Sunday, September 26, 2004

Ohio Casualty's policy of rebirth

Slashing costs - and employees - enables CEO to restore profitability

By James McNair
Enquirer staff writer

Dan R. Carmichael, shown on the patio at the Ohio Casualty Corp. campus in Fairfield, has overseen a turnaround at the nation's 48th-biggest property and casualty insurer since becoming president and CEO in December 2000.

FAIRFIELD - Checking in as CEO almost four years ago, Dan Carmichael walked into Ohio Casualty Corp. and was handed a nameplate and a box of business cards. He might as well have been given a pair of surgical gloves and a scalpel.

On the table before him that December 2000 was a company that needed immediate attention. Sales were sinking, bond ratings were lowered, and Ohio Casualty was careening toward a year-end loss of $79 million. Its stock price, tethered as it was to the company's travails, had crashed to a 15-year low, forcing directors to euthanize a 54-year streak of annual dividend increases.

"It was ugly," Carmichael recalled. "They were losing 16 to 19 cents on the dollar. They had serious problems in workers' compensation and personal auto lines - 2000 was the worst year in the history of the company."

Today, Ohio Casualty looks like a freshly sculpted and coiffed specimen from TV's Extreme Makeover. The nation's 48th-biggest property and casualty insurer is posting higher sales for the first time since 1999, and revenue from premiums is exceeding costs and claim payouts for the first time since 1987. Investors like what they see. Ohio Casualty's stock price, which closed Thursday at $20.49, has doubled since Carmichael took over.

"Dan Carmichael's done a remarkable job breathing more life into the company and bringing it into focus," said Tom Chatham, president of USI Midwest's commercial division in Cincinnati, which offers Ohio Casualty policies.

The turnaround didn't come without a high cost, and workers have paid dearly for the strategy of rationalizing products, markets and operations. Of the 3,470 employees on board at the time of Carmichael's arrival, a full third are now gone, including 450 since February. Internet message boards crackle with barbs on Ohio Casualty, some critical of Carmichael's leadership, others in his defense.

"The man was a shark posing as a goldfish, utterly charming," said one layoff victim who didn't want to be named.

Carmichael acknowledges that employee morale is fractured, but says the company had to cut payroll to regain profitability.

"From the day I got here, we've been talking about reducing expenses and layoffs," he said. "But, frankly, our attrition is so low that we had to take more action."

A rehab project

Even though he earned a master's degree in divinity from Emory University, insurance was Carmichael's calling. He started as a 25-year-old claims rep in Fort Lauderdale, Fla., and spent 16 years rising through the ranks of the insurance firm Crum & Forster. In 1995, he became CEO of IVANS Inc., an industry-owned organization in Greenwich, Conn., that supplies electronic communications services to the insurance and health care fields.

At 55, Carmichael reckoned IVANS would be his career finale.

Introduced by an executive recruiter, Carmichael saw Ohio Casualty for the rehab project that it was. He didn't regard it as a hopeless case, though. And with grandchildren in Columbus, he readily warmed to the idea of moving to Cincinnati and becoming the company's first leader from outside the Sloneker and Marcum families.

Ohio Casualty had been going downhill for a long time. Price wars through much of the 1990s cut into profits and ultimately led to a spate of failures and mergers. Insurers, meanwhile, were taking a beating on workers' comp, asbestos and construction defect claims. Ohio Casualty, founded in 1919, had too many under-performing businesses, too many agents with claim-happy clients and too many employees.

Some fixes were obvious.

Within 10 days of his arrival, Carmichael pulled the plug on the Avomark direct-sales auto-insurance unit, which was competing head-on with Ohio Casualty's independent agents. At his urging, the company eliminated the stock dividend that, as the share price plummeted in 2000, yielded an absurd return of 9.6 percent. He expanded the consolidation of field offices. He made early retirement offers that found hundreds of takers.

In 2001, Ohio Casualty sold its auto insurance unit in New Jersey. It was the eighth-biggest auto insurer in the state, but was a drain on the parent company.

"We were losing about $20 million a year - just to stay there," Carmichael said. "We weren't able to get the rate increases we needed to stay."

All told, Ohio Casualty ditched $373 million worth of business that was losing money, including the sale of personal lines of insurance in Florida and Texas. The company posted a net profit of $98.6 million in 2001, but the number was misleading because it was padded with gains from investments sold. In 2002, the company was back in the red with a $900,000 loss.

Carmichael kept his sleeves rolled up. Another round of layoffs ensued in 2002. Meanwhile, the company took a harder look at its base of agents, cutting loose those who wrote a "poor book of business," Carmichael said.

"We picked the ones that were least likely to turn around," he said. "From 2002 to 2003, we canceled 500 agencies that had a history of unprofitability, or about 15 percent of our agents."

Newfound selectivity

Before Carmichael arrived, Ohio Casualty was virtually a commodity brand. "Everybody represented Ohio Casualty," said Tim Marte, co-owner of Ted Marte & Associates, an insurance agency in Wyoming. "They weren't real particular about who represented them and what kind of business they got. Now they're more demanding, and that's the way it should be."

The company's newfound selectivity prompted an 8 percent drop in revenue from 1999 to 2003, but lowered claims by 42 percent, Carmichael said. The payroll cuts, however, made Ohio Casualty look like an up-and-comer on one revenue measure. In 1999, the company racked up about $400,000 in revenue per employee. Today, Carmichael said, it's at the $700,000 level. His goal? $750,000 to $800,000 per head.

The recent spate of hurricanes brought vindication to Carmichael's strategy of ceding the personal auto and homeowner insurance in most coastal states, including Florida and Georgia. More than three-quarters of Ohio Casualty's personal lines business now comes from the Midwest. For commercial policies, Ohio Casualty is a national player.

Carmichael still has his work cut out for him. For one, competition is heating up. Alison Jacobowitz of Merrill Lynch noted in her Aug. 4 report on Ohio Casualty that the commercial insurance sector - which accounts for 58 percent of the company's take from premiums - is becoming more competitive and that some auto insurers are beefing up advertising budgets and agency incentive programs. Bijan Moazami, an analyst with Friedman Billings Ramsey in Arlington, Va., suggests that Ohio Casualty must continue cutting overhead.

"We believe the only way to compete effectively in the standard commercial line segment is to have the lowest cost structure," he wrote Aug. 4. "We believe the company's cost structure does not allow the entity to be a reliable and competitive force in the market place."

Taking guesswork out

Carmichael isn't done cutting costs, but it's less likely to come at the expense of his workers. Future savings, the company says, will come from more nebulous alterations such as increasing employee productivity, leveraging technology and improving customer service. He has also taken the guesswork out of pricing coverage and monitoring workflow.

"We've literally taken every department, every transaction and every process apart, put it back together and made it more efficient," Carmichael said at a Sept. 17 conference with analysts. "As we've been reducing staff and lowering our costs internally, we've actually been improving services to our customers."

Whatever comes of streamlining will be gravy to shareholders who endured the fall of Ohio Casualty's stock price to $6.13 in 2000. As of June 30, the company's expenses and losses amounted to 99.5 percent of its premium revenue - still practically break even, but the company's best showing since 1987. Carmichael was so elated he gave employees half a day off when the results were announced.

Carmichael scoffs at the suggestion that he prepped the company to be sold. He also doesn't want to leave the impression that his work is done. "We think the turnaround is complete," he said, "but that doesn't mean we're going to sit down and relax."


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