Ohio Casualty’s Earnings Down $2.1M From Year Ago

August 8, 2003

Fairfield, Ohio-based carrier Ohio Casualty Corp. announced second-quarter net income of $11 million, or 18 cents per diluted share, down from a year ago’s $13.1 million, or 21 cents per diluted share.
The company also posted a statutory combined ratio of 106.2 percent, a 3.1 point improvement despite higher catastrophe losses, and net income before realized gains and losses of $6.6 million versus $6.9 million.

Underwriting expenses and operating results on a GAAP basis were negatively impacted by commission expenses that were higher on a statutory basis in the last two quarters of 2002, as previously announced. The GAAP basis expense was recognized in part during the first two quarters of 2003 as premiums were earned on business written in 2002.

Second-quarter net investment income increased in 2003 compared with 2002 despite lower average investment yields. The Company has completed its two-year initiative to reduce equity holdings. This restructuring reduces the effect on statutory surplus of future stock market volatility.

Amortization and impairment write-downs of the agent relationships intangible asset were $7.7 million in the second quarter of 2003, compared with $5.1 million in the second quarter of 2002.

Statutory net premiums written were flat for the second quarter, and down slightly for the first six months. Double-digit price increases and new business growth in the quarter matched the effects of market withdrawals in Personal Lines, higher reinsurance costs, stricter commercial underwriting guidelines and a competitive small to mid-sized commercial market.

Commercial Lines written premium growth was driven by price increases and new business production, offset in part by competition and also by restrictions and non- renewals of certain underperforming classes of business. Average renewal price increases for Commercial Lines were 10.9 percent in the second quarter 2003. Renewal price increases have declined for four of the last five consecutive quarters, part of a broad trend as Commercial Lines policies approach price adequacy and competitive pricing pressures increase. More conservative underwriting of workers’ compensation and certain construction classes of business continued, which offset some of the benefit of premium growth for other commercial product lines.

Specialty Lines net premiums written declined from last year’s level as a result of higher reinsurance costs for commercial umbrella.

Although second quarter net premiums written were below last year’s levels, Specialty Lines continued to generate higher average renewal prices and significant levels of new business production. Specialty Lines premiums before reinsurance increased 19.1 percent over second quarter 2002. Higher reinsurance costs in 2003 were driven by the addition of a ceding commission and by increased reinsurance rates per dollar of premium. The addition of ceding commissions on the current reinsurance contract causes a corresponding increase to ceded premiums. Renewal price increases for commercial umbrella insurance, the largest volume Specialty Lines product, averaged 22.4 percent for the second quarter 2003, compared to 20.5 percent and 33.1 percent, respectively, in the first quarter 2003 and fourth quarter 2002.

Personal Lines net premiums written declined slightly due to management’s decisions to cancel certain agents and to withdraw from selected markets. The combined effect of those decisions was an approximate $10.0 million decrease in net premiums written for the second quarter of 2003 compared to the same period one year ago. Higher levels of new business production and increased average rates on homeowners policies offset much of the withdrawal activity.

Market withdrawals are expected to have less impact on Personal Lines written premiums during the second half of the year.

The All Lines combined ratio improved compared to second quarter last year due primarily to the Group’s exit from the New Jersey Private Passenger Auto market (NJPPA) and lower personnel related expenses, offset somewhat by higher catastrophe losses, additional large non-catastrophe losses and increased technology costs.

Catastrophe losses in the second quarter were significantly above last year and included the largest tornado event on record — 410 tornadoes during 10 days in early May. Catastrophe losses for the quarter were in line with previously announced estimates, adding 4.0 points in the second quarter this year, compared with 2.8 points in the same quarter of 2002. Non-catastrophe commercial large losses were higher than normal for the quarter; a year earlier, they were lower than normal. Withdrawal from NJPPA lowered the combined ratio by 1.9 points compared to last year. Improvements in other areas, including higher pricing and improved underwriting, contributed to the improvement in the All Lines combined ratio.

Commercial Lines combined ratio increased 6.0 points for the quarter. Higher catastrophe losses and other large non-catastrophe property and casualty losses were principal factors. Hardest hit was commercial multiple peril while commercial auto and general liability also experienced more large losses than last year. The loss frequency trend for workers’ compensation continued to improve. Commercial auto had a combined ratio for the quarter of 101.7 percent despite the negative effects of an increase in large losses.

The Specialty Lines combined ratio benefited from a significantly improved loss ratio, which decreased 17.7 points compared to last year because of favorable development on prior accident years.

Withdrawal from New Jersey personal auto accounted for essentially all of the 9.4 point improvement in the Personal Lines combined ratio for the quarter. Also contributing to the improvement in the Personal Lines combined ratio for the quarter was substantial improvement in the loss ratio for homeowners. Personal auto for states other than New Jersey was negatively impacted by adverse development on prior accident years, which added 7.2 points to the combined ratio for the quarter. The accident year 2003 combined ratio for personal auto in states other than New Jersey was 102.8 percent for the first six months of 2003. Lower underwriting costs and lower loss adjustment expense also contributed, offset in part by higher catastrophe losses in the quarter.

The loss and LAE ratio component of the accident year combined ratio measures losses and LAE arising from insured events that occurred in the respective accident year. The current accident year excludes losses and LAE for insured events that occurred in prior accident years.

For the second quarter of 2003 compared to the second quarter of 2002:
—Catastrophe losses were $13.9 million vs. $10.3 million; the $3.6 million increase added 1.2 points to the All Lines combined ratio.
—LAE ratio improvement reflected previously announced staff reductions and improved management of claims legal expenses.
—Employee count was down 10.3 percent to 2,800 at June 30, 2003, which helped reduce the personnel related expense portion of the underwriting expense ratio by .9 points, and contributed to a 2.9 point reduction in the LAE ratio to 11.8 percent.
—Premiums to surplus ratio improved to 1.8 to 1 from 1.9 to 1, also improving from last quarter’s 1.9 to 1.
—Book value per share of $18.75 has increased 3.5 percent from second quarter 2002 and 7.6 percent from fourth quarter 2002.

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