1 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 June 30, 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 August 1, 1996 of the voting stock held by non-affiliates of the registrant was $1,043,638,464. On August 1, 1996 there were 35,223,083 shares outstanding. Page 1 of 9 2 PART I ITEM 1. FINANCIAL STATEMENTS OHIO CASUALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands) (Unaudited) June 30, December 31, 1996 1995 Assets Investments: Fixed maturities: Available for sale, at fair value (cost: $2,267,741 and $2,290,549) $ 2,318,975 $ 2,407,853 Equity securities, at fair value (cost: $311,076 and $326,999) 686,488 661,154 Short-term investments at cost 3,936 14,399 Total investments 3,009,399 3,083,406 Cash 13,630 23,883 Premiums and other receivables 206,627 196,175 Deferred policy acquisition costs 118,376 119,795 Property and equipment 44,785 43,846 Reinsurance recoverable 402,100 446,167 Deferred income taxes 9,808 0 Other assets 78,677 66,870 ------------ ------------ Total assets $ 3,883,402 $ 3,980,142 ============ ============ Liabilities Insurance reserves: Unearned premiums $ 510,351 $ 506,035 Losses 1,276,123 1,275,077 Loss adjustment expenses 363,482 356,107 Future policy benefits 303,119 360,074 Note payable 55,000 60,000 California Proposition 103 reserve 72,271 70,167 Deferred income taxes 0 2,112 Other liabilities 232,238 239,556 ------------ ------------ Total liabilities 2,812,584 2,869,128 Shareholders' equity Common stock, $.125 par value Authorized: 150,000,000 shares Issued: 5,850 5,850 Additional paid-in capital 3,489 3,422 Unrealized gain on investments, net of applicable income taxes 280,875 305,049 Retained earnings 1,020,580 1,030,468 Treasury stock, at cost: (Shares: 11,580,974; 11,407,745) (239,976) (233,775) ------------ ----------- Total shareholders' equity 1,070,818 1,111,014 ------------ ----------- Total liabilities and shareholders' equity $ 3,883,402 $ 3,980,142 ============ ============ 2 3 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (In thousands) (Unaudited) Three Months Ended June 30, 1996 1995 Premiums and finance charges earned $ 304,641 $ 317,937 Investment income less expenses 43,302 47,106 Investment gains realized 14,949 (1,904) ------------ ----------- Total income 362,892 363,139 Losses and benefits for policyholders 208,443 197,920 Loss adjustment expenses 36,379 28,276 General operating expenses 27,527 22,880 California Proposition 103 reserve 1,052 768 Amortization of deferred policy acquisition costs 77,602 82,581 ------------ ----------- Total expenses 351,003 332,425 Income before income taxes 11,889 30,714 Income taxes Current (1,371) 4,049 Deferred 608 1,121 ------------ ----------- Total income taxes (763) 5,170 ------------ ----------- Income from continuing operations 12,652 25,544 Income from discontinued operations 2,180 365 Net income $ 14,832 $ 25,909 ============ =========== Average shares outstanding 35,285 35,814 Income from continuing operations, per share $ 0.36 $ 0.71 Income from discontinued operations, per share 0.06 0.01 ------------ ----------- Net income, per share $ 0.42 $ 0.72 ============ =========== Cash dividends, per share $ 0.40 $ 0.38 3 4 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (In thousands) (Unaudited) Six Months Ended June 30, 1996 1995 Premiums and finance charges earned $ 614,858 $ 639,999 Investment income less expenses 88,290 94,490 Investment gains (losses) realized 20,902 (1,011) ------------ ----------- Total income 724,050 733,478 Losses and benefits for policyholders 428,781 406,291 Loss adjustment expenses 76,911 70,648 General operating expenses 51,648 43,358 California Proposition 103 reserve 2,105 1,536 Amortization of deferred policy acquisition costs 156,147 165,729 ------------ ----------- Total expenses 715,592 687,562 Income before income taxes 8,458 45,916 Income taxes Current (5,609) 6,205 Deferred (1,419) (238) ------------ ----------- Total income taxes (7,028) 5,967 ------------ ----------- Income from continuing operations 15,486 39,949 Income from discontinued operations 2,894 1,072 Net income $ 18,380 $ 41,021 ============ =========== Average shares outstanding 35,336 35,887 Income from continuing operations, per share $ 0.44 $ 1.11 Income from discontinued operations, per share 0.09 0.03 ------------ ----------- Net income, per share $ 0.53 $ 1.14 ============ =========== Cash dividends, per share $ 0.80 $ 0.76 4 5 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 243,175 243,175 Deferred income tax on net unrealized gain (84,480) (84,480) Net issuance of treasury stock under stock option plan ( 9,106 shares) 92 131 223 Repurchase of treasury stock (258,100 shares) (761) (8,458) (9,219) Net income 41,021 41,021 Cash dividends paid ($.38 per share) (27,263) (27,263) - ------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1995 $5,850 $ 3,363 $ 228,305 $ 998,065 $ (221,336) $ 1,014,247 ================================================================================================================== Balance, January 1, 1996 $5,850 $ 3,422 $ 305,049 $1,030,468 $ (233,775) $ 1,111,014 Unrealized gain (35,277) (35,277) Deferred income tax on net unrealized gain 11,105 11,105 Net issuance of treasury stock under stock option plan (7,175 shares) 67 115 182 Repurchase of treasury stock (113,500 shares) (6,317) (6,317) Net income 18,381 18,381 Cash dividends paid ($.40 per share) (28,270) (28,270) - ------------------------------------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1996 $5,850 $ 3,489 $ 280,877 $1,020,579 $ (239,977) $ 1,070,818 ================================================================================================================== 5 6 OHIO CASUALTY CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 1996 1995 Cash flows from: Operations Net income $ 18,380 $ 41,021 Adjustments to reconcile net income to cash from operations: Changes in: Insurance reserves (44,218) 7,440 Income taxes (18,711) (12,286) Premiums and other receivables (10,451) (22,094) Deferred policy acquisition costs 1,419 1,482 Reinsurance recoverable 44,067 3,079 Other assets (2,278) (12,588) Other liabilities (3,690) (4,620) Depreciation and amortization 6,670 6,045 Investment gains and losses (21,586) 1,472 California Proposition 103 2,105 1,536 ---------- ---------- Net cash generated by operations (28,293) 10,487 Investments Purchase of investments: Fixed income securities-available for sale (298,342) (322,230) Equity securities (43,862) (46,102) Proceeds from sales: Fixed income securities-available for sale 274,678 380,924 Equity securities 47,616 13,647 Proceeds from maturities and calls: Fixed income securities-available for sale 57,420 49,945 Equity securities 9,512 36,529 ---------- ---------- Net cash from investments 47,022 112,713 Financing Note payable (5,000) (5,000) Proceeds from exercise of stock options 142 208 Purchase of treasury stock (6,317) (8,458) Dividends paid to shareholders (28,270) (27,262) ---------- ---------- Net cash used in financing activity (39,445) (40,512) Net change in cash and cash equivalents (20,716) 82,688 Cash and cash equivalents, beginning of period 38,282 28,656 ---------- ---------- Cash and cash equivalents, end of period $ 17,566 $ 111,344 ========== ========== Footnotes: For complete disclosures see Notes to Consolidated Financial Statements on pages 28-34 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. 6 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Property and casualty pre-tax underwriting losses for the six months ended June 30, 1996 were $97.9 million, $2.77 per share, compared with $45.0 million, $1.26 per share for the same period in 1995. Gross premiums for the first six months of 1996 decreased 6.0% for all lines of business. Commercial lines decreased 6.0% and personal lines decreased 3.2% from the same period last year. Property and casualty net premiums decreased 4.3% for the second 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 was essentially unchanged, period over period. New Jersey is our largest state with 18.0% 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 $4.4 million compared with $1.0 million in 1995. The combined ratio this year was inflated due to severe weather related losses in the first six months. The combined ratio for the first six months increased 8.6 points to 115.5% from 106.9%. The six-month combined ratio for homeowners increased 42.3 points to 159.3% from 117.0% in the same period last year. Personal automobile, the Corporation's largest line, recorded a 1996 six-month combined ratio of 112.8%, up 10.5 points from 102.3% in 1995. Workers' compensation combined ratio for the first six months of 1996 increased 6.4 points to 102.1% from 95.7% during the same period last year. Last year's results were impacted positively by favorable accident year results. The general liability combined ratio for the second quarter increased 20 points to 101.5% from 81.5% in 1995. The six-month combined ratio decreased 14.9 points to 97.1% from 112.0% in the same period of 1995. The six-month combined ratio for CMP, fire and inland marine increased 10.2 points to 119.6% from 109.4% in 1995. This increase is due to the higher catastrophe losses experienced so far during 1996. Second quarter catastrophe losses were $19.7 million and accounted for 6.4 points on the combined ratio. This compares with $16.3 million and 5.1 points for the same period in 1995. Year to date catastrophe losses increased $20.3 million from $16.7 million in 1995 to $37.0 million in 1996. 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 29 of the Corporation's Annual Report to Shareholders. For the second quarter, property and casualty investment income was $42.7 million down from $46.4 million for the same period last year. The investment income per share before tax decreased slightly from $1.29 to $1.21 for the second quarter and from $2.59 to $2.46 for the first six months of 1996. The effective tax rate on investment income for the first six months of 1996 was 23.5% compared with 24.1% for the comparable period in 1995. This decline reflects the Corporation's increased investment in tax exempt municipal bonds. Net cash used by operations was $28.3 million for the first six months of the year compared with net cash generated of $10.5 million from operations for the same period in 1995. Shareholder dividend payments were $28.3 million in the first six months of 1996 compared with $27.3 million for the same period of 1995. Consolidated investments at June 30, 1996 included taxable high yield and unrated securities with an aggregate market value of $466.5 million and an aggregate amortized value of $465.9 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 June 30, 1996, the fixed maturity portfolio relating to property and casualty operations totaled $2.2 billion which consisted of 79.5% investment grade securities, 8.2% high yield securities and 12.3% unrated securities. The fixed maturity portfolio relating to life insurance operations totaled $55.4 million which consisted of 66.9% investment grade securities, 2.6% high yield securities and 30.5% unrated securities. 7 8 At June 30, 1996, the securities in the Corporation's high yield and unrated portfolio were issued by more than 180 corporate borrowers in approximately 44 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 $72.3 million for both principal and 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 began June 3. A decision from these hearings is not expected until sometime in the fourth quarter of this year. For further discussion of the Corporation's California withdrawal, see page 21 and footnote 13 in the Corporation's Annual Report to Shareholders. On July 29, 1996, Ohio Casualty accessed its line of credit for $8 million to capitalize on investment opportunities available at that time. This loan was repaid on August 2, 1996 with scheduled investment maturities. 8 9 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 - None 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) August 9, 1996 /S/ Barry S. Porter ------------------------- Barry S. Porter, CFO/Treasurer (on behalf of Registrant and as Principal Accounting Officer) 9