See pages 12 and 13 of the Annual Report to Shareholders for the fiscal year ended December 31, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 	 RESULTS OF OPERATIONS
In the first quarter of 2000, the Group made the strategic decision to discontinue its relationship with Managing General Agents. The decision was made to help give the Group better control of its underwriting and pricing practices. The Managing General Agents accounted for approximately $48 million in annual commercial lines premium written, of which $29 million was in the workers' compensation line of business. This business, which was acquired in the GAI commercial lines purchase in 1998, is being non-renewed as permitted by law and contractual agreements. The result of the decision was a write-off of $42.2 million of the agent relationships intangible asset, specifically relating to the Managing General Agents, which was recorded on the balance sheet in connection with the GAI purchase. The asset was also written off in 2000 by $3.8 million as a result of additional agent cancellations for a total write-off of $46.0 million for the year.
The 2000 operating loss was also impacted negatively by $23.2 million for ceded premiums on certain experience rated reinsurance contracts covering losses exceeding $1.0 million. The 1999 operating income was impacted by $13.0 million for similar premium cessions. These 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.
cancellation of the Managing General Agents, represent annual net premiums written of over $150 million. The full impact of these actions should be realized in 2001. The increase in premiums from 1998 to 1999 was due to the GAI acquisition adding almost $262.2 million to 1999 net premiums over 1998.
The combined ratio increased 6.4 points to 119.2% in 2000, compared with 112.8% in 1999 and 107.2% in 1998. The poor 2000 combined ratio was driven by increases in the loss and loss expense ratios. The calendar year 2000 loss ratio was 72.8% compared with 66.9% in 1999 and 63.7% in 1998. The 2000 loss ratio was impacted by adverse development in the workers' compensation and general liability lines of business for 1999 and prior accident years. The workers' compensation line of business added 6.8 points to the overall loss ratio. Deterioration in the private passenger automobile results driven in part by the mandatory 15% rollback of rates for New Jersey also affected the 2000 loss ratio results. Finally, inadequate pricing and a 10% increase in claims severity for workers' compensation business also contributed to the increased 2000 loss ratio. In order to resolve pricing inadequacies, the Group began implementing price increases across all commercial lines and some personal lines in 2000. The average price increase was approximately 9.8% on the Group's commercial lines book of business. The effects of these increases should be realized in 2001 as premiums are earned.
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 revenues and results reported include the activity of the GAI division from the December 1, 1998 acquisition date forward.
Continued deterioration in the workers' compensation line of business in 2000 led to disappointing results for the line in general as well as affecting the Group's overall results for the year. Including the year- end reserve reallocation mentioned in the results of operation section, the workers' compensation line of business added 6.8 points to the overall loss ratio.
In response to the deterioration of results, the Group is non-renewing its most unprofitable segment of workers' compensation policies, which amount to approximately $50 million in annual premium volume. This business has a loss ratio approximately 10 points higher than the total workers' compensation line of business and is referred to as unsupported workers' compensation as it is the only product in the customer's account. As mentioned in the results of operations section, the Group has also taken action to discontinue its relationship with Managing General Agents. These Managing General Agents accounted for $29.0 million in annual workers' compensation premium volume. The non-renewal of unsupported workers' compensation impacted premiums written by an estimated $13 million in 2000, with the remaining business to be non-renewed in 2001. The cancellation of Managing General Agents impacted premiums written by an estimated $16 million in 2000, with the remaining $13 million to effect 2001 results. These non-renewals and cancellations contributed to a 3.1% or $5.9 million decrease in 2000 workers' compensation net premiums written, which totaled $185.8 million. Net premiums written for 1999 and 1998 totaled $191.7 million and $100.2 million, respectively. The business acquired from GAI contributed to the increase in 1999 from 1998.
Net premiums written increased $3.2 million or 1.8% in 2000 to $178.7 million, compared with $175.5 million in 1999 and $139.1 million in 1998. The 2000 increase was driven by renewal price increases, averaging 9.2% on the commercial auto line of business. The increase in premiums between 1998 and 1999 was largely due to the GAI acquisition.
The 2000 combined ratio increased to 121.5%, compared with 117.1% in 1999 and 105.4% in 1998. 2000 was hindered by increased severity and large losses combined with inadequate pricing.
Net premiums written from the CMP segment have increased for five consecutive years. Net premiums written increased $7.3 million or 2.4% to $312.5 million in 2000, compared to $305.2 million in 1999 and $225.7 million in 1998. The implementation of renewal price increases contributed to the 2000 premium increase. Acquired business from GAI contributed $80.3 million to the 1999 increase when compared to 1998. The combined ratio decreased to 111.5% in 2000 from 126.0% in 1999 and 113.5% in 1998. In 2000, the Group was able to implement renewal price increases in the CMP segment. Although the renewal price increases climbed each quarter of the year, the full effects will not be realized until 2001.
Catastrophe losses added 4.6 points to the combined ratio in 2000, 7.8 points in 1999 and 4.9 points in 1998.
Net premiums written decreased $1.8 million or 2.2% in 2000 to $80.7 million, compared with $82.5 million in 1999 and $76.4 million in 1998. The 2000 decrease reflected the Group's focus on fundamental underwriting strategies.
Net premiums written increased $2.2 million or 3.2% in 2000 to $70.6 million, compared with $68.4 million in 1999 and $18.7 million in 1998. The 2000 increase was primarily generated by renewal price increases implemented in 2000. The increase between 1998 and 1999 was due to the GAI acquisition adding $48.7 million in premiums. The acquisition brought excess coverages that were new to the Group allowing for increased limits, broadened classes and improved coverage forms.
The 2000 combined ratio decreased 4.5 points to 119.6%. This compares with a combined ratio of 124.1% in 1999 and 118.4% in 1998. Combined ratios are heavily impacted by catastrophe losses which added 10.3 points to the combined ratio in 2000, 12.6 points in 1999 and 15.2 points in 1998.
Net premiums written decreased $.2 million or .6% in 2000 to $37.9 million, compared with $38.1 million in 1999 and $37.0 million in 1998.
The combined ratio decreased to 71.5% in 2000 from 77.0% in 1999 and 81.4% in 1998. The Group's combined ratio remains below the historical industry average of 86.8%.
Catastrophe losses in 2000 totaled $36.2 million, compared with $52.2 million in 1999 and $44.6 million in 1998. There were 24 separate catastrophes in 2000, compared with 27 catastrophes in 1999 and 37 in 1998. Catastrophe losses added 2.4 points to the combined ratio in 2000, compared with 3.4 points in 1999 and 3.6 points in 1998. The 1999 catastrophes included tornadoes in the greater Cincinnati and Oklahoma City areas as well as damage from Hurricane Floyd.
Statutory surplus, a traditional insurance industry measure of strength and underwriting capacity, was $812.1 million at December 31, 2000, compared with $899.8 million at December 31, 1999 and $1,027.1 million at December 31, 1998. The decrease in the 2000 surplus was due primarily to poor underwriting results, dividend payments, and the statutory treatment of the final installment payment for the acquisition of the Commercial Lines Division of GAI. The decrease in 1999 resulted from dividends, poor underwriting results and taxes on realized gains.
Net cash generated from operations was $99.6 million in 2000, compared with cash used of $137.7 million in 1999 and cash generated of $24.6 million in 1998. The change in 2000 is due in part to payment received in 2000 as part of the commutation of a reinsurance treaty in the fourth quarter of 1999, a refund of prior year taxes paid, a reduction in paid losses and paid loss
Shareholder dividend payments were $35.4 million in 2000, compared with $56.0 million in 1999 and $57.9 million in 1998. The decrease in 2000 was a result of the Corporation's decision to reduce quarterly dividend payments beginning in the second quarter to $.12 per share in order to strengthen the financial position of the Corporation. On February 8, 2001, the Corporation eliminated its current quarterly dividend in order to further strengthen the Corporation's financial position.
Cash flow has also been impacted by our share repurchase program. Although the Corporation did not repurchase any shares of its common stock in 2000, the Corporation did repurchase 2,478,000 shares for $46.1 million in 1999 and 4,725,800 shares for $100.2 million in 1998. The Corporation is currently authorized to repurchase 1,649,824 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, 31.7 million shares have been repurchased at an average cost of $14.10 per share. In the future, shares will be repurchased when doing so makes economic sense for the Corporation and its shareholders.
As of December 31, 2000, the Corporation had $220.8 million of outstanding notes payable. Of the $220.8 million, $5.8 million is related to a low interest loan outstanding with the state of Ohio used in conjunction with the home office purchase. The remaining $215.0 million is related to a 1997 credit facility that provided a $300.0 million revolving line of credit to the Corporation. The agreement expires in October 2002, with any outstanding loan balance due at that time. The credit facility agreement contains financial covenants and provisions customary for such arrangements. The most restrictive covenants include a maximum permissible consolidated funded debt that cannot exceed 30% of consolidated tangible net worth (as defined in the agreement) and a minimum statutory surplus of $750.0 million. The Corporation continues to review its financial covenants in the credit agreement in light of its operating losses. As of
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.
In recent years, environmental liability claims have expanded greatly in the insurance industry. 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.
Consolidated pre-tax investment income from continuing operations increased 11.3% to $205.1 million in 2000, compared with $184.3 million in 1999 and $169.0 million in 1998. The increase in investment income can be attributed to the second quarter 1999 reallocation in the investment portfolio from equity securities to investment grade securities. Also contributing to the increase has been the reallocation of investments from tax exempt municipal bonds to taxable bonds. After-tax investment income totaled $140.3 million in 2000, compared with $138.0 million in 1999 and $125.8 million in 1998. Pre-tax and after-tax investment income comparisons are impacted by investments in municipal bonds, which provide tax-free investment income.
At year-end 2000, consolidated investments had a carrying value of $3.3 billion. The excess of market value over cost was $629.4 million, compared with $505.4 million at year-end 1999 and $787.9 million at year- end 1998. The 2000 increase was due to market growth in both the fixed income and equity portfolios, while the 1999 decrease in unrealized gains was largely attributable to the Group's reallocation of its investment portfolio mentioned in the results of operations section. The 1999 reallocation resulted in $145.0 million of unrealized gains being recognized. Consolidated after-tax realized investment gains (losses) from continuing operations amounted to $(1.5) million in 2000, compared with $104.5 million in 1999 and $9.4 million in 1998. The 2000 realized loss was impacted by approximately $10.9 million due to the write-down of securities for other than temporary declines in market value. The 1999 portfolio reallocation led to the large realized gain in 1999.
Tax exempt bonds decreased to 3.2% of the fixed income portfolio at year-end 2000 versus 19.4% and 34.8% for December 31, 1999 and 1998, respectively. The funds previously held in tax exempt bonds have been reallocated to investment grade taxable bonds. Due to recent poor operating results, the Corporation has reduced its holdings during 2000 and 1999 in order to maximize after-tax income.
As of December 31, 2000, the Corporation held $1,124.0 million in mortgage-backed securities, compared with $784.3 million and $375.4 million at December 31, 1999 and 1998, respectively. The 2000 and 1999 increases are attributable to a redistribution of investments previously held in tax exempt bonds and the 1999 reallocation mentioned above. The majority of mortgage-backed security holdings are less volatile planned amortization class, sequential structures and agency pass-through securities. Of this portfolio, $13.1 million, $19.3 million and $9.6 million were invested in more volatile bond classes (e.g. interest-only, super-floaters, inverses) in 2000, 1999 and 1998, respectively.
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 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 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; Year 2000 issues; ability of Ohio Casualty to integrate and retain the business acquired from the Great American Insurance Company, and general economic and market conditions.