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 September 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 November 1, 1996 of the voting stock held
by non-affiliates of the registrant was $1,017,929,647.
On November 1, 1996 there were 35,138,083 shares outstanding.
Page 1 of 9
2
PART I
ITEM 1. FINANCIAL STATEMENTS
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
September 30, December 31,
1996 1995
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(Cost: $2,265,265 and $2,290,549) $ 2,312,573 $ 2,407,853
Equity securities, at fair value
(Cost: $312,375 and $326,999) 714,186 661,154
Short-term investments at cost 3,936 14,399
Total investments 3,030,695 3,083,406
Cash 22,581 23,883
Premiums and other receivables 199,859 196,175
Deferred policy acquisition costs 118,891 119,795
Property and equipment 42,408 43,846
Reinsurance recoverable 388,278 446,167
Other assets 69,642 66,870
------------ ------------
Total assets $ 3,872,354 $ 3,980,142
============ ============
Liabilities
Insurance reserves:
Unearned premiums $ 509,154 $ 506,035
Losses 1,259,132 1,275,077
Loss adjustment expenses 349,837 356,107
Future policy benefits 298,939 360,074
Note payable 55,000 60,000
California Proposition 103 reserve 73,324 70,167
Deferred income taxes 3,827 2,112
Other liabilities 226,389 239,556
------------ ------------
Total liabilities 2,775,602 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 3,519 3,422
Unrealized gain on investments, net of applicable
income taxes 296,427 305,049
Retained earnings 1,033,814 1,030,468
Treasury stock, at cost:
(Shares: 11,665,789; 11,407,745) (242,858) (233,775)
Total shareholders' equity 1,096,752 1,111,014
------------ ------------
Total liabilities and shareholders' equity $ 3,872,354 $ 3,980,142
============ ============
2
3
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
Three months
Ended September 30,
1996 1995
Premiums and finance charges earned $ 301,054 $ 317,165
Investment income less expenses 46,105 47,004
Investment gains realized 13,507 (430)
----------- -----------
Total income 360,666 363,739
Losses and benefits for policyholders 199,695 191,266
Loss adjustment expenses 22,968 33,730
General operating expenses 26,014 22,513
California Proposition 103 1,052 21,514
Amortization of deferred policy acquisition costs 76,717 81,515
----------- -----------
Total expenses 326,446 350,538
Income before income taxes 34,220 13,201
Income taxes
Current 1,730 10,324
Deferred 5,157 (7,398)
----------- -----------
Total income taxes 6,887 2,926
----------- -----------
Income from continuing operations 27,333 10,275
Income from discontinued operations 1,056 2,942
----------- -----------
Net income $ 28,389 $ 13,217
=========== ===========
Average shares outstanding 35,178 35,705
Income from continuing operations, per share $ 0.78 $ 0.29
Income from discontinued operations, per share 0.03 0.08
----------- -----------
Net income, per share $ 0.81 $ 0.37
=========== ===========
Cash dividends, per share $ 0.40 $ 0.38
3
4
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
Nine Months
Ended September 30,
1996 1995
Premiums and finance charges earned $ 915,912 $ 957,164
Investment income less expenses 134,395 141,494
Investment gains (losses) realized 34,409 (1,441)
----------- -----------
Total income 1,084,716 1,097,217
Losses and benefits for policyholders 628,475 597,557
Loss adjustment expenses 99,879 104,378
General operating expenses 77,662 65,871
California Proposition 103 3,157 23,050
Amortization of deferred policy acquisition costs 232,864 247,244
----------- -----------
Total expenses 1,042,037 1,038,100
Income before income taxes 42,679 59,117
Income taxes
Current (3,879) 16,529
Deferred 3,738 (7,636)
----------- -----------
Total income taxes (141) 8,893
----------- -----------
Income from continuing operations 42,820 50,224
Income from discontinued operations 3,950 4,014
=========== ===========
Net income $ 46,770 $ 54,238
=========== ===========
Average shares outstanding 35,283 35,825
Income from continuing operations, per share $ 1.22 $ 1.40
Income from discontinued operations, per share 0.11 0.11
----------- -----------
Net income, per share $ 1.33 $ 1.51
=========== ===========
Cash dividends, per share $ 1.20 $ 1.14
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 296,604 296,604
Deferred income tax on
net unrealized gain (102,975) (102,975)
Net issuance of treasury
stock under stock option
(11,525 shares) 76 179 255
Repurchase of treasury
stock (415,100 shares) (761) (13,464) (14,225)
Net income 54,238 54,238
Cash dividends paid
($1.14 per share) (40,826) (40,826)
- ----------------------------------------------------------------------------------------------------------
Balance, Sept. 30, 1995 $5,850 $ 3,347 $ 263,239 $ 997,719 $ (226,294) $1,043,861
==========================================================================================================
Balance January 1, 1996 $5,850 $ 3,422 $ 305,049 $1,030,468 $ (233,775) $1,111,014
Unrealized gain (12,944) (12,944)
Deferred income tax on
net unrealized gain 4,322 4,322
Net issuance of treasury
stock under stock option
plan and by charitable
donation (6,556 shares) 97 (1,099) 85 (917)
Repurchase of treasury
stock (264,600 shares) (9,168) (9,168)
Net income 46,770 46,770
Cash dividends paid
($1.20 per share) (42,325) (42,325)
- ----------------------------------------------------------------------------------------------------------
Balance, Sept. 30, 1996 $5,850 $ 3,519 $ 296,427 $1,033,814 $ (242,858) $1,096,752
==========================================================================================================
5
6
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended September 30,
1996 1995
Cash flows from:
Operations
Net income $ 46,770 $ 54,238
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves (80,231) (5,179)
Income taxes (11,256) (16,842)
Premiums and other receivables (3,684) (8,770)
Deferred policy acquisition costs 904 3,956
Reinsurance recoverable 57,889 (1,160)
Other assets 1,220 (7,690)
Other liabilities (6,931) (3,770)
Depreciation and amortization 10,358 9,346
Investment gains and losses (35,085) (312)
California Proposition 103 3,157 21,514
----------- -----------
Net cash generated by operations (16,889) 45,331
Investments
Purchase of investments:
Fixed income securities - available for sale (458,268) (723,733)
Equity securities (59,830) (63,895)
Proceeds from sales:
Fixed income securities - available for sale 387,241 691,899
Equity securities 71,314 29,073
Proceeds from maturities and calls:
Fixed income securities - available for sale 105,114 97,856
Equity securities 15,904 36,529
----------- -----------
Net cash from investments 61,475 67,729
Financing
Note payable (5,000) (5,000)
Proceeds from exercise of stock options 142 230
Purchase of treasury stock (9,168) (13,464)
Dividends paid to shareholders (42,325) (40,825)
----------- -----------
Net cash used in financing activity (56,351) (59,059)
Net change in cash and cash equivalents (11,765) 54,001
Cash and cash equivalents, beginning of period 38,282 28,656
----------- -----------
Cash and cash equivalents, end of period $ 26,517 $ 82,657
=========== ===========
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 nine months ended
September 30, 1996, were $121.6 million, $3.45 per share, compared with $77.2
million, $2.15 per share for the same period in 1995. Gross premiums for the
first nine months of 1996 decreased 4.5% in total. Commercial lines decreased
8.4% and personal lines decreased 1.6% from the same period last year.
Property and casualty net premiums decreased 4.5% in the first nine months and
decreased 4.6% for the third quarter of 1996.
Premium writings continue to demonstrate the impact of our agency
repositioning strategy of last year. However, premium from active agents
increased 2.5% over the same period last year. New Jersey is our largest
state with 18.1% 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 $4.4
million compared with $1.0 million in 1995.
The combined ratio this year was higher due to severe weather related losses
in the first nine months. The combined ratio for the first nine months
increased 7.4 points to 113.2% from 105.8% from the same period last year.
The nine-month combined ratio for homeowners increased 29.5 points to 148.3%
from 118.8% in the same period last year. Personal automobile, the
Corporation's largest line, recorded a 1996 nine-month combined ratio of
113.0%, up 12.5 points from 100.5% in 1995. Workers' compensation combined
ratio for the first nine months of 1996 increased 3.3 points to 98.2% from
94.9% 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 third quarter decreased 25.8
points to 84.2% from 110.0% in 1995. The nine-month combined ratio decreased
18.4 points to 92.8% from 111.2% in the same period of 1995. The nine-month
combined ratio for CMP, fire and inland marine increased 4.9 points to 114.5%
from 109.6% in 1995. This increase is due to the higher catastrophe losses
experienced so far during 1996.
Net income was positively impacted by a reserve reduction of $25 million in
the quarter. This is primarily due to significant favorable development from
non-California losses in the general liability and commercial multi peril
lines of business. Future development is uncertain.
The third quarter catastrophe losses were $16.5 million and accounted for 5.5
points on the combined ratio. This compares with $5.7 million and 1.8 points
for the same period in 1995. Catastrophes for the first nine months are $53.5
million or 5.8 points on the combined ratio compared with $22.5 million or 2.3
points on the combined ratio for the same period last year, representing a
137.8% increase. The $53.5 million represents the highest nine month
catastrophe results in the Corporation's history.
Impacting third quarter results were losses from hurricanes Bertha and Fran
totaling $9.1 million before taxes, including $1.5 million in windstorm pool
assessments. These catastrophe losses added 3.0 points on the third quarter
combined ratio. Further development in the fourth quarter of Hurricane Fran
losses totals $3.6 million, before taxes.
The Corporation's reserves for environmental liability claims have not changed
materially since December 31, 1995, and continue to total approximately $14.4
million. For a more complete discussion of this exposure see pages 21 and 29
of the Corporation's Annual Report to Shareholders.
For the third quarter, property and casualty investment income was $44.9
million, down from $46.0 million for the same period last year. Investment
income per share before tax decreased slightly for the third quarter from
$1.29 to $1.28 in 1996. Investment income per share decreased from $3.87 in
1995 to $3.74 in 1996. The effective tax rate on investment income for the
first nine months of 1996 was 23.6% compared with 26.1% 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 $16.9 million in the first nine months of the
year compared with net cash generated of $45.3 million for the same period in
1995. Shareholder dividend payments were $42.3 million in the first nine
months of 1996 compared with $40.8 million for the same period of 1995. The
decrease in cash flows from operations was primarily attributable to the heavy
catastrophe losses incurred this year.
7
8
Consolidated investments at September 30, 1996, included taxable high yield
and unrated securities with an aggregate market value of $267.8 million.
Comparable December 31, 1995 investments in taxable high yield and unrated
securities had a market value of $232.8 million. At September 30, 1996, the
fixed maturity portfolio relating to property and casualty operations totaled
$2.2 billion which consisted of 80.6% investment grade securities, 8.4% high
yield securities, and 11.0% unrated securities. Fixed maturity portfolio
relating to discontinued life insurance operations totaled $45.6 million which
consisted of 66.6% investment grade securities, 3.2% high yield securities and
30.2% unrated securities.
At September 30, 1996, the securities in the Corporation's high yield and
unrated portfolio were issued by more than 84 corporate borrowers in
approximately 39 industries. At that time, approximately 99.7% 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 $73.3 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.
Recently, the "Year 2000 Problem" has received extensive press in the
insurance industry. Apparently, many of our competitors are making large
expenditures in order to convert their computer systems to recognize the year
2000. Most computer systems were originally written with two digit date
fields. Therefore, the computer believes that the difference between `99 and
`00 is a negative 99 years instead of one year. Since the late 1980's, Ohio
Casualty has been converting our computer systems to be year 2000 compliant as
we modified and adjusted the programs for other purposes. As such, the
Corporation has not had to make such a dedicated and expensive effort to fix
the problem. Currently, over 60% of our systems are already compliant with
the remainder expected over the next two years. To date, we have spent
approximately $.3 million and expect to spend an additional $.2 million to
complete our efforts.
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)
November 11, 1996 /s/ Barry S. Porter
-------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
9