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UNITED STATES 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 quarterly period ended March 31, 2004.
--------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-05544
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, including area code)
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
On May 3, 2004, there were 61,333,117 shares of common stock
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 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 24
Item 4. Controls and Procedures 24
PART II
Item 1. Legal Proceedings 24
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 SEC Rule
13(a)-14(a)/15(d)-14(a)
Exhibit 31.2 Certification of Chief Financial Officer of Ohio Casualty
Corporation in accordance with SEC Rule
13(a)-14(a)/15(d)-14(a)
Exhibit 32.1 Certification of Chief Executive Officer of Ohio Casualty
Corporation in accordance with Section 1350 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer of Ohio Casualty
Corporation in accordance with Section 1350 of the
Sarbanes-Oxley Act of 2002
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in millions, except share data) (Unaudited) 2004 2003
- -------------------------------------------------------------------------------------------
Assets
Investments, at fair value:
Fixed maturities:
Available for sale, at fair value
(amortized cost: $2,929.1 and $2,851.2) $ 3,156.9 $ 3,022.2
Held-to-maturity, at amortized cost
(fair value: $346.9 and $354.2) 342.7 356.1
Equity securities, at fair value
(cost: $77.7 and $77.9) 343.2 329.0
Short-term investments, at fair value 34.0 40.4
- -------------------------------------------------------------------------------------------
Total investments 3,876.8 3,747.7
Cash 17.3 16.5
Premiums and other receivables, net of allowance for bad
debts of $4.2 and $4.2, respectively 346.1 347.9
Deferred policy acquisition costs 168.0 169.3
Property and equipment, net of accumulated depreciation of
$159.5 and $152.9, respectively 87.5 89.2
Reinsurance recoverable 632.0 592.7
Agent relationships, net of accumulated amortization of
$39.7 and $39.1, respectively 135.4 142.6
Interest and dividends due or accrued 42.5 47.5
Other assets 43.8 15.5
- -------------------------------------------------------------------------------------------
Total assets $ 5,349.4 $ 5,168.9
===========================================================================================
Liabilities
Insurance reserves:
Losses $ 2,226.3 $ 2,163.7
Loss adjustment expenses 467.0 464.1
Unearned premiums 707.4 703.0
Debt 198.0 198.0
Reinsuance treaty funds held 158.3 150.5
Deferred income taxes 46.3 12.8
Other liabilities 311.4 331.0
- -------------------------------------------------------------------------------------------
Total liabilities 4,114.7 4,023.1
Shareholders' Equity
Common stock, $.125 par value
Authorized: 150,000,000
Issued shares: 72,418,344; 72,418,344 9.0 9.0
Accumulated other comprehensive income 321.3 254.7
Retained earnings 1,052.2 1,033.4
Treasury stock, at cost:
(Shares: 11,196,553; 11,461,301) (147.8) (151.3)
- -------------------------------------------------------------------------------------------
Total shareholders' equity 1,234.7 1,145.8
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,349.4 $ 5,168.9
===========================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
62-75 of the Corporation's 2003 Form 10-K.
2
ITEM 1. Continued
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended March 31,
(Dollars in millions, except share data) (Unaudited) 2004 2003
- -------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 361.1 $ 349.3
Investment income less expenses 50.5 53.2
Investment gains realized, net 3.7 19.3
- -------------------------------------------------------------------------------------------
Total revenues 415.3 421.8
Losses and benefits for policyholders 195.2 208.8
Loss adjustment expenses 38.3 47.4
General operating expenses 140.2 125.1
Amortization of agent relationships 1.8 1.9
Write-down of agent relationships 5.4 2.9
Amortization of deferred policy acquisition costs 92.3 97.5
Deferral of deferred poliy acquisition costs (91.0) (94.9)
Depreciation and amortization expense 3.2 3.3
- -------------------------------------------------------------------------------------------
Total expenses 385.4 392.0
- -------------------------------------------------------------------------------------------
Income before income taxes 29.9 29.8
Income tax expense:
Current 11.3 7.7
Deferred (2.2) 2.2
- -------------------------------------------------------------------------------------------
Total income tax expense 9.1 9.9
Income before cumulative effect of an accounting change 20.8 19.9
Cumulative effect of an accounting change, net of tax 1.6 0.0
- -------------------------------------------------------------------------------------------
Net income $ 19.2 $ 19.9
===========================================================================================
Average shares outstanding - basic 61,064,480 60,728,489
===========================================================================================
Earnings per share - basic:
Net income, per share $ 0.31 $ 0.33
===========================================================================================
Average shares outstanding - diluted 62,143,049 60,968,486
===========================================================================================
Earnings per share - diluted:
Net income, per share $ 0.31 $ 0.33
===========================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
62-75 of the Corporation's 2003 Form 10-K.
3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Accumulated
stock other Total
(Dollars in millions, except Common purchase comprehensive Retained Treasury shareholders'
share data) (Unaudited) Stock warrants income earnings stock equity
- ----------------------------------------------------------------------------------------------------------------
Balance
January 1, 2003 $ 9.0 $ 21.1 $ 246.2 $ 936.7 $ (154.3) $ 1,058.7
Net income 19.9 19.9
Change in unrealized gain,
net of deferred income tax
expense of $5.8 (10.8) (10.8)
----------
Comprehensive income 9.1
Net issuance of treasury
stock (33,599 shares) 0.4 0.4
- -----------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2003 $ 9.0 $ 21.1 $ 235.4 $ 956.6 $ (153.9) $ 1,068.2
=================================================================================================================
Balance
January 1, 2004 $ 9.0 $ - $ 254.7 $1,033.4 $ (151.3) $ 1,145.8
Net income 19.2 19.2
Change in unrealized gain,
net of deferred income tax
expense of $25.3 47.1 47.1
Change in minimum pension
liability net of deferred
income tax benefit of $10.5 19.5 19.5
-----------
Comprehensive income 85.8
Issuance of restricted stock
(20,000 shares) (0.4) (0.4)
Net issuance of treasury
stock (264,748 shares) 3.5 3.5
- -----------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2004 $ 9.0 $ - $ 321.3 $1,052.2 $ (147.8) $ 1,234.7
=================================================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
62-75 of the Corporation's 2003 Form 10-K.
4
ITEM 1. Continued
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended March 31,
(Dollars in millions) (Unaudited) 2004 2003
- -------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Operating Activities
Net income $ 19.2 $ 19.9
Adjustments to reconcile net income to cash from
operating activities:
Changes in:
Insurance reserves 69.9 46.0
Reinsurance treaty funds held 7.8 11.9
Income taxes 8.0 17.1
Premiums and other receivables 1.8 (3.9)
Deferred policy acquisition costs 1.3 2.5
Reinsurance recoverable (39.3) (45.0)
Other assets (3.2) 3.7
Other liabilities (16.4) (33.6)
Amortization and write-down of agent relationships 7.2 4.8
Depreciation and amortization 4.9 3.5
Investment gains (3.7) (19.3)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 57.5 7.6
- -------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of securities:
Fixed maturity, available-for-sale (285.3) (300.6)
Fixed maturity, held-to-maturity (0.8) -
Proceeds from sales of securities:
Fixed maturity, available-for-sale 139.6 231.3
Equity 1.9 28.6
Proceeds from maturities and calls of securities:
Fixed maturity, available-for-sale 62.5 13.1
Fixed maturity, held-to-maturity 13.5 -
Equity 3.3 3.9
Property and equipment
Purchases (0.9) (1.7)
Sales 0.2 0.2
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (66.0) (25.2)
- -------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Debt:
Payments (0.1) (0.2)
Proceeds from exercise of stock options 3.0 0.3
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2.9 0.1
- -------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (5.6) (17.5)
Cash and cash equivalents, beginning of period 56.9 62.2
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 51.3 $ 44.7
=================================================================================================
Accompanying notes are an integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on pages
62-75 of the Corporation's 2003 Form 10-K.
5
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). All
dollar amounts presented in the Notes to Consolidated Financial Statements
are in millions unless otherwise noted.
NOTE I - INTERIM ADJUSTMENTS
We prepared the Consolidated Balance Sheet as of March 31, 2004 and the
Consolidated Statements of Income, Shareholders' Equity and Cash Flows all
for the three months ended March 31, 2004 and 2003, without an audit. In the
opinion of management, all adjustments necessary to fairly present the
financial position, results of operations and cash flows at March 31, 2004
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, 2003. The results of operations for the period ended
March 31, 2004 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:
Three Months Ended March 31
(in millions, except per share data) 2004 2003
- --------------------------------------------------------------------------
Net income
As reported $19.2 $19.9
Add: Stock-based employee compensation
reported in net income, net of related
tax effect - 0.1
Deduct: Total stock-based employee
compensation, net of related tax effects 1.3 1.5
------ ------
Pro forma $17.9 $18.5
Basic EPS
As reported $0.31 $0.33
Pro Forma $0.29 $0.30
Diluted EPS
As reported $0.31 $0.33
Pro Forma $0.29 $0.30
=========================================================================
6
NOTE III - EARNINGS PER SHARE
Basic and diluted earnings per share are summarized as follows:
Three Months Ended March 31
(in millions, except per share data) 2004 2003
- --------------------------------------------------------------------------
Net income $19.2 $19.9
Weighted average common shares
outstanding - basic (thousands) 61,064 60,728
Income before cumulative effect of
an accounting change $ 0.34 -
Cumulative effect of an accounting change $(0.03) -
Basic net income per weighted
average share $ 0.31 $0.33
==========================================================================
Weighted average common shares
outstanding (thousands) 61,064 60,728
Effect of dilutive securities (thousands) 1,079 240
- --------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted (thousands) 62,143 60,968
Income before cumulative effect of
an accounting change $ 0.34 -
Cumulative effect of an accounting change $(0.03) -
Diluted net income per weighted
average share $ 0.31 $0.33
==========================================================================
NOTE IV -- SEGMENT INFORMATION
The Corporation has determined its reportable segments based upon its method
of internal reporting, which is organized by product line. The property and
casualty segments are Commercial, Specialty, and Personal Lines. These
segments generate revenues by selling a wide variety of personal, commercial
and surety insurance products. The Corporation also has an all other segment
which derives its revenues from investment income.
Each segment of the Corporation is managed separately. The property and
casualty segments are managed by assessing the performance and profitability
of the segments through analysis of industry financial measurements including
statutory loss, loss adjustment and underwriting expense ratios, statutory
combined ratio, premiums written, premiums earned and statutory underwriting
gain/loss. The following tables present information by segment as it is
reported internally to management. Asset information by reportable segment
is not reported, since the Corporation does not produce such information
internally.
7
Three Months Ended March 31
($ in millions)
Commercial Lines Segment 2004 2003
- -------------------------------------------------------------------------
Net premiums written $212.2 $205.2
% Change 3.4% 6.4%
Net premiums earned 197.8 189.8
% Change 4.2% 9.0%
Underwriting loss (before tax) (2.6) (26.8)
Specialty Lines Segment 2004 2003
- --------------------------------------------------------------------------
Net premiums written $34.8 $ 32.9
% Change 5.8% (16.7)%
Net premiums earned 41.7 38.4
% Change 8.6% 28.4%
Underwriting gain (before tax) 6.1 5.4
Personal Lines Segment 2004 2003
- --------------------------------------------------------------------------
Net premiums written $117.0 $114.1
% Change 2.5% (20.0)%
Net premiums earned 121.6 121.1
% Change 0.4% (22.8)%
Underwriting loss (before tax) (7.4) (10.4)
Total Property & Casualty 2004 2003
- --------------------------------------------------------------------------
Net premiums written $364.0 $352.2
% Change 3.4% (6.1)%
Net premiums earned 361.1 349.3
% Change 3.4% (3.2)%
Underwriting loss (before tax) (3.9) (31.8)
All Other 2004 2003
- --------------------------------------------------------------------------
Revenues $ 1.5 $ 1.8
Write-down and amortization of agent
relationships (7.2) (4.8)
Other expenses (3.2) (2.9)
- --------------------------------------------------------------------------
Net loss before income taxes $(8.9) $(5.9)
Reconciliation of Revenues 2004 2003
- --------------------------------------------------------------------------
Net premiums earned for reportable segments $361.1 $349.3
Net investment income 49.6 51.5
Realized gains, net 5.0 16.4
- --------------------------------------------------------------------------
Total property and casualty revenues
(Statutory basis) 415.7 417.2
Property and casualty statutory to GAAP
adjustment (1.9) 2.8
- --------------------------------------------------------------------------
Total revenues property and casualty
(GAAP basis) 413.8 420.0
Other segment revenues 1.5 1.8
- --------------------------------------------------------------------------
Total revenues $415.3 $421.8
==========================================================================
Reconciliation of Underwriting Loss
(before tax) 2004 2003
- --------------------------------------------------------------------------
Property and casualty underwriting
loss (before tax) (Statutory basis) $ (3.9) $(31.8)
Statutory to GAAP adjustment (10.0) (3.2)
- --------------------------------------------------------------------------
Property and casualty underwriting
loss (before tax) (GAAP basis) (13.9) (35.0)
Net investment income 50.5 53.2
Realized gains, net 3.7 19.3
Write-down and amortization of agent
relationships (7.2) (4.8)
Other expenses (3.2) (2.9)
- --------------------------------------------------------------------------
Income before income taxes and cumulative
effect of an accounting change $ 29.9 $ 29.8
==========================================================================
8
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. Quarterly, agent relationships are
evaluated as events or circumstances indicate a possible inability to recover
their carrying amount. As a result of the evaluation, the agent relationship
asset was written down before tax by $5.4 and $2.9 in the first quarter of
2004 and 2003, respectively, for additional agency cancellations and for
certain agents determined to be impaired based on updated estimated future
undiscounted cash flows that were insufficient to recover the carrying amount
of the asset for the agent. 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.
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 Statement of Position 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. Capitalized software
costs and accumulated amortization in the consolidated balance sheet were
$52.8 and $8.2 at March 31, 2004 and $52.0 and $7.2 at December 31, 2003,
respectively.
NOTE VII - CONVERTIBLE DEBT
The Corporation has $205.0 of outstanding debt, including 5.00% convertible
notes (Notes) due March 19, 2022 in an aggregate principal amount of $201.3.
The Notes are reported on the consolidated balance sheet net of unamortized
issuance-related costs of $6.9 at March 31, 2004. The issuance and related
costs are being amortized over the life of the Notes and are being 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. 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 will be 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 March 31, 2004 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 months commencing Redemption Price
- ----------------------------------- ----------------
March 23, 2005 102%
March 19, 2006 101%
March 19, 2007 until maturity of the Notes 100%
9
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 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 $.4 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
$.2 annually. These fees are expensed when incurred by the Corporation. The
agreement requires the Corporation to maintain minimum net worth of $800.0.
The credit facility agreement also includes a minimum statutory surplus for
The Ohio Casualty Insurance Company of $650.0. The credit agreement will
expire on March 15, 2005. Additionally, other financial covenants and
customary provisions, as defined in the agreement, exist. At March 31, 2004,
the Corporation was in compliance with all financial covenants and
provisions. The outstanding loan amount of the revolving line of credit was
zero at March 31, 2004.
During 1999, the Corporation signed a $6.5 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 March 31, 2004, 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 $.6 and expires in November 2009.
The remaining balance at March 31, 2004 was $3.8.
NOTE VIII - CONTINGENCIES
In the fourth quarter of 2001, Ohio Casualty of New Jersey, Inc. (OCNJ)
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 to assume its renewal obligations. The
amount was taken as a charge in the fourth quarter of 2001 with payments made
over the course of twelve months beginning in early 2002. The contract
stipulates that a premiums-to-surplus ratio of 2.5 to 1 must be maintained on
the transferred business during the periods of March 2002 through December
2004. The final calculation is based upon the statutory insurance expense
exhibit which is due April 1, 2005. If this criteria is not met, OCNJ will
have to pay up to $15.6 to Proformance to maintain this premiums-to-surplus
ratio. As of March 31, 2004, the Group has evaluated the contingency based
upon preliminary financial data provided by Proformance and has calculated an
estimated liability of $9.0, which has been recognized in the consolidated
financial statements. The Group has requested additional financial
information from Proformance in order to verify the Group's actual liability.
The Corporation is involved in litigation and administrative proceedings
arising in the ordinary course of business, which, in the opinion of
management, after considering established reserves, are not expected to have
a material adverse effect on the financial condition, liquidity, or results
of operations of the Corporation. Current litigation includes five separate
proceedings making class action claims for which class certification has been
sought in two of the proceedings. No class certification has been granted at
this time.
NOTE IX - INVESTMENTS
During the first quarter of 2003, the Corporation and the Group transferred
$368.8 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.
NOTE X - EMPLOYEE BENEFITS
The Corporation has a non-contributory defined benefit retirement plan and a
contributory health care plan.
10
The net periodic pension cost as of March 31 is determined as follows:
(in millions) 2004 2003
- -------------------------------------------------------------------------
Service cost earned during the period $ 2.1 $ 1.8
Interest cost on projected benefit obligation 4.5 4.6
Expected return on plan assets (5.3) (5.4)
Amortization of accumulated losses 0.7 -
Amortization of unrecognized prior service cost (0.1) 0.1
Curtailment cost 0.1 -
- --------------------------------------------------------------------------
Net periodic pension cost $ 2.0 $ 1.1
==========================================================================
The Corporation contributed approximately $7.5 in the first quarter of 2004
to the defined benefit retirement plan.
In March 2004, the Corporation announced changes to the defined benefit
retirement plan which will be effective June 30, 2004, which will freeze
accrued benefits under the plan's current formula and incorporate a new
benefit formula beginning July 2004. As a result of these changes and staff
reductions announced in the first quarter, the Corporation recognized a
curtailment charge of $.1 in the first quarter of 2004.
The components of the Corporation's net periodic postretirement benefit cost
as of March 31:
(in millions) 2004 2003
- ---------------------------------------------------------------------------
Service cost $ 0.6 $ 0.7
Interest cost 1.5 1.9
Amortization of loss 0.1 -
Amortization of unrecognized prior service cost (0.5) -
Curtailment cost 0.1 -
- ---------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 1.8 $ 2.6
===========================================================================
In March 2004, the Corporation announced changes related to the
postretirement health care plan effective July 1, 2004 that will limit
eligibility for subsidized retiree medical and dental coverage to then
current retirees and employees with 25 or more years of service. Other
employees will be eligible for access to unsubsidized retiree dental coverage
and medical coverage up to age 65. As a result of these changes and staff
reductions announced in the first quarter, the Corporation recognized a
curtailment charge of $.1 in the first quarter of 2004.
NOTE XI - RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46 - Consolidation of Variable Interest Entities
(FIN 46), an interpretation of Accounting Research Bulletin (ARB) No. 51.
FIN 46 requires a variable interest entity (VIE) to be consolidated by the
primary beneficiary of the entity if certain criteria are met. Some
provisions of FIN 46 require certain Special Purpose Entity's (SPE's) to be
consolidated as of December 31, 2003. The Corporation does not have any
investments that qualify as SPE's under these provisions. FIN 46 also
requires consolidation of all variable interests held no later than the end
of the first reporting period that ends after March 15, 2004 (as of March 31,
2004 for the Corporation). The Corporation currently holds one equity
investment in APM Spring Grove, Inc. (APM), which was deemed a variable
interest entity in accordance with FIN 46. As a result, APM was consolidated
into the Corporation's financial statements during the first quarter of 2004
in accordance with FIN 46, which resulted in a $1.6 loss due to a cumulative
effect of an accounting change. The investment relates to an agreement in
1984, which created APM, whose largest asset is an office building located in
Cincinnati, Ohio. APM's only source of revenue is derived from leasing the
office building. The rental income on the office building is used by APM to
repay principal and interest on bonds owned by the Corporation that were
issued to purchase the building. The Corporation's maximum exposure to loss
as a result of its involvement with APM. is $3.6. As of December 31, 2003,
APM had total assets and total liabilities of $.7 and $2.4, respectively.
In January 2004, the FASB issued FASB Staff Position (FSP) FAS 106-1,
regarding accounting for effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (MMA). The FSP allows companies an
opportunity to either assess the effect of MMA on their retirement-related
benefit costs and
11
obligations or to defer accounting for the effects of MMA until authoritative
guidance is issued. In the first quarter of 2004, the Corporation had a
curtailment and plan amendment affecting the postretirement benefit plan. In
accordance with the FSP, the election to defer accounting for the effects of
MMA expires when significant events such as a plan amendment and curtailment
occur. As part of the plan amendments, the Corporation will no longer be
providing prescription drug benefits to Medicare eligible retirees effective
January 1, 2006, therefore, the MMA will not have a material effect on the
Corporation's APBO.
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). All
dollar amounts in this Management Discussion and Analysis (MD&A) are in
millions unless otherwise noted.
RESULTS OF OPERATIONS
Net income
The Corporation reported net income of $19.2, or $.31 per share for the three
months ending March 31, 2004, compared with $19.9, or $.33 per share in the
same period of 2003.
Investment Results
First quarter 2004 consolidated before-tax net investment income was $50.5
decreasing from $53.2 for the same period last year. During the first
quarter of 2003, net investment income was positively impacted by a
settlement in the amount of $1.3 for the termination of an investment
management agreement. The effective tax rate on investment income for the
first three months of 2004 was 32.9%, compared with 33.1% in 2003.
For the first quarter 2004, consolidated before-tax realized gains were $3.7
compared with $19.3 for the same period in 2003. Management of the
Corporation believes the significant volatility of realized investment gains
and losses limits the usefulness of net income as a measure of current
operating performance. Therefore, management uses the non-GAAP financial
measure of net income before net realized gains to further evaluate current
operating performance. Net income before net realized gains is reconciled to
net income in the table below:
Three Months
Ended March 31
($ in millions) 2004 2003
- --------------- ---- ----
Net income before net realized gains $16.8 $ 7.4
After-tax net realized gains 2.4 12.5
----- -----
Net income $19.2 $19.9
Net income before net realized gains
per share - diluted $0.27 $0.12
After-tax net realized gains per
share - diluted 0.04 0.21
----- -----
Net income per share - diluted $0.31 $0.33
For the first quarter 2004, consolidated after-tax realized gains positively
impacted net income by $2.4 compared with $12.5 for the first quarter of
2003. During the first quarter of 2004, the Group recognized a $4.3 loss on
a single asset backed security in the mobile home industry. This security
experienced significant deterioration of its value during the first quarter
of 2004. No material losses on the sale of any securities were realized
during the first quarter of 2003.
12
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 March 31, 2004, the amortized cost of the
held to maturity portfolio was $342.7.
Invested assets comprise a majority of the consolidated assets.
Consequently, accounting policies related to investments are critical. See
further discussion of investment accounting policies in the "Critical
Accounting Policies" section on page 23 and 24 of the Corporation's 2003 Form
10-K. Investments are continually evaluated based on current economic
conditions, credit loss experience and other developments. The difference
between the cost/amortized cost and estimated fair value of investments is
continually evaluated 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. The amount of impairment charge before tax was
$3.8 in the first quarter of 2004 compared to $5.6 in the first quarter of
2003.
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, the generation
of a competitive investment yield 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 and
held-to-maturity securities, the total gross unrealized losses, excluding
gross unrealized gains, by investment category and length of time the
securities have continuously been in an unrealized loss position as of March
31, 2004:
Available-for-sale with unrealized losses:
(in millions) Less than 12 months 12 months or longer Total
------------------- ------------------- ------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------------- ------------------- ------------------
Securities:
States, municipalities
and political
subdivisions $ - $ - $11.4 $(0.2) $ 11.4 $(0.2)
Corporate securities 124.9 (2.1) 27.3 (1.2) 152.2 (3.3)
Mortgage-backed
securities:
Other 85.6 (1.6) 16.9 (1.0) 102.5 (2.6)
- ----------------------------------------------------------------------------------------------
Total fixed maturities 210.5 (3.7) 55.6 (2.4) 266.1 (6.1)
Equity securities - - 3.5 (0.1) 3.5 (0.1)
- ----------------------------------------------------------------------------------------------
Total temporarily
impaired securities $210.5 $(3.7) $59.1 $(2.5) $269.6 $(6.2)
==============================================================================================
13
Held-to-maturity with unrealized losses:
(in millions) Less than 12 months 12 months or longer Total
------------------- ------------------- ------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------------- ------------------- ------------------
Securities:
Corporate securities $26.5 $(0.1) $ - $ - $26.5 $(0.1)
Mortgage-backed
securities:
Other 39.5 (0.3) 9.8 (0.2) 49.3 (0.5)
- ----------------------------------------------------------------------------------------------
Total temporarily
impaired securities $66.0 $(0.4) $ 9.8 $(0.2) $75.8 $(0.6)
==============================================================================================
As part of the evaluation of the entire $6.8 aggregate unrealized loss on the
investment portfolio, management performed a more intensive review of
securities with a relatively higher degree of unrealized loss. Based on a
review of each security, management believes that unrealized losses on these
securities were temporary declines in value at March 31, 2004. In the table
above, there are approximately 100 securities represented. Of this total, 11
securities have unrealized loss positions greater than 5% of their market
values at March 31, 2004 with none exceeding 20%. This group represents
$2.3, or 34% of the total unrealized loss position. Management believes that
they will recover the cost basis of these securities, and have both the
intent and ability to hold the securities until they mature or recover in
value.
All securities are monitored by portfolio managers who consider many factors
such as an issuer's degree of financial flexibility, management competence
and industry fundamentals in evaluating whether the decline in fair value is
temporary. In addition, management considers whether it is probable that all
contract terms of the security will be satisfied and whether the unrealized
loss position is due to changes in the interest rate environment. 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.
The amortized cost and estimated fair value of available-for-sale and held-
to-maturity fixed maturity securities in an unrealized loss position at March
31, 2004, 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.
Available-for-sale: Amortized Estimated Unrealized
(in millions) Cost Fair Value Loss
- --------------------------------------------------------------------------------
Due after one year through five years $ 11.5 $ 11.4 $(0.1)
Due after five years through ten years 75.8 74.2 (1.6)
Due after ten years 184.9 180.5 (4.4)
- --------------------------------------------------------------------------------
Total $272.2 $266.1 $(6.1)
Held-to-maturity: Amortized Estimated Unrealized
(in millions) Cost Fair Value Loss
- --------------------------------------------------------------------------------
Due after one year through five years $ 1.9 $ 1.9 $ -
Due after five years through ten years 11.1 11.1 -
Due after ten years 63.4 62.8 (0.6)
- ---------------------------------------------------------------------------------
Total $76.4 $75.8 $(0.6)
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 (GAI) 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 first quarter of 2004, the
agent relationship impairment before tax was $5.4 compared to the first
quarter 2003
14
impairment of $2.9. 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 $135.4.
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.
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 (LAE) 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 percentage of premium dollars used to
pay insurance losses and related expenses. The combined ratio is the sum of
the loss, LAE and underwriting expense ratios. All references to combined
ratio or its components in this 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. Insurance industry financial measures
are included in the next several sections of this MD&A that discuss results
of operations. A discussion of the differences between statutory accounting
and generally accepted accounting principles in the United States is included
in Item 15 page 73 and 74 of the Corporation's Form 10-K for the year ended
December 31, 2003.
At March 31, 2004 and December 31, 2003, statutory surplus, a financial
measure that is required by insurance regulators and used to monitor
financial strength, was $887.8 and $867.6, respectively. The ratio of twelve
months ended net premiums written to statutory surplus as of March 31, 2004
was 1.6 to 1.0 compared to 1.7 to 1.0 at December 31, 2003.
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 in property and casualty premium on a
gross and net basis compared with same period last year:
2004 increase over 2003 (in millions)
Gross Premiums Net Premiums
Written Written
First Quarter First Quarter
------------- -------------
Operating Segment
- -----------------
Commercial Lines Segment $ 6.6 $ 7.0
Specialty Lines Segment 3.4 1.9
Personal Lines Segment 1.9 2.9
------ ------
All Lines $ 11.9 $ 11.8
For the three months ended March 31, 2004, net premiums written were $364.0
compared to $352.2 for the first three months of 2003. Renewal price
increases and higher retention rates were the primary reason for premium
growth in the first quarter of 2004. The increased rate activity and
improved retention levels were partially offset by a decline in new business
premium production compared to first quarter 2003. 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
15
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.
Commercial Lines gross and net premiums written increased 3.1% and 3.4%
respectively. Commercial Lines renewal price increases averaged 6.9% in the
first quarter 2004 compared to 13.2% in the first quarter 2003. The decrease
in the renewal price increase period over period is the result of a broad
market trend indicating that competitive pricing pressures are increasing.
Specialty Lines gross and net premiums written both increased 5.8%, despite
increased reinsurance costs on commercial umbrella business. Commercial
umbrella, the largest Specialty Lines product, recognized a 12.9% average
renewal price increase for the first quarter 2004 compared to 20.5% in the
same period in 2003. Offsetting the rate increases were increases in ceded
premiums in the first quarter of 2004 compared to the first quarter of 2003.
The first quarter of 2003 included an accrual of ceded premuims related to
reinstatement of previous reinsurance contracts of $3.5. Commercial umbrella
ceded premiums excluding the reinstatement increased 19.5% over the first
quarter of 2003. Higher reinsurance costs are the result of an increase in
ceded loss activity related primarily to the commercial umbrella product line
over the last couple of years and an industry wide increase in reinsurance
loss trends.
Personal Lines gross and net premiums written increased 1.6% and 2.5%
respectively, from the first quarter 2003, despite a $10.0 decline in gross
written premiums related to the withdrawal from certain states and agency
cancellations. The Personal Lines premium growth was driven by renewal price
increases and a 5.0% increase in new business written premiums. New business
written premium was driven by personal auto, which increased 9.9% over the
same period last year.
All Lines Discussion
The combined ratio for the first quarter was 100.7%, a decrease of 8.1 points
from the first quarter 2003 combined ratio of 108.8%. The improvement in the
combined ratio is due primarily to a reduction of 5.6 points in the loss
ratio. The improved loss ratio is the result of reduced claim frequency,
fewer weather related losses, a decline in large losses (losses greater than
$250,000 per loss) and improved pricing levels. Catastrophe losses
negatively impacted the first quarter 2004 combined ratio by .8 points, a
decrease of 2.4 points over the first quarter of 2003. Both underwriting and
loss adjustment expenses were negatively impacted by $5.6 in severance and
other related restructuring costs associated with the Cost Structure
Efficiency (CSE) initiative discussed below. These expenses were partially
offset by a statutory curtailment gain of $8.0 related to the pension plan.
The first quarter underwriting expense ratio also includes a $9.0 contingent
liability accrual related to the 2001 sale of New Jersey private passenger
auto renewal rights to Proformance.
The Corporation recently announced results of the CSE initiative, which is
designed to improve productivity and customer service. Company-wide,
operating procedures are being analyzed and operating efficiencies and/or
technology advances are being implemented to reduce operating costs and
improve the level of service provided to policyholders and agents. The CSE
initiative is expected to reduce staff by a total of 400 to 500 positions
during 2004. Through the first quarter of 2004, 322 positions have been
identified and eliminated with another 62 positions eliminated in April. As
a result of these reductions, the Corporation recognized severance and other
related costs of $5.6 in the first quarter. Efficiencies implemented to date
are projected to reduce operating expenses by $5.5 in 2004, net of costs,
with projected annualized savings of $19.7 in 2005.
The loss and LAE ratio, which measures losses and LAE as a percentage of net
earned premiums, was positively impacted in the first quarter of 2004 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
16
excludes losses and LAE for insured events that occurred in prior accident
years. In total, this decrease in provisions for prior accident years'
losses and LAE recognized during the first quarter of 2004 was $2.5 before
tax, compared to an increase of $2.7 before tax in the first quarter of 2003.
The table below summarizes the impact of changes in provision for all prior
accident year losses and LAE:
Three Months Ended March 31
($ in millions) 2004 2003
- -----------------------------------------------------------------------------
Statutory net liabilities, beginning
of period $2,128.9 $2,078.7
Increase (decrease) in provision for
prior accident year claims $(2.5) $2.7
Increase (decrease) in provision for
prior accident year claims as %
of premiums earned (0.7)% 0.8%
The LAE ratio for the first quarter of 2004 was 10.6%. The ratio was 3.0
points lower than the first quarter 2003 loss adjustment expense ratio of
13.6%. The decrease is primarily the result of favorable development on
prior year claims. The decrease also includes the statutory pension
curtailment gain previously discussed, which reduced the LAE ratio by .8
points, coupled with lower paid expenses as a result of the lower claim
frequency, more effective management of claims litigation expenses and other
expense management initiatives. The decreases in the LAE ratio were
partially offset by severance charges recorded in the first quarter of 2004
related to the CSE initiative.
First quarter 2004 catastrophe losses were $3.0 and accounted for .8 points
on the combined ratio. This compares with $11.1 and a 3.2 point impact on
the combined ratio for the same period in 2003. The effect of future
catastrophes on the Corporation's results cannot be accurately predicted. As
such, severe weather patterns, acts of war or terrorist activities could have
a material adverse impact on the Corporation's results, reinsurance pricing
and availability of reinsurance. During the first quarter of 2004, there
were 5 catastrophes with the largest catastrophe generating $.8 in incurred
losses as compared with 5 catastrophes in the first quarter of 2003 with the
largest catastrophe generating $4.2 in incurred losses. For additional
disclosure of catastrophe losses, refer to Item 15, Losses and LAE Reserves
in the Notes to the Consolidated Financial Statements on pages 71 and 72 of
the Corporation's 2003 Form 10-K.
The table below summarizes the variance between the first quarter 2003 and
the first quarter 2004 expense ratio:
Variance from
First Quarter 2003
------------------
Underwriting expense ratio - first quarter 2003 35.6%
Contingent liability related to NJ PPA sale 2.5%
Severance related expenses due to reduction in force .9%
One-time curtailment credit related to pension plan (1.4)%
Reduction in personnel related expenses (.7)%
Impact of all other underwriting expense ratio items (.8)%
-------
Underwriting expense ratio - first quarter 2004 36.1%
The first quarter 2004 underwriting expense ratio, which measures
underwriting expenses as a percentage of net written premiums, was 36.1%
compared with 35.6% for the first quarter of 2003. The underwriting expense
ratio was impacted in the first quarter by severance and related costs due to
the reduction in staff and the recording of a $9.0 contingent liability
related to the 2001 sale of the New Jersey private passenger auto business
renewal rights to Proformance. The contract stipulated the Corporation would
be liable for up to $15.6 if a 2.5 to 1.0 premiums to surplus ratio was not
maintained during the period of March 2002 through December 2004. The final
calculation is based upon the statutory insurance expense exhibit which is
due April 1, 2005. The contingent liability accrual is based upon financial
data received from Proformance, although the Corporation has requested
additional information to verify the actual liability. Partially offsetting
this increase is a statutory pension curtailment gain.
17
Amortization expense related to the capitalization of application development
costs of $.8 and $.6 were recorded in underwriting expense for the first
quarter of 2004 and 2003, respectively. This expense relates to the rollout
of P.A.R.I.S.sm, a new internally developed software for policy administration
and rating. On a statutory accounting basis, the new application is being
amortized over a five-year period (compared to a ten-year period under GAAP)
in accordance with statutory accounting principles. The rollout has been
substantially completed for the Commercial Lines segment. During 2003, the
Group began capitalizing application development costs associated with the
Personal Lines segment, which is expected to begin rollout in 2005. The
Specialty Lines segment is on target for rollout in the beginning of 2005.
The employee count continues to decline as a result of the CSE initiative.
The CSE initiative is expected to reduce staff by a total of 400 to 500
positions when fully implemented. Through March 2004, 322 staff reductions
have been implemented. As of March 31, 2004, the employee count, excluding
those employees receiving severance and other termination benefits, was
2,361, compared with 2,859 at March 31, 2003 and 2,669 at December 31, 2003.
Segment Discussion
The Corporation's organizational structure consists of three operating units:
Commercial Lines, Specialty Lines and Personal Lines. The Corporation also
has an all other segment, which derives its revenue from investment income.
The following tables provide key financial measures for each of the property
and casualty reportable segments:
Commercial Lines Segment ($ in millions) 2004 2003
- ---------------------------------------------------------------------------
Net premiums written $212.2 $205.2
Net premiums earned 197.8 189.8
Loss ratio 52.3% 61.3%
Loss adjustment expense ratio 11.3% 13.3%
Underwriting expense ratio 35.2% 36.6%
Specialty Lines Segment ($ in millions) 2004 2003
- ---------------------------------------------------------------------------
Net premiums written $34.8 $ 32.9
Net premiums earned 41.7 38.4
Loss ratio 40.0% 23.8%
Loss adjustment expense ratio 3.8% 17.9%
Underwriting expense ratio 49.8% 51.5%
Personal Lines Segment ($ in millions) 2004 2003
- ---------------------------------------------------------------------------
Net premiums written $117.0 $114.1
Net premiums earned 121.6 121.1
Loss ratio 61.6% 68.4%
Loss adjustment expense ratio 11.8% 12.6%
Underwriting expense ratio 33.9% 29.3%
Commercial Lines Segment
The Commercial Lines combined ratio for the first quarter of 2004 decreased
12.4 points to 98.8% from 111.2% in the first quarter of 2003. The 2004
combined ratio improved primarily due to a significantly lower loss ratio as
a result of lower claim frequency, including lower catastrophe and other
large property losses. The loss ratio improvement also represents the result
of progress made over the past several years to improve price adequacy and to
underwrite a more profitable book of business. The first quarter 2004
Commercial Lines loss ratio included .8 points related to catastrophe losses
compared to 3.6 points in the first quarter of 2003. In addition, the
Commercial Lines loss and LAE ratios were favorably impacted by prior year
development of 3.3 points in first quarter 2004 compared to adverse
development of 1.5 points in first quarter 2003.
18
The commercial multi-peril, businessowners, fire and inland marine combined
ratio improved in the first quarter of 2004 to 94.0% from 101.1% in the same
period of 2003. Catastrophe losses for these lines were 1.6 points in first
quarter 2004 compared to 8.3 points in the first quarter 2003 accounting for
most of the improvement in the combined ratio. In 2003, these product lines
were also impacted by a higher frequency of large non-catastrophe losses.
The 2004 accident year combined ratio for the commercial multi-peril related
product lines was 98.8%, 4.8 points higher than the calendar year results.
The general liability combined ratio decreased in the first quarter of 2004
to 110.7%, from 125.3% in the same period of 2003. This product line was
negatively impacted in 2003 by increased estimates of legal costs on claims
from prior years. The 2004 accident year combined ratio for general
liability was 109.9%, .8 points lower than the calendar year results and 3.9
points lower than first quarter 2003's accident year results.
The workers' compensation product line combined ratio for the first quarter
of 2004 was 114.7% compared with 134.8% during the same period last year.
Although the Group has taken actions to improve workers' compensation
results, assessments for the National Workers' Compensation Pool negatively
impacted results in both the first quarter of 2004 and 2003. The impact of
the National Workers' Compensation Pool added 11.2 points to the workers'
compensation combined ratio for three months ended March 31, 2004 and added
10.1 points in the same period of 2003.
Specialty Lines Segment
The Specialty Lines combined ratio for the first quarter of 2004 was 93.6%, a
..4 point increase compared with 93.2% in the same period of 2003. Higher
reinsurance costs in the commercial umbrella line have put upward pressure on
loss and expense ratios. The first quarter 2003 combined ratio included 8.4
points related to a ceded premium accrual from the reinstatement of prior
years' reinsurance layers.
Personal Lines Segment
The Personal Lines combined ratio improved to 107.3% in the first quarter of
2004 from 110.3% in the first quarter of 2003. The improvement in the
combined ratio was driven by a significant improvement in the experience for
homeowners. This improvement was partially offset by adverse prior year
reserve development for personal auto and personal umbrella which added 4.4
points to the combined ratio for Personal Lines for the first quarter 2004
and by 7.7 points for the contingent liability accrual related to the surplus
guarantee on the Proformance transaction.
The homeowners product line combined ratio improved to 88.0% from 114.5% in
the first quarter 2003. The 26.5 point improvement in the homeowners
combined ratio resulted from a decline in catastrophe losses of 6.5 points,
and a reduction in the underwriting expense and loss adjustment expense
ratios. Catastrophe losses added 2.6 points to the first quarter of 2004
homeowners combined ratio compared to 9.1 points for the first quarter 2003.
The personal auto 2004 first quarter combined ratio was 117.1% up 9.1 points
from 108.0% in the first quarter of 2003. The current quarter's
deterioration for this product line was due to the contingent liability
accrual related to the surplus guarantee on the Proformance transaction,
which added 12.0 points to the personal auto underwriting expense ratio. The
product line's loss and loss adjustment expenses continue to benefit from the
implementation of insurance scoring, price increases, elimination of
unprofitable business, the withdrawal from the New Jersey market and targeted
underwriting. Adverse prior year reserve development offset the positive
actions taken to improve the personal auto results, adding 7.0 points to the
combined ratio.
19
Statutory Earned Premium and Combined Ratios
Combined Ratios
-------------------------------------------
Earned Calendar Accident
Premium Year Year
Year Year Year
(By operating segment, to Date to Date to Date Calendar Accident
including selected major March 31, March 31, March 31, Year Year
product lines) 2004 2004 2004(a) 2003 2003(a)
- ----------------------------------------------------------------------------------
Commercial Lines $197.8 98.8% 102.1% 112.3% 105.6%
Workers' compensation 33.1 114.7% 112.8% 123.0% 115.4%
Commercial auto 56.8 92.7% 98.2% 105.5% 103.6%
General liability 21.0 110.7% 109.9% 122.6% 113.6%
CMP, BOP, fire &
inland marine 86.9 94.0% 98.8% 109.7% 101.1%
Specialty Lines 41.7 93.6% 101.0% 77.2% 89.9%
Commercial umbrella 31.1 101.0% 105.7% 80.5% 92.9%
Fidelity & surety 10.6 67.4% 82.9% 68.1% 80.8%
Personal Lines 121.6 107.3% 101.4% 105.6% 102.2%
Personal auto, incl.
personal umbrella 74.0 118.8% 111.8% 107.0% 103.4%
Personal property 47.6 88.6% 84.4% 103.3% 100.0%
- ---------------------------------------------------------------------------------
Total All Lines $361.1 100.7% 101.4% 106.1% 102.7%
=================================================================================
(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 March 31, 2004. 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 March 31, 2004, the available-for-sale fixed maturity portfolio had a
market value of $3.2 billion, which consisted of 96.9% 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
$96.6 and comprised 3.1% of the available-for-sale fixed maturity portfolio
and 2.8% of the consolidated fixed maturity portfolio. This compares to a
fair value of $98.7, which comprised 3.3% of the available-for-sale fixed
maturity portfolio at December 31, 2003. The held-to-maturity fixed maturity
portfolio is accounted for at amortized cost, which was $342.7 at March 31,
2004 and consists entirely of investment grade securities.
Securities are classified 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 classification is based 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 $24.1 at March 31, 2004 and $24.0 at December 31,
2003.
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 obligations of the issuer. 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 March 31, 2004 and
December 31, 2003:
Amortized Fair Unrealized
(in millions) Cost Value Loss
- --------------------------------------------------------------------------
March 31, 2004 $13.8 $13.6 $(.2)
December 31, 2003 $23.5 $22.6 $(.9)
20
The investment portfolio includes 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
March 31, 2004 was $324.0 compared to $318.8 at December 31, 2003.
The consolidated fixed maturity portfolio has an intermediate duration and a
laddered maturity structure. The duration of the fixed maturity portfolio is
approximately 4.8 years as of March 31, 2004. 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 March 31, 2004, the Group's equity portfolio was $343.2, or 8.9% of the
total investment portfolio. Equity securities are carried at fair market
value on the balance sheet. As a result, shareholders' equity and statutory
surplus fluctuate with changes in the value of the equity portfolio. As of
March 31, 2004, the equity portfolio consisted of stocks in 45 separate
entities in 35 different industries. As of March 31, 2004, 31.7% of the
Group's equity portfolio was invested in five companies and the largest
single position was 7.7% 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,
2003.
Loss and Loss Adjustment Expenses
The Group's largest liabilities are reserves for losses and LAE. The
accounting policies related to the loss and LAE reserves are considered
critical. Loss and LAE reserves are established for all incurred claims and
are carried on an undiscounted basis before any credits for reinsurance
recoverable. Losses and LAE reserves are adjusted upward or downward as new
information is received. These reserves amounted to $2.7 billion at March
31, 2004 and $2.6 billion at December 31, 2003. As of March 31, 2004, the
reserves by operating segment were as follows: $1.6 billion in Commercial
Lines, $.6 billion in Specialty Lines and $.5 billion in Personal Lines.
Results for the first three months of 2004 were favorably impacted by losses
and LAE incurred for prior accident years totaling $(2.5) before tax on an
All Lines basis. Results for the first three months of 2003 were adversely
impacted by losses and LAE incurred for prior accident years totaling $2.7.
Losses and LAE incurred for prior accident years were recognized during the
first quarter of 2004 and 2003 based on new information received during the
first quarter that caused a revision to prior estimates for loss and LAE
reserves. 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 LAE 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.
Results for the three month periods of 2004 and 2003 were impacted by losses
and LAE for prior accident years as shown in the table below:
Three Months Ended
March 31 Year
2004 2003 2003
--------------------- ----
Prior Accident Year Loss & LAE
by Segment (in millions)
- ------------------------------
Commercial Lines $(6.6) $2.8 $41.0
Specialty Lines (3.1) (3.9) (21.3)
Personal Lines 7.2 3.8 14.4
------ ----- ------
Total All Lines Accident Year
Development $(2.5) $2.7 $34.1
21
Prior Accident Year Loss & LAE
(in millions)
- ------------------------------
Accident Year 2003 $(14.1) $ - $ -
Accident Year 2002 (3.1) (20.7) (39.0)
Accident Year 2001 and Prior 14.7 23.4 73.1
------- ------- -------
Total Accident Year Development $ (2.5) $ 2.7 $ 34.1
For the Commercial Lines operating segment, the favorable losses and LAE for
prior accident years recorded during the first three months of 2004 were
concentrated in the commercial automobile and commercial multi-peril product
lines. Adverse losses and LAE development for Commercial Lines for the first
three months of 2003 were concentrated in the workers' compensation and
general liability product lines.
For the Specialty Lines operating segment, the favorable losses and LAE for
prior accident years recorded during the first three months of 2004 were
concentrated in the bonds and commercial umbrella product lines. Comparable
Specialty Lines amounts for the first three months of 2003 occurred in the
commercial umbrella product line.
For the Personal Lines operating segment, the adverse losses and LAE for
prior accident years recorded during the first three months of 2004 were
concentrated in the personal automobile product line. Comparable Personal
Lines amounts for the first three months of 2003 were concentrated in the
personal umbrella and personal automobile product lines.
Losses and LAE for prior accident years were recognized during the year 2004
due to new information that caused a revision to prior estimates for loss and
LAE 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 jury
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 the ultimate cost of
claims, actual loss and LAE 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 LAE 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 from operations was $57.5 for the first three months of
2004 compared with $7.6 for the same period in 2003 largely resulting from a
decrease in paid loss and LAE expenses. Net cash used in investing was $66.0
in the first quarter of 2004 compared with $25.2 during the first quarter of
2003. Cash provided by financing operations was $2.9 in the first three
months of 2004 compared with $.1 in the first three months of 2003. Liquidity
needs of the Group are expected to be met by net cash generated from
operations, scheduled maturities of investments, interest and dividend
receipts and current cash balances.
Debt
At March 31, 2004, the Corporation had $205.0 of outstanding debt, including
5.00% convertible notes (Notes) due March 19, 2022 in the amount of $201.3.
The Notes are reported on the consolidated balance sheet net of unamortized
issuance-related costs of $6.9 at March 31, 2004. Interest is payable on
March 19 and September 19, and the Corporation uses the effective interest
rate method to record interest expense and amortization of issuance-related
costs.
Under certain conditions, at the option of the holders, the Notes may be
converted into shares of the Corporation's common stock at the rate of
44.2112 shares per $1,000 principal amount of the Notes, subject to
adjustment in certain circumstances. If the closing sale price of the
Corporation's common stock for at least twenty of the thirty consecutive
trading days ending on the last trading day of a calendar quarter
22
is more than $24.88, then the Notes may be converted during the immediately
following calendar quarter. Additionally, the Notes may be converted when
the credit rating of the Notes is below a specified level or withdrawn, or
when certain corporate transactions occur. If all the Notes were converted,
total outstanding common shares would increase by 8.9 million shares.
The impact of the Notes on earnings per share is based on the "if-converted"
method and is contingent upon whether the criteria for conversion have been
met. As of March 31, 2004, none of the conversion criteria had been met, and
no adjustment to diluted outstanding shares was required.
After March 22, 2005, the Corporation has the option to redeem all or a
portion of the outstanding Notes at the following redemption prices,
expressed percentages of the principal amount of the Notes:
During the twelve Redemption
months commencing Price
- ----------------- ----------
March 23, 2005 102%
March 19, 2006 101%
March 19, 2007 until maturity of the Notes 100%
Holders of the Notes have the option to require the Corporation to purchase
all or a portion of the Notes on March 19 of 2007, 2012 and 2017 at 100% of
the principal amount of the Notes. Further, 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 the Notes at 100% of the
principal amount.
The Corporation is a party to a revolving credit agreement (Agreement) with
four lenders. Under the terms of the Agreement, the lenders committed to
make loans to the Corporation in an aggregate amount up to $80.0 for general
corporate purposes until March 15, 2005. The Agreement requires the
Corporation to maintain net worth of not less than $800.0 and requires the
Company to maintain statutory surplus of $650.0 or greater. The Agreement
also contains other customary covenants and provisions. As of March 31,
2004, the Corporation is in compliance with all covenants and has not drawn
on the revolver.
At March 31, 2004, the Corporation had cash and marketable fixed maturity
investments totaling $71.0. In addition to investment income, the
Corporation is dependent on dividend payments from the Company for additional
liquidity. Insurance regulatory authorities impose various restrictions on
the payment of dividends by insurance companies. During 2004, dividend
payments from the Company to the Corporation are limited to approximately
$86.8 without prior approval of the Ohio Insurance Department. During the
first quarter of 2004, the Company paid a dividend of $30.0 to the
Corporation resulting in a dividend payment limitation of $56.8 for the
remainder of 2004.
Rating Agencies
Regularly the Corporation's financial condition is reviewed by four
independent rating agencies, A. M. Best Company (A.M. Best), Fitch, Inc.
(Fitch), Moody's and S&P. These agencies assign ratings and rating outlooks
reflecting the agencies' opinions of the Corporation's financial strength and
ability to meet its financial obligations to its debt security holders.
Following are the Corporation's current ratings and rating outlooks. During
the first quarter of 2004 S&P changed its rating outlook from negative to
stable.
A.M. Best Fitch Moody's S&P
--------- ----- ------- ---
Financial strength rating A- A- A3 BBB
Senior unsecured debt rating bbb- BBB- Baa3 BB
Rating outlook Stable Stable Stable Stable
For more information on the most recent rating agency actions, please refer
to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Corporation's Form 10-K for the year ended
December 31, 2003.
23
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 within the meaning of The Private
Securities Litigation Reform Act of 1933. 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 to appoint and retain agents; ability to achieve
targeted expense savings; ability to appoint and retain agents; 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) In the first quarter of 2004, the Company made a change
implementing a new system to record investment transactions,
including transactions involving mortgages and asset-backed
securitites, to improve accuracy for financial reporting
purposes. Except for the foregoing 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
A proceeding entitled Carol Murray v. Ohio Casualty Corporation,
The Ohio Casualty Insurance Co., Avomark Insurance Co., Ohio
Security Insurance Co., West American Insurance Co. (West
American), American Fire and Casualty Insurance Co., and Ohio
Casualty of New Jersey, Inc. was filed in the United States
District Court for the District of Columbia on February 5, 2004.
The proceeding alleges the defendants improperly classified current
and former employees as exempt from overtime pay requirements of
the Fair Labor Standards Act. The plaintiff, a former automobile
physical damage claim adjuster, seeks to certify a nationwide
collective action consisting of all current and former salaried
employees since February 5, 2001 who are/were employed to process
claims by policyholders and other persons for automobile property
damage. The complaint seeks overtime compensation for the plaintiff
and the class of persons plaintiff seeks to represent. The
defendants deny the allegations made in the complaint and will
vigorously defend themselves. Based on information currently
available to the Company, this proceeding is not expected to have a
material adverse effect on the financial condition, liquidity or
results of operation of Ohio Casualty Corporation.
24
A proceeding entitled Carol Lazarus v. The Ohio Casualty Group was
brought against West American in the Court of Common Pleas Cuyahoga
County, Ohio on October 25, 1999. The Court ordered the case to
proceed solely against West American on July 10, 2003. The
complaint alleges West American improperly charged for uninsured
motorists coverage following an October 1994 decision of the
Supreme Court of Ohio in Martin v Midwestern Insurance Company.
The Martin decision was overruled legislatively in September, 1997.
West American filed a motion for summary judgment on December 16,
2003. Plaintiff filed a motion for class certification on February
23, 2004. West American has responded to the motion for class
certification stating the motion is untimely (filed more than four
years after the initial complaint) and that Carol Lazarus failed to
provide sufficient evidence to satisfy the requirements for class
certification. Based on information currently available to the
Company, this proceeding is not expected to have a material adverse
effect on the financial condition, liquidity or results of
operation of Ohio Casualty Corporation.
The Company is involved in other litigation and administrative
proceedings arising in the ordinary course of business which is not
expected to have a material adverse effect on the financial
condition, liquidity, or results of operations of the Company.
Current litigation includes five separate proceedings making class
action claims for which class certification has been sought in the
two proceedings described above. No class certifications have been
granted at this time. See also Item 15, Note 8, Other Contingencies
and Commitments on pages 70 and 71 of the Corporation's 2003
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
At the annual meeting on April 21,2004, shareholders voted on the
election of three board of directors for terms expiring in 2007 as
follows:
Stanley N. Pontius For 51,033,023; Withheld 1,515,804
Terrence J. Baehr For 51,189,290; Withheld 1,359,537
Ralph S. Michael III For 49,290,215; Withheld 3,258,612
The other directors whose term of office continued after the
meeting were: William P. Boardman, Jack E. Brown, Dan R.
Carmichael, Catherine E. Dolan, Philip G. Heasley, Robert A. Oakley
and Jan H. Suwinski.
At the annual meeting on April 21, 2004, shareholders defeated a
proposal regarding compensation for senior executives. The
proposal was defeated with a final vote of:
For 4,104,250; Against 39,195,524;
Abstain 749,924; No Vote 8,499,129
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 January 27, 2004 to report
under Item 5, the filing of a press release naming Michael Winner
as its Senior Vice President and Controller, effective February 9,
2004. The Corporation also announced that then current Controller
Dennis McDaniel would assume the title of Vice President of
Strategic Planning and Investor Relations, effective February 9,
2004. Exhibits to the Form 8-K consisted of the press release
dated January 27, 2004.
25
The Corporation filed a Form 8-K on February 11, 2004 to report
under Item 5, Item 7 and Item 12 the filing of a press release
announcing fourth quarter 2003 earnings and Supplemental Financial
Information. The Corporation also announced the results of a
company-wide process re-engineering initiative. Exhibits to the
Form 8-K consisted of the press releases dated February 11, 1004
and the Supplemental Financial Information.
The Corporation filed a Form 8-K on March 12, 2004 to report under
Item 5, the filing of a press release announcing that Stephen S.
Marcum would not seek re-election as a member of the Board of
Directors of the Corporation. Exhibits to the Form 8-K consisted
of the press release dated March 12, 2004.
The Corporation filed a Form 8-K on March 15, 2004 to report under
Item 5, the filing of a press release announcing changes to its
retirement program in 2004-2006. Exhibits to the Form 8-K
consisted of the press release dated March 15, 2004.
II. Exhibits:
31.1 Certification of Chief Executive Officer of Ohio Casualty
Corporation in accordance with SEC Rule
13(a)-14(a)/15(d)-14(a)
31.2 Certification of Chief Financial Officer of Ohio Casualty
Corporation in accordance with SEC Rule
13(a)-14(a)/15(d)-14(a)
32.1 Certification of Chief Executive Officer of Ohio Casualty
Corporation in accordance with Section 1350 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer of Ohio Casualty
Corporation in accordance with Section 1350 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)
May 4, 2004 /s/Donald F. McKee
-----------------------------------------
Donald F. McKee, Executive Vice President
and Chief Financial Officer
26