2003, the equity portfolio consisted of stocks in 44 separate
entities in 35 different industries. As of September 30, 2003, 32.7% of the
Corporation's equity portfolio was invested in five companies and the largest
single position was 8.7% 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
21
change with further developments. These reserves amounted to $2.6 billion at
September 30, 2003 and $2.4 billion at December 31, 2002. As of September
30, 2003, the reserves by operating segment were as follows: $1.6 billion in
Commercial Lines, $0.5 billion in Specialty Lines and $0.5 billion in
Personal Lines.
Results for the three months and nine 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 Ended Nine Months Ended
September 30 September 30 Year
2003 2002 2003 2002 2002
------------------ ----------------- ----
Prior Accident Year Loss & LAE
by Segment (in millions)
- ------------------------------
Commercial Lines $ 3.7 $50.5 $ 14.1 $64.8 $73.9
Specialty Lines (1.9) 12.4 (12.1) 5.3 (2.2)
Personal Lines 3.4 (0.7) 7.7 5.1 12.7
------ ------ ------- ----- ------
Total All Lines
Accident Year Development $ 5.2 $62.2 $ 9.7 $75.2 $84.4
Prior Accident Year Loss & LAE
(in millions)
- ------------------------------
Accident Year 2002 $ (7.3) $(33.5)
Accident Year 2001 (1.2) $13.5 6.1 $(21.4) $(15.8)
Accident Year 2000 and Prior 13.7 48.7 37.1 96.6 100.2
------- ----- ------- ------- -------
Total Accident Year
Development $ 5.2 $62.2 $ 9.7 $75.2 $ 84.4
For the Commercial Lines operating segment, the losses and loss adjustment
expenses for prior accident years recorded during the first nine months of
2003 were concentrated in the commercial multiple peril and general liability
product lines. Comparable Commercial Lines amounts for the first nine months
of 2002 were concentrated in the commercial auto, 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 nine
months of 2003 and 2002 occurred in the fidelity and surety 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 nine months of
2003 and 2002 were concentrated in the personal auto product line.
The losses and loss adjustment expenses on prior accident years totaling $5.2
million for the third quarter 2003 reflect an update to estimates for
reserves based on new information during the third 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
22
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.
Cash Flow
Net cash generated by operations was $123.7 million for the first nine months
of the year compared with $105.2 million for the same period in 2002. Net
cash used in investing was $102.9 million in 2003 compared with $168.0
million during the first nine months of 2002. In 2002, the Corporation and
the Group sold equities as part of an investment management decision to
reduce equity holdings in favor of investment grade bonds in order to reduce
the potential for volatility in statutory surplus. 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 $1.4 million in the first nine months of
2003 compared with cash used of $5.2 million in the first nine 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 September 30, 2003, the Corporation had $205.3 million of debt
outstanding including a $4.1 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 September 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
23
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 September 30,
2003.
As of September 30, 2003, the Corporation had cash and marketable fixed
maturity investments totaling $41.0 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.
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 August 22, 2003, A.M. Best Company
revised its debt rating criteria and assigned a "bbb-" to the 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, subordinated 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,
subordinated 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
24
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
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 August 7, 2003 to report under
Item 9, the filing of a press release announcing the Corporation's
second quarter 2003 results and certain Supplemental Financial
Information. Exhibits to the Form 8-K consisted of the press
release dated August 7, 2003 and Supplemental Financial Information.
25
The Corporation filed a Form 8-K on September 11, 2003 to report
under Item 5, a financial presentation to discuss the Corporation's
Strategic Plan for 2004-2006. Exhibits to the Form 8-K consisted
of the slide presentation materials of the Corporation dated
September 12, 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)
November 10, 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