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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, 1998
[ ] 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, 1998 of the voting stock held by
non-affiliates of the registrant was $1,488,060,224.
On May 1, 1998 there were 33,600,463 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)
March 31, December 31,
1998 1997
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,086,769 and $2,112,291) $ 2,193,124 $ 2,226,030
Equity securities, at fair value
(cost: $274,009 and $275,637) 975,146 859,475
Short-term investments, at cost 55,888 65,849
------------ ------------
Total investments 3,224,158 3,151,354
Cash 72,561 54,206
Premiums and other receivables 205,438 193,615
Deferred policy acquisition costs 129,711 126,063
Property and equipment 52,373 50,699
Reinsurance recoverable 118,123 108,962
Other assets 102,276 93,883
------------ ------------
Total assets $ 3,904,640 $ 3,778,782
============ ============
Liabilities
Insurance reserves:
Unearned premiums $ 499,772 $ 495,076
Losses 1,177,094 1,176,614
Loss adjustment expenses 302,418 307,193
Future policy benefits 34,148 34,148
Note payable 40,000 40,000
California Proposition 103 reserve 67,804 66,908
Deferred income taxes 137,059 95,389
Other liabilities 244,750 248,625
----------- ------------
Total liabilities 2,503,045 2,463,953
Shareholders' equity
Common stock, $.125 par value
Authorized: 150,000,000 shares
Issued: 46,803,872 5,850 5,850
Additional paid-in capital 4,118 3,923
Accumulated other comprehensive income:
Unrealized gain on investments, net of applicable
income taxes 525,686 454,241
Retained earnings 1,174,705 1,158,308
Treasury stock, at cost:
(Shares: 13,203,964; 13,182,240) (308,764) (307,493)
----------- ------------
Total shareholders' equity 1,401,595 1,314,829
----------- ------------
Total liabilities and shareholders' equity $3,904,640 $3,778,782
=========== ============
Accompanying notes are integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 23-32 of the Corporation's 1997 Annual Report to Shareholders.
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
Three Months
Ended March 31,
1998 1997
Premiums and finance charges earned $ 309,627 $ 302,479
Investment income less expenses 44,633 43,717
Investment gains realized 4,082 13,340
---------- ----------
Total income 358,342 359,536
Losses and benefits for policyholders 188,117 186,181
Loss adjustment expenses 26,380 30,255
General operating expenses 28,352 25,272
California Proposition 103 reserve 897 1,052
Amortization of deferred policy acquisition costs 73,731 75,701
---------- ----------
Total expenses 317,477 318,461
Income before income taxes 40,865 41,075
Income taxes
Current 7,457 11,668
Deferred 2,494 (1,850)
---------- -----------
Total income taxes 9,951 9,818
Income from continuing operations 30,914 31,257
Income from discontinued operations 280 1,458
---------- ----------
Net income $ 31,194 $ 32,715
========== ==========
Other comprehensive income, net of tax:
Net change in unrealized gains (losses), net of income
tax expense/(benefit) of $38,470 and $(19,539),
respectively 71,445 (36,543)
Comprehensive income $102,639 $ (3,828)
========== ===========
Average shares outstanding - basic 33,621 34,904
Average shares outstanding - diluted 33,663 34,920
========== ===========
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 0.92 $ 0.90
Income from discontinued operations, per share 0.01 0.04
---------- ----------
Net income, per share $ 0.93 $ 0.94
Cash dividends, per share $ 0.44 $ 0.42
========== ==========
Accompanying notes are integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 23-32 of the Corporation's 1997 Annual Report to Shareholders.
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Accumulated
Additional other Total
Common paid-in comprehensive Retained Treasury shareholders'
Stock capital income earnings stock equity
Balance
January 1, 1997 $ 5,850 $ 3,603 $ 332,042 $ 1,076,545 $ (242,940) $ 1,175,100
Unrealized gain (loss) (56,083) (56,083)
Deferred income tax benefit on
net unrealized gain (loss) 19,539 19,539
Net issuance of treasury
stock under stock option
plan and by charitable
donation (19,418 shares) 231 172 261 664
Repurchase of treasury
stock (816,500 shares) (32,834) (32,834)
Net income 32,715 32,715
Cash dividends paid
($.42 per share) (14,709) (14,709)
- ------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1997 $ 5,850 $ 3,834 $ 295,498 $ 1,094,723 $ (275,513) $ 1,124,392
============================================================================================================
Balance
January 1, 1998 $ 5,850 $ 3,923 $ 454,241 $ 1,158,308 $ (307,493) $ 1,314,829
Unrealized gain (loss) 109,915 109,915
Deferred income tax benefit on
net unrealized gain (loss) (38,470) (38,470)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (8,276 shares) 195 193 388
Repurchase of treasury
stock (30,000 shares) (1,464) (1,464)
Net income 31,194 31,194
Cash dividends paid
($.44 per share) (14,797) (14,797)
- ------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1998 $ 5,850 $ 4,118 $ 525,686 $ 1,174,705 $ (308,764) $ 1,401,595
============================================================================================================
Accompanying notes are integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 23-32 of the Corporation's 1997 Annual Report to Shareholders.
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
Three Months
Ended March 31,
1998 1997
Cash flows from:
Operations
Net income $ 31,194 $ 32,715
Adjustments to reconcile net income to cash
from operations:
Changes in:
Insurance reserves 401 (20,405)
Income taxes 3,133 (5,071)
Premiums and other receivables (11,822) (12,810)
Deferred policy acquisition costs (3,648) 577
Reinsurance recoverable (9,160) (806)
Other assets 13,674 2,416
Other liabilities (3,899) (15,305)
Depreciation and amortization 3,463 6,610
Investment gains and losses (4,042) (14,063)
California Proposition 103 896 1,052
--------- ---------
Net cash generated (used) by operations 20,190 (25,090)
Investments
Purchase of investments:
Fixed income securities - available for sale (45,155) (74,831)
Equity securities (2,986) (8,116)
Proceeds from sales:
Fixed income securities - available for sale 10,426 90,906
Equity securities 6,678 41,065
Proceeds from maturities and calls:
Fixed income securities - available for sale 39,640 11,863
Equity securities 0 4
Property and equipment
Purchases (4,081) (3,831)
Sales 164 224
-------- ---------
Net cash from investments 4,686 57,284
Financing
Proceeds from exercise of stock options 1 213
Purchase of treasury stock (1,686) (32,834)
Dividends paid to shareholders (14,797) (14,709)
-------- ---------
Net cash used in financing activity (16,482) (47,330)
Net change in cash and cash equivalents 8,394 (15,136)
Cash and cash equivalents, beginning of period 120,055 61,624
--------- ----------
Cash and cash equivalents, end of period $ 128,449 $ 46,488
========= ==========
Accompanying notes are integral part of these financial statements. For
complete disclosures see Notes to Consolidated Financial Statements on
pages 23-32 of the Corporation's 1997 Annual Report to Shareholders.
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OHIO CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997, the Corporation adopted Statement of Financial Accounting
Standard 128 "Earnings Per Share." Basic earnings per share is computed using
weighted average number of common shares outstanding. Diluted earnings per
share is computed similar to basic earnings per share except that the weighted
average number of shares outstanding is increased to include the number of
additional common shares that would have been issued if all dilutive
outstanding stock options would have been exercised. All prior periods were
recalculated under the new definition of basic and diluted earnings per share.
Basic and diluted earnings per share are summarized as follows:
1998 1997
Income from continuing operations $30,914 $31,257
Average common shares
outstanding - basic 33,621 34,904
Basic income from continuing
operations per average share $ .92 $ .90
======= =======
Average common shares outstanding 33,621 34,904
Effect of dilutive securities 42 16
------- -------
Average common shares
outstanding - diluted 33,663 34,920
Diluted income from continuing
operations - per average share $ .92 $ .90
======== ========
The Corporation adopted Statement of Financial Accounting Standard No. 130 -
Reporting Comprehensive Income during the first quarter of 1998.
Comprehensive income is defined as changes in equity of a business enterprise
during a period from transactions and other events from non-owner sources.
The Corporation has displayed comprehensive income on its Statement of
Consolidated Income on page 3 of this Form 10-Q.
The Corporation also adopted Statement of Position 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement provides guidance on accounting for the costs of computer software
developed or obtained for internal use and allows for certain costs associated
with developing/obtaining software for internal use to be capitalized.
Pursuant to this, the Corporation capitalized $1.1 million during the first
quarter of 1998. Prior to this Statement of Position, this amount would have
been expensed as incurred.
NOTE II - FIRST QUARTER EVENTS
During the first quarter of 1998, the Corporation was in violation of one of
its loan covenants for its revolving line of credit. The covenant states that
no more than 30% of the Corporation's investment portfolio at market value may
be invested in equity securities. At March 31, 1998 the actual percentage of
equity securities to consolidated investments was 30.2% at market value. This
violation occurred solely because of appreciation in the Corporation's equity
portfolio. The Corporation has not allocated any new funds to the equity
portfolio in the last three years. The syndicate of banks under the credit
agreement have all signed waivers of default for this occurrence.
NOTE III - INTERIM ADJUSTMENTS
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, 1998 were $6.0 million, $.18 per share, compared with $14.4 million, $.41
per share for the same period in 1997. Gross premiums for the first three
months of 1998 increased 1.4% for all lines of business. Commercial lines
decreased 6.6% and personal lines increased 7.9% from the same period last
year. Property and casualty net premiums increased 1.3% for the first quarter
of 1998 from the same period a year ago.
Premium writings continue to demonstrate the impact of our agency
repositioning strategy. Premium from active agents increased 4.2% over the
same period last year. New Jersey is our largest state with 16.2% 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 1998 is
approximately $3.2 million compared with $4.2 million in 1997. Recently, the
New Jersey State Senate passed an auto insurance reform bill that mandates a
15% rate reduction for personal auto liability policies for drivers who agree
not to sue for "pain and suffering" unless they suffer permanent injury in an
accident. The bill is currently under review by the Assembly. The
anticipated impact on the Corporation is a tradeoff of lower premium rates for
personal auto policies but also lower losses on these policies. As of March
31, 1998 the Corporation had net premiums written of $12.6 million in personal
auto liability or 25% of total premiums that the Corporation writes in New
Jersey. The maximum impact of this reform bill on the Corporation would have
been a decrease of $1.9 million for the quarter in premium if all
policyholders made this election on their policies.
The combined ratio for the first three months decreased 2.2 points to 103.4%
from 105.6% from the same period last year. This reduction was due to fewer
catastrophe losses during the first quarter of 1998. The three-month combined
ratio for homeowners decreased 13.6 points to 105.9% from 119.5% in the same
period last year. This decrease is due to the reduction in catastrophe losses
in 1998 as well as fewer large claims occurring in 1998 compared with the same
period of 1997. Personal automobile, the Corporation's largest line, recorded
a 1998 three-month combined ratio of 101.4%, down 7.4 points from 108.8% in
1997. Workers' compensation combined ratio for the first three months of 1998
increased 49.2 points to 131.1% from 81.9% during the same period last year.
The deterioration in workers' compensation results were due to reserve
increases that resulted from additional development of certain pre-existing
claims.
The general liability combined ratio decreased 7.8 points to 91.0% from 98.8%
during the first quarter 1998. This reduction is largely due to favorable
loss development during the first quarter of 1998. The combined ratio for
CMP, fire and inland marine increased to 103.4% from 101.3% during March 1998.
The first quarter catastrophe losses were $3.0 million and accounted for 1.0
point on the combined ratio. This compares with $5.3 million and 1.8 points
for the same period in 1997.
For the quarter, property and casualty before tax investment income was $43.2
million, $1.29 per share, increasing slightly from $42.4 million, $1.21 per
share, for the same period last year. The effective tax rate on investment
income for the first quarter of 1998 was 24.4% compared with 24.3% for the
comparable period in 1997.
Net cash generated by operations was $20.2 million for the first three months
of the year compared with net cash used of $25.1 million for the same period
in 1997. Shareholder dividend payments were $14.8 million in the first three
months of 1998 compared with $14.7 million for the same period of 1997.
In 1995 the Corporation reinsured substantially all of its life insurance and
related businesses to Great Southern Life Insurance Company. During the
fourth quarter of 1997, Great Southern Life Insurance Company legally replaced
Ohio Life as the primary insurer for approximately 76% of the life insurance
policies subject to the 1995 agreement. As a result, 76% of the unamortized
ceding commission was recognized during 1997. There remains approximately
$2.1 million in unamortized ceding commission. This will continue to be
amortized over the remaining life of the underlying policies. Investments in
below
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investment grade securities (Standard and Poor's rating below BBB-) and
unrated securities are summarized as follows:
March 31, December 31,
1998 1997
Below investment grade securities:
Carrying value $164.2 $141.4
Amortized cost 158.2 135.6
Unrated securities:
Carrying value $272.0 $242.8
Amortized cost 255.5 228.6
Utilizing ratings provided by other agencies, such as the NAIC, categorizes
additional unrated securities into below investment grade ratings. The
following summarizes the additional unrated securities that are rated in the
below investment grade category by other rating agencies:
March 31, December 31,
1998 1997
Below investment grade securities at
carrying value $164.2 $141.4
Other rating agencies categorizing unrated
securities as below investment grade 8.0 8.1
------ ------
Below investment grade securities at
carrying value $172.2 $149.5
All of the Corporation's below investment grade securities 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 57 corporate borrowers in approximately 32
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 138,889 shares valued at $25 per share for a total
value of $3.5 million. The receipt of these shares was recorded as
miscellaneous income at March 31, 1997 and the value of the shares was added
to our equity portfolio.
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 14 on page
30 of the Annual Report to Shareholders, we have an interest rate swap with
Chase Manhattan Bank covering one-half the outstanding balance of the
revolving line of credit. This swap is not classified as an investment but
rather as a hedge against a portion of the Corporation's variable rate loan.
For further discussion of the Corporation's investments, see Item 1 of the
Corporation's Form 10-K for the year ended December 31, 1997.
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.
Proposition 103 was passed in the State of California in 1988 in an attempt to
legislate premium rates for that state. Even after considering investment
income, total returns in California have been less than what would be
considered "fair" by any reasonable standard. The Corporation is currently
involved in hearings
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with the State of California. In mid 1997, the Administrative Law Judge
presiding over the hearing requested a submission from the state showing
revised rollback calculations. The California Department of Insurance
filed two revised rollback calculations in December 1997. These
alternatives, based on concession of certain issues, provide a range of
rollback liabilities between $35.9 million plus interest and $39.9 million
plus interest.
In January 1998, the Judge indicated her intent to rule under the Department's
regulations, without consideration of the Corporation's constitutional
challenge, that the Corporation's liability should be $24.4 million plus
interest. The Commissioner may accept or reject the Judge's ultimate decision
in whole or in part and her determination will be subject to de novo review by
the State Superior Court. After consultation with outside counsel, the
Corporation has determined that $35.9 million plus interest is the more
reasonable of the two Department calculations should the Department of
Insurance prevail. As a result, the Corporation's reserve for this alleged
liability is $67.8 million. An administrative hearing process is ongoing
concerning the potential rollback liability. It is uncertain when this matter
will ultimately be resolved. The Corporation will continue to challenge the
validity of any rollback and plans to continue negotiations with Department
officials. For further discussion of the Corporation's California withdrawal,
see footnote 15 in the Corporation's Annual Report to Shareholders.
During the first quarter, Ohio Casualty continued its share repurchase
program. The total number of shares acquired during the quarter was 30,000,
at an average price of $48.81 per share. The Company has remaining
authorization to repurchase 1,996,812 additional shares.
The Corporation continues to work on converting our computer systems to be
year 2000 compliant. Currently over 70% of our systems have been modified for
year 2000. A compliance testing phase was added during 1997 to our year 2000
criteria. This involves individual system compliance testing and integrated
system compliance testing. The first step verifies that the systems are
compliant when they run independently. The second step verifies compliance
when they are integrated with all other systems with which they interface.
With this addition to our criteria we are over 50% completed with the entire
year 2000 compliance process. To date, the Corporation has spent
approximately $.9 million and expects to spend an additional $1.2 million to
complete our efforts.
The Corporation continues to contact vendors who provide products and/or
services requesting verification that they either are or will be year 2000
compliant. Over 50% have responded and second requests and follow-ups are
being sent during 1998 to verify compliance for those that have not responded
or indicated they would be compliant at a future date. For a discussion of
the Corporation's extent of liability for coverage of year 2000 issues under
property, general liability and directors and officers liability policies, see
pages 13 and 14 of the Corporations 1997 Form 10K.
During the first quarter of 1998, the Corporation was in violation of one of
its loan covenants for its revolving line of credit. The covenant states that
no more than 30% of the Corporation's investment portfolio at market value may
be invested in equity securities. At March 31, 1998 the actual percentage of
equity securities to consolidated investments was 30.2% at market value. This
violation occurred solely because of appreciation in the Corporation's equity
portfolio. The Corporation has not allocated any new funds to the equity
portfolio in the last three years. The syndicate of banks under the credit
agreement have all signed waivers of default for this occurrence.
From time to time, the Company may publish forward looking statements relating
to such matters as anticipated financial performance, business prospects and
plans, regulatory developments and similar matters. The statements contained
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations that are not historical information, are forward looking
statements. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor under The Securities Act of 1933 and The Securities Exchange Act
of 1934 for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following: changes in property and casualty reserves; catastrophe
losses; premium and investment growth; product pricing environment;
availability of credit; changes in government regulation; performance of
financial markets; fluctuations in interest rates; availability and pricing of
reinsurance; litigation and administrative proceedings and general economic
and market conditions.
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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 15, 1998, shareholders voted on board
of director seats for three year terms. Those elected were:
Wayne Embry: For 29,692,812; against 93,820,
abstentions 50,540
Stephen Marcum: For 29,287,581; against 65,917;
abstentions 483,674
Stanley Pontius: For 29,717,084; against 69,548;
abstentions 50,540
Bill Woodall: For 29,720,386; against 68,081;
abstentions 48,705
Those directors whose term of office continued after the meeting
were: Arthur J. Bennert, Catherine A. Dolan, Jack E. Brown, Jeffery
D. Lowe, Vaden Fitton, Lauren N. Patch, Joseph L. Marcum and Howard
L. Sloneker III.
In addition, shareholders voted to ratify Coopers and Lybrand L.L.P.
as independent accountants. Those votes were as follows:
For 29,649,681; against 60,749; abstentions 126,742
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K -
The Corporation filed a Form 8K on February 19, 1998 to file an
amended and restated Rights Agreement.
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, 1998 /s/ Barry S. Porter
-------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
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