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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 September 30, 1997
[ ] 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, 1997 of the voting stock held
by non-affiliates of the registrant was $1,359,007,216.
On November 1, 1997 there were 33,861,403 shares outstanding.
Page 1 of 10
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PART I
ITEM 1. FINANCIAL STATEMENTS
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
September 30, December 31,
1997 1996
- ------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(Cost: $2,126,507 and $2,225,517) $2,225,528 $2,310,938
Equity securities, at fair value
(Cost: $290,253 and $306,865) 834,439 721,152
Short-term investments at cost 51,419 41,546
----------- -----------
Total investments 3,111,386 3,073,636
Cash 60,225 20,078
Premiums and other receivables 206,042 186,676
Deferred policy acquisition costs 119,708 116,684
Property and equipment 43,408 42,239
Reinsurance recoverable 337,014 362,683
Other assets 89,795 87,985
- ------------------------------------------------------------------------------
Total assets $3,967,578 $3,889,981
==============================================================================
Liabilities
Insurance reserves:
Unearned premiums $ 508,984 $ 491,613
Losses 1,188,302 1,224,873
Loss adjustment expenses 317,698 331,797
Future policy benefits 264,822 280,002
Note payable 45,000 50,000
California Proposition 103 reserve 77,533 74,376
Deferred income taxes 81,147 27,993
Other liabilities 217,077 234,227
----------- -----------
Total liabilities 2,700,563 2,714,881
Shareholders' equity
Common stock, $.125 par value
Authorized: 150,000,000 shares
Issued: 46,803,872 5,850 5,850
Additional paid-in capital 3,885 3,603
Unrealized gain on investments, net of applicable
income taxes 418,465 332,042
Retained earnings 1,131,701 1,076,545
Treasury stock, at cost:
(Shares: 12,859,534; 11,662,559) (292,886) (242,940)
----------- -----------
Total shareholders' equity 1,267,015 1,175,100
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,967,578 $3,889,981
==============================================================================
See Notes to Consolidated Financial Statements on Page 6
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
Three months
Ended September 30,
1997 1996
- ------------------------------------------------------------------------------
Premiums and finance charges earned $300,252 $301,054
Investment income less expenses 45,365 46,105
Investment gains realized 20,806 13,507
--------- ---------
Total income 366,423 360,666
Losses and benefits for policyholders 200,085 199,695
Loss adjustment expenses 30,097 22,968
General operating expenses 25,184 26,014
California Proposition 103 reserve 1,052 1,052
Amortization of deferred policy acquisition costs 76,399 76,717
--------- ---------
Total expenses 332,817 326,446
Income before income taxes 33,606 34,220
Income taxes
Current 6,602 1,730
Deferred 1,680 5,157
--------- ---------
Total income taxes 8,282 6,887
- ------------------------------------------------------------------------------
Income from continuing operations 25,324 27,333
Income from discontinued operations (85) 1,056
- ------------------------------------------------------------------------------
Net income $ 25,239 $ 28,389
==============================================================================
Average shares outstanding 34,025 35,178
==============================================================================
Income from continuing operations, per share $ 0.74 $ 0.78
Income from discontinued operations, per share 0.00 0.03
--------- ---------
Net income, per share $ 0.74 $ 0.81
Cash dividends, per share $ 0.42 $ 0.40
==============================================================================
See Notes to Consolidated Financial Statements on Page 6
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
Nine Months
Ended September 30,
1997 1996
- ------------------------------------------------------------------------------
Premiums and finance charges earned $ 910,519 $ 915,912
Investment income less expenses 134,236 134,395
Investment gains (losses) realized 42,644 34,409
----------- -----------
Total income 1,087,399 1,084,716
Losses and benefits for policyholders 569,520 628,475
Loss adjustment expenses 90,226 99,879
General operating expenses 78,292 77,662
California Proposition 103 reserve 3,157 3,157
Amortization of deferred policy acquisition costs 228,180 232,864
----------- -----------
Total expenses 969,375 1,042,037
Income before income taxes 118,024 42,679
Income taxes
Current 25,693 (3,879)
Deferred 2,788 3,738
----------- -----------
Total income taxes 28,481 (141)
- ------------------------------------------------------------------------------
Income from continuing operations 89,543 42,820
Income from discontinued operations 2,516 3,950
- ------------------------------------------------------------------------------
Net income $ 92,059 $ 46,770
==============================================================================
Average shares outstanding 34,380 35,283
==============================================================================
Income from continuing operations, per share $ 2.61 $ 1.22
Income from discontinued operations, per share 0.07 0.11
----------- -----------
Net income, per share $ 2.68 $ 1.33
Cash dividends, per share $ 1.26 $ 1.20
==============================================================================
See Notes to Consoliated Financial Statements on Page 6
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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 investment earnings stock equity
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,
September 30, 1996 $ 5,850 $ 3,519 $ 296,427 $ 1,033,814 $ (242,858) $ 1,096,752
============================================================================================================
Balance
January 1, 1997 $ 5,850 $ 3,603 $ 332,042 $ 1,076,545 $ (242,940) $ 1,175,100
Unrealized gain 143,546 143,546
Deferred income tax on
net unrealized gain (50,242) (50,242)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (20,913 shares) 282 (478) 233 37
Repurchase of treasury
stock (1,217,888 shares) (50,179) (50,179)
Net income 92,059 92,059
Cash dividends paid
($1.26 per share) (43,306) (43,306)
- ------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1997 $ 5,850 $ 3,885 $ 425,346 $ 1,124,820 $ (292,886) $ 1,267,015
============================================================================================================
See Notes to Consolidated Financial Statements on Page 6
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended September 30,
1997 1996
Cash flows from:
Operations
Net income $ 92,059 $ 46,770
Adjustments to reconcile net income
to cash from operations:
Changes in:
Insurance reserves (48,480) (80,231)
Income taxes (7,471) (11,256)
Premiums and other receivables (19,366) (3,684)
Deferred policy acquisition costs (3,024) 904
Reinsurance recoverable 25,668 57,889
Other assets (19,510) 1,220
Other liabilities 4,592 (6,931)
Depreciation and amortization 16,216 10,358
Investment gains and losses (43,507) (35,085)
California Proposition 103 reserve 3,157 3,157
--------- ---------
Net cash generated by operations 334 (16,889)
--------- ---------
Investments
Purchase of investments:
Fixed income securities - available for sale (265,441) (458,268)
Equity securities (21,812) (59,830)
Proceeds from sales:
Fixed income securities - available for sale 261,926 387,241
Equity securities 86,225 71,314
Proceeds from maturities and calls:
Fixed income securities - available for sale 77,267 105,114
Equity securities 9,660 15,904
--------- ---------
Net cash from investments 147,825 61,475
--------- ---------
Financing
Note payable (5,000) (5,000)
Proceeds from exercise of stock options 346 142
Purchase of treasury stock (50,179) (9,168)
Dividends paid to shareholders (43,306) (42,325)
--------- ---------
Net cash used in financing activity (98,139) (56,351)
--------- ---------
Net change in cash and cash equivalents 50,020 (11,765)
--------- ---------
Cash and cash equivalents, beginning of period 61,624 38,282
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of period $111,644 $ 26,517
==============================================================================
Footnotes: For complete disclosures see Notes to Consolidated Financial
Statements on pages 28-34 of Annual Report.
Note 1 - During 1996, the Corporation entered into an interest rate swap. The
effect of the swap agreement is to establish a hedge against future interest
rate swings on its variable rate term loan. Net proceeds or payments from the
swap are charged to interest expense in the current period.
Covered call options are written on stocks and bonds held in the investment
portfolio. Changes in the values of the covered call options are recognized
in shareholders' equity as unrealized appreciation or depreciation.
Note 2 - 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 nine months ended
September 30, 1997 were $55.4 million, $1.61 per share, compared with $121.6
million, $3.45 per share for the same period in 1996. Gross premiums for the
first nine months of 1997 decreased .4% over the same period in 1996.
Commercial lines decreased 1.7% and personal lines increased .7% for the first
nine months of 1997. Property and casualty net premiums decreased 1.3% for
the third quarter of 1997 over 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 increased
5.1% year-to-date over 1996. New Jersey is our largest state with 18.2% 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. This leads to a
greater risk concentration in the state than the Corporation would otherwise
accept. New Jersey also requires assessments to be paid for the New Jersey
Unsatisfied Claim and Judgment Fund (UCJF). The assessment for 1997 is
approximately $4.2 million compared with $4.4 million in 1996. On August 11
the governor of New Jersey, Christie Whitman, called for guaranteed rate
reductions on personal auto insurance of up to 25%. Her proposals are
currently pending in the New Jersey Legislature and it is uncertain what
impact, if any, they will have on the Corporation. Through September of 1997,
New Jersey private passenger auto premium totaled $83.7 million which is 9.1%
of total premium and 23.9% of total private passenger auto premium for the
Corporation.
As part of its reinsurance transactions, the Corporation participates in an
experience rated First Casualty Excess of Loss Treaty. In accordance with
FASB 113 (Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts), anticipated profits from this agreement are recorded as
returned premium. Through September 30, 1997, due to unanticipated favorable
development in our liability lines, the actuarial projections of the estimated
profit from this agreement were updated to $10.3 million. Of this amount,
$7.3 million was recognized as return premium in the second quarter with $3.0
million recognized as return premium in the first quarter.
The combined ratio for the first nine months decreased 7.1 points to 106.1%
from 113.2% over the same period last year. The nine-month combined ratio for
homeowners decreased 31.2 points to 117.1% from 148.3% in the same period last
year. Personal automobile, the Corporation's largest line, recorded a 1997
nine-month combined ratio of 104.0%, down 9.0 points from 113.0% in 1996.
During the first nine months of 1996, results for both homeowners and personal
automobile were negatively impacted by a series of severe winter storms that
occurred throughout the Midwest. Workers' compensation combined ratio for the
first nine months of 1997 decreased 5.5 points to 92.7% from 98.2% during the
same period last year.
The general liability combined ratio for the third quarter increased 27.3
points to 111.5% from 84.2% in 1996. The nine-month combined ratio increased
11.3 points to 104.1% from 92.8% in the same period of 1996. These increases
are due primarily to increased severity in that line. At present the
Corporation believes this to be an aberration rather than a trend. The nine-
month combined ratio for CMP, fire and inland marine decreased 5.7 points to
108.8% from 114.5% in 1996 due primarily to reduced weather related losses.
Third quarter catastrophe losses were $9.0 million and accounted for 3.0
points on the combined ratio. This compares with $16.5 million and 5.5 points
for the same period in 1996. Year to date catastrophe losses decreased $34.7
million from $53.5 million in 1996 to $18.8 million in 1997. While
catastrophe losses for the period were considerably lower than in 1996, an
increase in severity in general liability and workers' compensation led to the
increased combined ratio for the quarter.
In 1996, the Corporation analyzed incurred but not reported reserves for
general liability and commercial multiple peril to segregate between asbestos
and environmental losses and all other losses. As a result of this analysis,
$27.4 million in incurred but not reported reserves were segregated as
asbestos and environmental related. This brought total asbestos and
environmental reserves to their current level of $41.0 million.
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For the quarter, property and casualty before tax investment income was $44.1
million, $1.30 per share, decreasing slightly from $44.9 million, $1.29 per
share, for the same period last year. The effective tax rate on investment
income for the third quarter of 1997 was 25.6% compared with 23.7% for the
comparable period in 1996. Additional discussion of the Corporation's
investment tax planning strategy is included in the 1996 Annual Report to
Shareholders.
Net cash generated by operations was $.3 million for the first nine months of
the year compared with net cash used of $16.9 million for the same period in
1996. Shareholder dividend payments were $43.3 million in the first nine
months of 1997 compared with $42.3 million for the same period of 1996.
During the first nine months of 1997, Ohio Casualty continued its share
repurchase program. The total number of shares acquired during the period was
1,217,888, or 3.6% of outstanding shares, at an average price of $41.20 per
share for a total cash outflow of $50.2 million. The Company has remaining
authorization to repurchase 853,612 additional shares.
In 1995, the Corporation reinsured substantially all of its life insurance and
related businesses to Great Southern Life Insurance Company. Great Southern
is expected to replace Ohio Life as the primary carrier through an assumption
and novation sometime during the fourth quarter. The ultimate timing of the
assumption is dependent upon receipt of state approval from each state in
which the life business is located. When the assumption occurs, the
unamortized ceding commission will be recognized in that period's income. The
current unamortized balance of the ceding commission is $10.1 million.
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) had an aggregate carrying value of $141.3 million and an aggregate
amortized cost of $135.0 million at September 30, 1997. Unrated securities
had an aggregate carrying value of $247.2 million and an aggregate amortized
cost of $230.1 million. At year-end 1996 the aggregate carrying value of
below investment grade securities was $184.6 million and the aggregate
amortized cost was $180.0 million. At year-end 1996, the aggregate carrying
value of unrated securities was $315.4 million and the aggregate amortized
cost was $308.3 million. Utilizing ratings provided by other agencies such as
the National Association of Insurance Commissioners, categorizes $18.4 million
of $247.2 million in unrated securities as non-investment grade. This brings
the aggregate market value of non-investment grade securities to $159.7
million at September 30, 1997, compared with $211.9 million at year-end 1996.
All of the Corporation's below investment grade securities (based on carrying
value) are performing in accordance with contractual terms and are making
principal and interest payments as required. The securities in the
Corporation's below investment grade portfolio have been issued by 61
corporate borrowers in approximately 31 industries.
In 1996 the Insurance Services Office (ISO) elected to become a public
corporation. As such, each member of ISO was allocated an equity stake in the
new entity. Effective January 1, 1997, ISO became a for-profit corporation
and Ohio Casualty received 138,899 shares valued at $25 per share for a total
value of $3.5 million. The receipt of these shares was recorded in the first
quarter as miscellaneous income and the value of the shares was added to our
equity portfolio.
For further discussion of the Corporation's investments, see Item 1 of the
Corporation's Form 10-K for the year ended December 31, 1996.
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 four times the necessary capital
to conform with the risk-based capital model.
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The Corporation continues to have no exposure to futures, forwards, caps,
floors, or similar derivative instruments as defined by Statement of Financial
Accounting Standards No. 119. However, as noted in footnote number 13 on page
34 of the Annual Report to Shareholders, we have an interest rate swap with
Chase Manhattan Bank covering our term loan. This swap is not classified as
an investment but rather as a hedge against a portion of the Corporation's
variable rate note payable.
On October 27, 1997, the Corporation signed a new credit facility with Chase
Manhattan Bank (see Exhibit 10c ). The credit facility makes available a $300
million revolving line of credit, which will immediately be accessed to
refinance the existing term loan balance with Chase Manhattan Bank. The
interest rate on the line of credit is based upon various bases including the
London InterBank Offered Rate. The credit agreement contains financial
convenants and provisions customary for such arrangements. Those financial
covenants include a required minimum level of statutory surplus and a maximum
debt to equity ratio. The agreement expires October 27, 2002, with any
outstanding balance due at that time.
The Corporation has reserved $77.5 million (including interest) for a
Proposition 103 liability asserted by the California Department of Insurance.
The Corporation is currently involved in hearings with the State of
California. The final arguments concluded in the first quarter of 1997 but
were recently reopened for additional testimony on loss development. A ruling
from the Administrative Law Judge is expected before the end of 1997. At that
time, the Insurance Commissioner will have 60 days to take the ruling under
advisement and return with a final ruling. The Corporation will continue to
challenge the validity of any rollback and plans to continue negotiations with
Department officials. It is uncertain when this will be resolved. For
further discussion of the Corporation's California withdrawal, see footnote 14
in the Corporation's Annual Report to Shareholders.
The SEC issued Financial Reporting Release 48 (Disclosures about Derivatives
and Other Financial Instruments) which is effective for periods ending after
June 15, 1997 for registrants with market capitalizations in excess of $2.5
billion and effective one year later for all other registrants. The
Corporation has a market capitalization of less than $2.5 billion. FRR 48
does not impact the Corporation's financial statements but does require
enhanced disclosures about market risk inherent in derivatives and other
financial instruments (as defined by FRR 48). The additional information will
be included in the footnotes to the Annual Report and annual filings with the
SEC after June 15, 1998.
Recently the FASB issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which supersedes APB Opinion No. 15, Earnings Per Share.
This standard replaces the primary EPS requirements with a basic EPS
computation and requires a dual presentation of basic and diluted EPS for
those companies with complex capital structures. The Corporation intends to
adopt the standards of Statement No. 128 for financial statements issued after
December 15, 1997. The impact of this statement is expected to be immaterial
on the Corporation's EPS calculation.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129 which clarifies disclosure requirements regarding a company's capital
structure. The Corporation is currently assessing the disclosure required
with SFAS 129 which becomes effective December 31, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. This standard establishes a requirement
for display of Comprehensive Income in a set of general-purpose financial
statements for fiscal periods beginning after December 15, 1997.
In June 1997, the FASB also released Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information. The standard requires reporting certain information about
operating segments for fiscal periods beginning after December 15, 1997. The
Corporation is currently reviewing what changes, if any, this will require in
the presentation of financial results.
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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 - None
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K
Attached hereto as Exhibit No. 10c, under Reg. S-K, Item 601, is the
Credit Agreement dated October 27, 1997 with The Chase Manhattan Bank,
NA as Agent.
No reports on Form 8-K were filed during the quarter ended September
30, 1997.
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 13, 1997 /s/ Barry S. Porter
---------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
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