1
EXHIBIT 13
OHIO CASUALTY CORPORATION & SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(in thousands) 1996 1995 1994
========================================================================================
Gross premiums and finance charges $1,240,354 $1,294,541 $1,332,279
Investment income, less expenses 183,308 188,107 185,708
Income before investment gains 64,941 91,400 77,083
Realized investment gains, after taxes 32,287 3,963 14,231
Income from discontinued operations 5,229 4,372 5,896
Cumulative effect of accounting changes 0 0 (319)
Net income 102,457 99,735 96,891
Property and casualty combined ratio 109.5% 104.0% 103.8%
PER COMMON SHARE
Income before investment gains $ 1.85 $ 2.56 $ 2.14
Realized investment gains, after taxes 0.91 0.11 0.40
Income from discontinued operations 0.15 0.12 0.16
Cumulative effect of accounting changes 0.00 0.00 (0.01)
Net income 2.91 2.79 2.69
Book value 33.44 31.39 23.64
Dividends 1.60 1.52 1.46
FINANCIAL CONDITION
Assets $3,889,981 $3,980,142 $3,738,956
Shareholders' equity 1,175,100 1,111,014 850,790
Average shares outstanding 35,247 35,750 36,033
Shares outstanding on December 31 35,141 35,396 35,993
Number of shareholders 6,500 6,100 6,100
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OHIO CASUALTY CORPORATION & SUBSIDIARIES
TEN-YEAR SUMMARY OF OPERATIONS
(in millions) 1996 1995 1994 1993
===================================================================================================
CONSOLIDATED OPERATIONS
Income after taxes
Property and casualty $66.1 $92.5 $79.3 $53.5
Premium finance 0.3 0.7 0.7 0.8
Corporate expenses (1.5) (1.8) (2.9) (2.8)
- ---------------------------------------------------------------------------------------------------
Operating income 64.9 91.4 77.1 51.5
Realized investment gains (losses) 32.3 4.0 14.2 28.7
- ---------------------------------------------------------------------------------------------------
Income from continuing operations 97.2 95.4 91.3 80.2
Discontinued operations 5.3 4.3 5.9 6.8
Cumulative effect of accounting changes 0.0 0.0 (0.3) 0.0
- ---------------------------------------------------------------------------------------------------
Net income 102.5 99.7 96.9 87.0
===================================================================================================
Income after taxes per average share outstanding
Property and casualty 1.88 2.59 2.20 1.49
Premium finance 0.01 0.02 0.02 0.02
Corporate expenses (0.04) (0.05) (0.08) (0.08)
- ---------------------------------------------------------------------------------------------------
Operating income 1.85 2.56 2.14 1.43
Realized investment gains (losses) 0.91 0.11 0.40 0.80
Discontinued operations 0.15 0.12 0.16 0.19
Cumulative effect of accounting changes 0.00 0.00 (0.01) 0.00
- ---------------------------------------------------------------------------------------------------
Net income 2.91 2.79 2.69 2.42
===================================================================================================
Average shares outstanding 35.2 35.8 36.0 36.0
Total assets 3,890.0 3,980.1 3,739.0 3,816.8
Shareholders' equity 1,175.1 1,111.0 850.8 862.3
Book value per share 33.44 31.39 23.64 23.93
Dividends paid per share 1.60 1.52 1.46 1.42
Percent increase over previous year 5.3% 4.1% 2.8% 6.0%
PROPERTY AND CASUALTY OPERATIONS
Gross premiums written 1,239.5 1,293.6 1,331.2 1,349.7
Net premiums written 1,209.0 1,250.6 1,286.4 1,306.0
Premiums earned 1,223.4 1,264.6 1,297.7 1,379.4
GAAP underwriting gain (loss) before taxes (112.2) (68.8) (92.9) (147.3)
Loss ratio 66.5% 61.2% 61.6% 64.9%
Loss expense ratio 9.7% 10.2% 10.0% 11.8%
Underwriting expense ratio 33.3% 32.6% 32.2% 33.6%
Combined ratio 109.5% 104.0% 103.8% 110.3%
Investment income before taxes 179.4 184.6 183.8 190.4
Per average share outstanding 5.09 5.16 5.10 5.29
Percent increase over previous year (1.4)% 1.2% (3.6)% (2.2)%
Property and casualty reserves
Unearned premiums 491.4 505.8 517.8 529.6
Losses 1,215.8 1,268.1 1,303.6 1,378.0
Loss adjustment expense 331.8 356.1 367.3 390.6
Statutory policyholders' surplus 984.9 876.9 660.0 713.6
Percent increase (decrease) over previous year 12.3% 32.9% (7.5)% 5.8%
3
10-Year Compound
1992 1991 1990 1989 1988 1987 Annual Growth
==============================================================================================
$61.2 $103.2 $93.4 $108.1 $133.4 $90.2 0.7%
1.5 2.1 2.2 2.3 2.5 2.1 -16.4%
(4.9) (6.2) (1.0) (1.1) (0.7) (0.3) 22.3%
- ----------------------------------------------------------------------------------------------
57.8 99.1 94.6 109.3 135.2 92.0 0.2%
35.1 9.8 (8.7) (10.5) (14.2) (17.9) 0.4%
- ----------------------------------------------------------------------------------------------
92.9 108.9 85.9 98.8 121.0 74.1 0.3%
4.1 (1.0) (1.8) 2.7 7.0 4.5 -4.5%
1.5 0.0 0.0 0.0 0.0 0.0 0.0%
- ----------------------------------------------------------------------------------------------
98.5 107.9 84.1 101.5 128.0 78.6 0.0%
==============================================================================================
1.70 2.88 2.43 2.53 3.06 2.00 3.2%
0.04 0.06 0.06 0.05 0.06 0.05 -12.9%
(0.14) (0.17) (0.02) (0.02) (0.02) 0 0.0%
- ----------------------------------------------------------------------------------------------
1.60 2.77 2.47 2.56 3.10 2.05 2.8%
0.98 0.27 (0.23) (0.25) (0.32) (0.41) 2.8%
0.12 (0.03) (0.05) 0.06 0.16 0.10 4.1%
0.04 0.00 0.00 0.00 0.00 0.00 0.0%
- ----------------------------------------------------------------------------------------------
2.74 3.01 2.19 2.37 2.94 1.74 2.5%
==============================================================================================
36.0 35.8 38.4 42.8 43.6 45.0 -2.3%
3,760.7 3,531.3 3,252.9 3,145.7 2,922.0 2,682.4 4.6%
825.2 774.5 651.2 775.0 718.5 615.7 6.8%
23.43 21.58 18.19 18.46 16.65 13.93 9.6%
1.34 1.24 1.16 1.04 0.94 0.84 7.9%
8.1% 6.9% 11.5% 10.6% 11.9% 12.0% 0.0%
1,541.5 1,519.3 1,492.1 1,404.5 1,383.6 1,398.2 -0.8%
1,508.5 1,492.3 1,468.4 1,377.6 1,353.2 1,359.6 -0.7%
1,517.6 1,469.1 1,438.0 1,364.2 1,339.6 1,356.6 0.0%
(130.8) (74.5) (79.4) (62.6) (16.3) (39.6)
63.7% 60.4% 61.4% 58.4% 55.2% 56.8% 0.0%
10.8% 10.6% 10.9% 12.1% 11.8% 12.7% 0.0%
33.5% 33.9% 33.0% 33.2% 33.8% 33.4% 0.0%
108.0% 104.9% 105.3% 103.7% 100.8% 102.9% 0.0%
194.6 191.6 176.7 187.7 169.8 156.9 2.5%
5.41 5.34 4.59 4.38 3.89 3.48 5.1%
1.3% 16.3% 4.8% 12.6% 11.8% 12.3% 0.0%
596.1 605.2 582.0 551.6 538.2 524.5 -0.6%
1,309.2 1,216.1 1,148.9 1,061.5 979.3 929.4 4.4%
364.0 350.0 335.1 308.5 273.1 242.0 5.7%
674.2 643.4 465.8 531.6 452.1 442.4 8.1%
4.8% 38.1% (12.4)% 17.6% 2.2% (2.2)% 0.0%
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MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
Net income increased 2.8% for 1996 to $102.5 million or $2.91 per share
while the combined ratio increased by 5.5 points to 109.5%. Losses were
negatively impacted by catastrophes with $62.2 million of catastrophe losses in
1996 versus only $27.3 million in 1995. The underwriting expense ratio was up
slightly due to a decline in premiums written; however, underwriting expenses
actually declined over $3.8 million versus 1995. Net premiums written declined
for the fourth straight year to $1.2 billion. The premium decline is
attributable to the Corporation's continued repositioning strategy where coastal
exposures are reduced, agents with insufficient premium volume are canceled, and
states with poor regulatory or legal environments are avoided. During 1996, 254
agents were canceled accounting for more than $27.1 million in written premium.
The largest decline in premium occurred in the workers' comp line of business
with a 17.9% decline. The largest premium decline in individual states came in
Pennsylvania with a $11.9 million decline. With our repositioning completed, it
is believed that our efforts will be rewarded with overall premium growth in
1997. As a leading indicator, our key agents showed positive growth for 1996.
Net cash used by operations was $20.3 million compared with cash used of
$74.7 million in 1995 and cash generated of $45.7 million in 1994. Investing
activities produced net cash of $119.1 million in 1996, compared with $169.2
million in 1995 and $39.3 million in 1994. Dividend payments were $56.4 million
in 1996 compared with $54.3 million in 1995 and $52.6 million in 1994. Total
cash used for financing activities was $75.4 million in 1996 compared with $85.0
million in 1995 and $86.8 million in 1994. Overall, total cash generated in 1996
was $23.3 million, compared with $9.6 million in 1995 versus net cash used of
$1.8 million in 1994.
The fourth quarter of 1996 yielded a combined ratio of 98.6%, the same
result as the fourth quarter of 1995. The fourth quarter results were especially
encouraging after the heavy catastrophe losses suffered in the first three
quarters of the year.
Branch consolidation continued in 1996 with the number of branches
decreasing from 36 in 1995 to 29 in 1996. The efficiencies that are produced
through these consolidations can be seen in our declining underwriting expenses.
The Corporation expects to close an additional 15 branches in 1997.
In order to evaluate corporate performance relative to shareholders'
expectations, the Corporation calculates a five-year average return on equity.
Net income and unrealized gains and losses on investments are included in the
calculation to derive a total return. A five-year average is used to correspond
to our planning horizon and emphasize consistent long term returns, not
intermediate fluctuations. At December 31, 1996, our five-year average return on
equity was 13.9% down from the 16% calculated at December 31, 1995.
PROPERTY AND CASUALTY
In a continuing effort to maximize the use of technology in our industry,
we expanded our internet applications in 1996. We now quote auto insurance
through the internet in 27 states and have begun to log sales from this
endeavor. In addition to the direct benefits of our internet presence, we
receive collateral sales through increased name recognition. This is just
another part of our continuing efforts at becoming more customer focused. A
significant part of this focus is maximizing the ease and convenience of buying
our product.
In addition to identifying new marketing opportunities, we continue
working to improve customer retention through improved service and better
products thus leading to increased premium income and profitability. This focus
on our policyholders has yielded a policyholder retention of 84.1% in 1996 and
83.1% in 1995. Our goal is to achieve a minimum 85% retention ratio. By
retaining valued customers, the Corporation is able to improve premium volume
while limiting the higher expense associated with new business underwriting.
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Property and casualty operating income was $66.1 million, $1.88 per
share, in 1996 compared with $92.5 million, $2.59 per share, in 1995 and $79.3
million, $2.20 per share in 1994. Catastrophe losses in 1996 totaled $62.2
million compared with $27.3 million in 1995 and $36.6 million in 1994. The
losses in 1996 came from 39 separate catastrophes, primarily winter and spring
storms in the Midwest. Catastrophe losses added 5.1 points to the combined ratio
in 1996 compared with 2.2 points in 1995 and 2.8 points in 1994.
Statutory surplus, a traditional insurance industry measure of strength
and underwriting capacity, was $984.9 million at December 31, 1996 compared with
$876.9 million at December 31, 1995 and $660.0 million at December 31, 1994. The
increases in 1996 and 1995 were due primarily to the unrealized gains in our
investment portfolio.
The ratio of premiums written to statutory surplus has not exceeded 1.7
to 1 for any property and casualty company in The Ohio Casualty Group in any of
the last three years. This ratio is one of the measures used by insurance
regulators to gauge the financial strength of an insurance company and indicates
the ability of the Corporation to grow by writing additional business.
Currently, the Corporation's ratio is 1.2 to 1. Ratios below 3 to 1 generally
indicate additional capacity and financial strength.
The National Association of Insurance Commissioners has developed a "Risk
Based Capital" formula for property and casualty insurers and life insurers. The
formulas are intended to measure the adequacy of an insurer's capital given the
asset structure and product mix of the company. Under the current formulas, all
insurance companies in The Ohio Casualty Group have at least twice the necessary
capital.
PREMIUM DISTRIBUTIONS BY TOP STATES
1996 1995 1994
New Jersey 18.3% 18.1% 16.3%
Ohio 10.2% 9.6% 9.7%
Pennsylvania 9.4% 10.0% 11.0%
Kentucky 7.2% 6.5% 6.4%
Illinois 5.0% 5.1% 4.9%
The premium growth in New Jersey is being driven primarily by the private
passenger auto line of business which grew 11.1% in 1995 and an additional .4%
in 1996. New Jersey requires insurers to write all auto business that meets
underwriting guidelines regardless of risk concentration. Net written premiums
for this state were $221.2 million for 1996.
PREMIUM FINANCE
Premium finance operating income decreased to $.3 million in 1996
compared with $.7 million in 1995 and 1994. Revenues were again down due to
repositioning and the movement away from premium financing to our commercial
lines direct billing system.
COMBINED RATIOS
1996 1995 1994 1993 1992
=================================================================================================
Automobile 109.1% 103.9% 101.9% 103.5% 101.0%
Commercial Multiple Peril, Fire
and Inland Marine 115.0% 105.7% 108.6% 124.2% 118.2%
General Liability 89.1% 105.3% 90.3% 120.6% 83.3%
Workers' Compensation 94.3% 93.7% 87.8% 111.3% 130.0%
Homeowners 135.9% 113.7% 135.7% 118.0% 118.9%
Fidelity and Surety 73.4% 84.5% 72.8% 79.1% 99.0%
- -------------------------------------------------------------------------------------------------
Total 109.5% 104.0% 103.8% 110.3% 108.0%
=================================================================================================
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DISCONTINUED OPERATIONS
During 1995, the Corporation's life operations were discontinued. We
found it increasingly difficult to achieve our targeted 16% rate of return in
this segment of our business. After extensive analysis, it was determined that a
16% return could not be achieved without substantial capital contributions and a
dramatic overhaul of the life operations. Since this was a small segment of our
overall business, it was decided that this would not be a prudent use of our
capital. Therefore, on October 2, 1995, the Corporation signed the final
documents to reinsure the existing blocks of business and enter a marketing
agreement with Great Southern Life Insurance Company. This will provide our
agents and policyholders access to quality life insurance products to meet their
financial needs. The existing blocks of business were reinsured through a 100%
coinsurance arrangement. As of December 31, 1996, $12.9 million of the net
ceding commission from the transaction remains unamortized, compared with $16.7
million unamortized at December 31, 1995. This will be amortized into income
over the expected remaining life of the underlying reinsured policies, in this
case, 14 years. An assumption is scheduled for the second quarter of 1997
whereby Great Southern will legally replace Ohio Life as the primary carrier on
these policies at which time the remaining unamortized gain will be recognized.
Until the assumption takes place, investments are retained in the Ohio Life
Insurance Company to support its primary liability on the reinsured business.
These investments generate ongoing investment income. Once the assumption
occurs, these investments will be freed to support continuing operations. Net
income from discontinued operations amounted to $5.2 million or $.15 per share
in 1996 compared with $4.4 million or $.12 per share in 1995 and $5.9 million or
$.16 per share in 1994.
REINSURANCE
In order to preserve capital and shareholder value, Ohio Casualty
Corporation purchases reinsurance to protect the Corporation against large or
catastrophic losses. Three separate reinsurance programs have been established
to protect the Corporation. The Property Per Risk contract covers Ohio Casualty
in the event that an insured sustains a property loss in excess of $1.0 million
in a single insured event. The Casualty Per Occurrence contract covers the
Corporation in the event that an insured sustains a liability loss in excess of
$1.0 million in a single insured event. On both of these contracts, Ohio
Casualty pays the first $1.0 million in losses. Property reinsurance covers
$15.0 million in excess of the retention. Casualty reinsurance covers $11.0
million in excess of the retention; and workers' compensation reinsurance covers
$74.0 million in excess of the retention. In 1997, the Corporation added two
layers of Workers' Compensation Catastrophe Excess of Loss protection. These
layers provide $51.0 million in additional coverage over the 1996 program.
The Catastrophe Reinsurance contract protects the Corporation against an
accumulation of losses arising from one defined catastrophic occurrence or
series of events. The 1996 program provided $125.0 million coverage in excess of
the Corporation's $25.0 million retention. An additional layer provided $50.0
million in excess of $150.0 million coverage for New Jersey only. The 1997
Catastrophe Program provides $150.0 million coverage in excess of the
Corporation's $25.0 million retention. Total reinsurance protection increased
20% in 1997 due to a larger participation by reinsurers. The New Jersey-only
layer was non-renewed for the 1997 program. Over the last twenty years, there
were two events that triggered coverage under our catastrophe contract. Losses
and loss adjustment expenses from the Oakland Fires in 1991 and Hurricane Andrew
in 1992 totaled $31.4 million and $28.9 million, respectively. Both of these
losses exceeded our prior retention amount of $13.0 million. The Corporation
recovered $29.5 million from reinsurers as a result of these events. Our
reinsurance limits are designed to cover our exposure to an event expected to
occur once every 300 years.
Since the Corporation's reinsurance protection is an important component
in our financial plan, we closely monitor the financial health of each of our
reinsurers. Annually, financial statements are reviewed and various ratios
calculated to identify reinsurers who have ceased to meet our
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high standards of financial strength. If any reinsurers fail these tests, they
are removed from the program at renewal.
LOSS AND LOSS ADJUSTMENT EXPENSES
The Corporation's largest liabilities are the reserves for losses and
loss adjustment expenses. Loss and loss adjustment expense reserves are
established for all incurred claims and are carried on an undiscounted basis
before any credits for reinsurance recoverable. These reserves amounted to $1.6
billion at December 31, 1996 and 1995 compared with $1.7 billion at December 31,
1994. As claims are paid, the related reserves are closed and any under- or
over-estimation of the claim reserve is closed to net income at that time.
In 1996, the Corporation continued the use of an 800 number for direct
reporting of claims. The percentage of all claims handled by direct reporting
was approximately 50% in 1996. This was almost two-thirds more than was handled
by direct reporting in 1995. The Corporation routinely receives positive
feedback on this option from our policyholders.
In recent years, environmental liability claims have expanded greatly in
the insurance industry. Fortunately, Ohio Casualty has a substantially different
mix of business than the industry. We have historically written small commercial
accounts, and have not attracted significant manufacturing liability coverage.
As a result, our environmental liability claims are substantially below the
industry average. Our liability business reflected our current mix of
approximately 67% contractors, 14% building/premises, 14% mercantile and only 5%
manufacturers. Within the manufacturing category, we have concentrated on the
light manufacturers which further limits our exposure to environmental claims.
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, an
additional $27.4 million in reserves was identified as asbestos and
environmental related. Based on this examination, an estimated liability of
$41.0 million was carried at year end 1996. Of this, reserves on known claims
totaled $13.6 million at year end 1996 compared with $14.4 million and $10.4
million at year end 1995 and 1994, respectively. Approximately $5.2 million in
reserves are for asbestos claims. The remainder are primarily for pre-1985
pollution claims. These loss estimates are based on the currently available
information. However, given the expansion of coverage and liability by the
courts and legislatures, there is some uncertainty as to the ultimate liability.
The Corporation's insurance subsidiaries changed their pollution exclusion
policy language between 1985 and 1987 to effectively eliminate these coverages.
CALIFORNIA WITHDRAWAL
On June 15, 1992, the Corporation announced its intention to withdraw its
business operations from California due to the lack of profitability and the
difficult regulatory environment. In December 1992, the Corporation stopped
writing business in California and filed a withdrawal plan with the California
Department of Insurance.
Under the terms of the plan, The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, and West American Insurance Company would withdraw
from California, leaving American Fire and Casualty Company licensed to wind
down the affairs of the Group. Also, the plan required the withdrawing companies
to transfer their California liabilities to American Fire and Casualty Company
along with assets to secure those liabilities. In April 1995, the California
Department of Insurance gave final approval for withdrawal and the Corporation
implemented the withdrawal plan.
Proposition 103 was passed in the State of California in 1988 in an
attempt to legislate premium rates for that state. Based on previous statements
by the California Department of Insurance and the Corporation's lack of
profitability in the state, it was concluded that no significant liability for
premium rollbacks existed. However, at the end of 1994, and again in 1995, the
State of California billed the Corporation for varying amounts. To date, the
Corporation has received three billings and one set of written testimony from
the State, each asserting a different liability.
8
The most current indication of the State's position is the filed written
testimony of the State's expert witness indicating the Corporation should not be
required to pay in excess of $42.1 million plus interest as a Proposition 103
assessment. Our current reserve of $74.4 million is based on this testimony. We
made no additions to reserves for principal amounts in 1996; however, we
continue to accrue interest on the assessed liability. Reserving for this
alleged liability negatively impacted net income by $2.7 million or $.08 per
share in 1996, $14.9 million or $.42 per share in 1995 and $30.7 million or $.85
per share in 1994.
The Corporation is currently involved in Proposition 103 hearings with
the State of California. The final arguments are expected to conclude in the
first quarter of 1997. A ruling from the Administrative Law Judge is expected in
the second quarter of 1997. At that time the Insurance Commissioner will have 60
days to take the ruling under advisement and return with his 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
ultimately be resolved.
INVESTMENTS
Consolidated pre-tax investment income from continuing operations
decreased 2.5% to $183.3 million in 1996 compared with $188.1 million in 1995
and $185.7 million in 1994. Of greater importance, after-tax investment income
totaled $138.6 million in 1996 compared with $138.4 million in 1995 and $142.5
million in 1994. Pre-tax and after-tax investment income comparisons versus 1995
are impacted by an increased exposure to municipal bonds in 1996. Investment
income growth over the past few years has been impacted by negative cash flow
from underwriting activities, a decline in average portfolio yields and the sale
of our life insurance subsidiary. The negative cash flow from underwriting
activities has been precipitated by our strategic repositioning. Cash flow also
continues to be impacted by our share repurchase program.
At year end 1996, consolidated investments had a carrying value of $3.1
billion. The excess of market value over cost was $499.7 million, compared with
a $465.9 million excess at year end 1995 and $105.4 million at year end 1994.
The increase in the excess of market value over cost in 1996 was attributable to
the strong performance of our equity portfolio, offset somewhat by a decline in
the value of our fixed income portfolios. After-tax realized investment gains
from continuing operations amounted to $32.3 million in 1996 compared with $4.0
million in 1995 and $14.2 million in 1994.
We continue 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, 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
variable rate loan. As of December 31, 1996, Ohio Casualty maintained a $446.9
million mortgage-backed securities portfolio compared with $403.1 million at
December 31, 1995. The majority of our mortgage-backed securities holdings are
less volatile planned amortization class, sequential structures and agency
pass-through securities. $27.0 million of this portfolio is invested in more
volatile bond classes (e.g. interest-only, super-floaters, inverses).
Ohio Casualty's fixed income strategy has been to maintain a portfolio
with a laddered maturity structure and an intermediate duration. We believe that
our portfolio composition and duration continue to be appropriate for our
insurance business. Further, we do not try to time the financial markets.
Instead, we believe it prudent to remain fully invested at all times, subject
only to our liquidity needs.
Tax exempt bonds were 34.4% of the fixed income portfolio at year end
1996 versus 37.3% at December 31, 1995. Although the year over year comparison
reflects a decreased exposure to municipals, our average exposure throughout the
year was substantially higher than it was in 1995. This higher average exposure
reflects our internal tax planning strategy as well as our belief that, coming
into 1996, municipals were attractive relative to taxable bond alternatives. As
9
1996 unfolded and underwriting results were factored into our tax planning
strategy, the municipal portfolio was reduced accordingly.
Our commitment to a diversified, growth-oriented equity portfolio remains
unchanged. Equity investments have increased as a percentage of our consolidated
portfolio from 21.4% in 1995 to 23.5% at year end 1996. This increase is
entirely attributable to market appreciation of existing investments as opposed
to commitment of new funds. In fact, no new funds have been allocated to
equities in the last two years.
In 1994, the Corporation implemented SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement requires the
classification of security investments into three categories: held to maturity,
trading and available for sale. In order to maintain the ability to actively
manage our fixed income portfolios, the Corporation has elected to place all of
our fixed income holdings in the available-for-sale category. Therefore, all of
our bond investments are now valued at market for balance sheet purposes.
During 1996, Ohio Casualty Corporation purchased 264,600 shares of its
common stock at a cost of $9.2 million compared with 613,900 shares for $20.9
million in 1995. The Corporation is currently authorized to repurchase 2.1
million additional shares of its common stock to be held as treasury shares for
stock options or other general corporate purposes. Since the beginning of 1987,
we have repurchased 10.7 million shares at an average cost of $22 per share. We
believe that when the market value of our stock fails to reflect the prospects
of our operations, repurchasing shares is a prudent use of our capital. In the
future, we intend to continue repurchasing shares when doing so makes economic
sense for the Corporation and its shareholders.
YEAR 2000
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.
10
OHIO CASUALTY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31 (in thousands) 1996 1995 1994
========================================================================================================
ASSETS
Investments:
Fixed maturities - available for sale, at fair value $2,310,938 $2,407,853 $2,509,961
(Cost: $2,225,517; $2,276,150; $2,586,687)
Equity securities, at fair value 721,152 661,154 520,025
(Cost: $306,865; $326,999; $337,814)
Short-term investments at cost 41,546 14,399 13,550
- --------------------------------------------------------------------------------------------------------
Total investments 3,073,636 3,083,406 3,043,536
Cash 20,078 23,883 15,106
Premiums and other receivables 186,676 196,175 199,167
Deferred policy acquisition costs 116,684 119,795 165,633
Property and equipment 42,239 43,846 35,404
Reinsurance recoverable 362,683 446,167 87,748
Deferred income taxes 0 0 118,370
Other assets 87,985 66,870 73,992
- --------------------------------------------------------------------------------------------------------
Total assets $3,889,981 $3,980,142 $3,738,956
========================================================================================================
LIABILITIES
Insurance reserves:
Unearned premiums $491,613 $506,035 $518,075
Losses 1,224,873 1,275,077 1,304,514
Loss adjustment expenses 331,797 356,107 367,309
Future policy benefits 280,002 360,074 352,400
Note payable 50,000 60,000 70,000
California Proposition 103 reserve 74,376 70,167 47,278
Deferred income taxes 27,993 2,112 0
Other liabilities 234,227 239,556 228,590
- --------------------------------------------------------------------------------------------------------
Total liabilities 2,714,881 2,869,128 2,888,166
- --------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
(see Notes 1 and 8)
SHAREHOLDERS' EQUITY
Common stock, $.125 par value 5,850 5,850 5,850
Authorized: 150,000,000 shares
Issued shares: 46,803,872 (See Note 16)
Additional paid-in capital 3,603 3,422 3,271
Unrealized gain on investments, net of applicable
income taxes 332,042 305,049 69,610
Retained earnings 1,076,545 1,030,468 985,068
Treasury stock, at cost
(Shares: 11,662,559; 11,407,745; 10,810,616) (242,940) (233,775) (213,009)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,175,100 1,111,014 850,790
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,889,981 $3,980,142 $3,738,956
========================================================================================================
See notes to consolidated financial statements
11
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
Year ended December 31 (in thousands) 1996 1995 1994
=================================================================================================================
Premiums and finance charges earned $1,226,651 $1,268,269 $1,298,861
Investment income less expenses 183,308 188,107 185,708
Investment gains realized, net 49,672 6,096 21,894
- -----------------------------------------------------------------------------------------------------------------
Total income 1,459,631 1,462,472 1,506,463
- -----------------------------------------------------------------------------------------------------------------
Losses and benefits for policyholders 812,234 774,282 799,295
Loss adjustment expenses 118,354 128,099 130,100
General operating expenses 100,939 89,970 82,418
Amortization of deferred policy
acquisition costs 308,856 327,055 338,046
California Proposition 103 reserve,
including interest 4,210 22,889 47,278
- -----------------------------------------------------------------------------------------------------------------
Total expenses 1,344,593 1,342,295 1,397,137
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 115,038 120,177 109,326
Income taxes
Current 10,173 23,514 26,948
Deferred 7,637 1,300 (8,936)
- -----------------------------------------------------------------------------------------------------------------
Total income taxes 17,810 24,814 18,012
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting changes & discontinued
operations 97,228 95,363 91,314
Income from discontinued operations
net of taxes of $2,663, $4,345 and
$1,636 (see Note 17) 5,229 4,372 5,896
Cumulative effect of accounting changes
(see Notes 1B and 6) 0 0 (319)
- -----------------------------------------------------------------------------------------------------------------
Net income $102,457 $99,735 $96,891
=================================================================================================================
Average shares outstanding 35,247 35,750 36,033
Earnings per share:
Income before effect of accounting changes
& discontinued operations $2.76 $2.67 $2.54
Income from discontinued operations 0.15 0.12 0.16
Cumulative effect of accounting changes 0.00 0.00 (0.01)
- -----------------------------------------------------------------------------------------------------------------
Net income per share $2.91 $2.79 $2.69
=================================================================================================================
See notes to consolidated financial statements
12
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
Additional Unrealized Total
Common paid-in gain (loss) Retained Treasury shareholders'
stock capital on investments earnings stock equity
=========================================================================================================================
(in thousands)
Balance, January 1, 1994 $2,925 $6,185 $124,284 $940,774 ($211,830) $862,338
Cumulative effect of
accounting change, net
of applicable taxes 116,144 116,144
Unrealized loss (262,117) (262,117)
Deferred income tax on
net unrealized loss 91,299 91,299
Net issuance of treasury
stock under stock option
plan and by charitable
donation (13,232 shares) 11 233 244
Repurchase of treasury
stock (50,000 shares) (1,412) (1,412)
Net income 96,891 96,891
Cash dividends paid
($1.46 per share) (52,597) (52,597)
Stock split (April 22, 1994) 2,925 (2,925) 0
- -------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1994 $5,850 $3,271 $69,610 $985,068 ($213,009) $850,790
Unrealized gain 360,372 360,372
Deferred income tax on
net unrealized gain (124,933) (124,933)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (16,771 shares) 151 427 578
Repurchase of treasury
stock (613,900 shares) (21,193) (21,193)
Net income 99,735 99,735
Cash dividends paid
($1.52 per share) (54,335) (54,335)
- -------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 $5,850 $3,422 $305,049 $1,030,468 ($233,775) $1,111,014
Unrealized gain 40,297 40,297
Deferred income tax on
net unrealized gain (13,304) (13,304)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (9,786 shares) 181 3 184
Repurchase of treasury
stock (264,600 shares) (9,168) (9,168)
Net income 102,457 102,457
Cash dividends paid
($1.60 per share) (56,380) (56,380)
- -------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 $5,850 $3,603 $332,042 $1,076,545 ($242,940) $1,175,100
=========================================================================================================================
See notes to consolidated financial statements
13
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
Year ended December 31 (in thousands) 1996 1995 1994
================================================================================================================================
Cash flows from:
Operations
Net income $102,457 $99,735 $96,891
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves (169,006) 116,397 (75,586)
Income taxes 8,238 (7,157) 557
Premiums and other receivables 9,500 2,993 1,519
Deferred policy acquisition costs 3,111 45,838 3,201
Reinsurance recoverable 83,484 (358,418) 6,326
Other assets (5,613) (11,387) (12,408)
Other liabilities (18,442) 14,577 (10,257)
California Proposition 103 reserves 4,209 21,353 47,278
Depreciation and amortization 12,388 12,600 11,123
Investment (gains) losses (50,674) (11,199) (23,225)
Cumulative effect of accounting changes 0 0 319
- --------------------------------------------------------------------------------------------------------------------------------
Net cash from operations (20,348) (74,668) 45,738
- --------------------------------------------------------------------------------------------------------------------------------
Investing
Purchase of securities:
Fixed income securities - available for sale (539,690) (944,077) (821,413)
Equity securities (74,243) (86,517) (116,852)
Proceeds from sales:
Fixed income securities - available for sale 501,394 929,890 699,383
Equity securities 122,970 89,771 83,226
Proceeds from maturities and calls:
Fixed income securities - available for sale 101,970 132,572 165,835
Equity securities 6,702 47,605 29,078
- --------------------------------------------------------------------------------------------------------------------------------
Net cash from investments 119,103 169,244 39,257
- --------------------------------------------------------------------------------------------------------------------------------
Financing
Note payable repayment (10,000) (10,000) (33,000)
Proceeds from exercise of stock options 135 578 244
Purchase of treasury stock (9,168) (21,193) (1,412)
Dividends paid to shareholders (56,380) (54,335) (52,597)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activity (75,413) (84,950) (86,765)
- --------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 23,342 9,626 (1,770)
Cash and cash equivalents, beginning of year 38,282 28,656 30,426
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $61,624 $38,282 $28,656
================================================================================================================================
See notes to consolidated financial statements
14
OHIO CASUALTY CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
A. The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles and include the accounts of Ohio
Casualty Corporation and its subsidiaries. All significant inter-company
transactions have been eliminated. All dollar amounts except share and per
share data are in thousands of dollars.
B. Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under the provisions of SFAS No. 115 investment securities should
be classified upon acquisition into one of the following categories:
(1) held to maturity securities
(2) trading securities
(3) available for sale securities
Available for sale securities are those securities that would be available
to be sold in the future in response to liquidity needs, changes in market
interest rates, and asset-liability management strategies, among others.
Available for sale securities are reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of deferred tax. Equity securities are carried at
quoted market values and include non-redeemable preferred stocks and common
stocks. Fair values of fixed maturities and equity securities are determined on
the basis of dealer or market quotations or comparable securities on which
quotations are available.
Prior to adoption of SFAS No. 115, securities purchased, where the
Corporation had both the intent and ability to hold to maturity, were recorded
at cost adjusted for accumulated amortization of premium and accretion of
discount. Securities purchased for trading purposes are immaterial and are not
presented separately in the Income Statement and the Balance Sheet.
As of January 1, 1994, the majority of fixed maturity investments,
including bonds, notes and redeemable preferred stock, were reclassified as
"available for sale". This necessitated them being marked to market. This
accounting change resulted in an increase to shareholders' equity of $116,100
net of tax as of January 1, 1994 and had an immaterial effect on net income.
Short-term investments include commercial paper and notes with original
maturities of 90 days or less and are stated at cost or amortized cost which
approximates market. Short-term investments are deemed to be cash equivalents.
Realized gains or losses on disposition of investments are determined on
the basis of specific cost of investments.
C. Property and casualty insurance premiums are earned principally on a monthly
pro rata basis over the term of the policy; the premiums applicable to the
unexpired terms of the policies are included in unearned premium reserve.
D. Acquisition costs incurred at policy issuance net of applicable ceding
commissions are deferred and amortized over the term of the policy for property
and casualty insurance, over the estimated life in proportion to future profits
of universal life type contracts and over the estimated premium paying period
for other life insurance contracts. Deferred policy acquisition costs are
reviewed to determine that they do not exceed recoverable amounts, including
anticipated investment income.
E. Liabilities for future policy benefits are computed based on contract terms
and issue date using interest rates ranging from 4% to 8 3/4%, select and
ultimate mortality experience and industry withdrawal experience. Interest rates
on $230,843 of such liabilities in 1996, $293,732 in 1995 and $287,190 in 1994
are periodically adjusted based on market conditions. Fair value is determined
by discounting cash flows at current market interest rates.
F. Deferred income taxes result from temporary differences between financial and
taxable income.
G. Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed principally on the straight-line method over the
estimated lives of the assets.
H. The Corporation's primary products consist of insurance for: personal auto,
commercial property, homeowners, workers' compensation and other miscellaneous
lines. Ohio Casualty operates through the independent agency system in 38
states. Of net premiums written, approximately 18.3% was generated in the State
of New Jersey, 10.2% in Ohio and 9.4% in Pennsylvania. The insurance industry is
subject to heavy regulation that differs by state. A dramatic change in
regulation in a given state may have a material adverse impact on the
Corporation.
I. Net income per share of common stock is based on the weighted average number
of shares outstanding during the period. Dilution arising from stock options is
insignificant.
J. The Corporation is dependent on dividend payments from its insurance
subsidiaries in order to meet operating expenses and to pay dividends. Insurance
regulatory authorities impose various restrictions and prior approval
requirements on the payment of dividends by insurance companies and holding
companies. At December 31, 1996, approximately $123,360 of retained earnings are
not subject to restriction or prior dividend approval requirements.
K. The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2 -- INVESTMENTS
Investment income is summarized as follows:
15
1996 1995 1994
-------- -------- --------
Investment income from:
Fixed maturities $176,160 $177,621 $176,975
Equity securities 14,135 14,721 13,868
Short-term securities 2,129 3,096 1,852
-------- -------- --------
Total investment income 192,424 195,438 192,695
Investment expenses 9,116 7,331 6,987
-------- -------- --------
Net investment income $183,308 $188,107 $185,708
======== ======== ========
Realized and unrealized gains (losses) on investments in securities are
summarized as follows:
1996 1995 1994
-------- --------- ---------
Realized gains (losses):
Fixed maturities $ 4,567 $ (8,104) $ 8,406
Equity securities 41,278 16,913 9,268
Other investments 3,827 (2,713) 4,220
------- --------- --------
$49,672 $ 6,096 $ 21,894
======= ========= ========
Unrealized gains (losses):
Securities $ 40,297 $ 360,372 $(262,117)
Deferred tax (13,304) (124,933) 91,299
Cumulative effect of
accounting changes 0 0 116,144
-------- --------- ---------
$ 26,993 $ 235,439 $ (54,674)
======== ========= =========
The amortized cost and estimated market values of investments in debt and
equity securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1996
- ---------------------------------------- ---------- ---------- ---------
Securities available
for sale:
U.S. Government $ 80,822 $ 2,101 $ (382) $ 82,541
States, municipalities
and political
subdivisions 760,602 34,966 (1,029) 794,539
Debt securities
issued by foreign
governments 3,000 296 0 3,296
Corporate securities 940,540 50,126 (7,008) 983,658
Mortgage-backed
securities:
U.S. Government Agency 171,291 12,992 (7,377) 176,906
Other 269,262 14,274 (13,538) 269,998
---------- ---------- ---------- ----------
Total fixed
maturities 2,225,517 114,755 (29,334) 2,310,938
Equity securities 306,865 425,022 (10,735) 721,152
Short-term investments 41,546 0 0 41,546
---------- ---------- ---------- ----------
Total securities,
available for sale $2,573,928 $ 539,777 $ (40,069) $3,073,636
========== ========== ========== ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1995
- ----------------------------------------- ---------- ---------- ---------
Securities available
for sale:
U.S. Government $ 110,628 $ 5,864 $ (5) $ 116,487
States, municipalities
and political
subdivisions 845,729 52,796 (59) 898,466
Debt securities
issued by foreign
governments 3,000 423 0 3,423
Corporate securities 927,375 66,309 (7,285) 986,398
Mortgage-backed
securities:
U.S. Government
Agency 168,219 7,556 (5,581) 170,193
Other 221,199 18,281 (6,594) 232,886
---------- ---------- ---------- ----------
Total fixed maturities 2,276,150 151,229 (19,524) 2,407,853
Equity securities 326,999 336,130 (1,974) 661,154
Short-term investments 14,399 0 0 14,399
---------- ---------- ---------- ----------
Total securities,
available for sale $2,617,548 $ 487,359 $ (21,498) $3,083,406
========== ========== ========== ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1994 Cost Gains Losses Value
- ----------------------------------------- ---------- ---------- ----------
Securities available
for sale:
U.S. Government $ 89,565 $ 313 $ (1,838) $ 88,040
States, municipalities
and political subdivisions 678,915 23,366 (7,961) 694,320
Debt securities issued by
foreign governments 39,379 188 (1,502) 38,065
Corporate securities 1,140,432 6,904 (55,398) 1,091,938
Mortgage-backed
securities:
U.S. Government
Agency 397,486 1,540 (27,135) 371,891
Other 240,910 59 (15,262) 225,707
---------- ---------- --------- ----------
Total fixed maturities 2,586,687 32,370 (109,096) 2,509,961
Equity securities 337,814 202,501 (20,290) 520,025
Short-term investments 13,550 0 0 13,550
---------- ---------- --------- ----------
Total securities,
available for sale $2,938,051 $ 234,871 $(129,386) $3,043,536
========== ========== ========= ==========
The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
----------- ------------
Due in one year or less $ 19,370 $ 19,740
Due after one year through five years 345,289 357,874
Due after five years through ten years 797,209 834,372
Due after ten years 623,096 652,048
Mortgage-backed securities:
U.S. Government Agency 171,291 176,906
Other 269,262 269,998
========== ==========
Total fixed maturities $2,225,517 $2,310,938
========== ==========
Certain securities were determined to have other than temporary declines in
book value and were written down through realized investment losses. Total
write-downs were $19,456, $26,290 and $19,030 as of 1996, 1995 and 1994,
respectively, representing a reduction in value of $7,055, $9,696 and $6,910 on
fixed maturities and $12,401, $16,595 and $12,120 on equity securities.
Proceeds from maturities and sales of investments in debt securities during
1996, 1995 and 1994 were $603,364, $1,062,462 and $865,218, respectively. Gross
gains of $14,257, $20,834 and $21,694 and gross losses of $10,388, $24,500 and
$13,276 were realized on those maturities and sales in 1996, 1995 and 1994,
respectively.
Covered call options are written on stocks and bonds in the investment
portfolio. As a writer of options, a premium is received at the outset with the
risk of losing the appreciation if the price of the underlying financial
instrument rises above the option strike price. There were no options on stock
outstanding at December 31, 1996 or 1994. The outstanding stock options for 1995
were $1,125. There were no options on bonds outstanding at December 31, 1996,
1995 or 1994.
Market values of securities can fluctuate greatly in the near term based on
such factors as: interest rates, unemployment rates, inflation, monetary policy
and general economic conditions.
16
NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Corporation's financial instruments:
Carrying Fair
1996 Amount Value
-------- ----------
Assets
Cash And Cash Equivalents $ 61,624 $ 61,624
Securities - Available For Sale 3,032,090 3,032,090
Liabilities
Future Policy Benefits $ 280,002 $ 280,002
Long-term Debt 50,000 50,000
Carrying Fair
1995 Amount Value
----------- ----------
Assets
Cash and cash equivalents $ 38,282 $ 38,282
Securities - available for sale 3,069,007 3,069,007
Liabilities
Future policy benefits $ 360,074 $ 360,074
Long-term debt 60,000 60,000
Carrying Fair
1994 Amount Value
----------- ----------
Assets
Cash and cash equivalents $ 28,656 $ 28,656
Securities - available for sale 3,029,986 3,029,986
Liabilities
Future policy benefits $ 352,400 $ 352,400
Long-term debt 70,000 70,000
See footnote 1 for disclosure related to fair value determination.
NOTE 4 -- DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are summarized as follows:
1996 1995 1994
--------- --------- ---------
Deferred, January 1 $ 119,795 $ 165,633 $ 168,835
--------- --------- ---------
Additions:
Commissions and brokerage 190,461 204,594 212,878
Salaries and employee benefits 47,092 43,867 49,937
Other 66,143 73,090 75,659
--------- --------- ---------
Deferral of expense 303,696 321,551 338,474
--------- --------- ---------
Amortization to expense
Discontinued operations (2,050) 40,333 3,630
Continuing operations 308,856 327,055 338,046
--------- --------- ---------
Deferred, December 31 $ 116,685 $ 119,795 $ 165,633
========= ========= =========
The above schedule includes deferred policy acquisition costs (net of
unamortized ceding commission) for discontinued life insurance operations of
$(11,486), $(13,535) and $24,749 as of 1996, 1995 and 1994, respectively. See
Note 17 for additional information regarding discontinued operations.
NOTE 5 -- INCOME TAX
The effective income tax rate is less than the statutory corporate tax rate of
35% for 1996, 1995 and 1994 for the following reasons:
1996 1995 1994
---------- ---------- ----------
Tax at statutory rate $ 40,263 $42,062 $38,264
Tax exempt interest (18,367) (16,150) (17,282)
Dividends received deduction
(DRD) (4,056) (3,446) (3,472)
Proration of DRD and tax
exempt interest 3,017 3,319 9,544
Reduction in provision for
audit issues (3,000) 0 (9,000)
Miscellaneous (47) (971) (42)
-------- ------- -------
Actual Tax $ 17,810 $24,814 $18,012
======== ======= =======
Tax years 1990 through 1992 are being examined by The Internal Revenue
Service. Management believes there will not be a significant impact on the
financial position or results of operations of the Corporation as a result of
this audit.
The components of the net deferred tax asset (liability) were as follows:
1996 1995 1994
---------- ---------- ----------
Unearned premium proration $ 33,833 $ 34,823 $ 35,805
Accrued expenses 59,217 64,658 54,667
Postretirement benefits 27,355 26,331 25,118
Discounted loss and loss
expense reserves 81,350 88,589 95,295
--------- --------- -------
Total deferred tax assets 201,755 214,401 210,885
Deferred policy acquisition
costs (51,129) (53,616) (55,363)
Unrealized gains on
investments (178,619) (162,897) (37,152)
--------- --------- -------
Total deferred tax
liabilities (229,748) (216,513) (92,515)
--------- --------- -------
Net deferred tax asset
(liability) $ (27,993) $ (2,112) $118,370
========= ========= ========
Taxes paid amounted to $16,336 in 1996, $37,346 in 1995 and $17,886 in
1994. Although realization of deferred assets is not assured, estimates indicate
that current levels of taxable income will comfortably support the realization
of the net deferred tax asset in future years. As such, no valuation allowance
has been recorded. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
are reduced.
NOTE 6 -- EMPLOYEE BENEFITS
The Corporation has a non-contributory defined benefit retirement plan and
contributory health care, life and disability insurance and savings plans
covering substantially all employees. Benefit expenses are as follows:
1996 1995 1994
---------- ---------- ----------
Employee benefit costs:
Retirement $ (136) $ (1,689) $ (731)
Health care 14,415 13,339 15,517
Life and disability
insurance 555 594 740
Savings plan 2,489 2,586 2,685
-------- ------- -------
$ 17,323 $14,830 $18,211
======== ======= =======
The pension benefit is determined as follows:
17
1996 1995 1994
-------- -------- ---------
Service cost/(benefit)
earned during the year $ 6,256 $ 5,701 $ 6,077
Interest cost on projected
benefit obligation 13,927 13,262 12,404
Actual return on plan assets (19,070) (34,448) (3,785)
Amortization of
unrecognized net asset
existing at January 1 (1,249) 13,796 (15,427)
-------- -------- --------
Net pension benefit $ (136) $ (1,689) $ (731)
======== ======== ========
Pension plan funding at December 31:
1996 1995 1994
---------- ---------- ----------
Plan assets at fair value
(primarily fixed income
and equity securities) $ 225,681 $ 217,274 $ 193,010
--------- --------- ---------
Plan benefit obligations:
Vested benefits 160,667 157,371 141,353
Non-vested benefits 2,780 3,046 2,710
Future benefits due to
salary increases 34,091 30,591 26,685
--------- --------- ---------
Total 197,538 191,008 170,748
--------- --------- ---------
Excess plan assets over
obligations $ 28,143 $ 26,266 $ 22,262
========= ========= =========
Unrecognized net gain (loss) $ 1,617 $ (3,082) $ (8,356)
Unrecognized net assets 18,102 21,119 24,136
Unrecognized prior service cost (566) (624) (683)
Expected long-term return
on plan assets 8.75% 8.50% 9.00%
Discount rate on plan
benefit obligations 7.75% 7.50% 8.00%
Expected future rate of
salary increases 5.25% 5.25% 5.75%
Pension benefits are based on service years and average compensation using
the five highest consecutive years of earnings in the last decade of employment.
The pension plan measurement date is October 1 for 1996 and 1995 and December 31
for 1994. The measurement date was changed in 1995 to allow for more timely
actuarial calculations. The maximum pension expense deductible for income tax
purposes has been funded. Plan assets at December 31, 1996 include $29,899 of
the Corporation's common stock at market value.
Employee contributions to the health care plan have been established as a
flat dollar amount with periodic adjustments as determined by the Corporation.
The health care plan is unfunded.
Accrued postretirement benefit liability at December 31:
1996 1995 1994
---------- ---------- ----------
Accumulated postretirement
benefit obligation $(71,797) $(71,519) $(72,695)
Unrecognized net loss(gain) (6,203) (2,481) 695
-------- -------- --------
Accrued postretirement
benefit liability $(78,000) $(74,000) $(72,000)
======== ======== ========
Postretirement benefit cost at December 31:
1996 1995 1994
---------- ---------- ----------
Service cost $1,967 $1,883 $2,423
Interest cost 5,412 5,144 5,368
Amortization of loss 0 0 45
------ ------ ------
Net periodic postretirement
benefit cost $7,379 $7,027 $7,836
====== ====== ======
Postretirement benefit rate assumptions at December 31:
1996 1995 1994
------ ------ -------
Medical trend rate 9% 10% 11%
Dental trend rate 7% 8% 9%
Ultimate health care trend rate 5% 5% 5%
Discount rate 7.75% 8.0% 7.25%
The postretirement plan measurement date is October 1 for 1996 and 1995
and December 31 for 1994. The measurement date was changed in 1995 to allow for
more timely actuarial calculations.
Increasing the assumed health care cost trend by 1 percentage point in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by approximately $9,491 and increase the postretirement
benefit cost for 1996 by $1,685.
In 1994 the Corporation's health care plan was changed from an indemnity
plan to a predominately managed care plan. Retired employees continue to be
eligible to participate in the health care and life insurance plans. Benefit
costs are accrued based on actuarial projections of future payments. There are
currently 3,156 active employees and 1,335 retired employees covered by these
plans.
Employees may contribute a percentage of their compensation to a savings
plan. A portion of employee contributions is matched by the Corporation and
invested in Corporation stock purchased on the open market by trustees of the
plan.
In the first quarter of 1994, the Corporation adopted the provisions of
SFAS 112, "Employers Accounting for Post-Employment Benefits". The effect of
this accounting change in 1994 was a $644 after-tax reduction in net income.
NOTE 7 - STOCK OPTIONS
The Corporation is authorized under provisions of the 1993 Stock Incentive
Programs to grant options to purchase 1,293,500 shares of the Corporation's
common stock to key executive employees and directors at a price not less than
the fair market value of the shares on dates the options are granted. The
options granted may be either "Incentive Stock Options" or "Nonqualified Stock
Options" as defined by the Internal Revenue Code; the difference in the option
plans affects treatment of the options for income tax purposes by the individual
employee and the Corporation. The options are non-transferable and exercisable
at any time after the vesting requirements are met. Option expiration dates are
five and ten years from the grant date. Options vest at 100% six months from the
grant date or at 33% per year for three consecutive years from the date of the
grant. At December 31, 1996, 1,115,500 remaining options may be granted.
In addition, the 1993 Stock Incentive Program provides for the grant of
Stock Appreciation Rights in tandem with the stock options. Stock Appreciation
Rights provide the recipient with the right to receive payment in cash or stock
equal to appreciation in value of the optioned stock from the date of grant in
lieu of exercise of the stock options held.
The Corporation continues to elect APB 25 for recognition of stock-based
compensation expense. However, under the provision of FAS 123 the Corporation is
required to estimate on the date of grant the fair value of each option using an
option-pricing model. Accordingly, the Black-Scholes option pricing model is
used with the following weighted-average assumptions for 1996 and 1995,
respectively: dividend yield of 4.5% for both years, expected volatility of
25.3% for both years, risk free interest rate of 6.34% and 6.20%, and
18
expected life of 8 years for both years. The following table summarizes
information about the stock-based compensation plan as of December 31, 1996 and
1995, and changes that occurred during the year:
1996 1995
-------------------- ----------------------
Shares Weighted-Avg Shares Weighted-Avg
(000) Exercise Price (000) Exercise Price
Outstanding beginning
of year 74 $30.02 91 $28.71
Granted 127 34.93 12 30.50
Exercised (28) 28.75 (29) 26.11
---- ---
Outstanding end of year 173 $33.84 74 $30.02
==== ===
Options exercisable at
year-end 52 74
Weighted-Avg fair
value of options granted
during the year $8.14 $7.02
At year end 1996, 172,500 options were outstanding with an average
remaining contractual life of 8.49 years and at a weighted exercise price of
$33.8409. Of the amount outstanding, 51,500 were exercisable with a weighted
average exercise price of $31.2342. At year end 1995, 73,800 options were
outstanding with an average remaining contractual life of 5.81 years and at a
weighted exercise price of $30.0167. Of the amount outstanding, 73,800 were
exercisable with a weighted average exercise price of $30.0167.
Had the Corporation adopted FAS 123, the amount of compensation expense
that would have been recognized in 1996 and 1995, respectively, would be $350
and $84. The Corporation's net income and earnings per share would have been
reduced to the pro forma amounts disclosed below:
1996 1995
-------- -------
Net Income As Reported: $102,457 $99,735
Pro Forma: $102,229 $99,680
Primary Earnings per share As Reported: $2.91 $2.79
Pro Forma: $2.90 $2.79
NOTE 8 -- REINSURANCE AND OTHER CONTINGENCIES
In the normal course of business, the Corporation seeks to reduce the loss that
may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk with other insurers or reinsurers.
In the event that such reinsuring companies might be unable at some future date
to meet their obligations under the reinsurance agreements in force, the
Corporation would continue to have primary liability to policyholders for losses
incurred. The following amounts are reflected in the financial statements as a
result of reinsurance ceded:
1996 1995 1994
---------- ---------- ----------
Premiums earned $30,534 $41,012 $45,133
Losses incurred 11,846 22,030 8,727
Reserve for unearned premiums 8,062 8,294 6,274
Reserve for losses 61,205 62,847 54,727
Reserve for future policy
benefits 280,002 360,074 6,825
Reserve for loss adjustment
expenses 8,833 11,272 10,609
Annuities are purchased from other insurers to pay certain claim
settlements; should such insurers be unable to meet their obligations under the
annuity contracts, the Corporation would be liable to claimants for the
remaining amount of annuities. The total amount of unpaid annuities was $25,139,
$24,300 and $24,300 at December 31, 1996, 1995 and 1994, respectively.
On October 2, 1995, as part of the transaction involving the reinsurance of
the Ohio Life business to Employers' Reassurance Corporation, Ohio Casualty
Insurance Company agreed to manage a $163,615 fixed income portfolio for
Employers' Reassurance. The term of the agreement is seven years, terminating on
October 2, 2002. There is no separate fee to Ohio Casualty for this investment
management service. The agreement requires that Ohio Casualty pay an annual rate
of 7.25% interest to Employers' Reassurance and maintain the market value of the
account at $163,615. In the event the market value falls below this amount, Ohio
Casualty is required to make up any deficiency. At the termination of the
contract, any excess over $163,615 is payable to Ohio Casualty. At December 31,
1996, the market value of the account exceeded the $163,615 required balance by
$699 compared with $2,497 in 1995 . The annual interest obligation of 7.25% was
also being adequately serviced by the portfolio assets.
NOTE 9 -- LOSSES AND LOSS RESERVES
The reserves for unpaid losses and loss adjustment expenses are based on
estimates of ultimate claim costs, including claims incurred but not reported,
salvage and subrogation and inflation without discounting. The methods of making
such estimates are continually reviewed and updated, and any resulting
adjustments are reflected in earnings currently.
1996 1995 1994
---------- ---------- -----------
Balance as of January 1,
net of reinsurance
recoverables of $74,119,
$65,336 and $75,738 $ 1,557,065 $ 1,606,487 $ 1,693,551
Incurred related to:
Current year 1,009,086 1,008,321 1,084,072
Prior years (76,920) (104,998) (153,717)
----------- ----------- -----------
932,166 903,323 930,355
Paid related to:
Current year 515,025 444,558 483,129
Prior years 487,584 508,187 534,290
----------- ----------- -----------
Total paid 1,002,609 952,745 1,017,419
Balance as of December 31,
net of reinsurance
recoverables of $70,048,
$74,119 and $65,336 $ 1,486,622 $ 1,557,065 $ 1,606,487
=========== =========== ===========
As a result of favorable development in estimates for insured events of
prior years, the incurred related to prior years shows a favorable development.
The following table presents catastrophe losses incurred and the respective
impact on the loss ratio:
1996 1995 1994
---- ---- ----
Incurred losses $62,189 $27,277 $36,618
Loss ratio effect 5.1% 2.2% 2.8%
The effect of catastrophes on the Corporation's results cannot be
accurately predicted. As such, severe weather patterns could have a material
adverse impact on the Corporation's results.
Inflation has historically affected operating costs, premium revenues and
investment yields as business expenses have increased over time. The long term
effects of inflation are considered when estimating the ultimate liability for
losses and loss adjustment expenses. The liability is based on historical loss
development trends which are
19
adjusted for anticipated changes in underwriting standards, policy provisions
and general economic trends. It is not adjusted to reflect the effect of
discounting.
Reserves for asbestos-related illnesses and toxic waste cleanup claims
cannot be estimated with traditional loss reserving techniques. In establishing
liabilities for claims for asbestos-related illnesses and for toxic waste
cleanup claims, management considers facts currently known and the current state
of the law and coverage litigation. However, given the expansion of coverage and
liability by the courts and the legislatures in the past and the possibilities
of similar interpretations in the future, there is uncertainty regarding the
extent of remediation. Accordingly, additional liability could develop.
Estimated environmental case reserves of $13,579, $14,467 and $10,400 were
included in loss and loss adjustment expense reserves for 1996, 1995 and 1994,
respectively. 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, $27,377 in incurred but not reported reserves were segregated as
asbestos and environmental related. This brings total asbestos and environmental
reserves as of December 31, 1996 to $40,956.
NOTE 10 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1996 First Second Third Fourth
- -------------------------------------- ---------- ---------- -----------
Premiums and finance
charges earned $310,217 $304,641 $301,054 $310,739
Net investment income 44,988 43,302 46,105 48,913
Investment gains
(losses) realized 5,954 14,948 13,507 15,263
Income from
continuing operations 2,835 12,652 27,333 54,408
Income from
discontinued
operations 713 2,181 1,056 1,279
Net income 3,548 14,833 28,389 55,687
Net income per share .10 .43 .81 1.58
1995 First Second Third Fourth
- -------------------------------------- ---------- ---------- -----------
Premiums and finance
charges earned $ 322,063 $ 317,936 $ 317,165 $ 311,105
Net investment
income 47,384 47,106 47,003 46,614
Investment gains
(losses) realized 893 (1,904) (430) 7,538
Income from
continuing
operations 14,406 25,543 10,275 45,139
Income from
discontinued
operations 706 366 2,942 358
Net income 15,112 25,909 13,217 45,497
Net income per
share .42 .72 .37 1.28
A new investment accounting system was implemented in the fourth quarter of
1996. The new system more accurately accrues interest and calculates
amortization for mortgage-backed securities. As a result, investment income was
increased by $3,977. This adjustment represents a one-time positive impact on
income.
NOTE 11 -- INDUSTRY SEGMENT INFORMATION
1996 1995 1994
------------ ------------ ------------
Property and Casualty Insurance
Revenue $1,453,623 $1,456,242 $1,501,883
Income before taxes 116,906 121,741 112,796
Identifiable assets 3,437,622 3,457,750 3,250,625
Premium Finance and Other
Revenue 6,008 6,230 4,580
Loss before taxes (1,868) (1,564) (3,470)
Identifiable assets 65,039 26,939 69,392
Discontinued Operations (Life
Insurance)
Revenue 10,396 (335,835) 52,187
Income before taxes 7,892 8,717 7,532
Identifiable assets 347,477 511,818 418,939
NOTE 12 -- STATUTORY ACCOUNTING INFORMATION
The following information has been prepared on the basis of statutory accounting
principles which differ from generally accepted accounting principles. The
principal differences relate to deferred acquisition costs, required statutory
reserves, assets not admitted for statutory reporting, California Proposition
103 reserve and deferred federal income taxes.
1996 1995 1994
-------- ------- --------
Property and Casualty
Insurance
Statutory net income $104,137 $103,802 $126,419
Statutory policyholders'
surplus 984,859 876,918 659,997
Life Insurance
Statutory net income 4,885 38,981 2,780
Statutory policyholders'
surplus 58,511 92,297 43,090
The Ohio Casualty Insurance Company, domiciled in Ohio, prepares its
statutory financial statements in accordance with the accounting practices
prescribed or permitted by the Ohio Insurance Department. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
The Company received written approval from the Ohio Insurance Department to
have the California Proposition 103 liability reported as a direct charge to
surplus and not included as a charge in the 1995 or 1994 statutory statement of
operations.
NOTE 13 -- BANK NOTE PAYABLE
In 1994, $70,000 was borrowed under a new credit facility to replace existing
debt. The new term loan has a final maturity in 2001 with equal semi-annual
installment payments of $5,000 beginning in April, 1995. On March 26, 1996, the
Corporation entered into an interest rate swap. The effect of the swap agreement
was to establish a fixed rate of 6.34% on one-half of the outstanding loan
balance. The remaining loan balance bears interest at a periodically adjustable
rate. The interest rate was 6.33% at December 31, 1996. The interest rate is
determined on various bases including prime rates, certificate of deposit rates
and the London Interbank Offered Rate. Interest incurred on borrowings amounted
to $3,769, $4,474 and $4,102 in 1996, 1995 and 1994, respectively.
20
Under the loan agreement, statutory surplus is $484,859 in excess of the minimum
amount required to be maintained at December 31, 1996.
NOTE 14 -- CALIFORNIA WITHDRAWAL
As a result of the lack of profitability and the difficult regulatory
environment, the Corporation announced its intention to withdraw from business
operation in California on June 15, 1992. In December 1992, the Corporation
stopped writing business in California and filed a withdrawal plan with the
California Department of Insurance. Under the terms of the plan, subsidiary
American Fire and Casualty Company would wind down the affairs of the Group. In
November 1994, the California Department of Insurance published the required
notices of the withdrawal application. In April 1995, the California Department
of Insurance gave final approval for withdrawal, and the Corporation implemented
the withdrawal plan.
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. During the fourth quarter of 1994, the State
of California billed the Corporation $59,867 for Proposition 103 assessment. In
February 1995, California revised this billing to $47,278 due to California
Senate Bill 905 which permits reduction of the rollback due to commissions and
premium taxes paid. The billing was revised again in August of 1995, and at
present, the State has indicated the Corporation should not be required to pay
in excess of $42,100 plus interest as a Proposition 103 assessment. As a result,
the Corporation's reserve for this alleged liability is $74,376.
The Corporation is currently involved in hearings with the State of
California. The final arguments are expected to conclude in the first quarter of
1997. A ruling from the Administrative Law Judge is expected in the second
quarter of 1997. At that time the Insurance Commissioner will have 60 days to
take the ruling under advisement and return with his 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
ultimately be resolved. To date, the Corporation has paid $2,889 in legal costs
related to the withdrawal, Proposition 103, and Fair Plan assessments.
NOTE 15 -- SHAREHOLDER RIGHTS PLAN
On December 15, 1989, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend of one Common Share Purchase Right expiring in 1999 for
each outstanding share of common stock. Each right entitles the registered
holder, under certain conditions, to purchase one share of common stock at a
price of $75, subject to adjustment at the time rights become exercisable if a
person or group acquires or announces its intention to acquire 20% or more of
the common stock of the Corporation without the prior approval of the Board of
Directors. The rights may be redeemed for one cent per right at any time prior
to becoming exercisable.
NOTE 16 -- STOCK SPLIT
On February 17, 1994, the Board of Directors declared a stock split in which one
share was distributed for each share outstanding. This 2 for 1 split pertained
to shareholders of record on April 1, 1994. The result of the stock split
increased issued shares from 23,401,936 to 46,803,872. All per share information
presented reflects the stock split.
NOTE 17 -- DISCONTINUED OPERATIONS (LIFE INSURANCE)
Discontinued operations include the operations of Ohio Life, a subsidiary of the
Ohio Casualty Insurance Company.
On October 2, 1995, the Company transferred its life insurance and related
businesses through a 100% coinsurance arrangement to Employers' Reassurance
Corporation and entered into an administrative and marketing agreement with
Great Southern Life Insurance Company. In connection with the reinsurance
agreement, $144,469 in cash and $161,401 of securities were transferred to
Employers' Reassurance to cover the liabilities of $348,479. Ohio Life received
an adjusted ceding commission of $37,641 as payment. After deduction of deferred
acquisition costs, the net ceding commission from the transaction was $17,284.
As of December 31, 1996, $12,918 of that gain remains unamortized. This balance
will be amortized over 14 years, the remaining expected life of the underlying
reinsured policies. It is anticipated that Great Southern will replace Ohio Life
as the primary carrier of these policies in the second quarter of 1997 through
an assumption. At that time, the remaining unamortized gain will be recognized.
Results of the discontinued life insurance operations for the years ended
December 31 were as follows:
1996 1995 1994
-------- --------- --------
Gross premiums written $ 1,428 $ 38,580 $ 28,210
Net premiums earned 4,582 (345,080) 22,774
Net investment income 4,812 4,143 28,082
Realized investment gains 1,002 5,102 1,331
-------- ---------- ---------
Total income 10,396 (335,835) 52,187
Income before income
taxes 7,892 8,717 7,532
-------- ---------- ---------
Provision for income
-------- ---------- ---------
taxes 2,663 4,345 1,636
-------- ---------- ---------
Net income $ 5,229 $ 4,372 $ 5,896
======== ========== =========
Assets and liabilities of the discontinued life insurance operations as of
the years ended December 31 were as follows:
1996 1995 1994
--------- --------- --------
Cash $ 1,150 $ 9,793 $ 6,197
Investments 71,313 107,603 359,138
Receivables (4) 5,165 2,773
Deferred policy
acquisition costs,
net of unamortized
ceding commission (11,486) (13,535) 24,749
Reinsurance receivable 285,354 363,127 6,925
Other assets 7,380 3,570 23,325
--------- --------- ---------
Total assets $ 353,707 $ 475,723 $ 423,107
========= ========= =========
Future policy benefits $ 280,002 $ 360,074 $ 352,400
Deferred income tax 1,728 11,172 3,710
Other liabilities 17,505 18,196 4,863
--------- --------- ---------
Total liabilities $ 299,235 $ 389,442 $ 360,973
========= ========= =========
21
OHIO CASUALTY CORPORATION & SUBSIDIARIES
SHAREHOLDER INFORMATION
STOCK PRICE AND DIVIDEND INFORMATION
(NASDAQ: OCAS)
Quarter 1st 2nd 3rd 4th
==================================================================================
1996 High 39 1/4 36 1/2 35 1/4 36 5/8
Low 33 1/4 33 1/4 30 3/8 32
Dividend
Declared $0.40 $0.40 $0.40 $0.40
1995 High 33 7/8 34 35 3/4 39
Low 28 1/4 29 1/4 31 1/2 32 7/8
Dividend
Declared $0.38 $0.38 $0.38 $0.38
1997 ANTICIPATED DIVIDEND SCHEDULE
DECLARATION DATE RECORD DATE PAYABLE DATE
- --------------------------------------------------------------------
February 20, 1997 March 3, 1997 March 10, 1997
May 15, 1997 May 30, 1997 June 10, 1997
August 21, 1997 September 1, 1997 September 10, 1997
November 20, 1997 December 1, 1997 December 10, 1997
DIVIDEND REINVESTMENT/STOCK
PURCHASE PLAN
The Corporation maintains a dividend reinvestment/stock purchase plan for
all holders of common stock. Under the Plan, shareholders may reinvest their
dividends in additional shares of common stock, and may also make extra cash
payments of up to $60,000 yearly toward the purchase of Ohio Casualty shares.
Participation is entirely voluntary. More information on the Dividend
Reinvestment and Stock Purchase Plan can be obtained by writing to the Transfer
Agent listed below.
FORM 10-K ANNUAL REPORT
The Form 10-K annual report for 1996, as filed with the Securities and
Exchange Commission, is available without charge upon written request from:
Ohio Casualty Corporation
Office of the Chief Financial Officer
136 N. Third St.
Hamilton, OH 45025
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Co.
of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
1-800-317-4445
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:30 a.m. on Wednesday,
April 16, 1997, in the meeting rooms of The Hamiltonian Hotel, One Riverfront
Plaza, Hamilton, OH 45011.
VISIT OUR INTERNET WEB SITE
http://www.ocas.com
The site includes current financial data about Ohio Casualty as well as
other corporate and product information.