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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended March 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
31-0783294
(I.R.S. Employer Identification No.)
136 North Third Street, Hamilton, Ohio
(Address of principal executive offices)
45025
(Zip Code)
(513) 867-3000
(Registrant's telephone number)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Par Value $.125 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports(, and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The aggregate market value as of May 1, 1996 of the voting stock held by
non-affiliates of the registrant was $1,086,111,443.
On May 1, 1996 there were 35,336,398 shares outstanding.
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PART I
ITEM 1. FINANCIAL STATEMENTS
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
March 31, December 31,
1996 1995
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,273,170 and $2,501,118) $ 2,314,255 $ 2,407,853
Equity securities, at fair value
(cost: $324,842 and $341,111) 696,596 661,154
Short-term investments at cost 39,689 14,399
------------ ------------
Total investments 3,050,540 3,083,406
Cash 12,792 23,883
Premiums and other receivables 200,996 196,175
Deferred policy acquisition costs 118,470 119,795
Property and equipment 44,110 43,846
Reinsurance recoverable 512,818 446,167
Deferred income taxes 2,960 0
Other assets 79,350 66,870
------------ ------------
Total assets $ 4,022,036 $ 3,980,142
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Liabilities
Insurance reserves:
Unearned premiums $ 506,240 $ 506,035
Losses 1,307,275 1,275,077
Loss adjustment expenses 387,725 356,107
Future policy benefits 360,074 360,074
Note payable 60,000 60,000
California Proposition 103 reserve 71,219 70,167
Deferred income taxes 0 2,112
Other liabilities 240,911 239,556
------------ ------------
Total liabilities 2,933,444 2,869,128
Shareholders' equity
Common stock, $.125 par value
Authorized: 150,000,000 shares
Issued: 46,803,872 5,850 5,850
Additional paid-in capital 3,489 3,422
Unrealized gain on investments, net of applicable
income taxes 295,517 305,049
Retained earnings 1,019,854 1,030,468
Treasury stock, at cost:
(Shares: 11,467,474; 11,407,745) (236,118) (233,775)
------------ ------------
Total shareholders' equity 1,088,592 1,111,014
------------ ------------
Total liabilities and shareholders' equity $ 4,022,036 $ 3,980,142
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
Three Months
Ended March 31,
1996 1995
Premiums and finance charges earned $ 310,217 $ 322,063
Investment income less expenses 44,988 47,385
Investment gains realized 5,954 893
------------ -----------
Total income 361,159 370,341
Losses and benefits for policyholders 220,338 208,370
Loss adjustment expenses 40,532 42,372
General operating expenses 24,121 20,491
California Proposition 103 reserve 1,052 755
Amortization of deferred policy acquisition costs 78,546 83,149
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Total expenses 364,589 355,137
Income before income taxes (3,430) 15,204
Income taxes
Current (4,239) 2,158
Deferred (2,026) (1,359)
------------ -----------
Total income taxes (6,265) 799
------------ -----------
Income from continuing operations 2,835 14,405
Income from discontinued operations 713 707
Net income $ 3,548 $ 15,112
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Average shares outstanding 35,387 35,960
Income from continuing operations, per share $ 0.08 $ 0.40
Income from discontinued operations, per share $ 0.02 $ 0.02
Net income, per share $ 0.10 $ 0.42
Cash dividends, per share $ 0.40 $ 0.38
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Additional Unrealized Total
Common paid-in gain (loss) Retained Treasury shareholders'
stock capital on investments earnings stock equity
Balance, January 1, 1995 $5,850 $ 3,271 $ 69,610 $ 985,068 $(213,009) $ 850,790
Unrealized gain 128,066 128,066
Deferred income tax on
net unrealized gain (44,535) (44,535)
Net issuance of treasury stock
under stock option plan
(8,106 shares) 85 111 196
Repurchase of treasury
stock (117,500 shares) (1,679) (3,857) (5,536)
Net income 15,112 15,112
Cash dividends paid
($.38 per share) (13,681) (13,681)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 $5,850 $ 3,356 $153,141 $ 984,820 $(216,755) $ 930,412
================================================================================================================
Balance, January 1, 1996 $5,850 $ 3,422 $305,049 $1,030,468 $(233,775) $1,111,014
Unrealized loss (13,330) (13,330)
Deferred income tax on
net unrealized loss 3,798 3,798
Net issuance of treasury stock
under stock option plan
(7,175 shares) 67 115 182
Repurchase of treasury
stock (66,100 shares) (2,459) (2,459)
Net income 3,548 3,548
Cash dividends paid
($.40 per share) (14,161) (14,161)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 $5,850 $ 3,489 $295,517 $1,019,855 $(236,119) $1,088,592
================================================================================================================
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
Three Months
Ended March 31,
1996 1995
Cash flows from:
Operations
Net income $ 3,548 $ 15,112
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves 64,022 18,923
Income taxes (16,863) (10,250)
Premiums and other receivables (4,820) (8,404)
Deferred policy acquisition costs 1,325 870
Reinsurance recoverable (66,651) (587)
Other assets 2,206 1,712
Other liabilities 8,223 (6,359)
Depreciation and amortization 3,149 2,687
Investment gains and losses (6,048) (553)
California Proposition 103 1,052 1,536
------------ ------------
Net cash generated (used) by operations (10,857) 14,687
Investments
Purchase of investments:
Fixed income securities - available for sale (137,187) (134,166)
Equity securities (5,021) (24,569)
Proceeds from sales:
Fixed income securities - available for sale 143,862 182,464
Equity securities 12,494 0
Proceeds from maturities and calls:
Fixed income securities - available for sale 26,517 25,119
Equity securities 870 24,964
------------ -----------
Net cash from investments 41,535 73,812
Financing
Note payable 0 0
Proceeds from exercise of stock options 142 196
Purchase of treasury stock (2,459) (3,857)
Dividends paid to shareholders (14,161) (13,681)
------------ -----------
Net cash used in financing activity (16,478) (17,342)
Net change in cash and cash equivalents 14,200 71,157
Cash and cash equivalents, beginning of period 38,282 28,656
------------ -----------
Cash and cash equivalents, end of period $ 52,482 $ 99,813
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Footnotes: For complete disclosures see Notes to Consolidated Financial
Statements on pages 28-35 of Annual Report.
Note 1 - It is believed that all material adjustments necessary to present a
fair statement of the results of the interim period covered are
reflected in this report.
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ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Property and casualty pre-tax underwriting losses for the quarter ended March
31, 1996 were $52.7 million, $1.49 per share, compared with $31.8 million,
$.89 per share for the same period in 1995. Gross premiums for the first
three months of 1996 decreased 4.4% for all lines of business. Commercial
lines decreased 3.9% and personal lines decreased 4.8% from the same period
last year. Property and casualty net premiums decreased 5.1% for the first
quarter of 1996 from the same period a year ago.
Premium writings continue to demonstrate the impact of our agency
repositioning strategy of last year. Premium from active agents actually
increased slightly, period over period. New Jersey is our largest state with
17.1% of total premiums written during the year. Legislation passed in 1992
requires automobile insurers operating in the state to accept all risks that
meet underwriting guidelines regardless of risk concentration. New Jersey
also requires assessments to be paid for the New Jersey Unsatisfied Claim and
Judgment Fund (UCJF). The assessment for 1996 is approximately $4.0 million
compared with $1.0 million in 1995.
The homeowners line combined ratio increased to 160.5% from 104.4% for the
same period last year. The combined ratio this year was inflated due to the
severe weather related losses experienced in the first quarter. Personal
automobile, the Corporation's largest line, had a combined ratio of 111.6%
compared with 99.3% in the first quarter 1995. Workers' compensation
combined ratio decreased 17.2 points to 100.0% from 117.2% during the same
period last year. This year's results were impacted positively by favorable
accident year results.
The general liability combined ratio decreased 43.6 points to 98.8% from
142.4% during the first quarter 1995. The combined ratio for CMP, fire and
inland marine increased to 132.4% from 112.5% during March 1995.
The first quarter catastrophe losses were $17.4 million and accounted for 5.6
points on the combined ratio. This compares with $.5 million and .2 points
for the same period in 1995. Overall, weather related losses including
catastrophes accounted for 12 points on the combined ratio.
The Corporation's reserves for environmental liability claims have not changed
materially since December 31, 1995, and continued to total approximately $14.4
million. For more complete discussion of this exposure see pages 21 and 28 of
the Corporation's Annual Report to Shareholders.
For the quarter, property and casualty before tax investment income was $44.3
million, $1.25 per share, down slightly from $46.5 million, $1.29 per share,
for the same period last year. The effective tax rate on investment income
for the first quarter of 1996 was 23.6% compared with 25.2% for the comparable
period in 1995.
Net cash used by operations was $10.9 million for the first three months of
the year compared with net cash generated of $14.7 million for the same period
in 1995. Shareholder dividend payments were $14.2 million in the first three
months of 1996 compared with $13.7 million for the same period of 1995.
Consolidated investments at March 31, 1996 included taxable high yield and
unrated securities with an aggregate market value of $458.9 million and an
aggregate amortized value of $454.0 million. Comparable December 31, 1995
investments in taxable high yield and unrated securities had a market value of
$490.2 million and an amortized value of $475.0 million. At March 31, 1996,
the fixed maturity portfolio relating to property and casualty operations
totaled $2.2 billion which consisted of 80.6% investment grade securities,
7.6% high yield securities and 11.8% unrated securities. The fixed maturity
portfolio relating to life insurance operations totaled $66.4 million which
consisted of 72.3% investment grade securities, 2.0% high yield securities and
25.7% unrated securities. In addition, security values were written down by
$33.3 million after tax due to non-performance of the issuers of the
securities.
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At March 31, 1996, the securities in the Corporation's high yield and unrated
portfolio were issued by more than 161 corporate borrowers in approximately 43
industries. At that time, approximately 99.9% of such investments (based on
amortized value) were performing in accordance with contractual terms and were
making principal and interest payments as required.
For further discussion of the Corporation's investments, see Item 1 of the
Corporation's Form 10-K for the year ended December 31, 1995.
In 1994, the National Association of Insurance Commissioners developed a risk-
based capital model to establish standards which will compare insurance
company statutory surplus to required minimum capital based on risks of
operations and assist regulators in determining solvency requirements. The
model is based on four risk factors in two categories: asset risk consisting
of investment risk and credit risk; and underwriting risk composed of loss
reserve and premiums written risks. Based on current calculations, all of the
Ohio Casualty Group companies have at least twice the necessary capital to
conform with the risk-based capital model.
Ohio Casualty does not own any "derivative financial instruments" as defined
in FAS 119. The Corporation maintains a laddered maturity structure in our
fixed income portfolios. Though not a formal "hedge", such a strategy does
mitigate some interest rate swings.
The Corporation has reserved $71.2 million plus interest for a Proposition 103
liability asserted by the California Department of Insurance. The Corporation
continues to challenge the validity of any rollback. Hearings before an
Administrative Law Judge are slated to begin June 3. For further discussion
of the Corporation's California withdrawal, see page 21 and footnote 13 in the
Corporation's Annual Report to Shareholders.
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PART II
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
At the annual meeting on April 17, 1996, shareholders voted on board
of director seats for three year terms. Those elected were:
Arthur J. Bennert: For 31,486,228; against 87,431;
abstentions 310,143
Catherine A. Dolan: For 31,450,734; against 111,970;
abstentions 321,098
Jeffery D. Lowe: For 31,417,415; against 105,216;
abstentions 361,171
Lauren N. Patch: For 31,453,784; against 98,608;
abstentions 331,410
Those directors whose term of office continued after the meeting
were: Jack E. Brown, Vaden Fitton, Joseph L. Marcum, Howard L.
Sloneker III, Wayne Embry, Stephen S. Marcum, Stanley N. Pontius and
William L. Woodall.
In addition, shareholders voted to amend the Company's Articles of
Incorporation to increase the authorized number of common stock
shares from 70,000,000 to 150,000,000. Those votes were cast as
follows:
For 26,330,110; against 4,570,097; abstentions 983,595
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO CASUALTY CORPORATION
-------------------------
(Registrant)
May 14, 1996 /S/ Barry S. Porter
-------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
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