Ohio Casualty Corporation (the Corporation) is the holding company of The Ohio Casualty Insurance Company (the Company), which is one of six property-casualty companies that make up the Ohio Casualty Group (the Group).
Management's Discussion and Analysis (MD&A) of financial condition and results of operations addresses the financial condition of the Corporation and the Group as of December 31, 2002, compared with December 31, 2001 and December 31, 2000 and the Corporation's and the Group's results of operations for each of the three years. The supplementary financial information should be read in conjunction with the consolidated financial statements and related notes, all of which are integral parts of the following analysis of the Corporation's and the Group's results of operations and financial position.
During 2002, the Group continued to invest in its strategy to improve the ease of use for agents doing business with the Group and demonstrated improved loss ratios despite the negative impact of business written in prior years. The Corporation also completed the refinancing of bank debt with a convertible debt issuance that aggregated net proceeds of $194.0 million as discussed further under "Liquidity and Financial Strength." In addition, substantial progress was made in 2002 toward implementing the Corporation's strategic plan.
The Corporation reported an after-tax net loss of $.9 million, or $.01 per share for the year 2002, compared with net income of $98.6 million, or $1.64 per share in 2001, and a net loss of $79.2 million, or $1.32 per share in 2000.
For the year 2002, the Corporation reported a net operating loss(1) of $30.2 million, compared with net operating losses of $36.4 million in 2001 and $77.7 million in 2000. During 2002, the Group increased provisions for prior accident years' losses and loss adjustment expenses (LAE) by $84.4 million before tax which was concentrated in the general liability, commercial auto and personal auto product lines. Also during 2002, operating results were negatively impacted by expenses totaling $79.7 million before tax related to the agent relationships identifiable intangible asset. This asset represents the excess of cost over fair value of net assets for the 1998 acquisition of the Great American Insurance Company's (GAI) commercial lines division. The components of this non-cash charge were $10.2 million before tax in amortization and $69.5 million before tax in impairment charges related to agent cancellations or other changes in estimated future cash flows. The impairment charges occurred where estimated future cash flows of certain agents were less than the carrying value. The larger than usual impairment charge in the third quarter of 2002 was due primarily to recognition that certain agents experienced sustained premium revenue trends that were significantly different from prior estimates, resulting in changes in estimated future cash flows for those agents. The determination of impairment involves the use of management estimates and assumptions. Due to the inherent uncertainties and judgments involved in making these assumptions and the fact that the asset cannot be increased for any agent, further reductions in the valuation of the agent relationships asset are
(1) Operating income (loss) differs from net income by the exclusion of realized investment gains (losses), net of tax. It is not intended as a substitute for net income prepared in accordance with accounting principles generally accepted in the United States.
Results for the year 2002 were negatively impacted by the losses and loss adjustment expenses for prior accident years as described above. The majority of the charge, $62.2 million before tax, occurred in the third quarter and was primarily related to construction defect claims for residential developers and contractors. The Group continues to address this specific type of business for non-renewal. For further discussion, refer to the "Loss and Loss Adjustment Expenses" section under "Liquidity and Financial Strength."
Contributing to the 2001 operating loss was the effects of additions to the Group's workers' compensation product line reserves and asbestos related reserves and the impact of an early retirement plan. The 2000 operating loss included the adverse effects of write-downs to the agent relationships intangible asset, additions to reserves, the impact of inadequate pricing and the negative effects of premium cessions on experience rated reinsurance contracts. Positively impacting 2000 results was the settlement of the California Proposition 103 liability.
During the fourth quarter of 2001, a member of the Group, Ohio Casualty of New Jersey, Inc. (OCNJ), entered into an agreement to transfer its obligations to renew private passenger auto business in New Jersey. The Group decided to eliminate future uncertainty and risks related to the New Jersey private passenger automobile market in order to achieve long-term strategic objectives. In 2001, management determined that it was uncertain whether profitability would return as there were indications that some insurance companies were receiving premium rate increase approval from regulators while others were not. The Group's inability to determine the future impact of insurance reform legislation created additional uncertainty. Both premium rate increases and insurance reform legislation might have returned OCNJ's private passenger auto business to profitability, but it was uncertain as to if and when that would occur. The Group concluded that it was a prudent business decision to pay a fee to transfer the obligation to renew OCNJ's New Jersey private passenger auto policies in order to eliminate the future uncertainty associated with that business.
The 2000 operating results were also impacted negatively by $23.2 million before tax for ceded premiums on certain experience rated reinsurance contracts covering losses exceeding $1.0 million. The premium cessions reflect changes in estimated loss experience, and have resulted in the maximum premium cessions under these contracts for business written through year 2000. During 2000, loss and loss adjustment expense reserves were strengthened by $56.8 million before tax, primarily for the workers' compensation and general liability product lines.
Consolidated before-tax investment income decreased 2.5% to $207.1 million in 2002, compared with $212.4 million in 2001 and $205.1 million in 2000. The decrease in investment income of $5.3 million before tax in 2002 was attributable to the significant decline in reinvestment rates on the high quality bonds in which the Corporation and the Group invest. This decrease in 2002 was partially offset by the reallocation of the equity portfolio in 2002 and 2001. The reallocation in the investment portfolio reduced equity securities and increased investment grade fixed maturity securities. The increase in investment income of $7.3 million before tax in 2001 was attributable to the reallocation in the investment portfolio noted above. Also contributing to the increase in before-tax investment income in 2001 was the reallocation of investments from tax exempt municipal bonds to taxable bonds. After-tax investment income totaled $136.9 million in 2002, compared with $141.3 million in 2001 and $140.3 million in 2000.
During 2001, the Corporation and the Group realized a loss of approximately $6.8 million before tax on the sale of bonds issued by Enron Corporation. These securities had been purchased in prior periods and were sold both prior and subsequent to Enron Corporation's filing for bankruptcy in December 2001. Prior to 2001, these securities were not in an unrealized loss position.
The amortized cost and estimated fair value of debt securities in an unrealized loss position at December 31, 2002, 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.
The Group renewed all of its reinsurance programs for 2002 with only moderate changes in the program structure and pricing. The enactment of the Federal Terrorism Act (the Act) in November 2002 has resulted in the Federal Government acting as a reinsurer on foreign terrorism losses, defined in the Act as a "certified loss" that has been approved by the Secretary of Treasury. The Group has dedicated resources to ensure compliance with the Act. Although the terrorist events of September 11, 2001 had a significant impact on the reinsurance market, the Group's reinsurance contracts do include coverage for acts of terrorism. Instead of being
Statutory net premiums written decreased $23.6 million in 2002 to $1.45 billion. This slight decline of net premiums written over 2001 is primarily attributable to the reduction in premiums related to the non- renewal of the Group's New Jersey private passenger auto business that began to be non-renewed in March of 2002. Net premiums written totaled $1.47 billion in 2001 and $1.51 billion in 2000. The net premiums written decrease in 2001 and 2000 can be attributed
primarily to a more selective underwriting philosophy that led to the elimination and cancellation of certain business and the cancellation of a number of agents. Actions taken in 2000 to cancel the Managing General Agents and the Group's most unprofitable agents and policies represented over $150.0 million in annual net premiums written.
New Jersey is the Group's largest state with 12.5% of the total net premiums written during 2002. In recent years, New Jersey's legislative and regulatory environments for private passenger automobile insurance have become less favorable to the insurance industry. The state requires insurance companies to accept all risks that meet underwriting guidelines for private passenger automobile while rigidly controlling the rates charged. In the fourth quarter of 2001, OCNJ entered into an agreement to transfer its New Jersey private passenger auto renewal obligations to Proformance. This transaction allowed the Group to stop writing business in the New Jersey private passenger auto and personal umbrella markets in early 2002. New Jersey private passenger auto made up 13.1%, 46.5%, and 43.2% of the Group's New Jersey net premiums written in 2002, 2001, and 2000, respectively. Excluding the Group's New Jersey private passenger auto net premiums written, New Jersey would have represented 10.8%, 9.3%, and 8.5% of the total all lines net premiums written in 2002, 2001, and 2000. The Group expects to continue writing all of its other lines of business in the state.
The improvement in the combined ratio in 2001 over 2000 was due to improvement in the Commercial Lines loss ratio and all lines underwriting expense ratio when excluding the $40.6 million New Jersey transfer fee. The 2001 Commercial Lines loss ratio improved to 64.5% from 78.6% in 2000. The 2000 combined ratio was impacted adversely by increases in the loss and loss adjustment expense ratios. The 2000 loss ratio was impacted by adverse development in the workers' compensation and general liability product lines for 1999 and prior accident years. Workers' compensation added 6.8 points to the overall 2000 loss ratio.
The All Lines combined ratio for accident year 2002 was 106.9%. The All Lines combined ratio for the year 2002 of 112.8% reflects losses and LAE recorded during 2002 for all accident years in aggregate and is therefore 5.8 points higher than the All Lines combined ratio for accident year 2002. The All Lines combined ratio for accident year 2002 is .8 points lower than the 107.7% All Lines combined ratio for accident year 2001, excluding the 2.7 point impact of the New Jersey renewal obligation transfer fee, based on accident year data as of December 31, 2002. Excluding the impact of New Jersey private passenger auto business, the 2002 and 2001 accident year numbers would have been 105.2% and 107.6%, respectively, an improvement of 2.4 points.
The combined ratio impact of this adverse development for prior accident years' losses and LAE was 5.8 points for the year 2002. For the year 2002, this was concentrated in the general liability and commercial auto product lines of the Commercial Lines operating segment and in the personal auto product line of the Personal Lines operating segment. Prior year losses and LAE for construction defect related claims were within the range expected for the fourth quarter 2002 after recognizing approximately $46.0 million before tax in the third quarter 2002.
At year-end 2000, the Group reallocated its carried bulk reserves in anticipation of 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 reserves. The reallocation did not affect the All Lines 2000 combined ratio and did not have a material impact on most lines of business other than workers' compensation and general liability. The reallocation added 9.6 points to the workers' compensation combined ratio and reduced the general liability combined ratio by 4.7 points.
The 2002 and 2001 underwriting expenses also included $2.6 million and $.5 million of software amortization expense before tax, respectively, related to the rollout of a new internally developed software application. On a statutory accounting basis, the new application is being amortized over a five-year period in accordance with statutory accounting principles. For year 2003, the Group will substantially complete the rollout of the new application for Commercial and Specialty segments. Upon full implementation, the impact on statutory expenses is expected to be approximately $8.0 million to $12.0 million in annual amortization expense before tax through 2007. The additional cost is expected to be offset in part by reduced labor costs related to underwriting and policy processing.
While improving, the workers' compensation product line in the Commercial Lines segment negatively impacted this year's All Lines results. Workers' compensation combined ratio decreased 9.4 points in 2002 to 129.2%, compared with 138.6% and 165.6% for 2001 and 2000, respectively. The loss ratio was the main component driving the high combined ratio. The 2002 workers' compensation loss ratio was 80.6%, compared with 95.8% and 118.8% in 2001 and 2000, respectively. Adverse development of prior year losses due to an increase in claims severity contributed to the poor 2002 and 2001 results. The 2002 accident year loss ratio of 78.3% was 2.3 points lower than the calendar year loss ratio, and the 2001 accident year loss ratio of 76.9% is 18.9 points lower than the calendar year loss ratio. The poor results in the workers' compensation product line in 2000 added 6.8 points to the All Lines loss ratio, when including the year-end reserve reallocation mentioned in the "All Lines Discussion" section.
In response to the deterioration of results, the Group took action in 2000 to begin non-renewing its most unprofitable workers' compensation policies. This business had a loss ratio of approximately 10 points higher than the total workers' compensation product line and is referred to as unsupported workers' compensation as it is the only product in the customer's account. As mentioned in the "Operating Results" section, the Group also took action to discontinue its relationship with Managing General Agents. These Managing General Agents accounted for $29.0 million in annual workers' compensation premium. The runoff of the unsupported workers' compensation business and Managing General Agent business was substantially completed by the end of 2001.
(2)When used in this report, renewal price increase means the average increase in premium for policies renewed by the Group. The average increase in premiums for each renewed policy is calculated by comparing the total expiring premium for the policy with the total renewal premium for the same policy. Renewal price increases include, among other things, the effects of rate increases and changes in the underlying insured exposures of the policy. Only policies issued by the Group in the previous policy term with the same policy identification codes are included. Therefore, renewal price increases do not include changes in premiums for newly issued policies and business assumed through reinsurance agreements, including Great American business not yet issued in the Group's systems. Renewal price increases also do not reflect the cost of any reinsurance purchased on the policies issued.
The general liability combined ratio increased 50.5 points in 2002 to 171.3%, compared with 120.8% in 2001 and 126.9% in 2000. The higher than desired 2002 loss ratio is attributable to 57.8 points of adverse development from prior accident years. The accident year combined ratio for 2002 was 113.4%. The difference between the accident and calendar year results is primarily due to increases in residential general contractors and developers related construction defect reserves established for prior accident years in 2002 due to greater than expected frequency and loss severity. The construction defect issues are being addressed by continuing and expanding previous underwriting actions on certain segments that are more prone to construction defect claims.
The fidelity & surety product lines in the Specialty Lines segment contributed to the favorable results for the segment. Fidelity & surety net premiums written increased $6.9 million, or 17.8% in 2002 to $45.6 million, compared with $38.7 million in 2001 and $37.6 million in 2000. The combined ratio was 81.7% in 2002, compared with 76.8% in 2001 and 70.7% in 2000. During the fourth quarter 2002, there was a return of ceded premium of $5.3 million before tax for the bond business in the Specialty Lines operating segment. This return of ceded premium was due to the exercise of a contractual option on the bond reinsurance treaty based on highly favorable bond combined ratios over the past fourteen years.
Net premiums written for the commercial umbrella product line increased $40.5 million, or 43.9% in 2002 to $132.7 million, compared with $92.2 million in 2001 and $65.6 million in 2000. The 2002 and 2001 increases were primarily generated by renewal price increases in 2002, 2001 and 2000. The average renewal price increase in 2002 was 37.2%, compared with 20.3% in 2001 and 8.9% in 2000. The 2002 combined ratio was 97.7%, compared with 93.6% in 2001 and 81.9% in 2000. Although the combined ratio increased, the results were still profitable for the Group.
Net premiums written for the private passenger auto - agency (excluding New Jersey and direct) product line decreased, as expected due to the Group's strategy to withdraw from certain states, by $30.1 million, or 9.3% to $293.9 million in 2002, compared with $324.0 million in 2001 and $347.6 million in 2000. Selective underwriting and agency cancellations contributed to the decline in premiums in 2002 and 2001. Private passenger auto - New Jersey and direct net premiums decreased $99.8 million, or 78.5% to $27.4 million in 2002, compared with $127.2 million in 2001 and $107.7 million in 2000.
The 2002 homeowners combined ratio decreased 10.2 points to 110.3%. This compares with a combined ratio of 120.5% in 2001 and 119.6% in 2000. Combined ratios are heavily impacted by catastrophe losses which added 8.7 points to the combined ratio in 2002, 12.3 points in 2001 and 10.3 points in 2000.
All investment securities are classified upon acquisition as held-to- maturity, trading or available-for-sale. At December 31, 2002, all of the Corporation's and the Group's fixed maturity securities are classified as available-for-sale and are carried at fair value and may be sold prior to their contractual maturity. The difference between amortized cost and fair value, net of deferred taxes, is classified as other comprehensive income in the Corporation's consolidated statement of shareholders' equity. Equity securities are carried at quoted market values and include non- redeemable preferred stocks and common stocks. The difference between cost and quoted market value, net of deferred taxes, is classified as other comprehensive income. The Corporation and the Group closely monitor their fixed maturity and equity portfolios for declines in value that are deemed to be other than temporary. The portfolios are regularly evaluated based on current economic conditions, credit loss experience and other specific developments. When a decline in value is deemed to be other than temporary, the Corporation and the Group recognize a realized loss and the security is written down to its estimated fair value. The Corporation and the Group follow EITF 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" in accounting for the securitized financial assets rated below AAA and interest-only securities, regardless of rating. Upon receipt of payments from such securities, the Corporation and the Group determine the appropriate amounts of the funds to be allocated as a reduction of principal and interest income. In making this allocation decision, investment personnel consider such factors as the original estimated average life of the investment, the amount of funds received to date and the timing of future cash flows. These securities are evaluated for impairment by computing the net-present-value of expected future cash flows and comparing this to the prior period estimate of expected future cash flows from the security. When the timing and/or amount of cash expected to be received from the security has changed materially and adversely from the previous valuation, the security is considered to be other than temporarily impaired and the amortized cost is written down to the estimated fair value with a realized loss recorded in the consolidated statement of income.
To further strengthen its financial position, the Corporation did not pay any shareholder dividends in 2002 or 2001, compared with dividend payments of $35.4 million in 2000. Quarterly cash dividends per share for 2000 were $.23 for the first quarter and $.12 for each of the remaining quarters in 2000.
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, 2002, approximately $112.5 million of statutory surplus was not subject to prior dividend approval requirements. Additional restrictions may result from the minimum net worth and surplus requirements in the credit agreement.
The following table presents the Corporation's obligations (other than obligations relating to its ordinary insurance operations) to make future payments under contractual obligations:
As of December 31, 2002, the Corporation had $205.8 million of principal outstanding on debt that includes a $4.5 million low interest loan with the state of Ohio. During the year 2002, the Corporation completed an offering of 5.00% convertible notes, in an aggregate principal amount of $201.3 million, due March 19, 2022 and generated net proceeds of $194.0 million. The issuance and related costs are being amortized over the life of the notes and are being recorded as related fees. The liability for debt is reported on the balance sheet net of the unamortized fees. The Corporation uses the effective interest rate method to record the interest and related fee amortization. Interest is payable on March 19 and September 19 of each year, beginning September 19, 2002. The notes may be converted into shares of the Corporation's common stock under certain conditions, including: if the price per share of the Corporation's common stock reaches specific thresholds; if the credit rating of the notes is below a specified level or withdrawn, or if the notes have no credit rating during any period; or if specified corporate transactions have occurred. The conversion rate is 44.2112 shares per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. If all outstanding notes are converted, the total outstanding common shares would increase by 8.9 million shares. The convertible debt impact on earnings per share is based on the "if-converted" method. The impact on diluted earnings per share is contingent on whether or not certain criteria have been met for conversion. As of December 31, 2002, the common share price criterion had not been met and, therefore, no adjustment to the number of diluted shares on the earnings per share calculation was made for the convertible debt. On or after March 23, 2005, the Corporation has the option to redeem all or a portion of the notes that have not been previously converted at the following redemption prices (expressed as a percentage of principal amount):
Additionally, on July 31, 2002 the Corporation entered into a revolving credit agreement. Under the terms of the credit agreement, the lenders agreed to make loans to the Corporation in an aggregate amount up to $80.0 million for general corporate purposes. The agreement requires the Corporation to maintain minimum net worth of $800.0 million. The credit agreement also includes a minimum statutory surplus requirement for The Ohio Casualty Insurance Company of $625.0 million through September 30, 2003, increasing to $650.0 million thereafter. Additionally, other covenants and customary provisions are included in the agreement. The credit agreement expires on March 15, 2005. The Corporation has not drawn on the revolver as of December 31, 2002.
The National Association of Insurance Commissioners (NAIC) has developed a "Risk-Based Capital" formula for property and casualty insurers and life insurers. The formula is intended to measure the adequacy of an insurer's capital given the asset structure and product mix of the company. As of December 31, 2002, all insurance companies in the Group exceeded the necessary capital requirements.
The NAIC adopted the Codification of Statutory Accounting Principles guidance in 1998, which replaced the former Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The new policies provide guidance for areas where statutory accounting had been silent and changed former statutory accounting in some areas. The Group implemented the Codification guidance effective January 1, 2001. The cumulative effect of changes in accounting principles adopted to conform to the Codification guidance were reported as an adjustment to statutory policyholders' surplus as of January 1, 2001. The cumulative effect of adopting Codification reduced statutory policyholders' surplus by $21.7 million on January 1, 2001.
Reinsurance is a contract by which one insurer, called a reinsurer, agrees to cover, under certain defined circumstances, a portion of the losses incurred by a primary insurer in the event a claim is made under a policy issued by the primary insurer. The Group purchases reinsurance to protect against large or catastrophic losses. There are several programs that provide reinsurance coverage and the programs in effect for 2002 are summarized below.
The Group's property per risk program covers property losses in excess of $1.0 million for a single insured, for a single event. This property per risk program covers up to $14.0 million in losses in excess of the $1.0 million retention level for a single event. The Group's casualty per occurrence program covers liability losses. Workers' compensation, umbrella and other casualty reinsurance cover losses up to $59.0 million, $24.0 million and $23.0 million, respectively, in excess of the $1.0 million retention level for a single insured event. The casualty reinsurance treaty includes a layer of coverage of $5.0 million in excess of $1.0 million that includes a fund managed by the Group and the Group has title to the assets. Ceded premiums are paid into the
The property catastrophe reinsurance program protects the Group against an accumulation of losses arising from one defined catastrophic occurrence or series of events. This program provides $150.0 million of coverage in excess of the Group's $25.0 million retention level. The treaty was written on a multiple year basis for years 2001 - 2004 with only a portion of the reinsurance layers expiring in a single year. This provides continuity and maintains rates and each reinsurer's overall share of the program. Over the last 20 years, two events triggered coverage under the catastrophe reinsurance program. Losses and loss adjustment expenses from the fires in Oakland, California in 1991 totaled $35.6 million and losses and loss adjustment expenses from Hurricane Andrew in 1992 totaled $29.8 million. Both of these losses exceeded the prior retention amount of $13.0 million, resulting in significant recoveries from reinsurers. Reinsurance limits are purchased to cover exposure to catastrophic events having the probability of occurring every 150-250 years.
Reinsurance contracts do not relieve the Group of their obligations to policyholders. The collectibility of reinsurance depends on the solvency of the reinsurers at the time any claims are presented. The Group monitors each reinsurer's financial health and claims settlement performance because reinsurance protection is an important component of the Corporation's financial plan. Each year, the Group reviews financial statements and calculates various ratios used to identify reinsurers who no longer meet appropriate standards of financial strength. Reinsurers who fail these tests are reviewed and those that are determined by the Group to have insufficient financial strength are removed from the program at renewal. Additionally, a large base of reinsurers is utilized to mitigate concentration of risk. The Group also records an estimated allowance for uncollectible reinsurance amounts as deemed necessary. During the last three fiscal years, no reinsurer accounted for more than 15% of total ceded premiums. As a result of these controls, amounts of uncollectible reinsurance have not been significant.
management records its best estimate of the liability for loss and loss adjustment expense reserves by considering the actuaries' point estimates. Management's best estimate recognizes that there is uncertainty underlying the actuarial point estimates. Reasonable range estimates around the point estimates are used by management to validate its best estimate of the liability.
The Group has three categories of loss and loss adjustment expense reserves that it considers highly uncertain, and therefore, could have a material impact on future financial results and financial position: asbestos and environmental liability exposures, construction defect exposures, and excess capacity liability exposures. These categories are described below with relevant historical data.
Results for the year 2002 were negatively impacted by losses and loss adjustment expenses for prior accident years totaling $84.4 million before tax on an All Lines basis. For the Commercial Lines operating segment, the losses and loss adjustment expenses for prior accident years recorded during 2002 were $73.9 million before tax and were concentrated in the general liability, commercial automobile and workers' compensation product lines. Comparable Commercial Lines amounts for 2001 and 2000 were $44.6 million and approximately $62.1 million, respectively. In both 2001 and 2000, this was concentrated in the workers' compensation and general liability product lines. The 2000 amount included the commercial umbrella product line as it was combined with the general liability product line at that time for purposes of accident year analyses.
For the Personal Lines operating segment there was $12.7 million losses or loss adjustment expenses for prior accident years recorded during 2002. Comparable amounts for 2001 and 2000 were $9.8 million and approximately $(1.8) million, respectively. In 2001, this was concentrated in the homeowners product line. In 2000, favorable development occurred in the personal automobile product line.
Losses and loss adjustment expenses for prior accident years were recognized during the year 2002 due to new information that caused a revision to prior estimates for loss and loss reserves as described above. There is considerable uncertainty in these estimates for reasons such as: the external environment including coverage litigation, judicial decisions, legislative changes, claimants and juries attitudes with respect to settlements; claim frequency and severity; the emergence of unusual types or sizes of claims; changes in underwriting quality of the book of business over time; and changes in claims handling which affects the payment rate or case reserve adequacy.
Because of the inherent uncertainties in estimating ultimate costs of claims, actual loss and loss adjustment expenses may deviate substantially from the amounts recorded. Furthermore, the timing, frequency and extent of adjustments to the estimated liabilities cannot be predicted since conditions and events which established historical loss and loss adjustment expense development and which serve as the basis for estimating ultimate claim cost may not occur in exactly the same manner, if at all.
Tax exempt bonds increased, as a percentage of amortized cost, to 1.5% of the fixed maturity portfolio at year-end 2002 versus 1.1% at December 31, 2001. This increase reflects a decision at the end of 2002 to add to municipal holdings in anticipation of improved underwriting results and to take advantage of unique municipal market opportunities. At December 31, 2000, the tax-exempt bonds represented 3.2% of the amortized cost of the consolidated fixed maturity portfolios. Due to poor underwriting results over the past few years, the Corporation and the Group had reduced their holdings of tax exempt municipal bonds in 2000 and 2001 to maximize after- tax income.
Ohio Casualty Corporation publishes forward-looking statements relating to such matters as anticipated financial performance, business prospects and plans, regulatory developments and similar matters. The statements contained in this Management's Discussion and Analysis that are not historical information, are forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward- looking statements. The operations, performance and development of the Corporation's business are subject to risks and uncertainties which may cause actual results to differ materially from those contained in or supported by the forward looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Corporation's business include the following: changes in property and casualty reserves; catastrophe losses; premium and investment growth; product pricing environment; availability of credit; changes in government regulation; performance of financial markets; fluctuations in interest rates; availability and pricing of reinsurance; litigation and administrative proceedings; rating agency actions; acts of war and terrorist activities; ability of Ohio Casualty to retain business acquired from the Great American Insurance Company; ability to achieve targeted expense savings; changes in estimated future cash flows and related impairment charges for the agent relationships intangible asset; ability to achieve premium targets and profitability goals; and general economic and market conditions.
See Item 15 for Index to Consolidated Financial Statements, including the Notes to Consolidated Financial Statements and the Report of Independent Accountants, and Schedules on page 52 of this Form 10-K.