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.
The year 1999 ended with the Corporation experiencing deterioration in certain lines of business, price inadequacies, and rising underwriting expenses. The Corporation responded in 2000 with a plan to aggressively manage expenses, implement price increases, and cancel or non-renew its most unprofitable business.
For the year 2000, the Corporation reported a net operating loss of $77.7 million or $1.29 per share, compared with operating income of $1.4 million or $.02 per share in 1999 and $73.6 million or $1.12 per share in 1998. Contributing to the 2000 net loss were the adverse effects of write-offs to the agent relationships intangible asset relating to the 1998 acquisition of the Great American Insurance Companies (GAI) Commercial Lines Division, the impact of inadequate pricing, and premium cessions on experience rated reinsurance contracts. Positively impacting 2000 results was the settlement of the California Proposition 103 liability.
Statutory net premiums written decreased $81.5 million in 2000 to $1.51 billion. Net premiums written totaled $1.59 billion in 1999 and $1.30 billion in 1998. The net premiums written decrease in 2000 can be attributed to a more conservative underwriting philosophy that led to the non-renewal of certain business, the effects of annualization of New Jersey private passenger automobile policies, and the premium cessions on experience rated reinsurance contracts mentioned previously. In order to improve underwriting results, the Corporation took action in 2000 to cancel its most unprofitable agents and policies. These actions, along with the
The 2000 accident year loss ratio, which measures losses and claims arising from insured events during the year was 69.3%, 3.5 points lower than the calendar year result, which includes loss payments made during the current year and changes in the provision for future loss payments. The difference is concentrated in the general liability and workers' compensation lines.
At year-end 2000, the Group reallocated its carried bulk reserves to comply with Statement of Statutory Accounting Principles No. 55 under Statutory Accounting Codification, which requires that companies carry their best estimate of loss reserves for each line of business, while previous requirements focused on the overall results. The reallocation, while not affecting the overall calendar year combined ratio, had a material impact on the reported combined ratios for several lines of business.
Workers' compensation combined ratio increased 48.1 points in 2000 to 165.6%, compared with 117.5% and 109.6% for 1999 and 1998, respectively. Excluding the 2000 year-end reserve reallocation, the combined ratio was 156.0%. The loss ratio was the main component driving the high combined ratio. Due to rising medical costs causing an increase in claims severity and the effects of the year-end reserve reallocation, the 2000 loss ratio swelled to 118.8% compared with 71.9% and 69.1% in 1999 and 1998, respectively. The Group was able to achieve an average renewal price increase for the workers' compensation line of business of 12.4% for 2000.
Net premiums written decreased $71.2 million or 13.5% to $455.3 million in 2000, compared with $526.5 million in 1999 and $515.4 million in 1998. 1999 net premiums written were positively impacted by the conversion to twelve-month policies in New Jersey, from the standard six- month policy issued. Additionally, the state mandated rate rollback effective in early 1999 reduced premium volume for a portion of 1999 and for a full year in 2000. New Jersey's private passenger auto net premiums written represent approximately 21% of the Group's total private passenger auto book of business. The combined ratio increased to 110.4% in 2000 from 106.3% in 1999 and 103.4% in 1998. An 8% increase in claims severity in 2000 contributed to the increase in the overall combined ratio. See discussion of New Jersey regulatory developments in Item 1, page 16.
The Group began direct marketing of personal auto coverage in January 1998. In 2000, the Corporation first restructured its Avomark operations with an internet-only strategy, and later discontinued the private passenger auto-direct line of business in the fourth quarter. As part of this restructuring, the Company completed an asset purchase agreement for the sale of the Avomark Call Center. Under this agreement, the buyer purchased certain assets used in the call center operation and entered into a new lease on the call center property, thereby replacing the Company as lessee. The line was discontinued in order to focus on the independent agency system as the distribution channel for the Group. As a result of the restructuring, 2000 net premiums written dropped from $17.1 million in 1999 to $10.7 million in 2000. The Group wrote $6.3 million of net premiums in 1998. Combined ratios were 167.9%, 208.4%, and 169.7% for 2000, 1999, and 1998, respectively.
The combined ratio increased 11.3 points in 2000 due to adverse development for 1999 and prior accident years to 126.9%, compared with 115.6% in 1999 and 114.0% in 1998. 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.
The 2000 combined ratio was 80.3%, compared with 47.3% in 1999 and 48.8% in 1998. Although the combined ratio increased, the results are still below the industry average.
Net premiums written fell 4.8% in 2000 to $173.2 million from $181.9 million in 1999 and $180.7 million in 1998. Over the past two years, the Group has placed emphasis on selective underwriting and the homeowners Insurance-To-Value program. The program addresses underinsured homeowner properties and emphasizes adequate replacement cost values. Upon renewal, homeowner's accounts are subject to a replacement cost valuation and appropriate premium increases are implemented. The Insurance-To-Value program has contributed to the Group implementing an average price increase of more than 10% during the year 2000.
adjustment expenses, and a reduction in paid underwriting expenses as a result of the expense management efforts. The decrease in 1999, compared with 1998, primarily resulted from lower operating income. Investing activities used net cash of $103.5 million in 2000, compared with net cash produced of $108.1 million in 1999 and $93.5 million in 1998. Total cash used for financing activities was $56.0 million in 2000, compared with $125.5 million in 1999 and total cash produced of $66.9 million in 1998. Cash used from financing decreased in 2000 as a result of the reduction in shareholder dividends and the Corporation's decision not to repurchase any of its treasury shares. Overall, total cash used in 2000 was $59.9 million, compared with $155.0 million in 1999 and cash generated of $184.9 million in 1998.
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 the Corporation's planning horizon and emphasizes long-term returns, not intermediate fluctuations. The five-year average return on equity was 6.2%, 12.0% and 14.3% for 2000, 1999 and 1998, respectively.
The Corporation is dependent on dividend payments from its insurance subsidiaries in order to meet operating expenses, debt obligations, 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. As of December 31, 2000, approximately $81.2 million of retained earnings were not subject to regulatory restriction or prior dividend approval requirements.
The Corporation is evaluating its capital requirements and is exploring ways to restructure and/or reduce its debt and strengthen its financial position. The Corporation has taken steps to strengthen its financial position by aggressively managing expenses and first reducing quarterly dividends to shareholders and later eliminating the current quarterly dividend in the first quarter of 2001. The Corporation may be required to obtain additional external funding, either in the form of debt or equity funding, to support its insurance operations in the future. While the Corporation believes that it should be able to obtain such external funding, if needed, the availability of such funding cannot be assured nor can the cost of such funding be evaluated at this time.
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 related to the restructuring plan, originally estimated to be 250 positions, have amounted to approximately 170 positions. The plan was estimated to generate $14 million in annual pre-tax savings upon full implementation in late 1999. The actual savings in 2000 were approximately $9 million.
During 1995, the Corporation's life operations were discontinued. In order to exit the life operations the Company executed an agreement in 1995 to reinsure the existing blocks of 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 and $1.1 million in 1998.
The Group's largest liabilities are 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 $2.0 billion at December 31, 2000, $1.9 billion at December 31, 1999 and $2.0 billion at December 31, 1998.
Estimated asbestos and environmental reserves are composed of case reserves, incurred but not reported reserves and reserves for loss adjustment expense. For 2000, 1999 and 1998, respectively, those reserves were $40.4 million, $41.1 million and $41.9 million. Asbestos reserves were $13.5 million, $9.6 million and $10.4 million and environmental reserves were $26.9 million, $31.5 million and $31.5 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.
Proposition 103 was passed in the state of California in 1988 in an attempt to legislate premium rates for that state. The proposition required premium rate rollbacks for 1989 California policyholders while allowing for a "fair" return for insurance companies.
In 1998, the Administrative Law Judge issued a proposed ruling with a rollback liability of $24.4 million plus interest. The Group established a contingent liability for the Proposition 103 rollback of $24.4 million plus simple interest at 10% from May 8, 1989. This brought the total reserve to $52.3 million at September 30, 2000. On October 25, 2000, the Group announced a settlement agreement for California Proposition 103 that was approved by the Commissioner of Insurance of the state of California. Under the terms of the settlement, the members of the group will pay
The Corporation's fixed income portfolio has an intermediate duration and a laddered maturity structure. The Corporation does not try to time markets, instead, always choosing to remain fully invested.
At year-end 2000, consolidated equity investments had a market value of $754.9 million. Equity investments have decreased as a percentage of the consolidated portfolio from 25.7% in 1998 to 22.7% at year-end 2000. This decrease is attributable to the 1999 reallocation of the Group's investment portfolio.
The Corporation is adopting Statement of Financial Accounting Standards (SFAS) No. 133 effective January 1, 2001, and has concluded that the adoption should have an immaterial impact on the financial results upon implementation.
See discussion of new accounting standards in Note 21, New Accounting Standards, in the Notes to the Consolidated Financial Statements on page 40 of the Annual Report to Shareholders for the fiscal year ended December 31, 2000.