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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 June 30, 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 August 2, 2004, there were 61,451,141 shares of common stock
outstanding.
Page 1 of 27
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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 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 26
Item 4. Controls and Procedures 26
PART II
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and reports on Form 8-K 26
Signature 27
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
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Dollars in millions, except share data) (Unaudited) 2004 2003
- -------------------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(amortized cost: $2,991.9 and $2,851.2) $ 3,090.5 $ 3,022.2
Held-to-maturity, at amortized cost
(fair value: $321.7 and $354.2) 329.2 356.1
Equity securities, at fair value
(cost: $86.9 and $77.9) 351.0 329.0
Short-term investments, at fair value 253.7 40.4
- -------------------------------------------------------------------------------------------
Total investments 4,024.4 3,747.7
Cash 10.6 16.5
Premiums and other receivables, net of allowance for bad
debts of $4.2 and $4.2, respectively 364.2 347.9
Deferred policy acquisition costs 172.6 169.3
Property and equipment, net of accumulated depreciation of
$161.7 and $152.9, respectively 86.4 89.2
Reinsurance recoverable 662.3 592.7
Agent relationships, net of accumulated amortization of
$40.0 and $39.1, respectively 131.1 142.6
Interest and dividends due or accrued 46.9 47.5
Other assets 60.4 15.5
- -------------------------------------------------------------------------------------------
Total assets $ 5,558.9 $ 5,168.9
===========================================================================================
Liabilities
Insurance reserves:
Losses $ 2,264.4 $ 2,163.7
Loss adjustment expenses 465.9 464.1
Unearned premiums 730.0 703.0
Debt 395.9 198.0
Reinsurance treaty funds held 165.4 150.5
Deferred income taxes 0.1 12.8
Other liabilities 357.2 331.0
- -------------------------------------------------------------------------------------------
Total liabilities 4,378.9 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 231.5 254.7
Retained earnings 1,084.4 1,033.4
Treasury stock, at cost:
(Shares: 10,983,459; 11,461,301) (144.9) (151.3)
- -------------------------------------------------------------------------------------------
Total shareholders' equity 1,180.0 1,145.8
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,558.9 $ 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
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended June 30,
(Dollars in millions, except share data) (Unaudited) 2004 2003
- -------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 367.2 $ 351.2
Investment income less expenses 48.6 51.4
Investment gains realized, net 3.2 6.8
- -------------------------------------------------------------------------------------------
Total revenues 419.0 409.4
Losses and benefits for policyholders 203.1 213.7
Loss adjustment expenses 40.1 41.4
General operating expenses 125.8 124.3
Amortization of agent relationships 1.7 1.9
Write-down of agent relationships 2.6 5.8
Amortization of deferred policy acquisition costs 91.9 96.7
Deferral of deferred policy acquisition costs (96.5) (95.0)
Depreciation and amortization expense 3.3 3.4
- -------------------------------------------------------------------------------------------
Total expenses 372.0 392.2
- -------------------------------------------------------------------------------------------
Income before income taxes 47.0 17.2
Income tax expense:
Current 12.3 2.8
Deferred 2.0 3.4
- -------------------------------------------------------------------------------------------
Total income tax expense 14.3 6.2
- -------------------------------------------------------------------------------------------
Net income $ 32.7 $ 11.0
===========================================================================================
Average shares outstanding - basic 61,344,980 60,835,215
===========================================================================================
Earnings per share - basic:
Net income, per share $ 0.53 $ 0.18
===========================================================================================
Average shares outstanding - diluted 62,474,082 61,169,556
===========================================================================================
Earnings per share - diluted:
Net income, per share $ 0.52 $ 0.18
===========================================================================================
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
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Six Months
Ended June 30,
(Dollars in millions, except share data) (Unaudited) 2004 2003
- -------------------------------------------------------------------------------------------
Premiums and finance charges earned $ 728.3 $ 700.5
Investment income less expenses 99.1 104.6
Investment gains realized, net 6.9 26.1
- -------------------------------------------------------------------------------------------
Total revenues 834.3 831.2
Losses and benefits for policyholders 398.3 422.5
Loss adjustment expenses 78.4 88.8
General operating expenses 266.0 251.9
Amortization of agent relationships 3.5 3.8
Write-down of agent relationships 8.0 8.7
Amortization of deferred policy acquisition costs 184.2 194.2
Deferral of policy acquisition costs (187.5) (192.4)
Depreciation and amortization expense 6.5 6.7
- -------------------------------------------------------------------------------------------
Total expenses 757.4 784.2
- -------------------------------------------------------------------------------------------
Income before income taxes 76.9 47.0
Income tax expense:
Current 23.6 10.5
Deferred (0.2) 5.6
- -------------------------------------------------------------------------------------------
Total income tax expense 23.4 16.1
Income before cumulative effect of an accounting change 53.5 30.9
Cumulative effect of an accounting change, net of tax 1.6 -
- -------------------------------------------------------------------------------------------
Net income $ 51.9 $ 30.9
===========================================================================================
Average shares outstanding - basic 61,204,730 60,782,147
===========================================================================================
Earnings per share - basic:
Net income, per share $ 0.85 $ 0.51
===========================================================================================
Average shares outstanding - diluted 62,306,935 61,067,946
===========================================================================================
Earnings per share - diluted:
Net income, per share $ 0.83 $ 0.51
===========================================================================================
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
Ohio Casualty Corporation & Subsidiaries
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 30.9 30.9
Change in unrealized gain,
net of deferred income tax
expense of $(26.8) 49.9 49.9
----------
Comprehensive income 80.8
Net issuance of treasury
stock (145,995 shares) (0.1) 1.9 1.8
- ------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 2003 $ 9.0 $ 21.1 $ 296.1 $ 967.5 $ (152.4) $ 1,141.3
=================================================================================================================
Balance
January 1, 2004 $ 9.0 $ - $ 254.7 $ 1,033.4 $ (151.3) $ 1,145.8
Net income 51.9 51.9
Change in unrealized gain,
net of deferred income tax
benefit of $21.3 (39.6) (39.6)
Change in minimum pension
liability, net of deferred income
tax benefit of $8.9 16.4 16.4
----------
Comprehensive income 28.7
Issuance of restricted stock
(59,284 shares) (0.4) 0.9 0.5
Net issuance of treasury
stock (418,558 shares) (0.5) 5.5 5.0
- ------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 2004 $ 9.0 $ - $ 231.5 $ 1,084.4 $ (144.9) $ 1,180.0
==================================================================================================================
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 and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months
Ended June 30,
(Dollars in millions) (Unaudited) 2004 2003
- -------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Operations
Net income $ 51.9 $ 30.9
Adjustments to reconcile net income to cash
from operations:
Changes in:
Insurance reserves 129.5 116.9
Reinsurance treaty funds held 14.9 (4.7)
Income taxes (9.9) 2.2
Premiums and other receivables (16.3) (34.3)
Deferred policy acquisition costs (3.3) 1.8
Reinsurance recoverable (69.6) (66.5)
Other assets (7.3) 2.1
Other liabilities (6.2) (8.8)
Amortization and write-down of agent relationships 11.5 12.4
Depreciation and amortization 8.9 7.5
Investment gains (6.9) (26.1)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 97.2 33.4
- -------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of securities:
Fixed maturity, available-for-sale (627.5) (564.2)
Fixed maturity, held-to-maturity (1.4) (6.0)
Equity (7.2) (5.9)
Proceeds from sales of securities:
Fixed maturity, available-for-sale 444.4 434.6
Equity 5.2 31.6
Proceeds from maturities and calls of securities:
Fixed maturity, available-for-sale 65.6 49.1
Fixed maturity, held-to-maturity 27.3 0.8
Equity 3.2 6.8
Property and equipment
Purchases (2.2) (3.9)
Sales 0.3 1.3
- -------------------------------------------------------------------------------------------------
Net cash used from investing activities (92.3) (55.8)
- -------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Debt:
Payments (0.3) (0.3)
Proceeds from the issuance of senior notes 199.3 -
Payments of issuance costs (1.3) -
Proceeds from exercise of stock options 4.8 1.4
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 202.5 1.1
- -------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 207.4 (21.3)
Cash and cash equivalents, beginning of period 56.9 62.2
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 264.3 $ 40.9
=================================================================================================
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.
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). 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 June 30, 2004 and the
Consolidated Statements of Income, Shareholders' Equity and Cash Flows all for
the three and six months ended June 30, 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 June 30, 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 June 30,
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 Six Months Ended
June 30 June 30
($ in millions) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------
Net income
As reported $32.7 $11.0 $51.9 $30.9
Add: Stock-based employee
compensation reported in net
income, net of related tax
effect 0.1 - 0.1 0.1
Deduct: Total stock-based
employee compensation, net of
related tax effects 1.5 1.4 2.8 2.9
----- ----- ----- -----
Pro forma $31.3 $ 9.6 $49.2 $28.1
Basic EPS
As reported $0.53 $0.18 $0.85 $0.51
Pro Forma $0.51 $0.16 $0.80 $0.46
Diluted EPS
As reported $0.52 $0.18 $0.83 $0.51
Pro Forma $0.50 $0.16 $0.79 $0.46
=================================================================================
7
NOTE III - EARNINGS PER SHARE
Basic and diluted earnings per share are summarized as follows:
Three Months Ended Six Months Ended
June 30 June 30
(in millions, except per share data) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------
Net income $32.7 $11.0 $51.9 $30.9
Weighted average common shares
outstanding - basic (thousands) 61,345 60,835 61,205 60,782
Income before cumulative effect of
an accounting change $0.53 $0.18 $ 0.88 $0.51
Cumulative effect of an accounting change - - $(0.03) -
Basic net income per weighted
average share $0.53 $0.18 $ 0.85 $0.51
==========================================================================================
Weighted average common shares
outstanding (thousands) 61,345 60,835 61,205 60,782
Effect of dilutive securities (thousands) 1,129 335 1,102 286
- ------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted (thousands) 62,474 61,170 62,307 61,068
Income before cumulative effect of
an accounting change $0.52 $0.18 $ 0.86 $0.51
Cumulative effect of an accounting change - - $(0.03) -
Diluted net income per weighted
average share $0.52 $0.18 $ 0.83 $0.51
==========================================================================================
NOTE IV -- SEGMENT INFORMATION
The Corporation has determined its reportable segments based upon its method
of internal reporting, which is organized by product line. The property and
casualty segments are Commercial, Specialty, and Personal Lines. These
segments generate revenues by selling a wide variety of personal, commercial
and surety insurance products. The Corporation also has an all other segment
which derives its revenues from investment income.
Each segment of the Corporation is managed separately. The property and
casualty segments are managed by assessing the performance and profitability
of the segments through analysis of industry financial measurements including
statutory loss, loss adjustment and underwriting expense ratios, statutory
combined ratio, premiums written, premiums earned and statutory underwriting
gain/loss. The following tables present information by segment as it is
reported internally to management. Asset information by reportable segment is
not reported, since the Corporation does not produce such information
internally.
8
Six Months Ended June 30
($ in millions)
Commercial Lines Segment 2004 2003
- --------------------------------------------------------------------------
Net premiums written $432.5 $415.1
% Change 4.2% 4.0%
Net premiums earned 400.2 381.1
% Change 5.0% 7.9%
Underwriting loss (before tax) (10.4) (55.6)
Specialty Lines Segment 2004 2003
- --------------------------------------------------------------------------
Net premiums written $73.9 $ 76.1
% Change (2.9)% (10.3)%
Net premiums earned 82.5 79.0
% Change 4.4% 15.0%
Underwriting gain (before tax) 9.3 14.1
Personal Lines Segment 2004 2003
- --------------------------------------------------------------------------
Net premiums written $244.3 $236.9
% Change 3.1% (11.1)%
Net premiums earned 245.6 240.4
% Change 2.2% (20.8)%
Underwriting loss (before tax) (2.7) (20.5)
Total Property & Casualty 2004 2003
- --------------------------------------------------------------------------
Net premiums written $750.7 $728.1
% Change 3.1% (2.9)%
Net premiums earned 728.3 700.5
% Change 4.0% (3.5)%
Underwriting loss (before tax) (3.8) (62.0)
All Other 2004 2003
- --------------------------------------------------------------------------
Revenues $ 3.7 $ 2.4
Write-down and amortization of
agent relationships (11.5) (12.5)
Other expenses (6.8) (5.9)
- --------------------------------------------------------------------------
Net loss before income taxes $(14.6) $(16.0)
Reconciliation of Revenues 2004 2003
- --------------------------------------------------------------------------
Net premiums earned for reportable segments $728.3 $700.5
Net investment income 97.2 102.3
Realized gains, net 3.7 24.4
- --------------------------------------------------------------------------
Total property and casualty revenues
(Statutory basis) 829.2 827.2
Property and casualty statutory to GAAP
adjustment 1.4 1.6
- --------------------------------------------------------------------------
Total revenues property and casualty
(GAAP basis) 830.6 828.8
Other segment revenues 3.7 2.4
- --------------------------------------------------------------------------
Total revenues $834.3 $831.2
==========================================================================
Reconciliation of Underwriting Loss
(before tax) 2004 2003
- --------------------------------------------------------------------------
Property and casualty underwriting loss
(before tax) (Statutory basis) $ (3.8) $(62.0)
Statutory to GAAP adjustment (7.0) (3.3)
- --------------------------------------------------------------------------
Property and casualty underwriting loss
(before tax) (GAAP basis) (10.8) (65.3)
Net investment income 99.1 104.6
Realized gains, net 6.9 26.1
Write-down and amortization of agent
relationships (11.5) (12.5)
Other expenses (6.8) (5.9)
- --------------------------------------------------------------------------
Income before income taxes and cumulative
effect of an accounting change $ 76.9 $ 47.0
==========================================================================
Three Months Ended June 30
($ in millions)
Commercial Lines Segment 2004 2003
- --------------------------------------------------------------------------
Net premiums written $220.3 $209.9
% Change 5.0% 1.8%
Net premiums earned 202.4 191.3
% Change 5.8% 6.8%
Underwriting loss (before tax) (7.8) (28.8)
Specialty Lines Segment 2004 2003
- --------------------------------------------------------------------------
Net premiums written $ 39.1 $ 43.2
% Change (9.4)% (4.6)%
Net premiums earned 40.8 40.6
% Change 0.5% 4.9%
Underwriting gain (before tax) 3.2 8.7
Personal Lines Segment 2004 2003
- --------------------------------------------------------------------------
Net premiums written $127.3 $122.8
% Change 3.7% (0.7)%
Net premiums earned 124.0 119.3
% Change 3.9% (18.7)%
Underwriting gain/(loss) (before tax) 4.7 (10.1)
Total Property & Casualty 2004 2003
- --------------------------------------------------------------------------
Net premiums written $386.7 $375.9
% Change 2.9% 0.2%
Net premiums earned 367.2 351.2
% Change 4.6% (3.7)%
Underwriting gain/(loss) (before tax) 0.1 (30.2)
All Other 2004 2003
- --------------------------------------------------------------------------
Revenues $ 2.2 $ 0.6
Write-down and amortization of
agent relationships (4.3) (7.7)
Other expenses (3.6) (3.0)
- --------------------------------------------------------------------------
Net loss before income taxes $ (5.7) $(10.1)
Reconciliation of Revenues 2004 2003
- --------------------------------------------------------------------------
Net premiums earned for reportable segments $367.2 $351.2
Net investment income 47.6 50.8
Realized gains/(losses), net (1.3) 8.0
- --------------------------------------------------------------------------
Total property and casualty revenues
(Statutory basis) 413.5 410.0
Property and casualty statutory to GAAP
adjustment 3.3 (1.2)
- --------------------------------------------------------------------------
Total revenues property and casualty
(GAAP basis) 416.8 408.8
Other segment revenues 2.2 0.6
- --------------------------------------------------------------------------
Total revenues $419.0 $409.4
==========================================================================
Reconciliation of Underwriting Gain/(Loss)
(before tax) 2004 2003
- --------------------------------------------------------------------------
Property and casualty underwriting
gain/(loss) (before tax) (Statutory basis) $ 0.1 $(30.2)
Statutory to GAAP adjustment 3.0 (0.1)
- --------------------------------------------------------------------------
Property and casualty underwriting gain/(loss)
(before tax) (GAAP basis) 3.1 (30.3)
Net investment income 48.6 51.4
Realized gains, net 3.2 6.8
Write-down and amortization of agent
relationships (4.3) (7.7)
Other expenses (3.6) (3.0)
- --------------------------------------------------------------------------
Income before income taxes and cumulative
effect of an accounting change $47.0 $ 17.2
==========================================================================
10
NOTE V - AGENT RELATIONSHIPS
The agent relationships asset is an identifiable intangible asset acquired in
connection with the 1998 Great American Insurance Company (GAI) commercial
lines acquisition. The Corporation follows the practice of allocating
purchase price to specifically identifiable intangible assets based on their
estimated values as determined by appropriate valuation methods. In the GAI
acquisition, the purchase price was allocated to agent relationships and
deferred policy acquisition costs. Agent relationships are evaluated
quarterly 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 $2.6 and $5.8 in the second quarter of
2004 and 2003, respectively. For the six months ended June 30, 2004 and 2003,
the asset was written down before tax by $8.0 and $8.7 respectively. The
write-downs are a result of agency cancellations and 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 $53.8 and $9.3 at June 30, 2004 and
$52.0 and $7.2 at December 31, 2003, respectively.
NOTE VII - DEBT
On June 24, 2004, the Corporation announced a $200.0 offering of 7.3% Senior
Notes due June 15, 2014. The net proceeds from the offering after issuance-
related fees and discount were $198.0. The Corporation intends to use the net
proceeds or $198.0 from the issuance of the Senior Notes to repay a portion of
the $201.3 aggregate principal amount of the Corporation's 5.00% Convertible
Notes due March 19, 2022, which the Corporation has the option to redeem after
March 22, 2005, in whole or in part. The Corporation may also use the net
proceeds to repurchase shares of its common stock in an amount up to the
equivalent number of shares issued if holders convert their Convertible Notes
into shares of the Corporation's common stock. The repayment of the
Convertible Notes will reduce the potential for significant future share and
earnings dilution. Until the funds are needed for such purposes, the
Corporation intends to invest the net proceeds. Interest is payable on the
Convertible Notes on March 19 and September 19 and payable on the Senior Notes
on June 15 and December 15.
The Convertible and Senior Notes are reported on the consolidated balance
sheet net of unamortized issuance-related costs and discount of $8.8 at June
30, 2004. The Corporation uses the effective interest rate method to record
interest expense, amortization of issuance-related costs and amortization of
the discount on the Senior Notes.
Holders of the Convertible Notes have the option to require the Corporation to
purchase all or a portion of the Convertible Notes on March 19 of 2007, 2012
and 2017 at 100% of the principal amount. 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 Convertible Notes at
100% of the principal amount.
11
Under certain conditions, at the option of the holders, the Convertible Notes
may be converted into shares of the Corporation's common stock at the rate of
44.2112 shares per $1,000 principal amount, 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 is more than $24.88, then the Convertible
Notes may be converted during the immediately following calendar quarter.
Additionally, the Convertible Notes may be converted when the credit rating of
the Convertible Notes is below a specified level or withdrawn, or when certain
corporate transactions occur. If all the Convertible Notes were converted,
total outstanding common shares would increase by 8.9 million shares.
The impact of the Convertible 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 June 30, 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 Convertible Notes at the following redemption
prices, expressed as 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%
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 $0.4 in fees related to establishing the line of credit and
amortizes the fees over the term of the agreement with a remaining unamortized
balance at June 30, 2004 of $0.2. In addition, the Corporation is obligated
to pay agency fees and facility fees of up to $0.2 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 June 30, 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 June 30, 2004.
In addition to the debt described above, the Corporation has a $6.5 low
interest loan with the State of Ohio that is secured by a mortgage on the
Corporation's home office property. As of June 30, 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 $0.6 and
expires in November 2009. The remaining balance at June 30, 2004 was $3.6.
Interest expense incurred for the period ending June 30, 2004 and 2003 was
$5.2 and $5.1, respectively.
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. 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. If this criteria is
not met, OCNJ will have to pay up to a maximum cumulative amount of $15.6 to
Proformance to maintain this premiums-to-surplus ratio. Based on data
provided by Proformance, the Group has paid $6.8 to Proformance in settlement
of this obligation through the year ended December 31, 2003. The Group has
$2.2 accrued in the consolidated financial statements for any possible
additional liability that may be incurred based upon the final liability
calculation using Proformance's 2004 results.
12
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 six 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 in the two proceedings.
NOTE IX - EMPLOYEE BENEFITS
The Corporation has a non-contributory defined benefit retirement plan and a
contributory health care plan. The net periodic pension cost as of June 30 is
determined as follows:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------
Service cost earned during the period $ 1.9 $ 1.8 $ 4.0 $ 3.6
Interest cost on projected benefit
obligation 4.1 4.6 8.6 9.2
Expected return on plan assets (5.4) (5.4) (10.7) (10.8)
Amortization of accumulated losses 0.7 - 1.4 -
Amortization of unrecognized prior
service cost (0.6) 0.1 (0.7) 0.1
Curtailment cost - - 0.1 -
- ---------------------------------------------------------------------------------------
Net periodic pension cost $ 0.7 $ 1.1 $ 2.7 $ 2.1
=======================================================================================
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 six months, the Corporation recognized a
curtailment charge of $0.1 through second quarter of 2004.
The components of the Corporation's net periodic postretirement benefit cost
as of June 30:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------
Service cost $ 0.1 $ 0.7 $ 0.7 $1.4
Interest cost 0.8 1.9 2.3 3.7
Amortization of accumulated losses 0.1 - 0.2 -
Amortization of unrecognized prior
service cost (1.5) - (2.0) 0.1
Curtailment cost - - 0.1 -
- ---------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $(0.5) $2.6 $ 1.3 $5.2
=======================================================================================
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 six months, the Corporation recognized a curtailment charge of $0.1
through second quarter of 2004.
13
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 $51.9, or $0.83 per share for the six
months ending June 30, 2004, compared with $30.9, or $0.51 per share in the
same period of 2003. For the second quarter of 2004, net income was $32.7, or
$0.52 per share, compared with net income of $11.0, or $0.18 per share in the
same quarter of 2003.
Investment Results
For the six months ended June 30, 2004 and 2003, consolidated before-tax net
investment income and net realized gains were $99.1, $104.6, $6.9 and $26.1,
respectively. The effective tax rate on investment income for the first six
months of 2004 was 33.0%, compared with 33.4% in 2003.
Second quarter 2004 and 2003 consolidated before-tax investment income and net
realized gains were $48.6, $51.4, $3.2 and $6.8, respectively. The investment
income effective tax rate for the second quarter 2004 was 33.2%, compared with
33.7% in the second quarter of 2003.
The Corporation and the Group did not realize any material losses on any
securities sold during the second quarter of 2004 and 2003 or for the six
months ended June 30, 2004 and 2003. Management of the Corporation believes
the significant volatility of realized investment gains and losses limits the
usefulness of net income as a measure of current operating performance.
Therefore, management uses the non-GAAP financial measure of operating income
to further evaluate current operating performance. Operating income is
reconciled to net income in the table below:
Three Months Six Months
Ended June 30 Ended June 30
($ in millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Operating income $30.6 $ 6.6 $49.0 $13.9
After-tax net realized gains 2.1 4.4 4.5 17.0
Cumulative effect of accounting change - - (1.6) -
----- ----- ------ -----
Net income $32.7 $11.0 $51.9 $30.9
Operating income per
share - diluted $0.49 $0.11 $0.79 $0.23
After-tax net realized gains per
share - diluted 0.03 0.07 0.07 0.28
Cumulative effect of accounting change
per share - diluted - - (0.03) -
----- ----- ------- -----
Net income per share - diluted $0.52 $0.18 $ 0.83 $0.51
In the second quarter of 2004, management invested approximately $198.0, the
proceeds from the June 2004 Senior Notes offering, in short-term taxable
securities. Until the funds are needed for their intended purpose management
will continue to invest the proceeds in a similar fashion.
14
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
$1.4 in the second quarter of 2004 compared to $2.5 in the second quarter of
2003, and $5.2 and $8.1 for the six months ended June 30, 2004 and 2003,
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, 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 June
30, 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:
U.S. Government $ 9.0 $ (0.2) $ - $ - $ 9.0 $ (0.2)
States, municipalities
and political
subdivisions 86.3 (1.7) 4.4 (0.5) 90.7 (2.2)
Corporate securities 616.3 (21.1) 41.4 (2.9) 657.7 (24.0)
Mortgage-backed
securities 266.9 (8.7) 37.1 (3.7) 304.0 (12.4)
- ---------------------------------------------------------------------------------------------
Total fixed maturities 978.5 (31.7) 82.9 (7.1) 1,061.4 (38.8)
Equity securities 8.2 (0.1) 1.5 (0.1) 9.7 (0.2)
- ---------------------------------------------------------------------------------------------
Total temporarily impaired
securities $986.7 $(31.8) $84.4 $(7.2) $1,071.1 $(39.0)
=============================================================================================
15
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 $125.9 $(5.0) $ - $ - $125.9 $(5.0)
Mortgage-backed
securities 92.6 (3.1) - - 92.6 (3.1)
- ---------------------------------------------------------------------------------------------
Total temporarily impaired
securities $218.5 $(8.1) $ - $ - $218.5 $(8.1)
=============================================================================================
As part of the evaluation of the entire $47.1 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 June 30, 2004. In the table
above, there are approximately 350 securities represented. Of this total, 61
securities have unrealized loss positions greater than 5% of their market
values at June 30, 2004, with none exceeding 20%. This group represents
$20.3, or 43% of the total unrealized loss position. Of this group, 46
securities, representing approximately $13.7 in unrealized losses, have been
in an unrealized loss position for less than twelve months. Of the remaining
15 securities in an unrealized loss position for longer than twelve months
totaling $6.6, management believes that it is probable that all contract terms
of the security will be satisfied; the unrealized loss position is due to the
changes in the interest rate environment; and that management has positive
intent and the 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 June 30,
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 $ 14.1 $ 14.0 $ (0.1)
Due after five years through ten years 521.1 505.1 (16.0)
Due after ten years 565.0 542.3 (22.7)
- ------------------------------------------------------------------------------------
Total $1,100.2 $1,061.4 $(38.8)
Held-to-maturity: Amortized Estimated Unrealized
(in millions) Cost Fair Value Loss
- ------------------------------------------------------------------------------------
Due after one year through five years $ 9.7 $ 9.5 $(0.2)
Due after five years through ten years 88.6 85.3 (3.3)
Due after ten years 128.3 123.7 (4.6)
- -----------------------------------------------------------------------------------
Total $226.6 $218.5 $(8.1)
16
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 second quarter of 2004, the agent relationship
impairment before tax was $2.6 compared to the second quarter 2003 impairment
of $5.8. For the six months ended June 30, 2004 and 2003, the agent
relationship impairment before tax was $8.0 and $8.7, respectively. 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 $131.1. 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 June 30, 2004 and December 31, 2003, statutory surplus, a financial measure
that is required by insurance regulators and used to monitor financial
strength, was $899.0 and $867.6, respectively. The ratio of twelve months
ended net premiums written to statutory surplus as of June 30, 2004 was 1.6 to
1.0 compared to 1.7 to 1.0 at December 31, 2003.
Premium Revenue Results
Premium revenue reflects premiums earned by the Group. The Group's premiums
are earned principally on a monthly pro rata basis over the term of the
policy. Management analyzes premium revenues primarily by premiums written in
the current period. Net premiums written differs from gross premiums written
by premiums ceded to reinsurers.
The table below summarizes property and casualty premium on a gross and net
basis compared with same period last year:
17
Three months ended June 30, Six months ended June 30,
($ in millions) 2004 2003 % Chg 2004 2003 % Chg
---- ---- ----- ---- ---- -----
Gross Premiums Written
- ----------------------
Commercial Lines $225.9 $219.4 3.0% $446.3 $433.2 3.0%
Specialty Lines 66.8 70.1 (4.7)% 128.6 128.6 -
Personal Lines 127.6 125.9 1.4% 246.5 242.9 1.5%
------ ------ ------ ------
All Lines $420.3 $415.4 1.2% $821.4 $804.7 2.1%
Three months ended June 30, Six months ended June 30,
($ in millions) 2004 2003 % Chg 2004 2003 % Chg
---- ---- ----- ---- ---- -----
Net Premiums Written
- --------------------
Commercial Lines $220.3 $209.9 5.0% $432.5 $415.1 4.2%
Specialty Lines 39.1 43.2 (9.4)% 73.9 76.1 (2.9)%
Personal Lines 127.3 122.8 3.7% 244.3 236.9 3.1%
------ ------ ------ ------
All Lines $386.7 $375.9 2.9% $750.7 $728.1 3.1%
The net premiums written for the Commercial, Specialty and Personal Lines
segments were favorably impacted by rate and/or renewal price increases and
$5.0 of return ceded premium on experience based reinsurance contracts in both
the second quarter and six months ended June 30, 2004, along with continued
strong retention rates. The experience rated reinsurance contracts are for a
funded layer of casualty excess of loss reinsurance coverage. These increases
were partially offset by a decline in new business premium production in all
three operating segments.
Commercial Lines renewal price increases averaged 4.5% in the second quarter
2004 compared to 10.9% in the second quarter 2003, while renewal price
increases averaged 5.7% compared to 11.5% for the first six months of 2004 and
2003, respectively. The decrease in the renewal price increase period over
period is the result of a broad market trend indicating that competitive
pricing pressure is increasing. 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.
In addition to the factors identified above, the Specialty Lines net premiums
written declined as a result of increased reinsurance rates on commercial
umbrella business, partially offset by good growth in the fidelity and surety
line in both second quarter and first six months of 2004. Higher reinsurance
rates 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. Commercial umbrella, the
largest Specialty Lines product, recognized an 8.2% average renewal price
increase for the second quarter 2004 compared to 22.4% in the same period in
2003. For the six months ended June 30, 2004, commercial umbrella recognized
a 9.7% average renewal price increase compared to 22.7% in 2003.
All Lines Discussion
The following table provides key financial measures for All Lines:
Three Months Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
---- ---- ---- ----
All Lines ($ in millions)
- -------------------------
Loss ratio 55.3% 60.8% 54.7% 60.2%
Loss adjustment expense ratio 9.8% 11.8% 10.2% 12.7%
Underwriting expense ratio 33.1% 33.6% 34.6% 34.6%
----- ------ ----- ------
Combined ratio 98.2% 106.2% 99.5% 107.5%
18
The improved loss and LAE ratios for 2004 are the result of reduced claim
frequency, fewer catastrophe losses, a decline in large losses (losses greater
than $250,000 per loss), improved pricing levels and favorable prior year
reserve development, as reflected below.
During the second quarter, underwriting and loss adjustment expenses were
impacted by $3.5 in severance and other related restructuring costs primarily
associated with the Cost Structure Efficiency (CSE) Initiative discussed
below. These expenses were partially offset by a statutory curtailment gain
of $3.2 related to the pension plan. For the first six months of 2004,
underwriting and loss adjustment expenses were impacted by $9.1 in severance
and other related restructuring costs primarily associated with the CSE
Initiative, offset by a statutory pension curtailment gain of $11.2. In
addition, the first six months of 2004 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 CSE Initiative is designed to improve productivity and customer service,
while lowering operating costs by implementing operating efficiencies and/or
technology advances to streamline workflow. As a result of the CSE
Initiative, the Group reduced staff by approximately 450 positions during the
first six months of 2004. Efficiencies implemented to date are projected to
reduce operating expenses by $4.0 in 2004, net of severance and related costs,
with projected annualized savings of $24.5 in 2005.
The loss and LAE ratio, which measures losses and LAE as a percentage of net
earned premiums, was positively impacted in the second quarter and first six
months of 2004 by adjustments to estimated losses related to prior years'
business. The loss and LAE ratio component of the accident year combined
ratio measures losses and LAE arising from insured events that occurred in the
respective accident year. The current accident year excludes losses and LAE
for insured events that occurred in prior accident years.
The table below summarizes the impact of changes in provision for all prior
accident year losses and LAE:
Three Months Six Months
Ended June 30 Ended June 30
($ in millions) 2004 2003 2004 2003
- --------------- ---- ---- ---- ----
Statutory net liabilities, beginning of period $2,141.9 $2,095.8 $2,128.9 $2,078.7
Increase/(decrease) in provision for prior
accident year claims $(10.2) $1.8 $(12.7) $4.5
Increase/(decrease) in provision for prior
accident year claims as % of premiums
earned (2.8)% 0.5% (1.7)% 0.6%
In addition to the reasons stated above, the LAE ratio was also favorably
impacted by lower paid expenses as a result of more effective management of
claims litigation expenses and other expense management initiatives.
Catastrophe losses impacted the second quarter 2004 combined ratio by 3.2
points, a decrease of 0.8 points from the second quarter of 2003 and impacted
the first six months of 2004 by 2.0 points, a decrease of 1.6 points over 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 second quarter of 2004, there were six catastrophes
with the largest catastrophe generating $3.8 in incurred losses as compared
with four catastrophes in the second quarter of 2003 with the largest
catastrophe generating $9.4 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.
19
The table below summarizes the variance in the underwriting expense ratio for
the second quarter 2003 compared to the second quarter 2004:
Underwriting expense
ratio variance
Underwriting expense ratio - second
quarter 2003 33.6%
Increase in professional fees 0.8%
Increase in commissions 0.4%
Severance related expenses due to
reduction in force 0.7%
One-time curtailment credit related
to pension plan (0.5)%
Reduction in personnel related expenses (0.8)%
Impact of all other underwriting expense
ratio items (1.1)%
-------
Underwriting expense ratio - second
quarter 2004 33.1%
The expense ratio was favorably impacted by reduced staff costs related to the
CSE Initiative and the statutory pension curtailment gain. Offsetting these
favorable impacts was severance and related costs described above, an increase
in professional fees related to the CSE Initiative and an increase in agent
contingent commissions due to the improvement in the loss ratio. Offsetting
these increases is a decrease in other underwriting expense ratio items, which
decreased the ratio by 1.1 points.
Statutory amortization expense related to the capitalization of application
development costs of $1.6 and $1.1 for the second quarter of 2004 and 2003,
respectively and $3.1 and $2.9 for the six months ended June 30, 2004 and
2003, respectively, was recorded in underwriting expenses. This expense
relates to the rollout of P.A.R.I.S.sm, a new internally developed software for
policy administration and rating. On a statutory accounting basis, the new
application is being amortized over a five-year period (compared to a ten-year
period under GAAP) in accordance with statutory accounting principles. The
rollout has been substantially completed for the Commercial Lines segment.
During 2003, the Group began capitalizing application development costs
associated with the Personal Lines segment, which is expected to begin rollout
in 2005. The Specialty Lines segment is on target for rollout in the
beginning of 2005.
The employee count continues to decline as a result of the CSE Initiative.
Through June 2004, approximately 450 staff reductions have been implemented.
As of June 30 2004, the employee count, excluding those employees receiving
severance and other termination benefits, was approximately 2,200, compared
with approximately 2,700 at December 31, 2003 and approximately 2,800 at
June 30, 2003.
Segment Discussion
The Corporation's organizational structure consists of three operating units:
Commercial Lines, Specialty Lines and Personal Lines. The Corporation also
has an all other segment, which derives its revenue from investment income.
The following tables provide key financial measures for each of the property
and casualty reportable segments:
Three Months Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
---- ---- ---- ----
Commercial Lines Segment ($ in millions)
- ----------------------------------------
Loss ratio 53.4% 63.4% 52.9% 62.3%
Loss adjustment expense ratio 12.7% 12.8% 12.0% 13.1%
Underwriting expense ratio 34.6% 35.4% 34.9% 36.0%
------ ------ ------ ------
Combined ratio 100.7% 111.6% 99.8% 111.4%
Specialty Lines Segment ($ in millions)
- ---------------------------------------
Loss ratio 45.5% 20.6% 42.6% 22.2%
Loss adjustment expense ratio 3.0% 13.3% 3.4% 15.5%
Underwriting expense ratio 45.5% 42.1% 47.6% 46.1%
------ ------ ------ ------
Combined ratio 94.0% 76.0% 93.6% 83.8%
Personal Lines Segment ($ in millions)
- --------------------------------------
Loss ratio 61.6% 70.5% 61.6% 69.4%
Loss adjustment expense ratio 7.3% 9.6% 9.6% 11.1%
Underwriting expense ratio 26.6% 27.6% 30.1% 28.4%
------ ------ ------ ------
Combined ratio 95.5% 107.7% 101.3% 108.9%
20
Commercial Lines Segment
The 2004 combined ratio improved due to a significantly lower loss ratio as a
result of lower claim frequency, including lower catastrophe and other large
property losses and favorable development on prior year reserves. 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 second quarter 2004 Commercial Lines loss ratio
included 0.9 points related to catastrophe losses compared to 2.5 points in
the second quarter of 2003. During the first six months of 2004, the
Commercial Lines loss ratio was impacted by 0.8 points related to catastrophe
losses compared to 3.0 points during the same period in 2003. In addition,
the Commercial Lines loss and LAE ratios were favorably impacted by prior year
development of 1.0 point in second quarter 2004 compared to adverse prior year
development of 4.0 points in second quarter 2003. For the first six months of
2004, Commercial Lines loss and LAE ratios were favorably impacted by prior
year development of 2.2 points compared to adverse development of 2.7 points
in 2003. Although the Group has taken actions to improve workers'
compensation results, assessments for the National Workers Compensation Pool
increased the Commercial Lines combined ratio by 0.4 points and 1.1 points in
second quarter 2004 and 2003, respectively and by 1.3 points and 1.6 points in
the first six months of 2004 and 2003, respectively.
Specialty Lines Segment
Higher reinsurance rates, which reduces net premiums written, in the
commercial umbrella line have put upward pressure on the loss ratio, which
increased 24.9 points and 20.4 points for the second quarter and for the six
months ended June 30, 2004, respectively. In both the second quarter and the
first six months of 2004 this product line was impacted by favorable prior
year reserve development, which lowered the loss and LAE ratios by 5.2 points
and 6.3 points. For the comparable periods in 2003, the favorable prior year
reserve development lowered the loss and LAE ratios by 15.5 points and 12.9
points, respectively.
Personal Lines Segment
The improvement in the second quarter combined ratio was driven by favorable
claim frequency trends, increased pricing and favorable prior year reserve
development. The favorable development improved the combined ratio for
Personal Lines by 4.8 points for the second quarter 2004 compared to adverse
prior year reserve development in second quarter 2003, which added 0.4 points
to the 2003 combined ratio. For the first six months of 2004, adverse prior
year development increased the Personal Lines combined ratio by 0.5 points
compared to 1.8 points in 2003. The six-month combined ratio was also
impacted by the contingent liability accrual of $9.0 related to the surplus
guarantee on the Proformance transaction which added 3.7 points to the
underwriting expense ratio. The second quarter 2004 Personal Lines loss ratio
included 8.0 points related to catastrophe losses compared to 7.7 points in
the second quarter of 2003. During the first six months of 2004, the Personal
Lines loss ratio was impacted by 4.7 points related to catastrophe losses
compared to 5.6 points during the same period in 2003.
21
Statutory Earned Premium and Combined Ratios
Combined Ratios
Earned ----------------------------------------------------
Premium Calendar Year Accident Year
Year to Date Year to Date Year to Date Calendar Accident
(By operating segment, including June 30, June 30, June 30, Year Year
selected major product lines) 2004 2004 2004(a) 2003 2003(a)
- ------------------------------------------------------------------------------------------------------
Commercial Lines $400.2 99.8% 102.0% 112.3% 105.0%
Workers' compensation 67.8 111.3% 113.7% 123.0% 113.6%
Commercial auto 114.5 96.2% 100.2% 105.5% 103.5%
General liability 42.5 106.5% 107.7% 122.6% 111.4%
CMP, fire & inland marine 175.4 96.0% 97.2% 109.7% 100.9%
Specialty Lines 82.5 93.6% 99.9% 77.2% 89.1%
Commercial umbrella 60.9 97.0% 101.3% 80.5% 92.4%
Fidelity & surety 21.6 79.2% 90.9% 68.1% 79.0%
Personal Lines 245.6 101.3% 100.8% 105.6% 101.9%
Personal auto, incl.
personal umbrella 150.0 107.6% 105.0% 107.0% 103.1%
Personal property 95.6 91.2% 94.1% 103.3% 99.7%
- ------------------------------------------------------------------------------------------------------
Total All Lines $728.3 99.5% 101.2% 106.1% 102.1%
======================================================================================================
(a) The loss and LAE ratio component of the accident year combined ratio
measures losses and LAE arising from insured events that occurred in the
respective accident year. The current accident year excludes losses and LAE
for insured events that occurred in prior accident years. The measurement
date for accident year data is June 30, 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 June 30, 2004, the available-for-sale fixed maturity portfolio had a market
value of $3.1 billion, which consisted of 97.1% 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 $91.1 and
comprised 2.9% of the available-for-sale fixed maturity portfolio and 2.5% 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 $329.2 at June 30, 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 $25.1 at June 30, 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 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.
22
Following is a table displaying non-investment grade and non-rated available-
for-sale securities in an unrealized loss position at June 30, 2004 and
December 31, 2003:
Amortized Fair Unrealized
(in millions) Cost Value Loss
- -----------------------------------------------------------------------------
June 30, 2004 $14.5 $14.0 $(.5)
December 31, 2003 $23.5 $22.6 $(.9)
At June 30, 2004, the Group's available-for-sale fixed maturity portfolio
contained tax-exempt fixed maturity securities totaling $283.8 or 9.2% of the
available-for-sale fixed maturity portfolio compared to $79.1 or 2.6% at
December 31, 2003. In 2004, as underwriting profitability has improved,
management has and plans to continue to invest more funds into tax-exempt
securities.
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 June
30, 2004 was $311.5 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 4.9 years as of June 30, 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 June 30, 2004, the Group's short-term portfolio was $253.7 or 6.3% of the
total investment portfolio compared to $40.4 at December 31, 2003. The
increase was due to the investing of the Group's June 2004 Senior Note
proceeds in short-term instruments. Short-term investments are carried at
fair market value on the balance sheet.
At June 30, 2004, the Group's equity portfolio, which consisted of preferred
and common stock, was $351.0, or 8.7% of the total investment portfolio
compared to $329.0 or 8.8% at December 31, 2003. 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 June 30, 2004, the equity portfolio consisted of stocks in
48 separate entities in 36 different industries. As of June 30, 2004, 30.4%
of the Group's equity portfolio was invested in five companies and the largest
single position was 7.6% 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 June 30,
2004 and $2.6 billion at December 31, 2003. As of June 30, 2004, the reserves
by operating segment were as follows: $1.7 billion in Commercial Lines, $0.6
billion in Specialty Lines and $0.4 billion in Personal Lines.
Losses and LAE incurred for prior accident years were recognized during the
second quarter of 2004 and 2003 based on new information received during the
second quarter that resulted in 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.
23
Results for the second quarter and six 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 Six Months Ended
June 30 June 30 Year
2004 2003 2004 2003 2003
------------------ ---------------- ----
Prior Accident Year Loss & LAE
by Segment (in millions)
- ------------------------------
Commercial Lines $ (2.1) $ 7.6 $ (8.7) $ 10.4 $ 41.0
Specialty Lines (2.1) (6.3) (5.2) (10.2) (21.3)
Personal Lines (6.0) 0.5 1.2 4.3 14.4
-------- ------ ------- ------- -------
All Lines Prior Accident
Year Development $(10.2) $ 1.8 $(12.7) $ 4.5 $ 34.1
Prior Accident Year Loss & LAE
(in millions)
- ------------------------------
Accident Year 2003 $ (8.1) $ - $(22.2) $ - $ -
Accident Year 2002 (2.4) (5.5) (5.5) (26.2) (39.0)
Accident Year 2001 and Prior 0.3 7.3 15.0 30.7 73.1
------- ------ ------- ------- -------
Total Prior Accident
Year Development $(10.2) $ 1.8 $(12.7) $ 4.5 $ 34.1
For the Commercial Lines operating segment, the favorable loss and LAE
development for prior accident years recorded during the first six months of
2004 was concentrated in the commercial automobile product line. Adverse loss
and LAE development for Commercial Lines for the first six months of 2003 were
concentrated in the commercial multiple peril and general liability product
lines.
For the Specialty Lines operating segment, the favorable loss and LAE
development for prior accident years recorded during the first six months of
2004 was concentrated in the bond and commercial umbrella product lines.
Favorable loss and LAE development for Specialty Lines for the first six
months of 2003 occurred in the bond and commercial umbrella product lines.
For the Personal Lines operating segment, the adverse losses and LAE for prior
accident years recorded during the first six months of 2004 was concentrated
in the personal auto, including personal umbrella product line. Adverse loss
and LAE development for Personal Lines for the first six months of 2003 was
concentrated in the personal auto, including personal umbrella product line.
There is considerable uncertainty in the estimates of loss and LAE reserves
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 trends; 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 incurred may deviate substantially from the
amounts recorded. Furthermore, the timing, frequency and extent of
adjustments to the estimated liabilities cannot be predicted since the
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 $97.2 for the first six months of 2004
compared with $33.4 for the same period in 2003 resulting from a reduction in
paid losses, a result of the improved loss and LAE ratios discussed above.
Net cash used in investing was $92.3 in the first six months of 2004 compared
with $55.8 during the first six months of 2003. Cash provided by financing
operations was $202.5 in the first six months of 2004 compared with $1.1 in
the first six months of 2003. In the second quarter of 2004 net proceeds of
approximately $198.0 from the issuance of 7.3% senior notes were invested in
short-term securities. Liquidity needs of the Group are expected to be met by
net cash generated from operations, maturities of investments, interest and
dividend receipts and current cash balances.
24
Debt
On June 24, 2004, the Corporation announced a $200.0 offering of its 7.3%
Senior Notes due 2014. The net proceeds from the offering after issuance-
related fees and discount was $198.0. The Corporation intends to use the net
proceeds from the Senior Notes to repay a portion of the $201.3 aggregate
principal amount of the Corporation's 5.00% Convertible Notes due March 19,
2022, which the Corporation has the option to redeem after March 22, 2005, in
whole or in part. The Corporation may also use the net proceeds to repurchase
shares of its common stock in an amount up to the equivalent number of shares
issued if holders convert their Convertible Notes into shares of the
Corporation's common stock. The repayment of the Convertible Notes will reduce
the potential for significant future share earnings dilution. Until the funds
are needed for such purposes, the Corporation intends to invest the net
proceeds in taxable fixed income securities.
For additional information regarding Liquidity of the Corporation, please
refer to Note VII in the Notes to the Consolidated Financial Statements on
page 11 of this Form 10-Q.
At June 30, 2004, the Corporation had cash, short term and marketable fixed
maturity investments totaling $305.3. 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 six months of 2004, the Company paid dividends totaling $60.0 to the
Corporation resulting in a dividend payment limitation of $26.8 for the second
half of 2004.
Rating Agencies
Regularly the financial condition of the Corporation and the Group 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 Group's financial strength
and the ability of the Corporation to meet its financial obligations to its
debt security holders. Following are the Corporation's current ratings and
rating outlooks.
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
During the first quarter of 2004, S&P changed its rating outlook from negative
to 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.
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 1995. 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
25
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 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.
PART II
ITEM 1. Legal Proceedings
Reference is made to the first paragraph under Item 1. Legal
Proceedings in the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2004, regarding the Fair Labor
Standards Act proceeding. A motion to change venue was granted on
May 25, 2004 with the proceeding assigned to the U.S. District Court
for the Southern District of Ohio, Eastern Division, Columbus, Ohio.
The Corporation 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 Corporation.
Current litigation includes six separate proceedings making class
action claims for which class certification has been sought in two
proceedings. No class certifications have been granted in the two
proceedings. 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 - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and reports on Form 8-K
I. Reports on Form 8-K:
The Corporation filed a Form 8-K on April 7, 2004 to report under
Item 5, the filing of a press release announcing the resignation of
Senior Vice President and Chief Investment Officer Richard B. Kelly,
JD, CPCU, CFA. Exhibits to the Form 8-K consisted of the press
release dated April 7, 2004.
26
The Corporation filed a Form 8-K/A on May 5, 2004 to report under
Item 7 and Item 12 the filing of a press release announcing first
quarter 2004 earnings and Supplemental Financial Information.
Exhibits to the Form 8-K/A consisted of the press release dated May
4, 2004 and the Supplemental Financial Information.
The Corporation filed a Form 8-K on May 10, 2004 to report under
Item 5, the filing of a press release announcing a management
reorganization, including a change in Chief Financial Officer.
Exhibits to the Form 8-K consisted of the press release dated
May 10, 2004.
The Corporation filed a Form 8-K on June 24, 2004 to report under
Item 5, the filing of a press release announcing a senior notes
offering. Exhibits to the Form 8-K consisted of the press release
dated June 24, 2004.
The Corporation filed a Form 8-K on June 30, 2004 announcing the sale
of $200 million aggregate principal amount of 7.30% senior notes due
June 15, 2014. Exhibits to the Form 8-K consisted of the
Underwriting Agreement dated June 24, 2004, Pricing Agreement dated
June 24, 2004, First Supplemental Indenture dated June 29, 2004, Form
of Senior Note, Opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
Opinion of Vorys, Sater, Seymour and Pease LLP, Computation of Ratio
of Earnings to Fixed Charges, Consent of Skadden, Arps, Slate,
Meagher & Flom LLP, Consent of Vorys, Sater, Seymour and Pease LLP.
II. Exhibits:
10 2004 Executive Management Team Annual Incentive Program
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)
August 3, 2004 /s/Michael A. Winner
-------------------------
Michael A. Winner, Executive Vice
President and Chief Financial Officer
27