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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the fiscal year ended DECEMBER 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from__________to____________
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-0783294
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
136 NORTH THIRD STREET, HAMILTON, OHIO 45025
(Address of principal executive offices) (Zip Code)
(513) 867-3000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares, Par Value $.0625 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value as of March 1, 2000 of the voting stock held by
non-affiliates of the registrant was $623,439,288
On March 1, 2000 there were 60,073,504 shares outstanding.
Page 1 of 88
INDEX TO EXHIBITS ON PAGE 71
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive Proxy Statement for the Annual Shareholders meeting
scheduled to be held April 26, 2000 is incorporated herein by reference for the
following items:
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Ohio Casualty Corporation (the Corporation) was incorporated under the laws of
Ohio in August, 1969. The Corporation operates primarily as a holding company
and is principally engaged, through its direct and indirect subsidiaries, in the
business of property and casualty insurance and insurance premium finance.
The Corporation has two industry segments: property and casualty insurance and
insurance premium finance. The Corporation conducts its property and casualty
insurance business through The Ohio Casualty Insurance Company ("Ohio
Casualty"), an Ohio corporation organized in 1919, and Ohio Casualty's five
operating property and casualty insurance subsidiaries: West American Insurance
Company ("West American"), an Indiana corporation (originally incorporated under
the laws of the state of California) acquired in 1945; Ohio Security Insurance
Company ("Ohio Security"), an Ohio corporation acquired in 1962; American Fire
and Casualty Company ("American Fire"), an Ohio corporation (originally
incorporated under the laws of the state of Florida) acquired in 1969; Avomark
Insurance Company ("Avomark"), an Indiana corporation created in 1996 and Ohio
Casualty of New Jersey, Inc. ("OCNJ"), an Ohio corporation created in 1998. This
group of six property-casualty companies that make up the Ohio Casualty Group
(the Group) presently underwrites most forms of property and casualty insurance.
The Corporation conducts its premium finance business through Ocasco Budget,
Inc. ("Ocasco"), an Ohio corporation (originally incorporated under the laws of
the state of California) organized in 1960. Ocasco is a direct subsidiary of
Ohio Casualty.
On December 1, 1998, Ohio Casualty acquired substantially all of the Commercial
Lines Division of Great American Insurance Company ("GAI"), an insurance
subsidiary of American Financial Group, Inc. As part of the transaction, the
Group assumed responsibility for 650 employees of GAI's Commercial Lines
Division, as well as relationships with 1,700 agents. The major lines of
business included in the sale were workers' compensation, commercial
multi-peril, umbrella, general liability and commercial auto. Four commercial
operations as well as all California business and all pre-1987 environmental
claims were excluded from the transaction.
Under the GAI asset purchase agreement, the Group assumed $645.8 million of
commercial lines insurance liabilities, $62.6 million in other liabilities and
acquired $287.9 million of investments, $1.5 million in cash and $119.1 million
in other assets. This resulted in an assumption by the Group of a net
statutory-basis liability of $300.0 million in addition to the Corporation's
issuance of warrants to purchase 6 million shares (as adjusted for 1999 stock
split) of Ohio Casualty Corporation common stock at a price of $22.505 per
share. In addition, if the annualized production from the transferred agents at
the end of eighteen months equals or exceeds the production in the twelve months
prior to closing, GAI will receive an additional $40.0 million. This bonus
payment grades down ratably where if eighteen-month annualized production equals
71% or less of previous production, no bonus payment is required. The bonus
payment will be accrued as additional agent relationships when minimum
contingency is achieved. Additional information related to the accounting
treatment of the acquisition as well as proforma results are set forth in Item
14, Note 14, Acquisition of Commercial Lines Business, in the Notes to the
Consolidated Financial Statements on pages 54 and 55 of this Form 10-K.
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ITEM 1. CONTINUED
During 1995, the Corporation's life insurance operations conducted through The
Ohio Life Insurance Company (Ohio Life) subsidiary were discontinued. We found
it increasingly difficult to achieve our targeted 16% rate of return in this
segment of our business. It was determined that a 16% return could not be
achieved without substantial capital contributions and a dramatic overhaul of
the life operations. It was decided that this would not be a prudent use of our
capital. Therefore, on October 2, 1995, the Corporation signed the final
documents to reinsure the existing blocks of business and enter a marketing
agreement with Great Southern Life Insurance Company. The existing blocks of
business were reinsured through a 100% coinsurance treaty with Employer's
Reassurance Corporation. During the fourth quarter of 1997, Great Southern Life
Insurance Company replaced Ohio Life as the primary insurer for approximately
76% of the life insurance policies subject to the 1995 agreement. As a result of
this assumption, fourth quarter 1997 net income was positively impacted by a
partial recognition of unamortized ceding commission. The after-tax impact was
an increase to net income of $5.3 million. At December 31, 1998, Great Southern
had assumed 95% of the life insurance policies subject to the 1995 agreement. As
a result, the Corporation recognized an additional amount of unamortized ceding
commission of $1.1 million before tax during 1998. During 1999, Great Southern
Life Insurance Company replaced Employers' Reassurance Corporation on the 100%
coinsurance treaty, and the Corporation recognized the remaining $1.1 million in
unamortized ceding commission. On December 31 1999, the Corporation completed
the sale of the Ohio Life shell, thereby transferring all remaining assets and
liabilities, as well as reinsurance treaty obligations, to the buyer. The
after-tax gain on this sale totaled $6.2 million, or $.11 per share. Net income
from discontinued operations amounted to $4.3 million or $.07 per share in 1999,
compared with $1.9 million or $.03 per share in 1998 and $8.7 million or $.13
per share in 1997. Additional information related to the discontinued life
insurance operations is included in Item 14, Note 20, Discontinued Operations,
in the Notes to the Consolidated Financial Statements on page 57 of this Form
10-K.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The revenues, operating profit and combined ratios of each industry segment for
the three years ended December 31, 1999 are set forth in Item 14, Note 13,
Segment Information, in the Notes to the Consolidated Financial Statements on
pages 53 and 54 of this Form 10-K.
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ITEM 1. CONTINUED
PREMIUMS
The following table shows the total net premiums written (gross premiums less
premiums ceded pursuant to reinsurance treaties) by line of business by the
Group and Ohio Life for the periods indicated.
Net Premiums Written
By Line of Business
(in thousands)
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Auto liability $ 437,856 $ 403,179 $ 384,358 $ 386,121 $ 403,781
Auto physical damage 281,054 257,170 219,870 208,541 207,534
Homeowners
multiple peril 181,905 180,697 168,168 166,457 160,444
Workers' compensation 191,688 100,150 97,176 115,398 140,558
Commercial
multiple peril 229,999 157,103 141,931 132,808 131,553
Other liability 150,879 95,144 96,610 101,688 108,483
All other lines 113,285 105,668 98,708 97,059 96,842
----------- ----------- ----------- ----------- -----------
Property and casualty
premiums $ 1,586,666 $ 1,299,111 $ 1,206,821 $ 1,208,072 $ 1,249,195
=========== =========== =========== =========== ===========
Premium finance
revenues $ 804 $ 1,170 $ 1,511 $ 1,981 $ 2,314
=========== =========== =========== =========== ===========
Discontinued operations-
Statutory premiums:
Individual life $ 0 $ 0 $ 0 $ 0 $ (126,979)
Annuity 0 0 0 0 (195,870)
Other 0 0 6 215 (22,012)
----------- ----------- ----------- ----------- -----------
Total 0 0 6 215 (344,861)
FAS 97 adjustments 0 0 0 0 (1,533)
----------- ----------- ----------- ----------- -----------
Discontinued operations
revenues $ 0 $ 0 $ 6 $ 215 $ (346,394)
=========== =========== =========== =========== ===========
Property and casualty net premiums written increased $287.6 million in 1999.
$262.2 million of this increase reflects a full twelve months of results from
the acquisition of GAI versus one month of activity in 1998. Net written
premiums from the GAI acquisition were $293.8 million in 1999 and $31.6 million
in 1998. Excluding the effects of GAI in 1998 and 1999, net premiums written
increased 2.0%.
Net premiums written distributions by state have shifted as a result of a full
year of results from the GAI acquisition. Excluding the effects of the GAI
acquisition, for comparison purposes, New Jersey net premiums written increased
$9.2 million, primarily due to increased net premiums written in Urban
Enterprise Zones and converting from six- to twelve-month policies. These
increases in New Jersey are offset by a state mandated 15% rate rollback. Ohio
and Kentucky
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ITEM 1. CONTINUED
net premiums written increased $1.9 million and $13.6 million, respectively. The
results in Ohio are largely due to growth in our auto and homeowners lines of
business. Increased premiums in Kentucky result from a personal lines
acquisition adding $9.3 million to premiums. Premiums decreased $9.5 million in
Pennsylvania and $1.8 million in Illinois. The decrease in Pennsylvania is
driven by competitive pricing conditions in all lines.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Group is represented on a commission basis by approximately 7,503
independent insurance agents. In most cases, these agents also represent other
unaffiliated companies which may compete with the Group. The six claim and eight
underwriting and service offices operated by the Group assist these independent
agents in producing and servicing the Group's business.
The following table shows consolidated direct premiums written for the Group's
ten largest states:
Ten Largest States
Direct Premiums Written
From Continuing Operations
(in thousands)
Percent Percent Percent
1999 of Total 1998 of Total 1997 of Total
---- -------- ---- -------- ---- --------
New Jersey $230,652 17.4 New Jersey $219,518 17.0 New Jersey $220,588 18.0
Ohio 153,146 11.5 Ohio 147,285 11.4 Ohio 132,325 10.8
Kentucky 125,438 9.5 Kentucky 120,309 9.3 Pennsylvania 101,341 8.3
Pennsylvania 87,986 6.6 Pennsylvania 96,932 7.5 Kentucky 101,074 8.2
Illinois 77,035 5.8 Illinois 73,794 5.7 Illinois 63,347 5.2
Indiana 74,073 5.6 Indiana 65,681 5.1 Maryland 54,415 4.4
North Carolina 39,345 3.0 Maryland 41,526 3.2 Indiana 46,660 3.8
Maryland 38,851 2.9 Texas 40,537 3.1 Texas 42,005 3.4
Texas 37,894 2.9 North Carolina 37,856 2.9 Florida 37,383 3.0
Oklahoma 33,995 2.6 Florida 32,649 2.5 North Carolina 34,570 2.8
-------- ---- -------- ---- -------- ----
$898,415 67.8 $876,087 67.7 $833,708 67.9
======== ==== ======== ==== ======== ====
INVESTMENT OPERATIONS
Each of the companies in the Group must comply with the insurance laws of its
domiciliary state and of the other states in which it is licensed for business.
Among other things, these laws prescribe the kind, quality and concentration of
investments which may be made by insurance companies. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stocks, real estate mortgages and real estate.
The distribution of invested assets of the Group is determined by a number of
factors, including insurance law requirements, the Corporation's liquidity
needs, tax position, and general market conditions. In addition, our business
mix and liability payout patterns are considered. Adjustments are made to the
asset allocation from time to time. During 1999, the Group reallocated its
investment portfolio to adjust its asset mix. Outstanding growth in the equity
portfolio caused the relationship of asset classes to fall outside of the
Group's long-standing guidelines. The Group responded by selling approximately
$200.0 million in equity securities,
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7
ITEM 1. CONTINUED
resulting in $145.0 million of realized gains in 1999. The Corporation has no
real estate investments. Assets relating to property and casualty operations are
invested to maximize after-tax returns with appropriate diversification of risk.
The following table sets forth the carrying values and other data of the
consolidated invested assets of the Corporation as of the end of the years
indicated:
Distribution of Invested Assets
(in millions)
1999
Average % of % of % of
Rating 1999 Total 1998 Total 1997 Total
------- -------- ----- -------- ----- -------- -----
U.S. government AAA $ 65.1 2.0 $ 79.8 2.2 $ 69.8 2.2
Tax exempt bonds
and notes AA+ 461.4 14.5 839.6 23.3 875.7 27.8
Debt securities
issued by foreign
governments N/A 0.0 0.0 3.6 0.1 3.5 0.1
Corporate securities BBB+ 1,066.1 33.5 1,117.5 31.0 929.9 29.5
Mortgage backed
securities
U.S. government AAA 46.5 1.5 6.3 0.2 17.6 0.6
Other AA 737.9 23.2 369.1 10.2 329.5 10.4
-------- ----- -------- ----- -------- -----
Total bonds A+ 2,377.0 74.7 2,415.9 67.0 2,226.0 70.6
Common stocks 698.0 22.0 919.8 25.5 853.9 27.1
Preferred stocks 0.1 0.0 5.1 0.2 5.6 0.2
-------- ----- -------- ----- -------- -----
Total stocks 698.1 22.0 924.9 25.7 859.5 27.3
Short-term 104.4 3.3 262.9 7.3 65.9 2.1
-------- ----- -------- ----- -------- -----
Total investments $3,179.5 100.0 $3,603.7 100.0 $3,151.4 100.0
======== ===== ======== ===== ======== =====
Total market value
of investments $3,179.5 $3,603.7 $3,151.4
======== ======== ========
Total amortized cost
of investments $2,674.1 $2,815.8 $2,453.8
======== ======== ========
The consolidated fixed income portfolio (identified as "Total bonds" in the
foregoing table) of the Corporation had a weighted average rating of "A+" and an
average stated maturity of 12.10 years as of December 31, 1999.
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) and unrated securities are summarized as follows:
1999 1998 1997
---- ---- ----
Below investment grade securities:
Carrying value $ 175.2 $ 207.3 $ 141.4
Amortized cost 187.1 208.8 135.6
Unrated securities:
Carrying value $ 303.2 $ 281.8 $ 242.8
Amortized cost 310.0 264.8 228.6
7
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ITEM 1. CONTINUED
Ratings provided by other agencies, such as the NAIC, categorize additional
unrated securities into below investment grade ratings. The following summarizes
the additional unrated securities that are rated in the below investment grade
category by other rating agencies:
1999 1998 1997
---- ---- ----
Below investment grade securities at
carrying value $ 175.2 $ 207.3 $ 141.4
Other rating agencies categorizing
unrated securities as below
investment grade 38.7 7.7 8.1
------- ------- -------
Below investment grade securities at
carrying value $ 213.9 $ 215.0 $ 149.5
All of the Corporation's below investment grade investments (based on carrying
value) are performing in accordance with contractual terms and are making
principal and interest payments as required. The securities in the Corporation's
below investment grade portfolio have been issued by 63 corporate borrowers in
approximately 45 industries. At December 31, 1999, the market value of the
Corporation's five largest investments in below investment grade securities
totaled $58.8 million, and had an approximate amortized cost of $60.8 million.
None of these holdings individually exceeded $23.5 million.
At December 31, 1999, the Group's fixed income portfolio totaled $2.4 billion
which consisted of 91.0% investment grade securities and 9.0% below investment
grade and/or unrated securities.
Investments in below investment grade securities have greater risks than
investments in investment grade securities. The risk of default by borrowers
which issue securities rated below investment grade is significantly greater
because these securities are generally unsecured and often subordinated to other
debt and these borrowers are often highly leveraged and are more sensitive to
adverse economic conditions such as a recession or a sharp increase in interest
rates. Investment grade securities are also subject to significant adverse risks
including the risks of re-leveraging and changes in control of the issuer. In
most instances, investors are unprotected with respect to such risks, the
effects of which can be substantial.
Yield (based on cost of investments) for the taxable fixed income portfolio was
10.9% and 8.9% at December 31, 1999 and 1998, respectively. Below investment
grade securities were yielding 9.1% and 8.8% at December 31, 1999 and 1998,
respectively, while investment grade securities were yielding 11.0% in 1999 and
8.9% in 1998. Yield for tax exempt securities was 6.0% and 6.0% at December 31,
1999 and 1998, respectively; however, this yield is not directly comparable to
taxable yield due to the complexity of federal taxation of insurance companies.
The Corporation remains committed to a diversified common stock portfolio. As of
December 31, 1999, the portfolio consisted of 49 separate issues, diversified
across 37 different industries; and the largest single position was 15.39% of
the portfolio. The portfolio strategy with respect to common stocks has been to
invest in companies whose stocks have below average valuations, yet above
average growth prospects.
8
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ITEM 1. CONTINUED
Investment income is affected by the amount of new investable funds and
investable funds arising from maturities, prepayments, calls and exchanges as
well as the timing of receipt of such funds. In addition, other factors such as
interest rates at time of investment and the maturity, income tax status, credit
status and other risks associated with new investments are reflected in
investment income. Future changes in the distribution of investments and the
factors described above could affect overall investment income in the future;
however, the amount of any increase or decrease cannot be predicted. Further
details regarding investment distribution and investment income are described in
Item 14, Note 2, Investments, in the Notes to Consolidated Financial Statements
on pages 46 and 47 this Form 10-K.
Purchases of taxable fixed income securities in 1999 were as follows: $1,314.3
million of investment grade securities, $131.5 million of high yield securities
and $125.8 million of unrated securities. Purchases of tax-exempt and equity
securities in 1999 totaled $1.0 million and $26.7 million, respectively.
Disposals (including maturities, calls, exchanges and scheduled prepayments) of
taxable fixed income securities in 1999 were as follows: $883.0 million of
investment grade securities, $155.6 million of high yield securities and $104.6
million of unrated securities. Dispositions of tax-exempt and equity securities
in 1999 totaled $278.1 million and $305.4 million, respectively.
The Corporation continues to have no exposure to futures, forwards, caps,
floors, or similar derivative instruments as defined by Statement of Financial
Accounting Standards No. 119. However, as noted in Item 14, Note 17, Bank Note
Payable, in the Notes to the Consolidated Financial Statements on page 56 of
this Form 10-K, we have an interest rate swap with Chase Manhattan Bank covering
$10.0 million of the outstanding balance of the Corporation's revolving line of
credit. This swap is not classified as an investment but rather as a hedge
against a portion of the variable rate loan.
Consolidated net realized investment gains (before taxes) in 1999 totaled $160.8
million, $2.63 per share. Included in this amount are approximately $8.5 million
in writedowns of the carrying values of certain securities the Corporation
determined had an other than temporary decline in value.
SHARE REPURCHASES
Since 1990, the Board of Directors of Ohio Casualty Corporation has authorized
the purchase of as many as 13,800,000 (as adjusted for stock splits) shares of
its common stock through open market or privately negotiated transactions.
During 1999, the Corporation purchased 2,478,000 shares of its common stock at a
cost of $46.1 million, compared with 4,725,800 shares for $100.0 million in 1998
and 3,089,376 shares for $64.9 million in 1997. This brings the remaining
repurchase authorization to 1,649,824 shares as of December 31, 1999.
LIABILITIES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Liabilities for loss and loss adjustment expenses are established for the
estimated ultimate costs of settling claims for insured events, both reported
claims and incurred but not reported claims, based on information known as of
the evaluation date. As more information becomes available
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10
ITEM 1. CONTINUED
and claims are settled, the estimated liabilities are adjusted upward or
downward with the effect of increasing or decreasing net income at the time of
adjustments. Such estimated liabilities include direct costs of the loss under
terms of insurance policies as well as legal fees and general expenses of
administering the claims adjustment process. The liabilities for claims incurred
in accident years 1998, 1997 and 1996 were reduced in the subsequent year as
shown below:
Accident Year Loss and Loss Adjustment Expense Liabilities
Subsequent Year Adjustment
(in millions)
1998 1997 1996
---- ---- ----
Property $ 0 $12 $ 2
Auto 21 24 12
Workers' compensation
and other liability 12 5 6
--- --- ---
Total reduction $33 $41 $20
=== === ===
The effect of catastrophes on the Group's results cannot be accurately
predicted. As such, severe weather patterns could have a material adverse impact
on the Group's results. In 1999, 1998 and 1997 there were 27, 37 and 25
catastrophes, respectively. The largest catastrophe in each of these years was
$17.9 million, $7.3 million and $4.6 million in incurred losses. Additional
catastrophes with over $1.0 million in incurred losses numbered 7, 14 and 3 in
1999, 1998 and 1997, respectively. For additional discussion of catastrophe
losses, refer to Item 14, Note 9, Losses and Loss Reserves, in the Notes to the
Consolidated Financial Statements on pages 51 and 52 of this Form 10-K.
In the normal course of business, the Group is involved in disputes and
litigation regarding terms of insurance contracts and the amount of liability
under such contracts arising from insured events. The liabilities for loss and
loss adjustment expenses include estimates of the amounts for which the Group
may be liable upon settlement or other conclusion of such litigation.
Because of the inherent future uncertainties in estimating ultimate costs of
settling claims, actual loss and loss adjustment expenses may deviate
substantially from the amounts recorded in the Corporation's consolidated
financial statements. Furthermore, the timing, frequency and extent of
adjustments to the estimated liabilities cannot be accurately predicted since
conditions and events which established historical loss and loss adjustment
expense development and which serve as the basis for estimating ultimate claims
cost may not occur in the future in exactly the same manner, if at all.
The anticipated effect of inflation is implicitly considered when estimating the
liability for losses and loss adjustment expenses based on historical loss
development trends adjusted for anticipated changes in underwriting standards,
policy provisions and general economic trends.
The following tables present an analysis of losses and loss adjustment expenses
and related liabilities for the periods indicated. The accounting policies used
to estimate liabilities for losses and loss adjustment expenses are described in
Item 14, Note 1H, Accounting Policies and Note 9, Losses and Loss Reserves, in
the Notes to Consolidated Financial Statements on pages 45, 51 and 52 of this
Form 10-K.
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ITEM 1. CONTINUED
Reconciliation of Liabilities for Losses and Loss Adjustment Expense
(in thousands)
1999 1998 1997
---- ---- ----
Net liabilities, beginning of year $ 1,865,643 $ 1,421,804 $ 1,486,622
Addition related to acquisition 0 483,938 0
Provision for current accident year
claims 1,176,072 989,114 922,065
Decrease in provisions for
prior accident year claims (418) (66,119) (53,615)
----------- ----------- -----------
1,175,654 922,995 868,450
Payments for claims occurring during:
Current accident year 600,942 513,292 448,402
Prior accident years 617,026 449,802 484,866
----------- ----------- -----------
1,217,968 963,094 933,268
Net liabilities, end of year 1,823,329 1,865,643 1,421,804
Reinsurance recoverable 85,126 91,296 62,003
----------- ----------- -----------
Gross liabilities, end of year $ 1,908,455 $ 1,956,939 $ 1,483,807
=========== =========== ===========
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ITEM 1. CONTINUED
Analysis of Development of Loss and Loss Adjustment Expense Liabilities
(In thousands)
Year Ended December 31 1989 1990 1991 1992 1993 1994 1995
- ---------------------- ---- ---- ---- ---- ---- ---- ----
Net liability as originally
estimated: $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,868 $ 1,693,551 $ 1,606,487 $ 1,557,065
Life Operations Liability 663 656 961 3,934
P&C Operations Liability $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,205 $ 1,692,895 $ 1,605,526 $ 1,553,131
Net cumulative payments as of:
One year later 489,562 506,246 526,973 561,133 533,634 510,219 486,168
Two years later 745,766 783,948 822,634 869,620 833,399 803,273 772,670
Three years later 902,081 955,666 1,007,189 1,060,433 1,017,893 997,027 944,294
Four years later 1,000,299 1,063,507 1,123,591 1,176,831 1,147,266 1,106,361 1,080,373
Five years later 1,061,173 1,131,012 1,201,317 1,264,900 1,218,916 1,203,717
Six years later 1,100,683 1,182,110 1,266,605 1,316,756 1,288,148
Seven years later 1,134,145 1,235,315 1,302,313 1,369,889
Eight years later 1,177,259 1,262,187 1,342,839
Nine years later 1,195,615 1,294,439
Ten years later 1,221,812
Gross cumulative payments as of:
One year later 586,869 547,377 522,811 500,150
Two years later 904,911 859,142 827,232 798,078
Three years later 1,107,980 1,051,915 1,030,701 988,674
Four years later 1,231,386 1,190,466 1,158,798 1,123,163
Five years later 1,328,478 1,278,602 1,254,475
Six years later 1,394,890 1,347,025
1,446,560
Year Ended December 31 1996 1997 1998 1999
- ---------------------- ---- ---- ---- ----
Net liability as originally
estimated: $ 1,486,622 $ 1,421,804 $ 1,865,643 $ 1,823,329
Life Operations Liability 3,722 100 98 -
P&C Operations Liability $ 1,482,900 $ 1,421,704 $ 1,865,545 $ 1,823,329
Net cumulative payments as of:
One year later 483,574 449,802 640,209
Two years later 747,374 751,179
Three years later 950,138
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Gross cumulative payments as of:
One year later 498,274 469,933 654,204
Two years later 781,853 775,371
Three years later 983,440
Four years later
Five years later
Six years later
12
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ITEM 1. CONTINUED
Analysis of Development of Loss and Loss Adjustment Expense Liabilities
(continued)
(In thousands)
Year Ended December 31 1989 1990 1991 1992 1993 1994 1995
- ---------------------- ---- ---- ---- ---- ---- ---- ----
Net liability re-estimated as of:
One year later 1,285,233 1,403,172 1,515,129 1,601,406 1,539,178 1,500,528 1,474,795
Two years later 1,299,428 1,407,197 1,500,890 1,555,452 1,510,943 1,501,530 1,441,081
Three years later 1,296,215 1,388,381 1,467,256 1,524,054 1,515,114 1,486,455 1,445,738
Four years later 1,281,246 1,368,530 1,449,789 1,559,492 1,525,493 1,507,331 1,478,787
Five years later 1,268,193 1,366,676 1,498,881 1,561,763 1,551,024 1,546,849
Six years later 1,270,734 1,423,277 1,499,009 1,588,063 1,587,885
Seven years later 1,327,228 1,420,105 1,526,136 1,627,385
Eight years later 1,325,938 1,444,589 1,558,571
Nine years later 1,342,741 1,472,173
Ten years later 1,367,216
Decrease (increase) in
original estimates: $ 2,838 $ 11,812 $ 7,568 $ 45,820 $ 105,010 $ 58,677 $ 74,344
Net liability as originally
estimated: $ 1,673,205 $ 1,692,895 $ 1,605,526 $ 1,553,131
Reinsurance recoverable on
unpaid losses and LAE 80,114 75,738 65,336 71,066
Gross liability as originally
estimated: $ 1,753,982 $ 1,769,289 $ 1,671,823 $ 1,631,184
Life Operations Liability 663 656 961 6,987
P&C Operations Liability 1,753,319 1,768,633 1,670,862 1,624,197
One year later 1,692,044 1,609,429 1,572,435 1,544,461
Two years later 1,644,586 1,590,205 1,578,905 1,515,032
Three years later 1,622,842 1,600,667 1,565,580 1,561,675
Four years later 1,663,734 1,612,300 1,630,314 1,585,459
Five years later 1,666,556 1,680,806 1,657,037
Six years later 1,722,897 1,704,863
1,758,687
Decrease (increase) in
original estimates: (5,368) 63,770 13,825 38,738
Year Ended December 31 1996 1997 1998 1999
- ---------------------- ---- ---- ---- ----
Net liability re-estimated as of:
One year later 1,427,992 1,355,586 1,888,387
Two years later 1,403,059 1,386,401
Three years later 1,439,008
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Decrease (increase) in
original estimates: $ 43,892 $ 35,304 $ (22,842)
Net liability as originally
estimated: $ 1,482,900 $ 1,421,704 $ 1,865,545 $ 1,823,329
Reinsurance recoverable on
unpaid losses and LAE 64,695 59,952 80,215 85,126
Gross liability as originally
estimated: $ 1,556,670 $ 1,483,807 $ 1,956,939 $ 1,908,455
Life Operations Liability 9,075 2,150 11,081
P&C Operations Liability 1,547,595 1,481,657 1,945,759 1,908,455
One year later 1,496,100 1,447,044 1,972,890
Two years later 1,507,365 1,477,874
Three years later 1,537,356
Four years later
Five years later
Six years later
Decrease (increase) in
original estimates: 10,239 3,783 (27,131)
13
14
ITEM 1. CONTINUED
REINSURANCE
In order to preserve capital and protect shareholder value, the Group purchases
reinsurance against large or catastrophic losses. The Property Per Risk treaty
covers the Group in the event that an insured sustains a property loss in excess
of $1.0 million in a single insured event. Property reinsurance covers $29.0
million in excess of the retention. The Casualty Per Occurrence treaty covers
the Group in the event an insured sustains a liability loss in excess of $1.0
million in a single insured event. Workers' compensation, umbrella and other
casualty reinsurance covers $100.0 million, $50.0 million and $24.0 million,
respectively, in excess of the retention.
The Catastrophe reinsurance treaty protects the Group against an accumulation of
losses arising from one defined catastrophic occurrence or series of events.
This treaty provides $150.0 million of coverage in excess of the Group's $25.0
million retention. In 1999, a portion of the catastrophe program was again
renewed with a multi-year placement. The multi-year placements maintain rates,
continuity and each reinsurer's overall share of the program. Over the last 20
years, there were two events that triggered coverage under our catastrophe
reinsurance treaty. Losses and loss adjustment expenses from the Oakland Fires
in 1991 and Hurricane Andrew in 1992 totaled $35.6 million and $29.8 million,
respectively. Both of these losses exceeded our prior retention amount of $13.0
million. The Group recovered $33.9 million from reinsurers as a result of these
events. Our reinsurance limits are designed to cover exposure to a catastrophic
event expected to occur once every 300 years.
The Aggregate Excess of Loss treaty covers the Group in the event that aggregate
losses and allocated loss adjustment expenses exceed a 64% gross loss ratio
subject to a $100 million aggregate limit.
The Group also carries various treaties covering specialty lines of business
brought about from the GAI transaction as well as facultative reinsurance
contracts protecting certain individual risks.
Reinsurance contracts do not relieve the Group of its obligation to the
policyholders. The collectibility of reinsurance is subject to the solvency of
the reinsurers. Since the Group's reinsurance protection is an important
component in our financial plan, we closely monitor the financial health and
claims settlement performance of each of our reinsurers. Annually, financial
statements are reviewed and various ratios calculated to identify reinsurers who
have ceased to meet our standards of financial strength. If any reinsurers fail
these tests, they are removed from the program at renewal. Currently, all of our
domestic reinsurers have an AM Best rating of "A-" or better, and the financial
condition of all of our international reinsurers meet the Group's
pre-established standards. Additionally, the Group utilizes a large base of
reinsurers to mitigate its concentration risk. In 1999, 1998 and 1997, no
reinsurer accounted for more than 10% of total ceded premiums. As a result of
the Group's controls over reinsurance, uncollectible amounts have not been
significant.
COMPETITION
More than 2,400 property and casualty insurance companies compete in the United
States and no one company or company group has a market share greater than
approximately 13.0%. The Group ranked as the thirty-sixth largest property and
casualty insurance group in the United States based on net insurance premiums
written in 1998, the latest year for which statistics are available. The Group
competes with other companies on the basis of service, price and coverage.
Competition in the property and casualty industry is intense, as reflected in
the weak pricing environment in the industry.
14
15
ITEM 1. CONTINUED
STATE INSURANCE REGULATION
GENERAL. The Corporation and the members of the Group are subject to regulation
under the insurance statutes, including the holding company statutes, of various
states. Ohio Casualty, American Fire, Ohio Security and OCNJ are all domiciled
in Ohio. West American and Avomark are domiciled in Indiana. Collectively, the
Group is authorized to transact the business of insurance in the District of
Columbia and all states. The Group is subject to examination of their affairs by
the insurance departments of the jurisdictions in which they are licensed.
State laws also require prior notice or regulatory agency approval of changes in
control of an insurer or its holding company and of certain material
intercorporate transfers of assets within the holding company structure. Under
applicable provisions of the Indiana insurance statutes ("Indiana Insurance
Law") and the Ohio insurance statutes (the "Ohio Insurance Law"), a person would
not be permitted to acquire direct or indirect control of the Corporation or any
of the Group's companies domiciled in such state, unless such person had
obtained prior approval of the Indiana Insurance Commissioner and the Ohio
Superintendent of Insurance, respectively, for such acquisition. For the
purposes of the Indiana Insurance Law and the Ohio Insurance Law, any person
acquiring more than 10% of the voting securities of a company is presumed to
have acquired "control" of such company.
Proposition 103 was passed in the state of California in 1988 in an attempt to
legislate premium rates for that state. As construed by the California Supreme
Court, the proposition requires premium rate rollbacks for 1989 California
policyholders while allowing for a "fair" return for insurance companies. Even
after considering investment income, total returns in California have been less
than what would be considered "fair" by any reasonable standard. During the
fourth quarter of 1994, the state of California assessed the Group $59.9 million
for Proposition 103. In February 1995, California revised this billing to $47.3
million. The assessment was revised again in August 1995 to $42.1 million plus
interest. In December 1997, during Administrative Law hearings, the California
Department of Insurance filed two revised rollback calculations. These
calculations indicated rollback liabilities of either $35.9 million or $39.9
million plus interest.
In 1998, the Administrative Law Judge finally issued a proposed ruling with a
rollback liability of $24.4 million plus interest. Her ruling was sent to the
California Commissioner of Insurance to be accepted, rejected or modified. Thus
far the Commissioner has not made a ruling. The asserted rollbacks to date have
ranged from $24.4 million to $61.1 million. The Administrative Law Judge
indicates clearly in her ruling that by her calculation the Group would have
lost approximately $1.0 million on 1989 operations if a rollback of $24.4
million were imposed. Given that conclusion, it is clear that any assessment
greater than $24.4 million would strengthen the Group's Constitutional argument
that this rollback is confiscatory. The Group does not believe it is possible to
pinpoint a specific rollback that may be required that is the most probable. The
Group has established a contingent liability for Proposition 103 rollback at
$24.4 million plus simple interest at 10% from May 8, 1989. This brings the
total reserve to $50.5 million at December 31, 1999.
To date, the Group has paid $5.1 million in legal costs related to the
withdrawal, Proposition 103, and Fair Plan assessments.
In December 1992, the Group stopped writing business in California due to a lack
of profitability and a difficult regulatory environment. In April 1995, the
California Department of Insurance gave final approval for withdrawal.
Currently, subsidiary American Fire and Casualty remains in the state to wind
down the affairs of the Group.
15
16
ITEM 1. CONTINUED
The state of New Jersey, our largest state with 15.8% of total net premiums
written during 1999, has historically been a profitable state for the Group. In
recent years, however, the legislative environment in that state has become more
difficult. Due to legislative rules and regulations designed to make insurance
less expensive and more easily obtainable for New Jersey residents, our results
have been adversely impacted. New Jersey passed the Fair Automobile Insurance
Reform Act which was an eight year assessment that began in 1990 and ended in
1997. In order to meet our state imposed assessment obligations under the Fair
Automobile Insurance Reform Act the Group incurred expenses of $3.3 million in
1997 and $3.6 million in 1996. The Group's future obligations related to this
act are minimal as only true-up payments are remaining, and any future true-ups
are anticipated to be immaterial to the Group's results of operations, financial
position and liquidity in future years.
The Unsatisfied Claim and Judgment Fund is another assessment made by the state
of New Jersey. This assessment is based upon estimated future direct premium
written in that state. The Group paid $3.4 million in 1999, $3.2 million in 1998
and $4.2 million in 1997. The Group anticipates the future assessments to be
between $3.0 and $4.0 million dollars annually. The Group anticipates future
assessments will not materially affect the Group's results of operations,
financial position or liquidity.
The New Jersey State Senate passed an auto insurance reform bill effective March
22, 1999 that mandates a 15% rate reduction for personal auto policies based on
a reduction in medical expense benefits, limitations on lawsuits and enhanced
fraud prevention provisions. All new and renewal policies written on or after
March 22, 1999 reflect the 15% rate reduction. The anticipated impact on the
Group is a tradeoff of lower premium rates on personal auto policies for
presumably lower losses but the degree of offset, if any, is uncertain at
present. For 1999, the Group had personal auto net premiums written in New
Jersey of $124.4 million. The estimated reduction in net premiums written
stemming from this reform bill for 1999 is approximately $11.3 million. The
projected impact in 2000 is a further reduction of approximately $5.7 million in
net premiums.
In 1999, New Jersey also began to require insurance companies to write a portion
of their premiums in Urban Enterprise Zones (UEZ). These zones are urban areas
frequently having high loss ratios. The Group is assigned premiums if it does
not write the required amount on its own. For the year ended December 31, 1999,
the Group wrote $5.7 million in UEZ premiums, with $6.7 million in additional
assigned premiums. The 1999 loss ratio on UEZ premiums is 132.1%, and the loss
ratio on the assigned business is 142.9%.
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS. The National Association of
Insurance Commissioners (the "NAIC") annually calculates a number of financial
ratios to assist state insurance regulators in monitoring the financial
condition of insurance companies. A "usual range" of results for each ratio is
used as a benchmark. Departure from the usual range on four or more of the
ratios could lead to inquiries from individual state insurance commissioners as
to certain aspects of a company's business. All of the companies in the Group
are within the usual range for the last five calendar years.
16
17
ITEM 1. CONTINUED
The NAIC has developed a "Risk-Based Capital" model for property and casualty
insurers. The model is used to establish standards which relate insurance
company statutory surplus to risks of operations and assist regulators in
determining solvency requirements. The model is based on four risk factors in
two categories: asset risk, consisting of investment risk and credit risk; and
underwriting risk, composed of loss reserves and premiums written risks. Based
on current calculations, all insurance companies in the Group are in excess of
levels that would require regulatory action.
The states of Ohio and Indiana have adopted the NAIC model law limiting dividend
payments by insurance companies. This law allows dividends to equal the greater
of 10% of policyholders' surplus or net income determined as of the preceding
year end without prior approval of the Insurance Department. At the end of 1999,
$98.3 million of policyholders' surplus is not subject to restrictions or prior
dividend approval.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas, e.g. deferred income taxes
are recorded. The Ohio and Indiana Insurance Departments have adopted the
Codification guidance, effective January 1, 2001. The Company has not estimated
the potential effect of the Codification guidance.
EMPLOYEES
At December 31, 1999, Ohio Casualty had approximately 3,900 employees of which
approximately 1,760 were located in the Fairfield and Hamilton, Ohio offices.
YEAR 2000
The Corporation successfully moved into the Year 2000 without impact or
interruption to the business as a result of Year 2000 computer problems. Though
no Year 2000 problems have occurred or are anticipated, the Corporation
continues to monitor the situation.
In 1999, the Corporation concluded its phased approach to convert its computer
systems to be Year 2000 compliant. The four phases included in this approach
were: awareness, planning, execution/ testing, and compliance. All phases were
completed on schedule; however, we continued testing throughout 1999 to ensure
utmost preparedness.
The Corporation began the awareness phase early in the 1990s, recognizing that
its systems and applications would need significant changes. From that time
forward all system development and major enhancements to existing systems took
Year 2000 processing requirements into consideration. This approach resulted in
some of our systems being converted and compliant long before there was any
business requirement or exposure to processing problems.
During 1995, the Information Systems Department began the planning phase. At
that time, Year 2000 compliance became a priority project with Project Managers
assigned specifically for converting our systems to be compliant. A
comprehensive inventory of our systems was completed, identifying the critical
date that each system must be compliant and an action plan was put together to
ensure that the conversion was completed on time.
17
18
ITEM 1. CONTINUED
As a result of the planning phase, dedicated staff and resources were assigned
to work on the Year 2000 project. This began our execution/testing phase of the
project which included addressing the remediation of Year 2000 problems
identified in the planning phase and logical partition (LPAR) compliance
testing. LPAR compliance testing requires an isolated partition within the
computer that runs independently. Essentially it can be considered an entirely
separate computer. In this environment, data was migrated forward and tested as
the internal date in the computer was changed to critical dates in 1999 and
2000. This provided an excellent environment to test applications, system
software and hardware. This involved individual and integrated compliance
testing. The first step verified that the systems are compliant when they run
independently. The second step verified compliance when they are integrated with
all other systems with which they interface. Testing was performed throughout
1998 and 1999, focusing initially on systems critical to the daily business
operation and followed by all others. The Corporation has six major system
areas: commercial lines, claims, auto, personal property, management/financial
reporting and human resources. All of these areas completed LPAR compliance
testing.
Following the completion of LPAR compliance testing, all systems underwent
integrated testing of the production environment. This integrated testing, as
was called for in our contingency plans, was repeated in the third and fourth
quarters of 1999.
As a result of the Corporation's efforts early in the 1990s to begin making
changes to systems and existing hardware and software, the Corporation did not
have to make an expensive effort to identify and remedy its Year 2000 issues and
does not anticipate that it will be required to make further substantial
expenditures to address any Year 2000 issues. As of December 31, 1999, the total
amount spent for I/S related costs on the Year 2000 project is $2.8 million.
These amounts do not include any costs associated with efforts made to contact
third parties or related to contingency planning.
During 1997, the Corporation began the compliance phase. The Year 2000 team
identified all significant vendors, suppliers and agents of the Corporation and
completed the initial contact to obtain written statements of their readiness
and commitment to a date for their Year 2000 compliance. The Corporation
monitored the Year 2000 status of these entities and developed contingency plans
to reduce the possible disruption in business operations that may have resulted
from the failure of third parties with which the Corporation has business
relationships to address their Year 2000 issues. Should a third-party with whom
the Corporation transacts business have had a system failure due to not being
Year 2000 compliant, the Corporation believes this could have resulted in a
delay in processing or reporting transactions of the Corporation, or a potential
disruption in service to its customers, notwithstanding the Corporation's
contingency plans to respond to these potential system failures by such third
parties.
The Corporation assessed the status of Year 2000 readiness of the business and
assets that Ohio Casualty acquired in the acquisition of substantially all the
Commercial Lines Division of Great American Insurance Companies ("GAI") on
December 1, 1998. For a period of at least 24 months from the date of the
acquisition, GAI is providing computer processing and communication services to
the Group in connection with the acquired business pursuant to an Information
Systems Agreement. Thus, the Corporation was dependent on GAI to address and
remediate Year 2000 issues with respect to the information technology systems
utilized for the business being acquired by the
18
19
ITEM 1. CONTINUED
Group. The failure of GAI to have satisfactorily corrected a material Year 2000
problem in the computer processing systems being used to provide services to the
Group in connection with the acquired business could have resulted in a material
adverse effect on the ability of the Group to integrate the acquired business
and to operate it on a profitable basis.
The failure to correct a material Year 2000 problem could have resulted in an
interruption in, or a failure of, the normal business operations of the
Corporation including the disruption or delay in premium or claim processing and
the disruption in service to its customers. Also the inability to be Year 2000
compliant of significant third-party providers of the Corporation could have
resulted in an interruption in the normal business operations. Due to the
general uncertainty inherent in the Year 2000 problem, such failures could have
materially and adversely affected the Corporation's financial position, results
of operations or liquidity.
The Year 2000 issue is also a concern from an underwriting standpoint regarding
the extent of liability for coverage under various general liability, property
and directors and officers liability products and policies. The Group took
various steps to manage this concern including providing educational information
on Year 2000 to agents; adding clarification and exclusionary language to
certain policies; and by evaluating underwriting practices. The Group believes
that no coverage exists; however, minimal coverage may be interpreted to exist
under some current liability and product policies. The Group has historically
avoided manufacturing risks which produce computer or computer-dependent
products.
The Insurance Services Office (ISO) developed policy language that clarifies
that there is no coverage for certain Year 2000 occurrences. The liability
exclusion has been accepted in over 40 states and a companion filing for
property has been accepted in at least 20 states at this time. Several states
have not adopted or approved the property exclusion form citing specifically
that there is no coverage under the current property contracts and therefore,
there is no reason to accept a clarifying endorsement. The Group addressed the
Year 2000 issue by attaching the ISO exclusionary language, where approved by
regulators, to general liability policies with a rating classification the Group
believes could potentially have had Year 2000 losses. The ISO exclusionary
language endorsement is included on all property policies where approved by
regulators. These actions minimized the Group's potential exposure to Year 2000
underwriting losses.
Directors and officers could be held liable if a company in their control fails
to take necessary actions to address any Year 2000 problems and that failure
results in a material financial loss to their company. The Group has written
directors' and officers' (D&O) liability policies since 1995, with approximately
$.6 million in premiums written in 1999. The Group managed its D&O Year 2000
exposure through underwriting guidelines which address Year 2000 issues in the
application process.
The Corporation had an effective program in place to resolve Year 2000 issues in
a timely manner and has contingency plans to continue operations should an
unforeseen situation arise. However, since it is not possible to anticipate all
possible future outcomes, especially when third parties are involved, there
could be scenarios in which the Corporation could experience interruptions in
normal business operations. These scenarios include: disruption or delay in
premium and claim processing; disruption in service to customers; litigation for
Year 2000-related claims and adverse affects on the Group's ability to integrate
the acquired business from GAI. The amount of potential liability and lost
revenue cannot be reasonably estimated.
19
20
ITEM 1. CONTINUED
CHANGE IN ACCOUNTING METHOD
During the first quarter of 1999, the Corporation adopted Statement of Position
97-3 "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments". This statement provides guidance on accounting for insurance
related assessments and required disclosure information. In accordance with SOP
97-3, the Corporation has accrued a total liability for insurance assessments of
$2.3 million net of tax, as of January 1, 1999. This was recorded as a change in
accounting method.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement standardizes the accounting for derivative
instruments by requiring those items to be recognized as assets or liabilities
with changes in fair value reported in earnings or other comprehensive income in
the current period. The Corporation expects the adoption of FAS 133 to have an
immaterial impact on the financial results due to its limited use of derivative
instruments. This statement is effective for fiscal quarters of fiscal years
beginning after June 15, 2000 (January 1, 2001 for the Corporation).
ITEM 2. PROPERTIES
The Corporation owns and leases office space in various parts of the country.
The principal office buildings consist of facilities owned in Fairfield and
Hamilton, Ohio.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Corporation or its
subsidiaries other than litigation arising in connection with settlement of
insurance claims as described on page 10 and Proposition 103 hearings described
on page 56.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of Shareholders through the solicitation of
proxies or otherwise.
20
21
ITEM 4. CONTINUED
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is related to executive officers who are not
separately reported in the Corporation's Proxy Statement:
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- --- ----------------------
John S. Busby 54 Senior Vice President of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company, Ohio Security Insurance Company and
West American Insurance Company; prior thereto,
Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company,
Ohio Security Insurance Company and West
American Insurance Company since May 1991.
Frederick W. Wendt 59 Senior Vice President of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company, Ohio Security Insurance Company, West
American Insurance Company and Avomark
Insurance Company; prior thereto, Vice
President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company,
Ohio Security Insurance Company and West
American Insurance Company since 1991.
Coy Leonard, Jr. 55 Senior Vice President of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company, Ohio Security Insurance Company, West
American Insurance Company, Ocasco Budget, Inc.
and Avomark Insurance Company; prior thereto,
Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company,
Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company;
prior thereto, Assistant Vice President of The
Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio
Security Insurance Company and West American
Insurance Company; prior thereto, Manager of
Strategic Planning and Technology.
Elizabeth M. Riczko 33 Senior Vice President of The Ohio Casualty
Insurance Company, Ohio Security Insurance
Company, American Fire and Casualty Company,
West American Insurance Company and Vice
President of Avomark Insurance Company; prior
thereto, Vice President of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company, Ocasco Budget, Inc., Ohio Security
Insurance Company and West American Insurance
Company since May 1996; prior thereto,
Assistant Secretary of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company, Ocasco Budget, Inc., Ohio Security
Insurance Company and West American Insurance
Company; prior thereto, Corporate Actuarial
Manager.
21
22
ITEM 4. CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- --- ----------------------
Ralph G. Goode 54 Senior Vice President of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company, Ohio Security Insurance Company and
West American Insurance Company, Vice President
of Avomark Insurance Company, prior thereto,
Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company,
Ohio Security Insurance Company and West
American Insurance Company; prior thereto,
Assistant Vice President of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company Ohio Security Insurance Company and
West American Insurance Company
Richard B. Kelly 45 Senior Vice President of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company, Ohio Security Insurance Company, West
American Insurance Company, Ocasco Budget, Inc.
and Avomark Insurance Company; prior thereto,
Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company,
Ohio Security Insurance Company, The Ohio Life
Insurance Company, West American Insurance
Company, Ocasco Budget, Inc. and Avomark
Insurance Company; prior thereto, Assistant
Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company,
Ohio Security Insurance Company, West American
Insurance Company, Avomark Insurance Company
and The Ohio Life Insurance Company
John E. Bade, Jr. 45 Senior Vice President of The Ohio Casualty
Insurance Company, American Fire and Casualty
Company, Ohio Security Insurance Company, West
American Insurance Company and Avomark
Insurance Company; prior thereto, Vice
President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company,
Ohio Security Insurance Company, West American
Insurance Company and Avomark Insurance
Company; prior thereto, Assistant Vice
President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company,
Ohio Security Insurance Company, West American
Insurance Company and Avomark Insurance
Company; prior thereto, Branch Manager of
Greensboro, NC
- ---------------------------------
(1) Ages listed are as of the annual meeting.
22
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See Item 14 on pages 25, 26 and 30 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
See Item 14 on pages 27 and 28 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See Item 14 on pages 29-40 of this Form 10-K.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
The 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 report that
are not historical information, are forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor under The
Securities Act of 1933 and The Securities Exchange Act of 1934 for
forward-looking statements. The risks and uncertainties that may affect
operations, performance, development and results of the Corporation's business
and the results of the acquisition described herein, 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 of pricing reinsurance; litigation and
administrative proceedings; Year 2000 issues, including the Corporation's
ability to successfully identify and remediate Year 2000 system issues with its
own IT and non-IT assets, the ability of third parties with which the
Corporation has business relationships to address and resolve their Year 2000
issues and the ability of the Corporation to identify these third party issues;
Year 2000 issues relating to the commercial lines business acquired from GAI and
the ability of the Corporation to implement appropriate contingency plans to
address Year 2000 problems which are not successfully remediated; ability of the
Group to integrate the acquired GAI business and to retain the acquired
insurance business; and general economic and market conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 14 on page 37 of this Form 10-K
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedules.
See Item 14 on pages 41-44 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference herein from those portions of the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders of the Company for 2000
under the headings "Election of Directors," and "Other Directorships and Related
Transactions and Relationships."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from those portions of the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders of the Company for 2000 under
the headings "Executive Compensation," "Employment Contracts and Termination of
Employment Agreements," and "Executive Compensation Committee Interlocks and
Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from those portions of the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders of the Company for 2000 under
the headings "Principal Shareholders," and "Shareholdings of Directors,
Executive Officers and Nominees for Election as Director."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from those portions of the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders of the Company for 2000 under
the heading "Other Directorships and Related Transactions and Relationships."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES REQUIRED TO BE
FILED BY ITEM 8 OF THIS FORM AND REGULATION S-X
24
25
ITEM 14. CONTINUED
SHAREHOLDER INFORMATION
AUTOMATIC DIVIDEND REINVESTMENT PLAN
The Corporation offers an automatic dividend reinvestment plan for all
registered holders of common stock. Under the plan, shareholders may reinvest
their dividends to buy additional shares of common stock, and may also make
voluntary cash payments of up to $60,000 yearly toward the purchase of Ohio
Casualty Corporation shares. Participation is entirely voluntary. More
information on the plan can be obtained by contacting the Transfer Agent listed
below.
FORM 10-K ANNUAL REPORT
The Form 10-K Annual Report for 1999, as filed with the Securities and Exchange
Commission, is available without charge upon written request to:
Ohio Casualty Corporation
Office of the Chief Financial Officer
9450 Seward Road
Fairfield, OH 45014-5456
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York, a division of EquiServe
P. O. Box 2500
Jersey City, NJ 07303-2500
1-800-317-4445
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:30 a.m. on Wednesday,
April 26, 2000, in the OCU Auditorium of the Ohio Fairfield facility, 9450
Seward Road, Fairfield, OH 45014-5456.
VISIT THE OHIO CASUALTY GROUP INTERNET
WEB SITE - www.ocas.com
The site includes current financial data about Ohio Casualty Corporation, as
well as other corporate, product and service information.
2000 ANTICIPATED DIVIDEND SCHEDULE
DECLARATION DATE RECORD DATE PAYABLE DATE
- -------------------------------------------------------------------
February 17, 2000 March 1, 2000 March 10, 2000
May 18, 2000 June 1, 2000 June 10, 2000
August 17, 2000 September 1, 2000 September 10, 2000
November 16, 2000 December 1, 2000 December 10, 2000
25
26
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF SHAREHOLDERS DATA) 1999 1998 1997
====================================================================================================================
Premiums and finance
charges earned $ 1,554,966 $ 1,268,824 $ 1,208,974
Investment income,
less expenses 184,287 169,024 177,700
Income before investment
gains 1,399 73,644 97,406
Realized investment gains,
after taxes 104,537 9,367 32,986
Income from discontinued
operations, after taxes 4,270 1,916 8,655
Gain on sale of discontinued operations,
after taxes 6,190 0 0
Cumulative effect of accounting changes (2,255) 0 0
Net income 114,141 84,927 139,047
Property and casualty
combined ratio 112.8% 107.2% 105.3%
BASIC AND DILUTED EARNINGS
PER COMMON SHARE*
Income before investment
gains $ 0.02 $ 1.12 $ 1.42
Realized investment gains,
after taxes 1.71 0.14 0.48
Income from discontinued
operations, after taxes 0.07 0.03 0.13
Gain on sale of discontinued operations,
after taxes 0.11 0.00 0.00
Cumulative effect of accounting changes (0.04) 0.00 0.00
Net income 1.87 1.29 2.03
Book value 19.16 21.12 19.56
Dividends 0.92 0.88 0.84
FINANCIAL CONDITION
Assets $ 4,476,444 $ 4,802,264 $ 3,778,782
Shareholders' equity 1,150,987 1,320,981 1,314,829
Average shares
outstanding - basic* 61,126 65,808 68,456
Average shares
outstanding - diluted* 61,139 65,870 68,514
Shares outstanding
on December 31* 60,083 62,538 67,244
Number of shareholders 6,200 6,100 6,200
*Adjusted for 2 for 1 stock split effective July 22, 1999 (See Note 23)
26
27
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
TEN-YEAR SUMMARY OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996
============================================================================================================================
CONSOLIDATED OPERATIONS
Income after taxes
Operating income $ 1.4 $ 73.6 $ 97.4 $ 64.9
Realized investment gains (losses) 104.5 9.4 33.0 32.3
- ----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 105.9 83.0 130.4 97.2
Discontinued operations 4.3 1.9 8.7 5.3
Gain on sale of discontinued operations 6.2 0.0 0.0 0.0
Cumulative effect of accounting changes (2.3) 0.0 0.0 0.0
- ----------------------------------------------------------------------------------------------------------------------------
Net income 114.1 84.9 139.1 102.5
============================================================================================================================
Income after taxes per average share outstanding - BASIC*
Operating income 0.02 1.12 1.42 0.93
Realized investment gains (losses) 1.71 0.14 0.48 0.46
Discontinued operations 0.07 0.03 0.13 0.07
Gain on sale of discontinued operations 0.11 0.00 0.00 0.00
Cumulative effect of accounting changes (0.04) 0.00 0.00 0.00
- ----------------------------------------------------------------------------------------------------------------------------
Net income 1.87 1.29 2.03 1.46
============================================================================================================================
Average shares outstanding - BASIC* 61.1 65.8 68.5 70.4
Income after taxes per average share outstanding - DILUTED*
Operating income 0.02 1.12 1.42 0.93
Realized investment gains (losses) 1.71 0.14 0.48 0.46
Discontinued operations 0.07 0.03 0.13 0.07
Gain on sale of discontinued operations 0.11 0.00 0.00 0.00
Cumulative effect of accounting changes (0.04) 0.00 0.00 0.00
- ----------------------------------------------------------------------------------------------------------------------------
Net income 1.87 1.29 2.03 1.46
============================================================================================================================
Average shares outstanding -DILUTED* 61.1 65.9 68.5 70.5
Total assets 4,476.4 4,802.3 3,778.8 3,890.0
Shareholders' equity 1,151.0 1,321.0 1,314.8 1,175.1
Book value per share* 19.16 21.12 19.56 16.72
Dividends paid per share* 0.92 0.88 0.84 0.80
Percent increase over previous year 4.5% 4.8% 5.0% 5.3%
PROPERTY AND CASUALTY OPERATIONS
Net premiums written 1,586.9 1,299.6 1,207.6 1,209.0
Net premiums earned 1,554.1 1,267.8 1,204.3 1,223.4
GAAP underwriting gain (loss) before taxes (184.2) (74.1) (49.6) (112.2)
Loss ratio 66.9% 63.7% 62.7% 66.5%
Loss adjustment expense ratio 10.7% 9.1% 9.4% 9.7%
Underwriting expense ratio 35.2% 34.4% 33.2% 33.3%
Combined ratio 112.8% 107.2% 105.3% 109.5%
Investment income before taxes 181.1 164.8 172.4 179.4
Per average share outstanding* 2.96 2.51 2.52 2.54
Property and casualty reserves
Unearned premiums 725.2 668.4 494.9 491.4
Losses 1,545.0 1,569.5 1,174.5 1,215.8
Loss adjustment expense 363.5 376.3 307.2 331.8
Statutory policyholders' surplus 899.8 1,027.1 1,109.5 984.9
*Adjusted for 2 for 1 stock split effective July 22, 1999 (See Note 23)
27
28
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
TEN-YEAR SUMMARY OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA) 1995 1994 1993 1992
=============================================================================================================
CONSOLIDATED OPERATIONS
Income after taxes
Operating income $ 91.4 $ 77.1 $ 51.5 $ 57.8
Realized investment gains (losses) 4.0 14.2 28.7 35.1
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations 95.4 91.3 80.2 92.9
Discontinued operations 4.3 5.9 6.8 4.1
Gain on sale of discontinued operations 0.0 0.0 0.0 0.0
Cumulative effect of accounting changes 0.0 (0.3) 0.0 1.5
- -------------------------------------------------------------------------------------------------------------
Net income 99.7 96.9 87.0 98.5
=============================================================================================================
Income after taxes per average share outstanding - BASIC*
Operating income 1.28 1.07 0.72 0.80
Realized investment gains (losses) 0.05 0.20 0.40 0.49
Discontinued operations 0.06 0.08 0.09 0.06
Gain on sale of discontinued operations 0.00 0.00 0.00 0.00
Cumulative effect of accounting changes 0.00 0.00 0.00 0.02
- -------------------------------------------------------------------------------------------------------------
Net income 1.39 1.35 1.21 1.37
=============================================================================================================
Average shares outstanding - BASIC* 71.5 72.0 72.0 72.0
Income after taxes per average share outstanding - DILUTED*
Operating income 1.28 1.07 0.72 0.80
Realized investment gains (losses) 0.05 0.20 0.40 0.49
Discontinued operations 0.06 0.08 0.09 0.06
Gain on sale of discontinued operations 0.00 0.00 0.00 0.00
Cumulative effect of accounting changes 0.00 0.00 0.00 0.02
- -------------------------------------------------------------------------------------------------------------
Net income 1.39 1.35 1.21 1.37
=============================================================================================================
Average shares outstanding -DILUTED* 71.5 72.0 72.0 72.0
Total assets 3,980.1 3,739.0 3,816.8 3,760.7
Shareholders' equity 1,111.0 850.8 862.3 825.2
Book value per share* 15.69 11.82 11.97 11.72
Dividends paid per share* 0.76 0.73 0.71 0.67
Percent increase over previous year 4.1% 2.8% 6.0% 8.1%
PROPERTY AND CASUALTY OPERATIONS
Net premiums written 1,250.6 1,286.4 1,306.0 1,508.5
Net premiums earned 1,264.6 1,297.7 1,379.4 1,517.6
GAAP underwriting gain (loss) before taxes (68.8) (92.9) (147.3) (130.8)
Loss ratio 61.2% 61.6% 64.9% 63.7%
Loss adjustment expense ratio 10.2% 10.0% 11.8% 10.8%
Underwriting expense ratio 32.6% 32.2% 33.6% 33.5%
Combined ratio 104.0% 103.8% 110.3% 108.0%
Investment income before taxes 184.6 183.8 190.4 194.6
Per average share outstanding* 2.58 2.55 2.64 2.70
Property and casualty reserves
Unearned premiums 505.8 517.8 529.6 596.1
Losses 1,268.1 1,303.6 1,378.0 1,309.2
Loss adjustment expense 356.1 367.3 390.6 364.0
Statutory policyholders' surplus 876.9 660.0 713.6 674.2
10-Year Compound
(IN MILLIONS, EXCEPT PER SHARE DATA) 1991 1990 Annual Growth
=====================================================================================================
CONSOLIDATED OPERATIONS
Income after taxes
Operating income $ 99.1 $ 94.6 (35.3)%
Realized investment gains (losses) 9.8 (8.7) 0.0%
- -----------------------------------------------------------------------------------------------------
Income from continuing operations 108.9 85.9 0.7%
Discontinued operations (1.0) (1.8) 4.8%
Gain on sale of discontinued operations 0.0 0.0 0.0%
Cumulative effect of accounting changes 0.0 0.0 0.0%
- -----------------------------------------------------------------------------------------------------
Net income 107.9 84.1 1.2%
=====================================================================================================
Income after taxes per average share outstanding - BASIC*
Operating income 1.38 1.24 (34.0)%
Realized investment gains (losses) 0.14 (0.11) 0.0%
Discontinued operations (0.02) (0.03) 8.8%
Gain on sale of discontinued operations 0.00 0.00 0.0%
Cumulative effect of accounting changes 0.00 0.00 0.0%
- -----------------------------------------------------------------------------------------------------
Net income 1.50 1.10 4.6%
=====================================================================================================
Average shares outstanding - BASIC* 71.7 76.8 (3.3)%
Income after taxes per average share outstanding - DILUTED*
Operating income 1.38 1.24 (34.0)%
Realized investment gains (losses) 0.14 (0.11) 0.0%
Discontinued operations (0.02) (0.03) 8.8%
Gain on sale of discontinued operations 0.00 0.00 0.0%
Cumulative effect of accounting changes 0.00 0.00 0.0%
- -----------------------------------------------------------------------------------------------------
Net income 1.50 1.10 4.6%
=====================================================================================================
Average shares outstanding -DILUTED* 71.8 76.9 (3.3)%
Total assets 3,531.3 3,252.9 3.6%
Shareholders' equity 774.5 651.2 4.0%
Book value per share* 10.79 9.10 7.6%
Dividends paid per share* 0.62 0.58 5.9%
Percent increase over previous year 6.9% 11.5% (8.2)%
PROPERTY AND CASUALTY OPERATIONS
Net premiums written 1,492.3 1,468.4 1.4%
Net premiums earned 1,469.1 1,438.0 1.3%
GAAP underwriting gain (loss) before taxes (74.5) (79.4) 11.4%
Loss ratio 60.4% 61.4%
Loss adjustment expense ratio 10.6% 10.9%
Underwriting expense ratio 33.9% 33.0%
Combined ratio 104.9% 105.3%
Investment income before taxes 191.6 176.7 (0.4)%
Per average share outstanding* 2.67 2.30 3.1%
Property and casualty reserves
Unearned premiums 605.2 582.0 2.8%
Losses 1,216.1 1,148.9 3.8%
Loss adjustment expense 350.0 335.1 1.7%
Statutory policyholders' surplus 643.4 465.8 5.4%
28
29
ITEM 14. CONTINUED
MANAGEMENT'S
DISCUSSION & ANALYSIS
Ohio Casualty Corporation (the Corporation) is the holding company of The Ohio
Casualty Insurance Company, which is one of six property-casualty companies that
make up the Ohio Casualty Group (the Group).
RESULTS OF OPERATIONS
Net income increased 34.4% for 1999 to $114.1 million or $1.87 per share.
Contributing to 1999 net income were investment gains from a strategic
reallocation of the Group's investment portfolio during the second quarter.
Outstanding growth in the equity portfolio combined with share repurchases
caused the relationship of asset classes to fall outside the Group's
long-standing guidelines. These guidelines limit the fair market value of equity
securities to 80% of statutory surplus. The Corporation responded by selling
approximately $200.0 million in equity securities, resulting in the recognition
of $145.0 million in previously unrealized gains.
The 1999 combined ratio increased by 5.6 points to 112.8%. Losses were
negatively impacted by catastrophes with $52.2 million of catastrophe losses in
1999 versus $44.6 million in 1998 and $21.4 million in 1997. Underwriting
expenses, as a percentage of net premiums written, increased by .8% in 1999,
compared with an increase of 1.2% in 1998 and a decrease of .1% for 1997.
General operating expenses, a component of underwriting expenses, have increased
over the period of 1997 to 1999. The increase in operating expense for 1999 is
primarily due to restructuring expenses amounting to approximately $20.0 million
or 1.2 points. The increase for 1998 pertained to greater emphasis on
advertising as a part of the Corporation's efforts to increase name recognition
of its property and casualty operations.
Statutory net premiums written increased $287.3 million in 1999 to $1.6
billion. $262.2 million of this increase reflects a full twelve months of
results from the acquisition of Great American Insurance Companies ("GAI")
Commercial Lines Division versus one month of activity in 1998. Net premiums
written from the GAI acquisition amounted to $293.8 million in 1999 and $31.6
million in 1998. In addition, the Group's premium growth continued to be led by
our key agents with a 3.6% increase in written premiums for the year. The Group
has established a successful Key Producer Program for agencies who are willing
to set and achieve goals in production, loss ratio and retention. Excluding the
GAI Commercial Division acquisition, the largest increase in net premiums
written occurred in the personal auto line of business with a $21.9 million
increase and the largest increase in net premiums written by individual state
came in Kentucky with a $13.5 million increase.
New Jersey is our largest state with 15.8% of total net premiums written
during 1999. Legislation passed in 1992 requires automobile insurers operating
in the state to accept all risks that meet underwriting guidelines regardless of
risk concentration. This leads to a greater risk concentration in the state than
the Group would otherwise accept. New Jersey also requires assessments to be
paid for the New Jersey Unsatisfied Claim and Judgment Fund (UCJF). This
assessment is based upon estimated future direct premium written in that state.
The Group paid $3.4 million in 1999, $3.2 million in 1998 and $4.2 million in
1997. The Corporation anticipates future assessments will not materially affect
the Corporation's results of operations, financial position or liquidity.
The New Jersey State Senate passed an auto insurance reform bill effective
March 22, 1999 that mandates a 15% rate reduction for personal auto policies
based on a reduction in medical expense benefits, limitations on lawsuits and
enhanced fraud prevention provisions. All new and renewal policies written on or
after March 22, 1999 reflect the 15% rate reduction. The anticipated impact on
the Group is a tradeoff of lower premium rates on personal auto policies for
presumably lower losses but the degree of offset, if any, is uncertain at
present. For 1999, the Group had personal auto net premiums written in New
Jersey of $124.4 million. The estimated reduction in net premiums written
stemming from this reform bill for 1999 is approximately $11.3 million. The
projected impact in 2000 is a further reduction of approximately $5.7 million.
29
30
ITEM 14. CONTINUED
The state of New Jersey has also begun to require insurance companies to
write a portion of their premiums in Urban Enterprise Zones (UEZ). These zones
are urban areas frequently having high loss ratios. The Group is assigned
premiums if it does not write the required amount on its own. During 1999, the
Group wrote $5.7 million in UEZ premiums, with $6.7 million in additional
assigned premiums. The 1999 loss ratio on UEZ premiums is 132.1% and the loss
ratio on the assigned business is 142.9%.
Net cash used for operations was $137.7 million, compared with cash
produced of $24.6 million in 1998 and $26.4 million in 1997. The decrease in
1999 primarily resulted from lower operating income. Investing activities
produced net cash of $108.1 million in 1999, compared with $93.5 million in 1998
and $164.0 million in 1997. Total cash used for financing activities was $125.5
million in 1999, compared with total cash produced of $66.9 million in 1998 and
total cash used of $131.9 million in 1997. The decrease in 1999 primarily
resulted from decreased borrowing from notes payable. Dividend payments were
$56.0 million in 1999, compared with $57.9 million in 1998 and $57.5 million in
1997. Overall, total cash used in 1999 was $155.0 million, compared with cash
generated of $184.9 million in 1998 and $58.4 million in 1997.
In order to evaluate corporate performance, the Corporation calculates a
five-year average return on equity. Net income and unrealized gains and losses
on investments are included in the calculation to derive a total return. A
five-year average is used to correspond to our planning horizon and emphasize
consistent long-term returns, not intermediate fluctuations. Our five-year
average return on equity was 12.0%, 14.3% and 15.5% for 1999, 1998 and 1997,
respectively.
As described in more detail in Note 14, the Group purchased substantially
all of the Commercial Lines Division of Great American Insurance Companies
("GAI") on December 1, 1998. The acquisition has been treated as a purchase for
accounting purposes. The revenue and profit reported include the results of the
division from the December 1, 1998 acquisition date forward.
The Group's strategy in purchasing substantially all of the Commercial
Lines Division of GAI includes broadening its product mix and adding
approximately 1,400 agents to the Group's existing agency plant. From a
geographic point of view, the Group increased its presence in areas where it
already does business and added a presence in the Northeast, a region in which
the Group had hoped to expand. Finally, the Group anticipates that it will
achieve financial benefits through cross-selling of products, economies of scale
and reductions in expenses through improved processes.
Property and casualty operating income was $14.8 million, $.24 per share,
in 1999, compared with $74.9 million, $1.14 per share, in 1998 and $97.4
million, $1.42 per share in 1997. Catastrophe losses in 1999 totaled $52.2
million, compared with $44.6 million in 1998 and $21.4 million in 1997. There
were 27 separate catastrophes in 1999, compared with 37 catastrophes in 1998 and
25 in 1997. Catastrophe losses added 3.4 points to the combined ratio in 1999,
compared with 3.6 points in 1998 and 1.8 points in 1997. 1999 catastrophes
included tornadoes in the greater Cincinnati and Oklahoma City areas as well as
damages from Hurricane Floyd. 1998 catastrophes include wind and hail-related
losses in Kentucky, Minnesota and Iowa.
HIGH/LOW MARKET PRICE PER SHARE
(IN DOLLARS)
High Low
1999 21 11/16 15 1/16
1998 25 9/16 17 1/16
1997 25 3/8 17 3/16
1996 19 5/8 15 3/16
1995 19 1/2 14 1/8
1994 16 7/8 13 1/4
1993 17 15/16 14 3/8
1992 16 5/8 12 1/4
1991 12 9/16 10
1990 12 11/16 6 11/16
PRIVATE PASSENGER AUTO - AGENCY
As one of the Group's top emphasis products, net premiums written from our
personal auto segment increased for the fourth consecutive year. Net premiums
written increased $11.5 million or 2.2% to $526.9
30
31
ITEM 14. CONTINUED
million in 1999, compared with $515.4 million in 1998 and $464.7 million in
1997. Factors increasing 1999 premium include $7.2 million of acquired business
in the state of Kentucky; $10.4 million increase in premiums written for Urban
Enterprise Zones in New Jersey; $16.5 million resulting from converting from
six- to twelve-month policies in New Jersey. These increases are offset by lower
retention rates and a state-mandated premium rate rollback in New Jersey
amounting to approximately $11.3 million.
The combined ratio increased to 106.2% in 1999 from 103.4% in 1998 and
105.4% in 1997. In 1999, we experienced increased frequency of losses
accompanied with nonrecurring expenses associated with the restructuring of the
Group's personal lines business centers and claims branch offices.
PRIVATE PASSENGER AUTO - DIRECT
The Group began direct marketing of personal auto coverage in January 1998.
In 1998, premium was generated in three states. In 1999, premium was being
generated in ten states. Net premiums written increased $10.4 million or 164.3%
in 1999 to $16.8 million from $6.3 million in 1998. $3.2 million of 1999 new
business premiums were generated from various internet partnerships.
Combined ratios were 209.7% and 169.7% for 1999 and 1998, respectively.
High ratios for a direct start-up business can be expected due to initial costs
for equipment, advertising and other start-up expenditures. Additionally, the
majority of premium written is from first year business. Based on industry
averages, loss ratios on first year business run approximately 25.0 to 30.0
points higher than seasoned business.
COMMERCIAL MULTI PERIL, FIRE
& INLAND MARINE (CMP)
Net premiums written from our CMP segment have increased for four
consecutive years. Net premiums written increased $79.4 million or 35.2% to
$305.2 million in 1999, compared to $225.7 million in 1998 and $206.1 million in
1997. Acquired business from GAI contributed $80.3 million to the 1999 increase.
The increase in 1998 is largely attributable to production from our key agents,
which increased approximately $7.3 million from 1997.
Intense competition among property-liability insurers is fueling a
sustained period of inadequate pricing levels in the commercial segment.
Consequently, rates have remained flat while the combined ratio increased in
1999 to 126.0% from 113.5% in 1998 and 107.7% in 1997. For 1999, nonrecurring
restructuring expenses accompanied with increased severity of losses adversely
impacted the combined ratio. Catastrophe losses added 7.8 points in 1999, 4.9
points in 1998 and 2.5 points in 1997.
GENERAL LIABILITY
Net premiums written increased $6.1 million or 7.9% in 1999 to $82.5
million, compared with $76.4 million in 1998 and $78.7 million in 1997. The 1999
increase was generated from the GAI acquisition adding $4.5 million or 5.9%
The combined ratio increased 1.6 points in 1999 to 115.6%, compared with
114.0% in 1998 and 113.0% in 1997. This line continues to be subject to
inadequate pricing arising from intense competition. While profitable premium
growth remains very difficult to achieve, the Group is focusing efforts on
underwriting integrity.
UMBRELLA
Net premiums written increased $49.7 million or 265.4% in 1999 to $68.4
million, compared with $18.7 million in 1998 and $18.0 million in 1997. The 1999
increase was primarily generated from the GAI acquisition adding $48.7 million.
With the GAI acquisition, this segment now includes excess coverages which are
new to the Group. Additionally, the Group has increased its limits, broadened
classes it will write and improved coverage forms. These enhancements offer
promising revenue opportunities.
The 1999 combined ratio was 47.3%, compared with 48.8% in 1998 and 58.4% in
1997. As a result of the Group's very good experience, this segment is one of
the Group's top emphasis products.
31
32
ITEM 14. CONTINUED
COMMERCIAL AUTO
Net premiums written increased $36.4 million or 26.2% in 1999 to $175.5
million, compared with $139.1 million in 1998 and $140.3 million in 1997. The
1999 increase was largely generated from the GAI acquisition adding $35.5
million or 25.5%. Excluding the acquisition, premiums were flat which is
indicative of an exceptionally competitive market combined with selective
underwriting.
The 1999 combined ratio increased to 117.1%, compared with 105.4% in 1998
and 112.9% in 1997. 1999 was hindered by increased severity and large losses
combined with higher overhead expenses associated with nonrecurring
restructuring costs.
WORKERS' COMPENSATION
Net premiums written increased $91.5 million or 91.4% in 1999 to $191.7
million, compared with $100.2 million in 1998 and $97.2 million in 1997. The GAI
acquisition contributed an additional $95.6 million or a 95.4% increase from
1998. Excluding the acquisition, net premiums written decreased $4.1 million or
4.7% in 1999 and decreased $9.7 million or 10.0% in 1998. These decreases are
indicative of extremely competitive market conditions combined with increased
emphasis on underwriting integrity.
The combined ratio increased 7.9 points in 1999 to 117.5%, compared with
109.6% in 1998 and 93.0% in 1997. Fierce competition has resulted in flat rates
while inflation, especially for medical costs, are driving losses upward. During
1999, the Group initiated various cost containment measures which are intended
to mitigate this trend. For 1999, an increase in large losses as well as
nonrecurring restructuring expenses hindered the combined ratio.
HOMEOWNERS
During 1999, the Group placed great emphasis on a homeowners
Insurance-To-Value program. The program addresses underinsured homeowner
properties and emphasizes adequate replacement cost values. Upon renewal,
homeowners accounts are subject to a replacement cost valuation and appropriate
premium increases are implemented. Also in 1999, homeowners products were
offered as ancillary to our personal auto products. The Insurance-To-Value
initiative and selective underwriting have resulted in a $1.2 million or .7%
increase in 1999 net premiums written to $181.9 million in 1999, compared with
$180.7 million in 1998 and $168.2 million in 1997.
The combined ratio increased to 124.1% from 118.4% in 1998 and 111.2% in
1997. Combined ratios are heavily impacted by catastrophe losses which added
12.6 points in 1999, 15.2 points in 1998 and 8.1 points in 1997.
FIDELITY & SURETY
Net premiums written increased $1.1 million or 2.9% in 1999 to $38.1
million, compared with $37.0 million in 1998 and $34.4 million in 1997.
Increases for the second consecutive year are primarily driven by commercial
surety products and are fueled by a strong economy.
The combined ratio decreased to 77.0% in 1999 from 81.4% in 1998 and 76.5%
in 1997. The Group's combined ratio remains below the historical industry
average of 86.2%.
STATUTORY SURPLUS
Statutory surplus, a traditional insurance industry measure of strength and
underwriting capacity, was $899.8 million at December 31, 1999, compared with
$1,027.1 million at December 31, 1998 and $1,109.5 million at December 31, 1997.
The decrease in 1999 resulted from dividends, poor underwriting results and
taxes on realized gains. The decrease in 1998 was due to the statutory treatment
of agent relationships. The increase in 1997 was due primarily to unrealized
gains in our investment portfolio and net income less dividends paid.
The ratio of premiums written to statutory surplus is one of the measures
used by insurance regulators to gauge the financial strength of an insurance
company and indicates the ability of the Group to grow by writing additional
business. Currently, the Group's ratio is 1.8 to 1. Ratios below 3 to 1
generally indicate additional capacity and financial strength.
The National Association of Insurance Commissioners has developed a
"Risk-Based Capital" formula for property and casualty insurers and life
insurers. The formulas are
32
33
ITEM 14. CONTINUED
intended to measure the adequacy of an insurer's capital given the asset
structure and product mix of the company. Under the current formulas, all
insurance companies in the Group comfortably exceed the necessary capital.
NET PREMIUM WRITTEN
DISTRIBUTION BY TOP STATES
1999 1998 1997
- ------------------------------------------------
New Jersey 15.8% 16.6% 17.9%
Ohio 9.6% 11.3% 10.7%
Kentucky 8.7% 9.1% 8.2%
Pennsylvania 6.2% 7.4% 8.3%
Illinois 5.1% 6.0% 5.2%
- ------------------------------------------------
Premium distributions by state have shifted due to a full year of results
from the GAI acquisition in 1999 versus one month in 1998. When excluding GAI,
for comparison purposes, 1999 premiums increased $13.6 million in Kentucky, $9.2
million in New Jersey and $1.9 million in Ohio. Premiums decreased $9.5 million
in Pennsylvania and $1.8 million in Illinois. Increased premiums in Kentucky
result from a personal lines acquisition adding $9.3 million. The increase in
New Jersey results from increased premiums written in Urban Enterprise Zones and
converting from six- to twelve-month policies. These increases are offset by a
state-mandated 15% rate rollback. The increase in Ohio is spread among
homeowners, private and commercial auto and CMP. The decrease in Pennsylvania is
driven by competitive pricing conditions in all lines.
COMBINED RATIOS
1999 1998 1997 1996 1995
=====================================================================================================
Private Passenger Auto - Agency 106.2% 103.4% 105.4% 110.0% 100.3%
Private Passenger Auto - Direct 209.7% 169.7% N/A N/A% N/A
Commercial Multiple Peril, Fire
and Inland Marine 126.0% 113.5% 107.7% 115.0% 105.7%
General Liability 115.6% 114.0% 113.0% 89.1% 105.3%
Umbrella 47.3% 48.8% 58.4% 35.9% 44.3%
Commercial Auto 117.5% 109.6% 93.0% 94.3% 93.7%
Workers' Compensation 117.1% 105.4% 112.9% 105.3% 115.3%
Homeowners 124.1% 118.4% 111.2% 135.9% 113.7%
Fidelity and Surety 77.0% 81.4% 76.5% 73.4% 84.5%
- -----------------------------------------------------------------------------------------------------
Total 112.8% 107.2% 105.3% 109.5% 104.0%
=====================================================================================================
RESTRUCTURING
In December 1998, the Group initiated a restructuring and reorganization
plan. Under the plan, the Group consolidated many of its branch locations for
underwriting and claims throughout 1999. Personal lines business centers were
reduced from five to three locations. Commercial underwriting branches were
reduced from 17 to eight locations and claims branches were reduced from 38 to
six locations. Workforce reductions have amounted to approximately 240 positions
since the initial combination of personnel from the GAI acquisition. The plan is
expected to generate approximately $14.0 million in annualized pre-tax savings
upon full implementation.
Restructuring charges recorded in 1998 were comprised of expenses
associated with abandoned lease space totaling $10.0 million or $.15 per share
before-tax and $6.5 million or $.10 per share after-tax. During 1999, the Group
released $2.9 million of the liability due to payments under leases and $2.4
million for changes in assumptions used to establish the initial reserve.
DISCONTINUED OPERATIONS
During 1995, the Corporation's life operations were discontinued. In order
to exit the life operations, The Ohio Casualty Insurance Company (the Company)
executed an agreement in 1995 to reinsure the existing blocks of
33
34
ITEM 14. CONTINUED
business through a 100% coinsurance arrangement.
Since The Ohio Life Insurance Company was contractually replaced as the
primary insurer, the Corporation recognized unamortized ceding commission of
$1.1 million before tax in 1999, $1.1 million in 1998 and $10.7 million in 1997.
On December 31, 1999, the Company sold 100% of The Ohio Life Insurance
Company stock, thereby transferring all remaining assets and liabilities to the
Buyer. The after-tax gain on this sale totaled $6.2 million, or $.11 per share.
Net income from discontinued operations amounted to $4.3 million or $.07
per share in 1999, compared with $1.9 million or $.03 per share in 1998 and $8.7
million or $.13 per share in 1997.
REINSURANCE
In order to preserve capital and protect shareholder value, the Group
purchases reinsurance against large or catastrophic losses.
The Property Per Risk treaty covers the Group in the event that an insured
sustains a property loss in excess of $1.0 million in a single insured event.
Property reinsurance covers $29.0 million in excess of the retention. The
Casualty Per Occurrence treaty covers the Group in the event an insured sustains
a liability loss in excess of $1.0 million in a single insured event. Workers'
compensation, umbrella and other casualty reinsurance covers $100.0 million,
$50.0 million and $24.0 million, respectively, in excess of the retention.
The catastrophe reinsurance treaty protects the Group against an
accumulation of losses arising from one defined catastrophic occurrence or
series of events. This treaty provides $150.0 million of coverage in excess of
the Group's $25.0 million retention. In 1999, a portion of the catastrophe
program was again renewed with a multi-year placement. The multi-year placements
maintain rates, continuity and each reinsurer's overall share of the program.
Over the last 20 years, there were two events that triggered coverage under our
catastrophe reinsurance treaty. Losses and loss adjustment expenses from the
Oakland Fires in 1991 and Hurricane Andrew in 1992 totaled $35.6 million and
$29.8 million, respectively. Both of these losses exceeded our prior retention
amount of $13.0 million. The Group recovered $33.9 million from reinsurers as a
result of these events. Our reinsurance limits are designed to cover exposure to
a catastrophic event expected to occur once every 300 years.
The Aggregate Excess of Loss treaty covers the Group in the event that
aggregate losses and allocated loss adjustment expenses exceed a 64% gross loss
ratio subject to a $100 million aggregate limit.
The Group also carries various treaties covering specialty lines of
business brought about from the GAI transaction as well as facultative
reinsurance contracts protecting certain individual risks.
Reinsurance contracts do not relieve the Group of its obligation to
policyholders. The collectibility of reinsurance is subject to the solvency of
the reinsurers. Since the Group's reinsurance protection is an important
component in our financial plan, we closely monitor the financial health and
claims settlement performance of each of our reinsurers. Annually, financial
statements are reviewed and various ratios calculated to identify reinsurers who
have ceased to meet our standards of financial strength. If any reinsurers fail
these tests, they are removed from the program at renewal. Currently, all of our
domestic reinsurers have an A.M. Best rating of "A-" or better and the financial
condition of all of our international reinsurers meet the Group's
pre-established standards. Additionally, the Group utilizes a large base of
reinsurers to mitigate its concentration risk. In 1999, 1998 and 1997 no
reinsurer accounted for more than 10% of total ceded premiums. As a result of
the Group's controls over reinsurance, uncollectible amounts have not been
significant.
CATASTROPHE LOSSES
(IN MILLIONS)
1999 $52
1998 $45
1997 $21
1996 $62
1995 $27
34
35
ITEM 14. CONTINUED
LOSS AND LOSS ADJUSTMENT EXPENSES
The Group's largest liabilities are the reserves for losses and loss
adjustment expenses. Loss and loss adjustment expense reserves are established
for all incurred claims and are carried on an undiscounted basis before any
credits for reinsurance recoverable. These reserves amounted to $1.9 billion at
December 31, 1999, $2.0 billion at December 31, 1998 and $1.5 billion at
December 31, 1997.
In recent years, environmental liability claims have expanded greatly in
the insurance industry. Fortunately, the Group has a substantially different mix
of business than the industry. We have historically written small commercial
accounts, and have not attracted significant manufacturing liability coverage.
As a result, our environmental liability claims are substantially below the
industry average. Our liability business reflected our current mix of
approximately 66% contractors, 16% building/premises, 12% mercantile and only 6%
manufacturers. Within the manufacturing category, we have concentrated on the
light manufacturers, which further limits our exposure to environmental claims.
Estimated asbestos and environmental reserves are composed of case
reserves, incurred but not reported reserves and reserves for loss adjustment
expense. For 1999, 1998 and 1997, respectively, those reserves were $41.1
million, $41.9 million and $40.1 million. Asbestos reserves were $9.6 million,
$10.3 million and $7.0 million and environmental reserves were $31.5 million,
$31.5 million and $33.2 million for those respective years. These loss estimates
are based on currently available information. However, given the expansion of
coverage and liability by the courts and legislatures, there is some uncertainty
as to the ultimate liability. The Group changed its pollution exclusion policy
language between 1985 and 1987 to effectively eliminate these coverages.
CALIFORNIA WITHDRAWAL
Due to a lack of profitability and a difficult regulatory environment, in
1992 the Group stopped writing business in California and in 1995 a withdrawal
plan was approved by the California Department of Insurance.
Under the terms of the plan, The Ohio Casualty Insurance Company, Ohio
Security Insurance Company and West American Insurance Company withdrew from
California, leaving American Fire and Casualty Company licensed to wind down the
affairs of the Group.
Proposition 103 was passed in the state of California in 1988 in an attempt
to legislate premium rates for that state. As construed by the California
Supreme Court, the proposition requires premium rate rollbacks for 1989
California policyholders while allowing for a "fair" return for insurance
companies. Even after considering investment income, total returns in California
have been less than would be considered "fair" by any reasonable standard.
During the fourth quarter of 1994, the state of California assessed the Group
$59.9 million for Proposition 103. In February 1995, California revised this
billing to $47.3 million. The assessment was revised again in August 1995 to
$42.1 million plus interest. In December 1997, during Administrative Law
hearings, the California Department of Insurance filed two revised rollback
calculations. These calculations indicated rollback liabilities of either $35.9
million or $39.9 million plus interest.
In 1998, the Administrative Law Judge issued a proposed ruling with a
rollback liability of $24.4 million plus interest. Her ruling was sent to the
California Commissioner of Insurance to be accepted, rejected or modified. Thus
far the Commissioner has not made a ruling. The asserted rollbacks to date have
ranged from $24.4 million to $61.1 million. The Administrative Law Judge
indicates clearly in her ruling that by her calculation the Group would have
lost approximately $1.0 million on 1989 operations if a rollback of $24.4
million were imposed. Given that conclusion, it is clear that any assessment
greater than $24.4 million would strengthen the Group's Constitutional argument
that this rollback is confiscatory. The Group does not believe it is possible to
pinpoint a specific rollback that may be required that is the most probable. The
Group has established a contingent liability for Proposition 103 rollback at
$24.4 million plus simple interest at 10% from May 8, 1989. This brings the
total reserve to $50.5 million at December 31, 1999.
To date, the Group has paid $5.1 million in legal costs related to the
withdrawal, Proposition 103 and Fair Plan assessments.
35
36
ITEM 14. CONTINUED
INVESTMENTS
Consolidated pre-tax investment income from continuing operations increased
9.0% to $184.3 million in 1999, compared with $169.0 million in 1998 and $177.7
million in 1997. After-tax investment income totaled $138.0 million in 1999,
compared with $125.8 million in 1998 and $133.6 million in 1997. Pre-tax and
after-tax investment income comparisons are impacted by investments in municipal
bonds, which provide tax-free investment income.
Cash flow from investment income has been impacted by our continued share
repurchase program. During 1999, the Corporation purchased 2,478,000 shares of
its common stock at a cost of $46.1 million, compared with 4,725,800 shares for
$100.0 million in 1998 and 3,089,376 shares for $64.9 million in 1997. The
Corporation is currently authorized to repurchase 1.6 million additional shares
of its common stock to be held as treasury shares for stock options or other
general corporate purposes. Since the beginning of 1987, we have repurchased
31.7 million shares at an average cost of $14.10 per share. In the future, we
intend to continue repurchasing shares when doing so makes economic sense for
the Corporation and its shareholders.
At year end 1999, consolidated investments had a carrying value of $3.2
billion. The excess of market value over cost was $505.4 million, compared with
$787.9 million at year-end 1998 and $697.6 million at year-end 1997. As
mentioned in the Results of Operations section, the decrease in unrealized gains
in 1999 was largely attributable to the Group's strategic reallocation of its
investment portfolio. This resulted in $145.0 million of unrealized gains to be
recognized. The after-tax proceeds have been invested in fixed income
instruments which we anticipate will increase investment income in the future.
The portfolio reallocation also impacted after-tax realized investment gains
from continuing operations which amounted to $104.5 million in 1999, compared
with $9.4 million in 1998 and $33.0 million in 1997.
Tax exempt bonds decreased to 19.4% of the fixed income portfolio at
year-end 1999 versus 34.8% and 39.4% for December 31, 1998 and 1997,
respectively. The Corporation's financial position during the year did not
require a large tax-exempt portfolio.
As of December 31, 1999, the Corporation maintained $784.3 million in
mortgage-backed securities, compared with $375.4 million and $347.1 million at
December 31, 1998 and 1997, respectively. The 1999 increase is attributable to a
redistribution of investments previously in tax exempt bonds and the strategic
reallocation discussed above. The majority of mortgage-backed security holdings
are less volatile planned amortization class, sequential structures and agency
pass-through securities. Of this portfolio, $19.3 million, $9.6 million and $5.8
million were invested in more volatile bond classes (e.g. interest-only,
super-floaters, inverses) in 1999, 1998 and 1997, respectively.
The Group's fixed income strategy has been to maintain a portfolio with a
laddered maturity structure and an intermediate duration. We believe that our
portfolio composition and duration continue to be appropriate for our insurance
business. Further, we do not try to time the financial markets. Instead, we
believe it's prudent to remain fully invested at all times, subject only to our
liquidity needs. Equity investments have decreased as a percentage of our
consolidated portfolio from 27.3% in 1997 to 22.0% at year-end 1999. This
decrease is again attributable to the strategic reallocation of the Group's
investment portfolio mentioned earlier.
The Corporation continues to have no exposure to futures, forwards, caps,
floors, or similar derivative instruments as defined by Statement of Financial
Accounting Standards No. 119. However, as noted in footnote number 17, the
Corporation has an interest rate swap with Chase Manhattan Bank covering a
portion of the outstanding balance of our line of credit. At year-end 1999, the
amount covered by the swap was $10.0 million. This swap is not classified as an
investment but rather as a hedge against a portion of the variable rate loan.
Due to market conditions, the swap was eliminated in early 2000.
MARKET RISK DISCLOSURES FOR
FINANCIAL INSTRUMENTS
Market risk is the risk of loss resulting from adverse changes in interest
rates and market prices. In addition to market risk, the Corporation is exposed
to other risks, including the credit risk related to its financial instruments
36
37
ITEM 14. CONTINUED
and the underlying insurance risk relating to the Group's core business. The
sensitivity analysis below summarizes only the exposure to market risk.
The Corporation's investments are held for purposes other than trading with
an objective of earning relative competitive returns by investing in a diverse
portfolio of high-quality, liquid securities. As a result, the Corporation
minimizes its credit risk.
Interest Rate Risk - The Corporation has exposure to losses resulting from
interest rate risk arising from potential volatility in interest rates. The
Corporation attempts to mitigate its exposure to interest rate risk through
active portfolio management including periodic reviews of our asset and
liability positions. Estimates of cash flows, as well as the impact of interest
rate fluctuations relating to the Corporation's investment portfolio and
revolving line of credit are modeled and reviewed quarterly.
Equity Price Risk - The Corporation's portfolio of marketable equity
securities has exposure to losses resulting from equity price risk arising from
potential volatility in equity market values. The Corporation attempts to
mitigate its exposure to equity price risk by maintaining a portfolio of
investments which are diversified across industries, and concentrations in any
one company or industry are limited by parameters established by senior
management. Market risk is actively managed by analysis of various portfolio
characteristics on a routine basis.
The following tables illustrate the hypothetical effect of an increase in
interest rates of 100 basis points (1%) and a 10% decrease in equity values at
December 31, 1999 and 1998, respectively. The changes in market rates selected
reflect the Corporation's view of changes which are reasonably possible over a
one-year period. These rates should not be considered a prediction by the
Corporation of future events. This analysis is not intended to provide a precise
forecast of the effect of changes in interest rates and equity prices on the
Corporation's income, cash flow and shareholders' equity. In addition, the
analysis does not take into account any actions the Corporation may take to
reduce its exposure in response to market fluctuations.
Estimated Adjusted Market
Value
December 31, 1999 Fair Value as indicated above
- -------------------------------------------------------
Interest Rate Risk:
Fixed maturities $2,377 $2,272
Short-term
investments 104 104
Equity Price Risk:
Equity securities 698 628
- -------------------------------------------------------
Totals $3,179 $3,004
=======================================================
Estimated Adjusted Market
Value
December 31, 1998 Fair Value as indicated above
- -------------------------------------------------------
Interest Rate Risk:
Fixed maturities $2,416 $2,312
Short-term
investments 263 263
Equity Price Risk:
Equity securities 925 832
- -------------------------------------------------------
Totals $3,604 $3,407
=======================================================
In addition to the above scheduled investments, the Corporation has a
revolving line of credit. An increase in interest rates of one hundred basis
points would result in additional annual interest expense of $2.3 million.
Certain assumptions are inherent in the above analysis. The Corporation
assumes an instantaneous shift in interest rates and equity prices at December
31, 1999 and 1998 and that the composition of its investment portfolio remains
relatively constant. Also, the Corporation assumes a change in interest rates is
reflected uniformly across all financial instruments even though interest rates
on certain types of instruments may fluctuate or lag behind other instruments.
The adjusted market values are estimated using discounted cash flow analysis and
duration modeling.
YEAR 2000
The Corporation successfully moved into the Year 2000 without impact or
interruption to the business as a result of Year 2000 computer problems. Though
no Year 2000 problems have occurred or are anticipated, the Corporation
continues to monitor the situation.
In 1999, the Corporation concluded its phased approach to convert its
computer systems to be Year 2000 compliant. The four phases included in this
approach were: awareness, planning, execution/ testing, and compliance. All
phases were completed on schedule; however, we continued testing throughout 1999
to ensure utmost preparedness.
37
38
ITEM 14. CONTINUED
The Corporation began the awareness phase early in the 1990s, recognizing
that its systems and applications would need significant changes. From that time
forward all system development and major enhancements to existing systems took
Year 2000 processing requirements into consideration. This approach resulted in
some of our systems being converted and compliant long before there was any
business requirement or exposure to processing problems.
During 1995, the Information Systems Department began the planning phase.
At that time, Year 2000 compliance became a priority project with Project
Managers assigned specifically for converting our systems to be compliant. A
comprehensive inventory of our systems was completed, identifying the critical
date that each system must be compliant and an action plan was put together to
ensure that the conversion was completed on time.
As a result of the planning phase, dedicated staff and resources were
assigned to work on the Year 2000 project. This began our execution/testing
phase of the project which included addressing the remediation of Year 2000
problems identified in the planning phase and logical partition (LPAR)
compliance testing. LPAR compliance testing requires an isolated partition
within the computer that runs independently. Essentially it can be considered an
entirely separate computer. In this environment, data was migrated forward and
tested as the internal date in the computer was changed to critical dates in
1999 and 2000. This provided an excellent environment to test applications,
system software and hardware. This involved individual and integrated compliance
testing. The first step verified that the systems are compliant when they run
independently. The second step verified compliance when they are integrated with
all other systems with which they interface. Testing was performed throughout
1998 and 1999, focusing initially on systems critical to the daily business
operation and followed by all others. The Corporation has six major system
areas: commercial lines, claims, auto, personal property, management/financial
reporting and human resources. All of these areas completed LPAR compliance
testing.
Following the completion of LPAR compliance testing, all systems underwent
integrated testing of the production environment. This integrated testing, as
was called for in our contingency plans, was repeated in the third and fourth
quarters of 1999.
As a result of the Corporation's efforts early in the 1990s to begin making
changes to systems and existing hardware and software, the Corporation did not
have to make an expensive effort to identify and remedy its Year 2000 issues and
does not anticipate that it will be required to make further substantial
expenditures to address any Year 2000 issues. As of December 31, 1999, the total
amount spent for I/S related costs on the Year 2000 project is $2.8 million.
These amounts do not include any costs associated with efforts made to contact
third parties or related to contingency planning.
During 1997, the Corporation began the compliance phase. The Year 2000 team
identified all significant vendors, suppliers and agents of the Corporation and
completed the initial contact to obtain written statements of their readiness
and commitment to a date for their Year 2000 compliance. The Corporation
monitored the Year 2000 status of these entities and developed contingency plans
to reduce the possible disruption in business operations that may have resulted
from the failure of third parties with which the Corporation has business
relationships to address their Year 2000 issues. Should a third-party with whom
the Corporation transacts business have had a system failure due to not being
Year 2000 compliant, the Corporation believes this could have resulted in a
delay in processing or reporting transactions of the Corporation, or a potential
disruption in service to its customers, notwithstanding the Corporation's
contingency plans to respond to these potential system failures by such third
parties.
The Corporation assessed the status of Year 2000 readiness of the business
and assets that it acquired in the acquisition of substantially all the
Commercial Lines Division of Great American Insurance Companies ("GAI") on
December 1, 1998. For a period of at least 24 months from the date of the
acquisition, GAI is providing computer processing and communication services to
the Group in connection with the acquired business pursuant to an Information
Systems Agreement. Thus, the Corporation was dependent on GAI to address and
remediate Year 2000 issues with respect to the information technology systems
utilized for the business being acquired by the Group. The failure of GAI to
have satisfactorily corrected a material Year
38
39
ITEM 14. CONTINUED
2000 problem in the computer processing systems being used to provide services
to the Group in connection with the acquired business could have resulted in a
material adverse effect on the ability of the Group to integrate the acquired
business and to operate it on a profitable basis.
The failure to correct a material Year 2000 problem could have resulted in
an interruption in, or a failure of, the normal business operations of the
Corporation including the disruption or delay in premium or claim processing and
the disruption in service to its customers. Also the inability to be Year 2000
compliant of significant third-party providers of the Corporation could have
resulted in an interruption in the normal business operations. Due to the
general uncertainty inherent in the Year 2000 problem, such failures could have
materially and adversely affected the Corporation's financial position, results
of operations or liquidity.
The Year 2000 issue is also a concern from an underwriting standpoint
regarding the extent of liability for coverage under various general liability,
property and directors and officers liability products and policies. The Group
took various steps to manage this concern including providing educational
information on Year 2000 to agents; adding clarification and exclusionary
language to certain policies; and by evaluating underwriting practices. The
Group believes that no coverage exists; however, minimal coverage may be
interpreted to exist under some current liability and product policies. The
Group has historically avoided manufacturing risks which produce computer or
computer-dependent products.
The Insurance Services Office (ISO) developed policy language that
clarifies that there is no coverage for certain Year 2000 occurrences. The
liability exclusion has been accepted in over 40 states and a companion filing
for property has been accepted in at least 20 states at this time. Several
states have not adopted or approved the property exclusion form citing
specifically that there is no coverage under the current property contracts and
therefore, there is no reason to accept a clarifying endorsement. The Group
addressed the Year 2000 issue by attaching the ISO exclusionary language, where
approved by regulators, to general liability policies with a rating
classification the Group believes could potentially have had Year 2000 losses.
The ISO exclusionary language endorsement is included on all property policies
where approved by regulators. These actions minimized the Group's potential
exposure to Year 2000 underwriting losses.
Directors and officers could be held liable if a company in their control
fails to take necessary actions to address any Year 2000 problems and that
failure results in a material financial loss to their company. The Group has
written directors' and officers' (D&O) liability policies since 1995, with
approximately $.6 million in premiums written in 1999. The Group managed its D&O
Year 2000 exposure through underwriting guidelines which address Year 2000
issues in the application process.
The Corporation had an effective program in place to resolve Year 2000
issues in a timely manner and has contingency plans to continue operations
should an unforeseen situation arise. However, since it is not possible to
anticipate all possible future outcomes, especially when third parties are
involved, there could be scenarios in which the Corporation could experience
interruptions in normal business operations. These scenarios include: disruption
or delay in premium and claim processing; disruption in service to customers;
litigation for Year 2000-related claims and adverse affects on the Group's
ability to integrate the acquired business from GAI. The amount of potential
liability and lost revenue cannot be reasonably estimated.
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards in Note 21.
FORWARD-LOOKING STATEMENTS
The 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
report that are not historical information, are forward- looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor under
The Securities Act of 1933 and The Securities Exchange Act of 1934 for
forward-looking statements. The risks and uncertainties
39
40
ITEM 14. CONTINUED
that may affect operations, performance, development and results of the
Corporation's business and the results of the acquisition described herein,
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 of pricing reinsurance; litigation
and administrative proceedings; Year 2000 issues, including the Corporation's
ability to successfully identify and remediate Year 2000 system issues with its
own IT and non-IT assets, the ability of third parties with which the
Corporation has business relationships to address and resolve their Year 2000
issues and the ability of the Corporation to identify these third party issues;
Year 2000 issues relating to the commercial lines business acquired from GAI and
the ability of the Corporation to implement appropriate contingency plans to
address Year 2000 problems which are not successfully remediated; ability of the
Group to integrate the acquired business and to retain the acquired insurance
business; and general economic and market conditions.
40
41
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
===========================================================================================================================
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value $ 2,376,973 $ 2,415,904 $ 2,226,030
(Cost: $2,408,201; $2,307,734; $2,112,291)
Equity securities, at fair value 698,129 924,906 859,475
(Cost: $161,498; $245,129; $275,637)
Short-term investments, at fair value 104,398 262,863 65,849
(Cost: $104,446; $262,939; $65,849)
- ---------------------------------------------------------------------------------------------------------------------------
Total investments 3,179,500 3,603,673 3,151,354
Cash 45,559 42,139 54,206
Premiums and other receivables, net of allowance for bad
debts of $9,338, $8,739 and $4,200, respectively 366,202 301,943 193,615
Deferred policy acquisition costs 177,745 176,606 126,063
Property and equipment, net of accumulated depreciation of
$113,541, $97,991 and $87,232, respectively 94,670 80,065 50,699
Reinsurance recoverable 139,021 154,123 108,962
Agent relationships, net of accumulated amortization of
$13,298, $1,031 and $0, respectively 293,565 308,206 0
Other assets 180,182 135,509 93,883
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,476,444 $ 4,802,264 $ 3,778,782
===========================================================================================================================
LIABILITIES
Insurance reserves:
Unearned premiums $ 725,399 $ 668,550 $ 495,076
Losses 1,544,967 1,580,599 1,176,614
Loss adjustment expenses 363,488 376,340 307,193
Future policy benefits 0 25,518 34,148
Notes payable 241,446 265,000 40,000
California Proposition 103 reserve 50,486 48,043 66,908
Deferred income taxes 62,843 140,730 95,389
Other liabilities 336,828 376,503 248,625
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities (See Notes 1 and 8) 3,325,457 3,481,283 2,463,953
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $.0625 par value 5,901 5,901 5,901
Authorized: 150,000 shares
Issued shares: 94,418*
Additional paid-in capital 4,286 4,135 3,872
Common stock purchase warrants 21,138 21,138 0
Accumulated other comprehensive income:
Unrealized gain on investments, net of applicable
income taxes 329,354 511,816 454,241
Retained earnings 1,243,463 1,185,349 1,158,308
Treasury stock, at cost
(Shares: 34,335; 31,070; 26,364) * (453,155) (407,358) (307,493)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,150,987 1,320,981 1,314,829
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 4,476,444 $ 4,802,264 $ 3,778,782
===========================================================================================================================
*Adjusted for 2 for 1 stock split effective July 22, 1999 (See Note 23)
See notes to consolidated financial statements
41
42
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
========================================================================================================================
Premiums and finance charges earned $ 1,554,966 $ 1,268,824 $ 1,208,974
Investment income less expenses 184,287 169,024 177,700
Investment gains realized, net 160,827 14,411 50,749
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 1,900,080 1,452,259 1,437,423
Losses and benefits for policyholders 1,008,668 805,020 751,207
Loss adjustment expenses 166,986 115,253 113,435
General operating expenses 173,212 120,304 103,299
Amortization of agent relationships 12,267 1,031 0
Amortization of deferred policy acquisition costs 401,993 316,516 303,494
Restructuring charge (2,378) 10,000 0
California Proposition 103 reserve, including interest 2,443 (18,865) (7,469)
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 1,763,191 1,349,259 1,263,966
- ------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 136,889 103,000 173,457
Income taxes:
Current 11,067 6,258 44,263
Deferred 19,886 13,731 (1,198)
- ------------------------------------------------------------------------------------------------------------------------
Total income taxes 30,953 19,989 43,065
- ------------------------------------------------------------------------------------------------------------------------
Income before discontinued operations 105,936 83,011 130,392
Income from discontinued operations, net of taxes of
$78, $1,028 and $4,661, respectively (See Note 20) 4,270 1,916 8,655
Gain on sale of discontinued operations, net of taxes of
$235, $0 and $0 (See Note 20) 6,190 0 0
Cumulative effect of accounting change, net of taxes (2,255) 0 0
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 114,141 $ 84,927 $ 139,047
========================================================================================================================
Other comprehensive income, net of taxes:
Net change in unrealized gains (losses), net of
income tax expense of $(98,249), $31,002 and
$65,882, respectively (182,462) 57,575 122,199
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) (See Note 12) $ (68,321) $ 142,502 $ 261,246
========================================================================================================================
Average shares outstanding - basic* 61,126 65,808 68,456
Average shares outstanding - diluted* 61,139 65,870 68,514
========================================================================================================================
Earnings per share (basic and diluted):*
Income from continuing operations, per share $ 1.73 $ 1.26 $ 1.90
Income from discontinued operations, per share 0.07 0.03 0.13
Gain on sale of discontinued operations, per share 0.11 0.00 0.00
Effect of change in accounting principle (net of taxes) (0.04) 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------
Net income, per share $ 1.87 $ 1.29 $ 2.03
========================================================================================================================
*Adjusted for 2 for 1 stock split effective July 22, 1999 (See Note 23)
42
43
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
COMMON ACCUMULATED
ADDITIONAL STOCK OTHER TOTAL
(in thousands, except per COMMON PAID-IN PURCHASE COMPREHENSIVE RETAINED TREASURY SHAREHOLDERS'
share data) STOCK CAPITAL WARRANTS INCOME EARNINGS STOCK EQUITY
====================================================================================================================================
Balance,
January 1, 1997 $ 5,901 $ 3,552 $ 0 $ 332,042 $ 1,076,545 $ (242,940) $1,175,100
Unrealized gain 188,081 188,081
Deferred income tax on
net unrealized gain (65,882) (65,882)
Net issuance of treasury
stock under stock option
plan (50 shares)* 320 172 305 797
Repurchase of treasury
stock (3,089 shares)* (64,858) (64,858)
Net income 139,047 139,047
Cash dividends paid
($.84 per share)* (57,456) (57,456)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 $ 5,901 $ 3,872 $ 0 $ 454,241 $ 1,158,308 $ (307,493) $1,314,829
Unrealized gain 88,577 88,577
Deferred income tax on
net unrealized gain (31,002) (31,002)
Net issuance of treasury
stock under stock option
plan (20 shares)* 263 126 389
Repurchase of treasury
stock (4,726 shares)* (99,991) (99,991)
Issuance of warrants 21,138 21,138
Net income 84,927 84,927
Cash dividends paid
($.88 per share)* (57,886) (57,886)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 $ 5,901 $ 4,135 $ 21,138 $ 511,816 $ 1,185,349 $ (407,358) $1,320,981
Unrealized gain (280,711) (280,711)
Deferred income tax on
net unrealized gain 98,249 98,249
Net issuance of treasury
stock under stock option
plan (24 shares) 151 290 441
Repurchase of treasury
stock (2,478 shares) (46,087) (46,087)
Net income 114,141 114,141
Cash dividends paid
($.92 per share) (56,027) (56,027)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1999 $ 5,901 $ 4,286 $ 21,138 $ 329,354 $ 1,243,463 $ (453,155) $1,150,987
====================================================================================================================================
*Adjusted for 2 for 1 stock split effective July 22, 1999 (See Note 23)
See notes to consolidated financial statements
43
44
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1999 1998 1997
==========================================================================================================================
CASH FLOWS FROM:
OPERATIONS
Net income $ 114,141 $ 84,927 $ 139,047
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves (17,153) (8,051) (315,255)
Income taxes (5,510) (978) 10,691
Premiums and other receivables (64,259) 9,983 (6,939)
Deferred policy acquisition costs (1,139) (13,171) (9,379)
Reinsurance recoverable 15,101 (45,161) 253,720
Other assets (16,930) (39,156) (22,339)
Other liabilities (38,806) 52,440 20,677
California Proposition 103 reserves 2,443 (18,865) (7,469)
Amortization of agent relationships 12,267 1,031 0
Depreciation and amortization 28,769 15,902 16,035
Investment gains (162,698) (14,339) (52,382)
Gain on sale of discontinued
operations (See Note 20) (6,190) 0 0
Cumulative effect of an accounting change 2,255 0 0
- --------------------------------------------------------------------------------------------------------------------------
Net cash generated (used) from operating activities (137,709) 24,562 26,407
- --------------------------------------------------------------------------------------------------------------------------
INVESTING
Purchase of securities:
Fixed income securities - available-for-sale (1,572,645) (467,295) (351,393)
Equity securities (26,696) (32,502) (66,433)
Proceeds from sales:
Fixed income securities - available-for-sale 1,287,982 425,355 342,193
Equity securities 302,355 51,217 144,688
Proceeds from maturities and calls:
Fixed income securities - available-for-sale 133,269 136,066 103,165
Equity securities 3,000 21,848 10,013
Property and equipment:
Purchases (31,425) (40,642) (18,968)
Sales 1,270 517 702
Cash proceeds from sale of discontinued
operations (See Note 20) 11,011 0 0
Cash paid in acquisition of business, net of cash acquired 0 (1,082) 0
- --------------------------------------------------------------------------------------------------------------------------
Net cash generated from investing activities 108,121 93,482 163,967
- --------------------------------------------------------------------------------------------------------------------------
FINANCING
Notes payable:
Borrowings 16,500 230,000 0
Repayments (40,054) (5,000) (10,000)
Proceeds from exercise of stock options 211 1 371
Purchase of treasury stock (46,087) (100,212) (64,858)
Dividends paid to shareholders (56,027) (57,886) (57,456)
- --------------------------------------------------------------------------------------------------------------------------
Net cash generated (used) from financing activities (125,457) 66,903 (131,943)
- --------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (155,045) 184,947 58,431
Cash and cash equivalents, beginning of year 305,002 120,055 61,624
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 149,957 $ 305,002 $ 120,055
==========================================================================================================================
Additional disclosures:
Interest paid $ 14,046 $ 3,547 $ 3,147
Income taxes paid 34,824 21,805 37,035
See notes to consolidated financial statements
44
45
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
NOTE 1 -- ACCOUNTING POLICIES
A. NATURE OF BUSINESS
Ohio Casualty Group includes six property and casualty insurers whose primary
products consist of insurance for personal auto, commercial property,
homeowners, workers' compensation and other miscellaneous lines. The Group
operates through the independent agency system in over 40 states. Of 1999 net
premium written, approximately 15.8% was generated in the state of New Jersey,
9.6% in Ohio and 8.7% in Kentucky.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles and include the accounts of Ohio
Casualty Corporation and its subsidiaries. The results of operations of the
acquisition of certain assets and liabilities of the Great American Insurance
Company Commercial Lines Division ("GAI") have been included in the consolidated
financial statements of the Corporation since the date of acquisition, December
1, 1998 (See Note 14). All significant inter-company transactions have been
eliminated.
C. INVESTMENTS
Investment securities are classified upon acquisition into one of the following
categories:
(1) held to maturity securities
(2) trading securities
(3) available-for-sale securities
Currently, the Corporation's investments are held as available-for-sale
securities. Available-for-sale securities are those securities that would be
available to be sold in the future in response to liquidity needs, changes in
market interest rates, and asset-liability management strategies, among others.
Available-for-sale securities are reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of deferred tax. Equity securities are carried at
quoted market values and include nonredeemable preferred stocks and common
stocks. Fair values of fixed maturities and equity securities are determined on
the basis of dealer or market quotations or comparable securities on which
quotations are available.
Short-term investments include commercial paper and notes with original
maturities of 90 days or less and are stated at fair value. Short-term
investments are deemed to be cash equivalents.
Realized gains or losses on disposition of investments are determined on
the basis of specific cost of investments.
D. PREMIUMS
Property and casualty insurance premiums are earned principally on a monthly pro
rata basis over the term of the policy; the premiums applicable to the unexpired
terms of the policies are included in unearned premium reserve.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs incurred at policy issuance net of applicable ceding
commissions are deferred and amortized over the term of the policy. Acquisition
costs deferred consist of commissions, brokerage fees, salaries and benefits,
and other underwriting expenses to include allocations for inspections, taxes,
rent and other expenses which vary directly with the acquisition of insurance
contracts. Periodically, we perform an analysis of the deferred policy
acquisition costs in relation to the expected recognition of revenues including
investment income to determine if any deficiency exists. No deficiencies have
been indicated in the periods presented.
F. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed principally on the straight-line method over the
estimated lives of the assets. As of January 1, 1998, the Corporation adopted
Statement of Position (SOP) 98-1 and began capitalizing costs incurred to
internally develop software products used in the Corporation's operations. The
Corporation amortizes these costs on a straight-line basis over the estimated
useful life of the product, generally not to exceed five years. Unamortized
software costs and accumulated amortization in the consolidated balance sheet
were $17,960 and $368 at December 31, 1999, and $8,013 and $184 at December 31,
1998, respectively.
G. AGENT RELATIONSHIPS
The Corporation records an asset (agent relationships) for the excess of cost
over the fair value of net assets acquired. Agent relationships are amortized on
a straight-line basis over a twenty-five year period. Agent relationships are
evaluated periodically as events or circumstances indicate a possible inability
to recover their carrying amount. Such evaluation is based on various analyses,
including cash flow and profitability projections that incorporate, as
applicable, the impact on existing company businesses. The analyses necessarily
involve significant management judgments to evaluate the capacity of an acquired
business to perform within projections. If future undiscounted cash flows are
insufficient to recover the carrying amount of the asset, an impairment loss
will be recognized.
H. LOSS RESERVES
The reserves for unpaid losses and loss adjustment expenses are based on
estimates of ultimate claim costs, including claims incurred but not reported,
salvage and subrogation and inflation without discounting. The methods of making
such estimates are continually reviewed and updated, and any resulting
adjustments are reflected in earnings currently.
I. DEFERRED INCOME TAXES
The Corporation records deferred tax assets and liabilities based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
45
46
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
J. STOCK OPTIONS
The Corporation accounts for stock options issued to employees 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.
K. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The insurance industry is subject to heavy regulation that differs by
state. A dramatic change in regulation in a given state may have a material
adverse impact on the Corporation.
NOTE 2 -- INVESTMENTS
Investment income is summarized as follows:
1999 1998 1997
- --------------------------------------------------------------
Investment income from:
Fixed maturities $177,018 $155,153 $166,554
Equity securities 12,961 15,533 13,776
Short-term securities 5,942 5,332 3,477
- --------------------------------------------------------------
Total investment income 195,921 176,018 183,807
Investment expenses 11,634 6,994 6,107
--------- -------- --------
Net investment income $184,287 $169,024 $177,700
===============================================================
The proceeds, gross realized gains and gross realized losses from sales of
available-for-sale securities were as follows:
Gross Gross Net
Realized Realized Realized
December 31 Proceeds Gains Losses Gains
- ---------------------------------------------------------------
1999 $1,590,337 $169,301 $8,474 $160,827
1998 476,572 22,531 8,120 14,411
1997 486,881 57,751 7,002 50,749
The increase in realized gains in 1999 was due to a strategic asset
reallocation involving the sale of approximately $200 million in equity
securities causing $145 million of realized gains during the year. The purpose
of this reallocation was to bring the relationship of asset classes back in line
with the Corporation's long standing portfolio guidelines. Proceeds from sales
of securities increased in 1999 due to the selling of equity securities in the
reallocation and an overall decrease of holdings in municipal securities as a
result of our financial position during the year.
Unrealized gains (losses) on investment in securities are summarized as
follows:
1999 1998 1997
- ----------------------------------------------------------------
Unrealized gains (losses):
Securities $(280,711) $ 88,577 $188,081
Deferred tax 98,249 (31,002) (65,882)
- ----------------------------------------------------------------
Net unrealized gains $(182,462) $ 57,575 $122,199
(losses)
================================================================
The amortized cost and estimated market values of investments in debt and
equity securities are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1999 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------
Securities
available-for-sale:
U.S. Government $ 65,214 $ 1,001 $ (1,108) $ 65,107
States,
municipalities
and political 456,959 9,724 (5,256) 461,427
subdivisions
Corporate 1,082,975 17,344 (34,196) 1,066,123
securities
Mortgage-backed
securities:
U.S.
Government 47,865 30 (1,438) 46,457
Agency
Other 755,188 5,093 (22,422) 737,859
- -------------------------------------------------------------------
Total fixed 2,408,201 33,192 (64,420) 2,376,973
maturities
Equity securities 161,498 543,718 (7,087) 698,129
Short-term
investments 104,446 29 (77) 104,398
- -------------------------------------------------------------------
Total securities,
available-for-sale $2,674,145 $ 576,939 $ (71,584) $3,179,500
===================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ---------------------------------------------------------------------
Securities
available-for-sale:
U.S. Government $ 74,534 $ 5,340 $ (20) $ 79,854
States,
municipalities
and political 800,945 38,668 (40) 839,573
subdivisions
Debt securities
issued by
foreign 3,000 636 0 3,636
governments
Corporate 1,062,165 62,275 (6,965) 1,117,475
securities
Mortgage-backed
securities:
U.S.
Government 6,130 145 0 6,275
Agency
Other 360,960 9,226 (1,095) 369,091
- ---------------------------------------------------------------------
Total fixed 2,307,734 116,290 (8,120) 2,415,904
maturities
Equity securities 245,129 686,715 (6,938) 924,906
Short-term
investments 262,939 5 (81) 262,863
- ---------------------------------------------------------------------
Total securities,
available-for-sale $2,815,802 $ 803,010 $(15,139) $3,603,673
======================================================================
46
47
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- ----------------------------------------------------------------------
Securities
available-for-sale:
U.S. Government $ 66,244 $ 3,601 $ (1) $69,844
States,
municipalities
and political 835,355 40,405 (19) 875,741
subdivisions
Debt securities
issued by
foreign 3,000 458 0 3,458
governments
Corporate
securities 872,904 58,046 (1,026) 929,924
Mortgage-backed
securities:
U.S.
Government 16,876 678 (1) 17,553
Agency
Other 317,912 12,838 (1,240) 329,510
- ----------------------------------------------------------------------
Total fixed 2,112,291 116,026 (2,287) 2,226,030
maturities
Equity securities 275,637 597,803 (13,965) 859,475
Short-term
investments 65,849 0 0 65,849
- ----------------------------------------------------------------------
Total securities,
available-for- $2,453,777 $713,829 $(16,252) $3,151,354
sale
======================================================================
The amortized cost and estimated fair value of debt securities at December
31, 1999, 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.
Estimated
Amortized Fair
Cost Value
- -----------------------------------------------------------------
Due in one year or less $ 43,062 $ 43,111
Due after one year through five 443,870 442,678
years
Due after five years through ten 629,490 625,715
years
Due after ten years 488,726 481,153
Mortgage-backed securities:
U.S. Government Agency 47,865 46,457
Other 755,188 737,859
- ----------------------------------------------------------------
Total fixed maturities $ 2,408,201 $ 2,376,973
================================================================
Certain securities were determined to have other than temporary declines in
book value and were written down through realized investment losses. Total
write-downs were $14,850, $12,709 and $14,433 during 1999, 1998 and 1997,
respectively, representing a reduction in value of $6,967, $4,469 and $0 on
fixed maturities and $7,883, $8,240 and $14,433 on equity securities.
Proceeds from maturities and sales of investments in debt securities during
1999, 1998 and 1997 were $1,421,251, $561,421 and $445,358, respectively. Gross
gains of $13,677, $23,108 and $12,665 and gross losses of $37,126, $6,778 and
$4,311 were realized on those maturities and sales in 1999, 1998 and 1997,
respectively.
NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Corporation's financial instruments:
CARRYING FAIR
1999 AMOUNT VALUE
- ------------------------------------------------------------
Assets
Cash and short-term
investments $ 149,957 $ 149,957
Securities -
available-for- 3,075,102 3,075,102
sale
Liabilities
Long-term debt $ 241,446 $ 241,446
Carrying Fair
1998 Amount Value
- ------------------------------------------------------------
Assets
Cash and short-term
investments $ 305,002 $ 305,002
Securities -
available-for-
sale 3,340,810 3,340,810
Liabilities
Future policy benefits $ 25,518 $ 25,518
Long-term debt 265,000 265,000
Carrying Fair
1997 Amount Value
- ------------------------------------------------------------
Assets
Cash and short-term
investments $ 120,055 $ 120,055
Securities -
available-for-
sale 3,085,505 3,085,505
Liabilities
Future policy benefits $ 34,148 $ 34,148
Long-term debt 40,000 40,000
The Corporation believes that the fair value of long-term debt is
approximately equal to its carrying value due to the market-based variable
interest rates associated with the debt.
NOTE 4 -- DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are summarized as follows:
47
48
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
1999 1998 1997
- ---------------------------------------------------------------
Deferred, January 1 $176,606 $126,063 $116,684
- ---------------------------------------------------------------
Additions:
Addition due to acquisition 0 37,371 0
Commissions and brokerage 250,390 207,747 190,029
Salaries and employee 70,823 50,194 46,241
benefits
Other 80,826 70,654 67,301
- ---------------------------------------------------------------
Deferral of expense 402,039 365,966 303,571
- ---------------------------------------------------------------
Amortization to expense
Discontinued operations (1,093) (1,093) (9,302)
Continuing operations 401,993 316,516 303,494
- ---------------------------------------------------------------
Deferred, December 31 $177,745 $176,606 $126,063
===============================================================
The above schedule includes deferred policy acquisition costs (net of
unamortized ceding commission) for discontinued life insurance operations of $0,
$(1,093) and $(2,186) as of 1999, 1998 and 1997, respectively.
NOTE 5 -- INCOME TAX
The effective income tax rate is less than the statutory corporate tax rate of
35% for 1999, 1998 and 1997 for the following reasons:
1999 1998 1997
- ---------------------------------------------------------------
Tax at statutory rate $ 45,626 $ 36,050 $ 60,710
Tax exempt interest (12,543) (16,433) (16,522)
Dividends received
deduction (DRD) (3,483) (3,247) (3,239)
Proration of DRD and tax
exempt interest 2,124 2,826 2,796
Miscellaneous (771) 793 (679)
- ---------------------------------------------------------------
Actual tax $ 30,953 $ 19,989 $ 43,065
===============================================================
Tax years 1993 through 1995 are being examined by the Internal Revenue
Service. Management believes there will not be a significant impact on the
financial position or results of operations of the Corporation as a result of
this audit.
The components of the net deferred tax asset (liability) were as follows:
1999 1998 1997
- --------------------------------------------------------------
Unearned premium proration $ $ $ 34,065
38,574 35,209
Accrued expenses 34,595 48,549 52,520
Postretirement benefits 31,766 29,768 28,522
Discounted loss and loss
expense reserves 69,955 70,663 78,217
- --------------------------------------------------------------
Total deferred tax assets 174,890 184,189 183,968
- --------------------------------------------------------------
Deferred policy (60,811) (49,765) (44,122)
acquisition costs
Unrealized gains on (176,922) (275,154) (244,591)
investments
- --------------------------------------------------------------
Total deferred tax (237,733) (324,919) (279,357)
liabilities
- --------------------------------------------------------------
Net deferred tax liability $ (62,843) $(140,730)$ (95,389)
==============================================================
NOTE 6 -- EMPLOYEE BENEFITS
The Corporation has a non-contributory defined benefit retirement plan, a
contributory health care, life and disability insurance plan and a savings plan
covering substantially all employees. Benefit expenses are as follows:
1999 1998 1997
- ----------------------------------------------------------
Employee benefit costs:
Pension plan $ 1,858 $(1,610) $ (252)
Health care 16,180 13,215 12,555
Life and disability
insurance 743 502 463
Savings plan 2,948 2,404 2,321
- ----------------------------------------------------------
$21,729 $14,511 $15,087
==========================================================
The pension benefit is determined as follows:
1999 1998 1997
- -----------------------------------------------------------
Service cost (benefit)
earned during the year $ 8,545 $ 6,011 $ 6,354
Interest cost on projected
benefit obligation 15,729 15,068 15,003
Expected return on plan (19,598) (19,871) (18,650)
assets
Amortization of
unrecognized net (3,017) (3,017) (3,017)
obligation (asset)
Amortization of
unrecognized prior 199 199 58
service cost
- -----------------------------------------------------------
Net pension benefit $ 1,858 $ (1,610)$ (252)
===========================================================
Changes in the benefit obligation during the year:
1999 1998 1997
- -----------------------------------------------------------
Benefit obligation at
beginning of year $239,293 $213,720 $197,538
- -----------------------------------------------------------
Service cost 8,545 6,011 6,354
Interest cost 15,729 15,068 15,003
Amendments 0 0 2,000
Actuarial loss (gain) (24,141) 17,132 4,142
Benefits paid (14,956) (12,638) (11,317)
Curtailments 1,115 0 0
Special termination 3,509 0 0
benefits
- -----------------------------------------------------------
Benefit obligation at end
of year $229,094 $239,293 $213,720
===========================================================
Changes in pension plan assets during the year:
1999 1998 1997
- -------------------------------------------------------------
Fair value of plan assets
at beginning of year $252,224 $276,477 $225,681
- -------------------------------------------------------------
Actual return on plan 40,279 (12,038) 62,113
assets
Benefits paid (14,915) (12,215) (11,317)
- -------------------------------------------------------------
Fair value of plan assets
at end of year $277,588 $252,224 $276,477
=============================================================
Pension plan funding at December 31:
48
49
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
1999 1998 1997
- --------------------------------------------------------------
Funded status $48,495 $12,931 $62,757
Unrecognized net gain 37,293 (6,697) 42,443
(loss)
Unrecognized net assets 8,837 12,068 15,085
Unrecognized prior service
cost (2,093) (2,308) (2,508)
- --------------------------------------------------------------
Accrued pension liability $ 4,458 $ 9,868 $ 7,737
==============================================================
Expected long-term return
on plan assets 8.75% 7.75% 8.25%
Discount rate on plan
benefit obligations 7.75% 6.75% 7.25%
Expected future rate of
salary increases 5.25% 5.25% 5.25%
Pension benefits are based on service years and average compensation using
the five highest consecutive years of earnings in the last decade of employment.
The pension plan measurement date is October 1, 1999, 1998 and 1997. The maximum
pension expense deductible for income tax purposes has been funded. Plan assets
at December 31, 1999 include $27,057 of the Corporation's common stock at market
value compared to $34,637 and $37,585 at December 31, 1998 and 1997,
respectively.
Postretirement benefit cost at December 31:
1999 1998 1997
- -------------------------------------------------------------
Service cost $ 3,141 $ 2,061 $ 1,739
Interest cost 6,448 5,753 5,588
Amortization of
unrecognized 535 0 0
prior service costs
- -------------------------------------------------------------
Net periodic
postretirement benefit $10,124 $ 7,814 $ 7,327
cost
=============================================================
Changes in the postretirement benefit obligation during the year:
1999 1998 1997
- --------------------------------------------------------------
Benefit obligation at
beginning of year $98,347 $81,694 $71,797
- --------------------------------------------------------------
Service cost 3,141 2,061 1,739
Interest cost 6,448 5,753 5,588
Plan participants'
contributions (4,652) (4,676) (3,912)
Increase due to actuarial
loss (gain), change in
discount rate, or other
assumptions (11,045) 7,099 6,326
Prior service cost
unrecognized at year end 0 6,416 0
- --------------------------------------------------------------
Benefit obligation at end
of year $92,239 $98,347 $81,694
==============================================================
Accrued postretirement benefit liability at December 31:
1999 1998 1997
- --------------------------------------------------------------
Accumulated postretirement
benefit obligation
$92,239 $98,347 $81,694
Unrecognized net gain
(loss) 4,404 (6,642) (203)
Unrecognized prior service
cost (5,882) (6,416) 0
- -------------------------------------------------------------
Accrued postretirement
benefit liability $90,761 $85,289 $81,491
=============================================================
Postretirement benefit weighted average rate assumptions at October 1:
1999 1998 1997
- --------------------------------------------------------
Medical trend rate 8% 7% 8%
- --------------------------------------------------------
Dental trend rate 5% 5% 6%
Ultimate health care
trend rate 5% 5% 5%
Discount rate 7.75% 6.75% 8.00%
The above medical trend rates assumed for 1999, 1998 and 1997 were assumed
to decrease .5%, 1% and 1% per year to the ultimate rate of 5% in 6, 2 and 3
years, respectively. The postretirement plan measurement date is October 1 for
1999, 1998 and 1997.
Increasing the assumed health care cost trend by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1999 by approximately $15,681 and increase the postretirement
benefit cost for 1999 by $2,227. Likewise, decreasing the assumed health care
cost trend by one percentage point in each year would decrease the accumulated
postretirement benefit obligation as of December 31, 1999 by approximately
$12,913 and decrease the postretirement benefit cost for 1999 by $1,822.
The Corporation's health care plan is a predominately managed care plan.
Retired employees continue to be eligible to participate in the health care and
life insurance plans. Employee contributions to the health care plan have been
established as a flat dollar amount with periodic adjustments as determined by
the Corporation. The health care plan is unfunded. Benefit costs are accrued
based on actuarial projections of future payments. There are currently 3,582
active employees and 1,505 retired employees covered by these plans.
Employees may contribute a percentage of their compensation to a savings
plan. A portion of employee contributions is matched by the Corporation and
invested in Corporation stock purchased on the open market by trustees of the
plan.
NOTE 7 - STOCK OPTIONS
The Corporation is authorized under provisions of the 1993 Stock Incentive
Programs to grant options to
49
50
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
purchase 2,587,000 shares of the Corporation's common stock to key executive
employees, directors and other full time salaried employees at a price not less
than the fair market value of the shares on dates the options are granted. The
options granted may be either "Incentive Stock Options" or "Nonqualified Stock
Options" as defined by the Internal Revenue Code; the difference in the option
plans affects treatment of the options for income tax purposes by the individual
employee and the Corporation. The options are non-transferable and exercisable
at any time after the vesting requirements are met. Option expiration dates are
ten years from the grant date. Options vest either at 100% six months from the
grant date or at 33% per year for three consecutive years from the date of the
grant. At December 31, 1999, 1,125,852 remaining options may be granted.
In addition, the 1993 Stock Incentive Program provides for the grant of
Stock Appreciation Rights in tandem with the stock options. Stock Appreciation
Rights provide the recipient with the right to receive payment in cash or stock
equal to appreciation in value of the optioned stock from the date of grant in
lieu of exercise of the stock options held. At December 31, 1999, there were no
outstanding stock appreciation rights.
Restricted stock awards are occasionally granted by the Corporation. The
common shares covered by a restricted stock award may be sold or otherwise
disposed of only after a minimum of three years from the grant date of the
award. The difference between issue price and the fair market value on the date
of issuance is recorded as compensation expense. The amount of compensation
expense recognized related to restricted stock awards was $231 in 1999, $387 in
1998 and $345 in 1997 before tax, respectively. Currently there are 37,852
shares of restricted stock outstanding.
The Corporation also issues, at its discretion, dividend payment rights in
connection with the grant of stock options. These rights entitle the holder to
receive, for each dividend payment right, an amount in cash equal to the
aggregate amount of dividends that the Corporation has paid on each common share
from the date on which such right becomes effective through the payout date. One
third of these rights becomes vested on each anniversary after the grant.
Dividends accrue and payments are made when the rights are fully vested by the
rightholder. The Corporation recognizes compensation expense accordingly. The
amount of compensation expense related to dividend payment rights recognized in
1999 was $52 with $551 in 1998 and $517 in 1997 before tax. As of December 31,
1999, 1,003,000 dividend payment rights were outstanding.
The Corporation continues to elect APB 25 for recognition of stock-based
compensation expense. Under APB 25, expense is recognized based on the intrinsic
value of the options. However, under the provision of FAS 123 the Corporation is
required to estimate on the date of grant the fair value of each option using an
option-pricing model. Accordingly, the Black-Scholes option pricing model is
used with the following weighted-average assumptions: dividend yield of 4.5% for
1999, 1998 and 1997, expected volatility of 28.5% for 1999, 26.7% for 1998 and
26.1% for 1997, risk free interest rate of 5.25% for 1999, 5.63% for 1998 and
6.87% for 1997, and expected life of eight years. The following table summarizes
information about the stock-based compensation plan as of December 31, 1999,
1998 and 1997, and changes that occurred during the year:
1999 1998 1997
- ----------------------------------------------------------------
Weighted- Weighted- Weighted-
Avg Avg Avg
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
---------------- --------------- ----------------
Outstanding
beginning 759 $20.26 525 $18.69 347 $16.92
of year
Granted 723 20.31 246 23.49 240 20.72
Exercised (16) 17.50 (12) 12.50 (54) 16.67
Canceled (140) 20.67 0 (8) 16.19
----- ---- ---
Outstanding
end of
year 1,326 $20.28 759 $20.26 525 $18.69
====== ==== ===
Options
exercisable 527 320 162
at year end
Weighted-Avg
fair
value of
options $4.70 $5.30 $5.09
granted
during the
year
Adjusted for July 22, 1999 2 for 1 stock split (See Note 23).
At year end 1999, 1,326,262 options were outstanding with an average
remaining contractual life of 7.97 years and weighted exercise price of $20.28.
The outstanding options had an exercisable price ranging from $14.00 to $23.63.
Of the amount outstanding, 527,259 were exercisable with a weighted average
exercise price of $19.38. At year end 1998, 759,368 options were outstanding
with an average remaining contractual life of 7.94 years and a weighted exercise
price of $20.27. Of the amount outstanding, 319,362 were exercisable with a
weighted average exercise price of $18.45. At year end 1997, 524,988 options
were outstanding with an average remaining contractual life of 8.35 years and a
weighted exercise price of $18.69. Of the amount outstanding, 162,986 were
exercisable with a weighted average exercise price of $17.03.
Had the Corporation adopted FAS 123, the amount of compensation expense
that would have been recognized in 1999, 1998 and 1997 respectively, would be
$1,831, $1,164 and $755. The Corporation's net income and earnings per share
would have been reduced to the pro forma amounts disclosed below:
50
51
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
1999 1998 1997
- ---------------------------------------------------- ----------- -------- -----------
Net Income As Reported: $114,141 $84,927 $139,047
Pro Forma: $112,491 $83,994 $138,411
Basic and diluted earnings per share As Reported: $1.87 $1.29 $2.03
Pro Forma: $1.84 $1.28 $2.02
NOTE 8 -- REINSURANCE AND OTHER CONTINGENCIES
In the normal course of business, the Group seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk with other insurers or reinsurers.
In the event that such reinsuring companies might be unable at some future date
to meet their obligations under the reinsurance agreements in force, the Group
would continue to have primary liability to policyholders for losses incurred.
The Group evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk to minimize its exposure to significant losses
from reinsurer insolvencies. The following amounts are reflected in the
financial statements as a result of reinsurance ceded:
1999 1998 1997
- ---------------------------------------------------------------
Ceded premiums earned,
presented net $72,297 $35,334 $32,169
Ceded losses incurred,
presented net 19,346 41,477 13,387
Reserve for unearned premiums 36,603 12,290 8,242
Reserve for losses 75,882 82,589 54,209
Reserve for future policy
benefits 0 25,518 34,148
Reserve for loss adjustment
expenses 9,770 8,707 7,794
Annuities are purchased from other insurers to pay certain claim
settlements. These payments are made directly to the claimants; should such
insurers be unable to meet their obligations under the annuity contracts, the
Group would be liable to claimants for the remaining amount of annuities. The
claim reserves are presented net of the related annuities on the Corporation's
balance sheet. The total amount of unpaid annuities was $23,267, $24,155 and
$25,123 at December 31, 1999, 1998 and 1997, respectively.
On October 2, 1995, as part of the transaction involving the reinsurance of
the Ohio Life business to Employers' Reassurance Corporation, The Ohio Casualty
Insurance Company agreed to manage a $163,615 fixed income portfolio for
Employers' Reassurance. The term of the agreement is seven years, terminating on
October 2, 2002. There is no separate fee for this investment management
service. The assets of the fixed income portfolio are not carried on the
Corporation's balance sheet as these are assets of Employers' Reassurance
Corporation. The agreement requires that the Corporation pay an annual rate of
7.25% interest to Employers' Reassurance and maintain the market value of the
account at $163,615. As the market value fluctuates from this amount, the
Corporation is required to make up the deficiency and is entitled to receive any
excess. Accordingly, the Corporation accrues any deficiency or excess in market
value over the guaranteed amount of $163,615. This results in either investment
income or loss and is recorded in earnings of the current period. At December
31, 1999, the market value of the account was below the $163,615 required
balance by $2,384, compared with excesses of $1,356 in 1998 and $2,080 in 1997.
The deficit in 1999 was related to an overall drop in the market value due to
rising interest rates.
NOTE 9 -- LOSSES AND LOSS RESERVES
The following table presents a reconciliation of liabilities for losses and loss
adjustment expenses:
1999 1998 1997
- -------------------------------------------------------------
Balance as of January 1,
net of
reinsurance
recoverables of
$91,296, $62,003 and
$70,048 $1,865,643 $1,421,804 $1,486,622
Addition related to
acquisition 0 483,938 0
Incurred related to:
Current year 1,176,072 989,114 922,065
Prior years (418) (66,119) (53,615)
- -------------------------------------------------------------
1,175,654 922,995 868,450
Paid related to:
Current year 600,942 513,292 448,402
Prior years 617,026 449,802 484,866
- -------------------------------------------------------------
Total paid 1,217,968 963,094 933,268
Balance as of December
31, net of reinsurance
recoverables of
$85,126, $91,296 and
$62,003 $1,823,329 $1,865,643 $1,421,804
=============================================================
The following table presents catastrophe losses incurred and the respective
impact on the loss ratio:
1999 1998 1997
- ------------------------------------------------------------
Incurred losses $52,208 $44,595 $21,389
Loss ratio effect 3.4% 3.6% 1.8%
In 1999, 1998 and 1997 there were 27, 37 and 25 catastrophes respectively.
The largest catastrophe in each year was $17,900, $7,300 and $4,600 in incurred
losses. Additional catastrophes with over $1,000 in incurred losses numbered 7,
14 and 3 in 1999, 1998 and 1997.
The effect of catastrophes on the Corporation's results cannot be
accurately predicted. As such, severe weather patterns could have a material
adverse impact on the Corporation's results.
Inflation has historically affected operating costs, premium revenues and
investment yields as business expenses have increased over time. The long term
effects of inflation are considered when estimating the ultimate
51
52
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
liability for losses and loss adjustment expenses. The liability is based on
historical loss development trends which are adjusted for anticipated changes in
underwriting standards, policy provisions and general economic trends. It is not
adjusted to reflect the effect of discounting.
Reserves for asbestos-related illnesses and toxic waste cleanup claims
cannot be estimated with traditional loss reserving techniques. In establishing
liabilities for claims for asbestos-related illnesses and for toxic waste
cleanup claims, management considers facts currently known and the current state
of the law and coverage litigation. However, given the expansion of coverage and
liability by the courts and the legislatures in the past and the possibilities
of similar interpretations in the future, there is uncertainty regarding the
extent of remediation. Accordingly, additional liability could develop.
Estimated asbestos and environmental reserves are composed of case reserves,
incurred but not reported reserves and reserves for loss adjustment expense. For
1999, 1998 and 1997, respectively, total case, incurred but not reported and
loss adjustment expense reserves were $41,098, $41,898 and $40,121. Asbestos
reserves were $9,564, $10,364 and $6,966 and environmental reserves were
$31,534, $31,534 and $33,155 for those respective years.
NOTE 10 -- EARNINGS PER SHARE
Basic and diluted earnings per share are summarized as follows:
1999 1998 1997
- ---------------------------------------------------------------
Income from continuing
operations $105,936 $83,011 $130,392
Average common shares
outstanding - basic
(000's) 61,126 65,808 68,456
Basic income from continuing
operations per average
share $1.73 $1.26 $1.90
===============================================================
Average common shares
outstanding 61,126 65,808 68,456
Effect of dilutive securities 13 62 58
- ---------------------------------------------------------------
Average common shares
outstanding - diluted 61,139 68,870 68,514
Diluted income from
continuing operations per
average share $1.73 $1.26 $1.90
===============================================================
Adjusted for July 22, 1999 2 for 1 stock split (See Note 23).
At December 31, 1999, 6,000,000 purchase warrants and 1,074,469 stock
options were not included in earnings per share calculations for 1999 as they
were antidilutive.
NOTE 11 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1999 FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------
Premiums and
finance charges
earned $384,545 $374,309 $384,274 $411,838
Net investment
income 41,809 41,013 49,679 51,786
Investment gains
(losses) realized 903 167,340 (2,269) (5,147)
Income (loss) from
continuing
operations 11,717 96,673 (6,982) 4,528
Income from
discontinued
operations 1,795 104 117 2,254
Gain on sale of
discontinued
operations 0 0 0 6,190
Cumulative effect
of accounting
change, net of
taxes (2,255) 0 0 0
Net income (loss) 11,257 96,777 (6,865) 12,972
Basic and diluted
net income
(loss) per share 0.18 1.58 (0.11) 0.22
1998 First Second Third Fourth
- --------------------------------------------------------------
Premiums and
finance charges
earned $309,627 $311,663 $314,956 $332,406
Net investment
income 44,634 41,299 42,231 40,860
Investment gains
(losses) realized 4,082 8,151 3,537 (1,359)
Income from
continuing
operations 30,914 9,989 22,903 19,205
Income from
discontinued
operations 280 345 278 1,013
Net income 31,194 10,334 23,181 20,218
Basic and diluted
net income per 0.46 0.15 0.35 0.32
share
The second quarter of 1999 investment gains realized included approximately
$145,000 related to the strategic asset reallocation that was completed during
the quarter.
The fourth quarter adjustments for 1998 included income of $12,262 after
tax for the reduction in Proposition 103 liability and an expense of $6,500
after tax for a restructuring charge.
NOTE 12 -- COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities were as follows:
52
53
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
1999 1998 1997
- --------------------------------------------------------------
Unrealized holding gains
(losses) arising
during the period,
net of taxes $ (56,994) $71,207 $143,794
Less: Reclassification
adjustment for
gains included
in net income,
net of taxes 125,468 13,632 21,595
- ---------------------------------------------------------------
Net unrealized gains
(losses) on securities,
net of taxes $(182,462) $57,575 $122,199
===============================================================
NOTE 13 -- SEGMENT INFORMATION
The Corporation has determined its reportable segments based upon its method of
internal reporting which is organized by product line. The property and casualty
segments are private passenger auto - agency, private passenger auto - direct,
CMP, fire, inland marine, general liability, umbrella, workers' compensation,
commercial auto, homeowners, fidelity and surety. These segments generate
revenues by selling a wide variety of personal, commercial and surety insurance
products. The Corporation also has an all other segment which derives its
revenues from premium financing, investment income, royalty income and
discontinued life insurance operations.
Each segment of the Corporation is managed separately. The property and
casualty segments are managed by assessing the performance and profitability of
the segments through analysis of industry financial measurements including loss
and loss adjustment expense ratios, combined ratio, premiums written,
underwriting gain/loss and the effect of catastrophe losses on the segment. The
following tables present this information by segment as it is reported
internally to management. In 1999, the Group began managing the private
passenger auto - direct segment separately from private passenger auto - agency
and umbrella segment separately from general liability. As a result, prior year
results for general liability and private passenger auto - agency have been
restated to reflect this change. Asset information by reportable segment is not
reported, since the Corporation does not produce such information internally.
Private Passenger Auto -
Agency 1999 1998 1997
- --------------------------------------------------------------
Net premiums written $526,884 $515,447 $464,693
% Increase 2.2% 10.9% 1.8%
Net premiums earned 513,045 498,783 460,029
% Increase 2.9% 8.4% 0.6%
Underwriting loss
(before tax) (35,326) (20,732) (25,926)
Loss ratio 69.3% 68.7% 72.0%
Loss expense ratio 11.9% 10.3% 9.6%
Underwriting expense ratio 25.0% 24.4% 23.8%
Combined ratio 106.2% 103.4% 105.4%
Impact of catastrophe
losses on combined ratio 0.8% 1.2% 0.5%
Private Passenger Auto -
Direct 1999 1998 1997
- --------------------------------------------------------------
Net premiums written $ 16,776 $6,347 $ 0
% Increase 164.3% N/A N/A
Net premiums earned 13,096 2,002 0
% Increase 554.1% N/A N/A
Underwriting loss
(before tax) (16,738) (3,488) 0
Loss ratio 129.1% 105.6% N/A
Loss expense ratio 16.3% 15.9% N/A
Underwriting expense ratio 64.3% 48.2% N/A
Combined ratio 209.7% 169.7% N/A
Impact of catastrophe
losses on combined ratio 0.3% N/A N/A
CMP, Fire, Inland Marine 1999 1998 1997
- -------------------------------------------------------------
Net premiums written $305,181 $225,749 $206,133
% Increase 35.2% 9.5% 5.6%
Net premiums earned 298,766 217,236 200,330
% Increase 37.5% 8.4% 2.5%
Underwriting loss
(before tax) (80,245) (33,008) (17,812)
Loss ratio 71.9% 64.5% 58.7%
Loss expense ratio 11.1% 6.2% 7.0%
Underwriting expense
ratio 43.0% 42.8% 42.0%
Combined ratio 126.0% 113.5% 107.7%
Impact of catastrophe
losses on combined ratio 7.8% 4.9% 2.5%
General Liability 1999 1998 1997
- -------------------------------------------------------------
Net premiums written $82,489 $ 76,427 $ 78,653
% Increase (decrease) 7.9% (2.8%) (6.4%)
Net premiums earned 71,562 78,061 80,947
% Decrease (8.3%) (3.6%) (6.1%)
Underwriting loss
(before tax) (17,063) (10,000) (9,379)
Loss ratio 46.4% 41.7% 39.9%
Loss expense ratio 15.2% 17.3% 23.3%
Underwriting expense
ratio 54.0% 55.0% 49.8%
Combined ratio 115.6% 114.0% 113.0%
Umbrella 1999 1998 1997
- -------------------------------------------------------------
Net premiums written $68,392 $18,717 $18,045
% Increase 265.4% 3.7% 0.4%
Net premiums earned 70,453 18,474 18,023
% Increase (decrease) 281.4% 2.5% (0.9%)
Underwriting gain
(before tax) 37,826 9,181 7,487
Loss ratio 17.7% 11.3% 21.9%
Loss expense ratio (2.8%) (2.0%) 1.5%
Underwriting expense
ratio 32.4% 39.5% 35.0%
Combined ratio 47.3% 48.8% 58.4%
53
54
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
Workers' Compensation 1999 1998 1997
- -------------------------------------------------------------
Net premiums written $191,688 $100,150 $ 97,176
% Increase (decrease) 91.4% 3.1% (15.8%)
Net premiums earned 195,773 100,336 103,484
% Increase (decrease) 95.1% (3.0%) (16.7%)
Underwriting gain (loss)
(before tax) (32,849) (9,606) 9,130
Loss ratio 71.9% 69.1% 57.2%
Loss expense ratio 11.8% 8.2% 6.4%
Underwriting expense
ratio 33.8% 32.3% 29.4%
Combined ratio 117.5% 109.6% 93.0%
Commercial Auto 1999 1998 1997
- -------------------------------------------------------------
Net premiums written $175,482 $139,087 $140,295
% Increase (decrease) 26.2% (0.9%) 0.6%
Net premiums earned 171,676 139,114 139,933
% Increase (decrease) 23.4% (0.5%) (1.8%)
Underwriting loss
(before tax) (30,803) (7,453) (18,146)
Loss ratio 69.3% 61.2% 69.3%
Loss expense ratio 11.4% 8.6% 10.2%
Underwriting expense
ratio 36.4% 35.6% 33.3%
Combined ratio 117.1% 105.4% 112.9%
Impact of catastrophe
losses on
combined ratio 1.0% 0.7% 0.3%
Homeowners 1999 1998 1997
- -------------------------------------------------------------
Net premiums written $181,905 $180,697 $168,168
% Increase 0.7% 7.5% 1.0%
Net premiums earned 183,047 177,419 166,474
% Increase 3.2% 6.6% 0.5%
Underwriting loss
(before tax) (43,667) (33,824) (19,254)
Loss ratio 79.2% 73.8% 66.5%
Loss expense ratio 9.3% 8.2% 8.7%
Underwriting expense
ratio 35.6% 36.4% 36.0%
Combined ratio 124.1% 118.4% 111.2%
Impact of catastrophe
losses on
combined ratio 12.6% 15.2% 8.1%
Fidelity & Surety 1999 1998 1997
- -------------------------------------------------------------
Net premiums written $38,100 $37,022 $34,418
% Increase (decrease) 2.9% 7.6% (0.2%)
Net premiums earned 36,890 36,403 35,045
% Increase 1.3% 3.9% 2.7%
Underwriting gain
(before tax) 7,722 6,351 8,663
Loss ratio 7.2% 10.3% 7.9%
Loss expense ratio 5.9% 5.2% 2.8%
Underwriting expense
ratio 63.9% 65.9% 65.8%
Combined ratio 77.0% 81.4% 76.5%
Total Property & Casualty 1999 1998 1997
- -------------------------------------------------------------
Net premiums written $1,586,897 $1,299,643 $1,207,581
% Increase (decrease) 22.1% 7.6% (0.1%)
Net premiums earned 1,554,308 1,267,828 1,204,265
% Increase (decrease) 22.6% 5.3% (1.6%)
Underwriting loss
(before tax) (211,143) (102,579) (65,237)
Loss ratio 66.9% 63.7% 62.7%
Loss expense ratio 10.7% 9.1% 9.4%
Underwriting expense
ratio 35.2% 34.4% 33.2%
Combined ratio 112.8% 107.2% 105.3%
Impact of catastrophe
losses on
combined ratio 3.4% 3.6% 1.8%
All other 1999 1998 1997
- -------------------------------------------------------------
Revenues $13,707 $ 5,391 $ 6,833
Expenses 20,814 6,663 6,880
- -------------------------------------------------------------
Net income $ (7,107) $(1,272) $ (47)
Reconciliation of
Revenues 1999 1998 1997
- -------------------------------------------------------------
Net premiums earned for
reportable segments $1,554,308 $1,267,828 $1,204,265
Investment income 181,078 164,812 172,372
Realized gains 144,754 26,516 58,912
Miscellaneous income (2,426) 162 453
- -------------------------------------------------------------
Total property and
casualty revenues 1,877,714 1,459,318 1,436,002
(Statutory basis)
Property and casualty
statutory
to GAAP adjustment 8,658 (12,450) (5,412)
- -------------------------------------------------------------
Total revenues property
and casualty 1,886,372 1,446,868 1,430,590
(GAAP basis)
Other segment revenues 13,708 5,391 6,833
- -------------------------------------------------------------
Total revenues $1,900,080 $1,452,259 $1,437,423
=============================================================
Reconciliation of Underwriting
gain (loss) (before tax) 1999 1998 1997
- -------------------------------------------------------------
Property and casualty
under-
writing loss (before $(211,143) $(102,579) $ (65,237)
tax)
(Statutory basis)
Statutory to GAAP
adjustment 26,905 28,528 15,597
- -------------------------------------------------------------
Property and casualty
under-
writing loss (before
tax)
(GAAP basis) (184,238) (74,051) (49,640)
Net investment income 184,287 169,024 177,700
Realized gains 160,827 14,411 50,749
Other income (23,987) (6,384) (5,352)
- -------------------------------------------------------------
Income from continuing
operations before income $136,889 $103,000 $173,457
taxes
=============================================================
NOTE 14 -- ACQUISITION OF COMMERCIAL LINES BUSINESS
On December 1, 1998, the Group acquired substantially all of the Commercial
Lines Division of Great American Insurance Company ("GAI"), an insurance
subsidiary of the American Financial Group, Inc. As part of the transaction, the
Group assumed responsibility for 650 employees of GAI's Commercial Lines
Division, as well as relationships with 1,700 agents. The major lines of
business included in the sale were workers' compensation, commercial
multi-peril, umbrella, general liability and commercial auto. Four commercial
54
55
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
operations as well as substantially all California business and all pre-1987
environmental claims were excluded from the transaction.
Under the asset purchase agreement, the Group assumed $645,813 of
commercial lines insurance liabilities, $62,639 in other liabilities and
acquired $287,900 of investments, $1,500 in cash and $119,052 in other assets.
This resulted in an assumption by the Group of a net statutory-basis liability
of $300,000 plus warrants to purchase 6 million shares of Ohio Casualty
Corporation common stock at a price of $22.505. In addition, if the annualized
production from the transferred agents at the end of eighteen months equals or
exceeds the production in the twelve months prior to closing, GAI will receive
an additional $40,000. This bonus payment grades down ratably where if
eighteen-month annualized production equals 71% or less of previous production,
no bonus payment is required. The bonus payment will be accrued as additional
agent relationships when minimum contingency is achieved.
The transaction was accounted for using the purchase method of accounting.
The Corporation has recorded agent relationships of $308,550 relating to this
transaction, consisting of $284,674 of net liabilities assumed, $21,138 in
warrants given and $2,738 in acquisition expenses. Deferred policy acquisition
costs of $37,371 were also recorded as a result of the transaction. 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, allocation of the
purchase price was made to agent relationships and deferred policy acquisition
costs as the Corporation believes it did not acquire any other significant
specifically identifiable intangible assets.
The warrants which were issued in connection with the transaction provide
for the purchase of the Corporation's common stock at $22.505 per share and
expire in December 2003. The warrants may be settled through physical or net
share settlement and thus have been recorded as equity in the financial
statements at their estimated fair value. Estimated fair value was determined
based on a third party appraisal of the warrants.
The following table presents the unaudited proforma results of operations
for 1998 and 1997 had the acquisition occurred at the beginning of each year.
(Unaudited) 1998 1997
- ---------------------------- ------------- -------------
Revenues $1,750,528 $1,775,556
Net income 58,866 130,206
Diluted
earnings per
share 0.89 1.90
NOTE 15 -- RESTRUCTURE CHARGE
During December 1998, the Group adopted a plan to restructure its branch
operations. To continue in the Corporation's efforts to reduce expenses,
personal lines business centers were reduced in 1999 from five to three
locations. Underwriting branch locations were reduced from seventeen to eight
locations and claims branches were reduced from thirty-eight to six locations in
1999. The Corporation recognized $10,000 in expense in its 1998 income statement
to reflect one-time charges related to its branch office consolidation plan.
These charges consisted solely of future contractual lease payments related to
abandoned facilities. During 1999, the Corporation reduced $5,336 of liability.
Of the total $5,336 reduced, $2,958 was due to payments under leases and $2,378
was for changes in assumptions used to establish the initial reserve. The
activities under the plan were completed in 1999, but due to leases still in
effect, the balance in the restructuring reserve, $4,664 at December 31, 1999,
will continue to remain as leases expire in 2000.
NOTE 16 -- STATUTORY ACCOUNTING INFORMATION
The following information has been prepared on the basis of statutory accounting
principles which differ from generally accepted accounting principles. The
principal differences relate to deferred acquisition costs, required statutory
reserves, assets not admitted for statutory reporting, California Proposition
103 reserve, agent relationships and deferred federal income taxes.
1999 1998 1997
- -----------------------------------------------------------
Property and Casualty
Insurance
Statutory net
income $109,172 $ 82,044 $ 142,457
Statutory
policyholders'
surplus 899,759 1,027,105 1,109,517
The Ohio Casualty Insurance Company (the Company), domiciled in Ohio,
prepares its statutory financial statements in accordance with the accounting
practices prescribed or permitted by the Ohio Insurance Department. Prescribed
statutory accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
The Company received written approval from the Ohio Insurance Department to
have the California Proposition 103 liability reported as a direct charge to
surplus and not included as a charge in the 1995 statutory statement of
operations. Following this same treatment, during 1997 and 1998 the principal
reduction in the Proposition 103 liability was taken as an increase to
55
56
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
statutory surplus and not included in the 1997 or 1998 statutory statements of
operations.
For statutory purposes, agent relationships related to the GAI acquisition
were taken as a direct charge to surplus.
The Corporation is dependent on dividend payments from its insurance
subsidiaries in order to meet operating expenses and to pay dividends. Insurance
regulatory authorities impose various restrictions and prior approval
requirements on the payment of dividends by insurance companies and holding
companies. At December 31, 1999, approximately $98,269 of retained earnings are
not subject to restriction or prior dividend approval requirements.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance, which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting. The
Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas, e.g. deferred
income taxes are recorded.
The Ohio Insurance Department has adopted the Codification guidance,
effective January 1, 2001. The Company has not estimated the potential effect of
the Codification guidance.
NOTE 17 -- BANK NOTE PAYABLE
During 1997, the Corporation signed a credit facility that makes available a
$300,000 revolving line of credit. This line of credit was accessed in 1997 to
refinance the outstanding term loan balance the Corporation had at that time. In
1998, the line of credit was used for capital infusion of $200,000 into the
property and casualty subsidiaries due to the acquisition. The line of credit
was again accessed during 1998 for the purchase of a building and to purchase
treasury shares. The credit agreement contains financial covenants and
provisions customary for such arrangements. The agreement expires in October
2002, with any outstanding loan balance due at that time. The revolving line of
credit maintains an interest rate swap that existed on the previous term loan.
The effect of the swap agreement was to establish a fixed rate of 6.34% on the
outstanding balance converted to the revolving line of credit. As of December
31, 1999, $10,000 was outstanding on the converted balance. The remaining
balance and any additional borrowings under the line of credit bear interest at
a periodically adjustable rate (6.67% at December 31, 1999). The interest rate
is determined on various bases including prime rates, certificate of deposit
rates and the London Interbank Offered Rate. Interest incurred on borrowings
amounted to $14,055, $3,547 and $3,147 in 1999, 1998 and 1997, respectively.
Under the loan agreement, the maximum permissible consolidated funded debt
cannot exceed 30% of consolidated tangible net worth.
NOTE 18 -- CALIFORNIA PROPOSITION 103
Proposition 103 was passed in the state of California in 1988 in an attempt to
legislate premium rates for that state. As construed by the California Supreme
Court, the proposition requires premium rate rollbacks for 1989 California
policyholders while allowing for a "fair" return for insurance companies. Even
after considering investment income, total returns in California have been less
than what would be considered "fair" by any reasonable standard. During the
fourth quarter of 1994, the state of California assessed the Group $59,867 for
Proposition 103. In February 1995, California revised this billing to $47,278.
The assessment was revised again in August 1995 to $42,100 plus interest. In
December 1997, during Administrative Law hearings, the California Department of
Insurance filed two revised rollback calculations. These calculations indicated
rollback liabilities of either $35,900 or $39,900 plus interest.
In 1998, the Administrative Law Judge finally issued a proposed ruling with
a rollback liability of $24,428 plus interest. Her ruling was sent to the
California Commissioner of Insurance to be accepted, rejected or modified. The
Group expected the commissioner to rule sometime after the election in November
1998, but he has so far failed to do so. The asserted rollbacks to date have
ranged from $24,428 to $61,197. The Administrative Law Judge indicates clearly
in her ruling that by her calculation the Corporation would have lost
approximately $1,000 on 1989 operations if a rollback of $24,428 were imposed.
Given that conclusion, it is clear that any assessment greater than $24,428
would strengthen the Group's Constitutional argument that this rollback is
confiscatory. The Group does not believe it is possible to pinpoint a specific
rollback that may be required that is the most probable. The Group has
established a contingent liability for Proposition 103 rollback at $24,428 plus
simple interest at 10% from May 8, 1989. This brings the total reserve to
$50,486 at December 31, 1999.
To date, the Group has paid $5,147 in legal costs related to the
withdrawal, Proposition 103, and Fair Plan assessments.
NOTE 19 -- SHAREHOLDER RIGHTS PLAN
In December 1989, the Board of Directors adopted the Shareholders Rights
Agreement (the Agreement). The Agreement is designed to deter coercive or unfair
takeover tactics and to prevent a person(s) from gaining control of the
Corporation without offering a fair price to all shareholders.
Under the terms of the Agreement, each outstanding common share is
associated with one half of one common share purchase right, expiring in 2009.
Currently, each whole right, when exercisable, entitles the registered
56
57
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
holder to purchase one common share of the Corporation at a purchase price of
$125 per share.
The rights become exerciseable for a 60 day period commencing 11 business
days after a public announcement that a person or group has acquired shares
representing 20 percent or more of the outstanding shares of common stock,
without the prior approval of the board of directors; or 11 business days
following commencement of a tender or exchange of 20 percent or more of such
outstanding shares of common stock.
If after the rights become exercisable, the Corporation is involved in a
merger, other business consolidation or 50 percent or more of the assets or
earning power of the Corporation is sold, the rights will then entitle the
rightholders, upon exercise of the rights, to receive shares of common stock of
the acquiring company with a market value equal to twice the exercise price of
each right.
The Corporation can redeem the rights for $0.01 per right at any time prior
to becoming exercisable.
NOTE 20 -- DISCONTINUED OPERATIONS (LIFE INSURANCE)
Discontinued operations include the operations of Ohio Life, a subsidiary of The
Ohio Casualty Insurance Company.
On October 2, 1995, the Company transferred its life insurance and related
businesses through a 100% coinsurance arrangement to Employers' Reassurance
Corporation and entered into an administrative and marketing agreement with
Great Southern Life Insurance Company ("Great Southern"). In connection with the
reinsurance agreement, $144,469 in cash and $161,401 of securities were
transferred to Employers' Reassurance to cover the liabilities of $348,479. Ohio
Life received an adjusted ceding commission of $37,641 as payment. After
deduction of deferred acquisition costs, the net ceding commission from the
transaction was $17,284. During the fourth quarter of 1997, Great Southern
legally replaced Ohio Life as the primary insurer for approximately 76% of the
life insurance policies subject to the 1995 agreement. As a result of this
assumption, fourth quarter of 1997 net income was positively impacted by a
partial recognition of unamortized ceding commission. The after-tax impact was
an increase to net income of $5,300. At December 31, 1998, Great Southern had
assumed 95% of the life insurance policies subject to the 1995 agreement. As a
result, the Corporation recognized an additional amount of unamortized ceding
commission of $1,093 before tax during the fourth quarter 1998. In 1999, the
Corporation recognized the remaining $1,093 of unamortized ceding commission.
During 1999, Great Southern Life Insurance Company replaced Employers'
Reassurance Corporation on the 100% coinsurance treaty.
On December 31, 1999, the Company completed the sale of the Ohio Life
shell, thereby transferring all remaining assets and liabilities, as well as
reinsurance treaty obligations, to the Buyer. The after-tax gain on this sale
totaled $6,200 million, or $.11 per share.
Results of the discontinued life insurance operations for the years ended
December 31 were as follows:
1999 1998 1997
- -------------------------------------------------------------
Gross premiums written $ 0 $ 0 $ 1,267
Net premiums earned 1,765 3,708 23,865
Net investment income 827 2,288 3,954
Realized investment
gains (losses) 1,200 (72) 1,633
- -------------------------------------------------------------
Total income 3,792 5,924 29,452
Income before income
taxes 4,349 2,944 13,316
- -------------------------------------------------------------
Provision for income
taxes 79 1,029 4,661
- -------------------------------------------------------------
Net income $ 4,270 $ 1,916 $ 8,655
=============================================================
Gain on sale of
discontinued
operations - after tax $ 6,190 $ 0 $ 0
=============================================================
Assets and liabilities of the discontinued life insurance operations as of
the years ended December 31 were as follows:
1999 1998 1997
- --------------------------------------------------------------
Cash $ 0 $ 24 $ 9,214
Investments 0 13,917 21,320
Deferred policy
acquisition costs,
net of unamortized
ceding commission 0 (1,093) (2,185)
Reinsurance receivable 0 36,599 36,198
Other assets 0 3,191 4,219
- --------------------------------------------------------------
Total assets $ 0 $52,638 $68,766
==============================================================
Future policy benefits $ 0 $25,518 $34,148
Deferred income tax 0 (1,215) (1,357)
Other liabilities 0 46,822 35,512
- --------------------------------------------------------------
Total liabilities $ 0 $71,125 $68,303
==============================================================
NOTE 21 -- NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133 "Accounting for Derivative Instruments and
Hedging Activities". This statement standardizes the accounting for derivative
instruments by requiring those items to be recognized as assets or liabilities
with changes in fair value reported in earnings or other comprehensive income in
the current period. The Corporation expects the adoption of FAS 133 to have an
immaterial impact on the financial results due to its limited use of derivative
instruments. This statement is effective for fiscal quarters of fiscal years
beginning after June 15, 2000 (January 1, 2001 for the Corporation).
57
58
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
NOTE 22 -- CHANGE IN ACCOUNTING METHOD
During the first quarter of 1999, the Corporation adopted Statement of Position
97-3 "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments". This statement provides guidance on accounting for insurance
related assessments and required disclosure information. In accordance with SOP
97-3, the Corporation has accrued a total liability for insurance assessments of
$2,300 million net of taxes, as of January 1, 1999. This was recorded as a
change in accounting method.
NOTE 23 -- STOCK SPLIT
On May 27, 1999, the Board of Directors declared a 2 for 1 stock split of the
outstanding common shares of record on July 1, 1999. The split was effective in
the form of a 100% stock dividend payable on July 22, 1999. The number of common
shares outstanding and earnings per share information for prior years have been
adjusted to reflect the stock split.
58
59
ITEM 14. CONTINUED
(b) REPORTS ON FORM 8-K OR 8-K/A SINCE OCTOBER 1, 1999.
On November 19, 1999, the Corporation filed Form 8-K announcing
that Thomas A. Hayes, Executive Vice President and Chief Operating
Officer of Ohio Casualty Corporation is no longer associated with
the Corporation.
On February 24, 2000, the Corporation filed Form 8-K announcing
the resignation of Lauren N. Patch as President and Chief Executive
Officer and from the Corporation's Board of Directors. The
Corporation also named William L. Woodall President and Chief
Executive Officer effective February 17, 2000, and successor to
Joseph L. Marcum as Chairman of the Board effective April 26, 2000.
(c) EXHIBITS. (SEE INDEX TO EXHIBITS ATTACHED HERETO.)
59
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
March 13, 2000 By: /S/ WILLIAM L. WOODALL
----------------------
William L. Woodall
President
Chief Executive Officer
Vice Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 13, 2000 /S/ JOSEPH L. MARCUM
----------------------------------------------------------------------------------
Joseph L. Marcum, Chairman of the Board
March 13, 2000 /S/ WILLIAM L. WOODALL
----------------------------------------------------------------------------------
William L. Woodall, President, Chief Executive Officer, Vice Chairman of the Board
March 13, 2000 /S/ TERRENCE J. BAEHR
----------------------------------------------------------------------------------
Terrence J. Baehr, Director
March 13, 2000 /S/ ARTHUR J. BENNERT
----------------------------------------------------------------------------------
Arthur J. Bennert, Director
March 13, 2000 /S/ JACK E. BROWN
----------------------------------------------------------------------------------
Jack E. Brown, Director
March 13, 2000 /S/ CATHERINE E. DOLAN
----------------------------------------------------------------------------------
Catherine E. Dolan, Director
March 13, 2000 /S/ WAYNE R. EMBRY
----------------------------------------------------------------------------------
Wayne R. Embry, Director
March 13, 2000 /S/ VADEN FITTON
----------------------------------------------------------------------------------
Vaden Fitton, Director
March 13, 2000 /S/ STEPHEN S. MARCUM
----------------------------------------------------------------------------------
Stephen S. Marcum, Director
March 13, 2000 /S/ STANLEY N. PONTIUS
----------------------------------------------------------------------------------
Stanley N. Pontius, Director
March 13, 2000 /S/ HOWARD L. SLONEKER III
----------------------------------------------------------------------------------
Howard L. Sloneker III, Director
60
61
FORM 10-K, ITEM 14
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
OHIO CASUALTY CORPORATION
The following statements are included herein as Item 14:
Page Number
in This Report
--------------
Consolidated Balance Sheet at December 31, 1999, 1998, 1997 41
Statement of Consolidated Income for the years ended
December 31, 1999, 1998 and 1997 42
Statement of Consolidated Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 43
Statement of Consolidated Cash Flow for the years ended
December 31, 1999, 1998 and 1997 44
Notes to Consolidated Financial Statements 45-58
Report of Independent Accountants 62
Page Number
in This Report
--------------
The following financial statement schedules are included herein:
Schedule I - Consolidated Summary of Investments Other Than
Investments in Related Parties at December 31, 1999 63
Schedule II - Condensed Financial Information of Registrant for
the years ended December 31, 1999, 1998 and 1997 64
Schedule III - Consolidated Supplementary Insurance Information
for the years ended December 31, 1999, 1998 and 1997 65-67
Schedule IV - Consolidated Reinsurance for the years ended
December 31, 1999, 1998 and 1997 68
Schedule V - Valuation and Qualifying Accounts for the years
ended December 31, 1999, 1998 and 1997 69
Schedule VI - Consolidated Supplemental Information Concerning
Property and Casualty Insurance Operations for the
years ended December 31, 1999, 1998 and 1997 70
61
62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Ohio Casualty Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 61 present fairly, in all material respects,
the financial position of Ohio Casualty Corporation and its subsidiaries at
December 31, 1999, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedules listed in the
index appearing under Item 14(a) on page 61 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 22 to the financial statements, the Company changed its
method of accounting for insurance-related assessments.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 3, 2000
62
63
Schedule I
Ohio Casualty Corporation and Subsidiaries
Consolidated Summary of Investments
Other than Investments in Related Parties
(In thousands)
December 31, 1999
Amount shown
Type of investment Cost Value in balance sheet
- ------------------ ---- ----- ----------------
Fixed maturities
Bonds:
United States govt. and
govt. agencies with auth $ 65,214 $ 65,107 $ 65,107
States, municipalities and
political subdivisions 456,959 461,427 461,427
Corporate securities 1,082,975 1,066,123 1,066,123
Mortgage-backed securities:
U.S. government guaranteed 47,865 46,457 46,457
Other 755,188 737,859 737,859
---------- ---------- ----------
Total fixed maturities 2,408,201 2,376,973 2,376,973
Equity securities:
Common stocks:
Banks, trust and insurance
companies 39,032 213,275 213,275
Industrial, miscellaneous and
all other 122,378 484,718 484,718
Preferred stocks:
Non-redeemable 88 136 136
Convertible 0 0 0
---------- ---------- ----------
Total equity securities 161,498 698,129 698,129
Short-term investments 104,446 104,398 104,398
---------- ---------- ----------
Total investments $2,674,145 $3,179,500 $3,179,500
========== ========== ==========
63
64
Schedule II
Ohio Casualty Corporation
Condensed Financial Information of Registrant
(In thousands)
1999 1998 1997
---- ---- ----
Condensed Balance Sheet:
Investment in wholly-owned
subsidiaries, at equity $ 1,314,399 $ 1,482,064 $ 1,258,432
Investment in bonds/stocks 52,581 76,687 85,742
Cash and other assets 32,145 31,066 13,000
----------- ----------- -----------
Total assets 1,399,125 1,589,817 1,357,174
Notes payable 241,446 265,000 40,000
Other liabilities 6,692 3,836 2,345
----------- ----------- -----------
Total liabilities 248,138 268,836 42,345
Shareholders' equity $ 1,150,987 $ 1,320,981 $ 1,314,829
=========== =========== ===========
Condensed Statement of Income:
Dividends from subsidiaries $ 112,122 $ 119,988 $ 169,988
Equity in subsidiaries 8,955 (33,929) (30,867)
Operating (expenses) (6,936) (1,132) (74)
----------- ----------- -----------
Net income $ 114,141 $ 84,927 $ 139,047
=========== =========== ===========
Condensed Statement of Cash Flows:
Cash flows from operations
Net distributed income $ 105,186 $ 118,856 $ 169,914
Other (8,609) (2,562) (805)
----------- ----------- -----------
Net cash from operations 96,577 116,294 169,109
Investing
Purchase of bonds/stocks (11,987) (200,740) (57,031)
Sales of bonds/stocks 42,148 14,440 28,147
----------- ----------- -----------
Net cash from investing 30,161 (186,300) (28,884)
Financing
Notes payable:
Borrowings 16,500 230,000 (10,000)
Repayments (40,054) (5,000) 0
Exercise of stock options 211 1 371
Purchase of treasury stock (46,087) (100,212) (64,858)
Dividends paid to shareholders (56,027) (57,886) (57,456)
----------- ----------- -----------
Net cash from financing (125,457) 66,903 (131,943)
Net change in cash 1,281 (3,103) 8,282
Cash, beginning of year 8,554 11,657 3,375
----------- ----------- -----------
Cash, end of year $ 9,835 $ 8,554 $ 11,657
=========== =========== ===========
64
65
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1999
Deferred Future policy Benefits,
policy benefits Net losses and
acquisition losses and Unearned Premium investment loss
costs loss expenses premiums revenue income expenses
------------ -------------- ------------- ------------- ------------- -------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 12,672 $ 186,221 $ 88,559 $ 171,676 $ $ 136,792
Private Passenger Auto - Agency 35,934 399,860 153,282 512,731 403,643
Private Passenger Auto - Direct 2,063 10,108 8,383 13,096 19,073
Workers' compensation 16,459 609,438 99,603 195,773 156,273
Gen. liability, A&H 14,745 214,921 42,816 71,562 53,321
Umbrella 6,732 67,668 39,229 70,453 460
Homeowners 28,213 64,193 98,221 183,047 160,311
CMP, fire and allied lines,
inland marine 49,568 343,676 166,833 298,766 242,806
Fidelity, surety, burglary 11,359 12,370 28,319 36,890 2,975
Miscellaneous Income 69
Addition due to acquisition
Investment 181,131
------------ -------------- ------------- ------------- ------------- -------------
Total property and
casualty insurance 177,745 1,908,455 725,245 1,554,063 181,131 1,175,654
Life ins.(discontinued operations) 1,765 827
Premium finance 154 903 113
Corporation 3,043
------------ -------------- ------------- ------------- ------------- -------------
Total $177,745 $ 1,908,455 $725,399 $ 1,556,731 $185,114 $1,175,654
============ ============== ============= ============= ============= =============
Amortization
of deferred General
acquisition operating Premiums
costs expenses written
------------ ------------ --------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 37,224 $ 13,893 $ 175,482
Private Passenger Auto - Agency 108,539 35,280 526,653
Private Passenger Auto - Direct 3,072 7,716 16,776
Workers' compensation 29,261 26,629 191,688
Gen. liability, A&H 29,066 6,213 82,489
Umbrella 12,840 12,074 68,392
Homeowners 47,470 17,503 181,905
CMP, fire and allied lines,
inland marine 84,283 35,868 305,181
Fidelity, surety, burglary 18,836 5,477 38,100
Miscellaneous Income
Addition due to acquisition 31,402
Investment
------------ ------------ --------------
Total property and
casualty insurance 401,993 160,653 1,586,666
Life ins.(discontinued operations) (731) 174
Premium finance 1,277 804
Corporation 23,614
------------ ------------ --------------
Total $401,262 $185,718 $1,587,470
============ ============ ==============
1. Net investment income has been allocated to principal business segments
on the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on policy counts.
65
66
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1998
Deferred Future policy Benefits,
policy benefits Net losses and
acquisition losses and Unearned Premium investment loss
costs loss expenses premiums revenue income expenses
------------ -------------- ------------- ------------- ------------ -------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 9,890 $ 189,817 $ 83,448 $ 139,114 $ $ 97,077
Private Passenger Auto - Agency 34,700 417,316 139,195 498,225 393,879
Private Passenger Auto - Direct 862 1,254 4,348 2,002 2,433
Workers' compensation 7,627 591,527 95,839 100,336 77,632
Gen. liability, A&H 12,008 259,017 52,984 78,061 46,013
Umbrella 2,946 61,152 12,509 18,474 1,895
Homeowners 28,379 63,230 98,807 177,419 145,500
CMP, fire and allied lines,
inland marine 38,542 348,013 154,233 217,236 153,575
Fidelity, surety, burglary 11,342 14,532 27,019 36,403 5,662
Miscellaneous Income 334
Investment 164,812
Addition due to acquisiton 31,402
Retro reinsurance assumed
from acquisition
------------ -------------- ------------- ------------- ------------ -------------
Total property and
casualty insurance 177,698 1,945,858 668,382 1,267,604 164,812 923,666
Life ins. (discontinued operations) (1,092) 36,599 3,709 2,288 (1)
Premium finance 168 1,219 94
Corporation 4,118
------------ -------------- ------------- ------------- ------------ -------------
Total $176,606 $ 1,982,457 $ 668,550 $ 1,272,532 $ 171,312 $923,665
============ ============== ============= ============= ============ =============
Amortization
of deferred General
acquisition operating Premiums
costs expenses written
------------ ------------ -------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 26,833 $ 18,309 $ 139,087
Private Passenger Auto - Agency 100,122 11,684 514,915
Private Passenger Auto - Direct 439 146 6,347
Workers' compensation 18,060 11,912 100,150
Gen. liability, A&H 27,202 11,766 76,427
Umbrella 6,673 2,887 18,717
Homeowners 46,448 17,497 180,697
CMP, fire and allied lines,
inland marine 67,125 24,541 225,749
Fidelity, surety, burglary 17,646 6,124 37,021
Miscellaneous Income
Investment
Addition due to acquisiton 5,968
Retro reinsurance assumed
from acquisition 137,636
------------ ------------ -------------
Total property and
casualty insurance 316,516 104,866 1,436,746
Life ins. (discontinued operations) 2,524 456
Premium finance 1,529 1,170
Corporation 6,075
------------ ------------ -------------
Total $ 319,040 $ 112,926 $1,437,916
============ ============ =============
1. Net investment income has been allocated to principal business segments
on the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on premium volume.
66
67
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1997
Deferred Future policy Benefits,
policy benefits Net losses and
acquisition losses and Unearned Premium investment loss
costs loss expenses premiums revenue income expenses
------------ -------------- ------------- ------------- ------------- ------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 8,835 $ 167,558 $ 64,350 $ 139,932 $ $107,740
Private Passenger Auto - Agency 29,247 421,276 122,536 459,180 375,431
Workers' compensation 5,290 367,802 40,705 103,484 65,762
Gen. liability, A&H 11,411 207,902 35,199 80,947 51,104
Umbrella 2,625 46,257 7,831 18,024 4,227
Homeowners 26,582 64,681 94,752 166,474 125,136
CMP, fire and allied lines,
inland marine 33,537 193,885 103,751 200,330 131,499
Fidelity, surety, burglary 10,721 12,296 25,759 35,045 3,743
Miscellaneous Income 3,925
Investment 172,372
------------ -------------- ------------- ------------- ------------- ------------
Total property and
casualty insurance 128,248 1,481,657 494,883 1,207,341 172,372 864,642
Life ins.(discontinued operations) (2,185) 36,298 23,865 3,954 268
Premium finance 193 1,632 65
Corporation 5,264
------------ -------------- ------------- ------------- ------------- ------------
Total $126,063 $ 1,517,955 $495,076 $ 1,232,838 $181,655 $864,910
============ ============== ============= ============= ============= ============
Amortization
of deferred General
acquisition operating Premiums
costs expenses written
------------ ------------ -------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 28,242 $ 15,886 $ 140,295
Private Passenger Auto - Agency 93,488 9,047 463,933
Workers' compensation 21,313 9,979 97,176
Gen. liability, A&H 27,423 9,428 78,653
Umbrella 6,308 2,169 18,045
Homeowners 44,666 15,897 168,168
CMP, fire and allied lines,
inland marine 64,520 21,220 206,133
Fidelity, surety, burglary 17,534 5,220 34,418
Miscellaneous Income
Investment
------------ ------------ -------------
Total property and
casualty insurance 303,494 88,846 1,206,821
Life ins.(discontinued operations) 15,049 819 6
Premium finance 1,655 1,511
Corporation 5,329
------------ ------------ -------------
Total $318,543 $ 96,649 $1,208,338
============ ============ =============
1. Net investment income has been allocated to principal business segments
on the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on policy counts.
67
68
Schedule IV
Ohio Casualty Corporation and Subsidiaries
Consolidated Reinsurance
(In thousands)
December, 1999, 1998 and 1997
Percent of
amount
Ceded to Assumed assumed
Gross other from other Net to net
amount companies companies amount amount
------------ ------------ ------------ ------------ ------------
Year Ended December 31, 1999
Life insurance in force $ 279 $ 279 $ 0 $ 0 0.0%
Premiums
Property and casualty insurance $ 1,325,243 $ 106,852 $ 368,275 $ 1,586,666 23.2%
Life insurance (Discontinued operations) 1,694 1,694 0 0 0.0%
Accident and health insurance 198 198 0 0 0.0%
------------ ------------ ------------ ------------
Total premiums 1,327,135 108,744 368,275 1,586,666 23.2%
Premium finance charges 804
Life insurance - FAS 97 adjustment 0
------------
Total premiums and finance charges written 1,587,470
Change in unearned premiums and finance charges (29,911)
Retro reinsurance assumed from acquisition -
------------
Total premiums and finance charges earned 1,557,559
Miscellaneous income (2,593)
Discontinued operations - life insurance 0
------------
Total premiums & finance charges earned - continuing operations $ 1,554,966
============
Year Ended December 31, 1998
Life insurance in force $ 329 $ 329 $ 0 $ 0 0.0%
Premiums
Property and casualty insurance $ 1,289,837 $ 79,268 $ 226,177 $ 1,436,746 15.7%
Life insurance (Discontinued operations) 3,187 3,187 0 0 0.0%
Accident and health insurance 567 567 0 0 0.0%
------------ ------------ ------------ ------------
Total premiums 1,293,591 83,022 226,177 1,436,746 15.7%
Premium finance charges 1,170
Life insurance - FAS 97 adjustment 0
------------
Total premiums and finance charges written 1,437,916
Change in unearned premiums and finance charges (31,790)
Retro reinsurance assumed from acquisition (137,636)
------------
Total premiums and finance charges earned 1,268,490
Miscellaneous income 334
Discontinued operations - life insurance 0
------------
Total premiums & finance charges earned - continuing operations $ 1,268,824
============
Year Ended December 31, 1997
Life insurance in force $ 547 $ 547 $ 0 $ 0 0.0%
============ ============ ============ ============
Premiums
Property and casualty insurance $ 1,225,813 $ 31,298 $ 12,306 $ 1,206,821 1.0%
Life insurance (Discontinued operations) 18,359 18,359 0 0 0.0%
Accident and health insurance 1,392 1,575 189 6 3150.0%
------------ ------------ ------------ ------------
Total premiums 1,245,564 51,232 12,495 1,206,827 1.0%
Premium finance charges 1,511
Life insurance - FAS 97 adjustment 0
------------
Total premiums and finance charges written 1,208,338
Change in unearned premiums and finance charges (3,283)
------------
Total premiums and finance charges earned 1,205,055
Miscellaneous income 3,925
Discontinued operations - life insurance (6)
------------
Total premiums & finance charges earned - continuing operations $ 1,208,974
============
68
69
Schedule V
Ohio Casualty Corporation and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
Balance at Addition Balance at
beginning Charged to due to end of
of period expenses Acquisition Deductions period
Year ended December 31, 1999
Reserve for bad debt 8,739 600 0 0 9,339
Year ended December 31, 1998
Reserve for bad debt 4,200 100 4,439 0 8,739
Year ended December 31, 1997
Reserve for bad debt 3,700 500 0 0 4,200
69
70
Schedule VI
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplemental Information Concerning Property and Casualty
Insurance Operations
(In thousands)
Claims and claim
Reserves for adjustment expenses
Deferred unpaid claims incurred related to
policy and claim Discount Net -----------------------
Affiliation with acquisition adjustment of Unearned Earned investment Current Prior
registrant costs expenses reserves premiums premiums income year years
----------- ------------ --------- ---------- ----------- ---------- ----------- -----------
Property and casualty
subsidiaries
Year ended December 31,
1999 $ 177,745 $ 1,908,455 $ 0 $ 725,245 $1,554,063 $ 181,131 $1,176,072 $ (418)
=========== ============ ========= ========== =========== ========== =========== ==========
Year ended December 31,
1998 $ 177,698 $ 1,945,858 $ 0 $ 668,382 $1,267,604 $ 164,812 $ 989,115 $ (66,119)
=========== ============ ========= ========== =========== ========== =========== ==========
Year ended December 31,
1997 $ 128,248 $ 1,481,657 $ 0 $ 494,883 $1,207,341 $ 172,372 $ 921,818 $ (53,615)
=========== ============ ========= ========== =========== ========== =========== ==========
Amortization Paid
of deferred claims
policy and claim
Affiliation with acquisition adjustment Premiums
registrant costs expenses written
----------- ------------ ------------
Property and casualty
subsidiaries
Year ended December 31,
1999 $ 401,993 $1,217,948 $ 1,586,666
=========== ============ ============
Year ended December 31,
1998 $ 316,516 $ 963,094 $ 1,436,746
=========== ============ ============
Year ended December 31,
1997 $ 303,494 $ 929,399 $ 1,206,821
=========== ============ ============
70
71
FORM 10-K
OHIO CASUALTY CORPORATION
INDEX TO EXHIBITS
Page
Number
------
Exhibit 21 Subsidiaries of Registrant 72
Exhibit 23 Consent of Independent Accountants to incorporation of their
opinion by reference in Registration Statement on Form S-3 and
Form S-8 73
Exhibit 27 Financial Data Schedule 74
Exhibit 28 Information from Reports Furnished to State Insurance
Regulation Authorities 75-88
Exhibits incorporated by reference:
Exhibit 2 Asset Purchase Agreement between Ohio Casualty Corporation
and Great American Insurance Company filed with Form 10Q on
November 13, 1998
Exhibit 3 Amended Articles of Incorporation and Code of Regulations filed
with Form 8-K on January 15, 1987
Exhibit 3a Amendment to Amended Articles of Incorporation authorizing
a new class of 2,000,000 shares of preferred stock, dated
April 15, 1992 filed with Form 10-Q dated August 12, 1992
Exhibit 3b Amendment to Amended Articles of Incorporation increasing
authorized number of shares to 150,000,000 common shares and
authorized 2,000,000 preferred shares, dated April 17, 1996
filed with Form 10-K dated March 27, 1997
Exhibit 4 Amended and Restated Rights Agreement dated as of February
19, 1998 between Ohio Casualty Corporation and First Chicago
Trust Company of New York, as Rights Agent filed with Form
10-Q dated May 14 1998
Exhibit 10a Ohio Casualty Corporation 1993 Stock Incentive Program
filed with Form 10-Q as Exhibit 10d on May 31, 1993
Exhibit 10a1 Ohio Casualty Corporation amended 1993 Stock Incentive
Program filed with Form 10-Q dated May 14, 1997
Exhibit 10b Coinsurance Life, Annuity and Disability Income
Reinsurance Agreement between Employer's Reassurance
Corporation and The Ohio Life Insurance Company dated as of
October 2, 1995 filed with Form 10-K dated March 26, 1996
Exhibit 10c Credit Agreement dated October 27, 1997 with Chase
Manhattan Bank, N.A. as agent, filed with Form 10-Q on
November 13, 1997
Exhibit 22 Definitive Proxy Statement of the Corporation for the Annual
Meeting of Shareholders for 2000
71