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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1997
-----------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to ____________________
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-0783294
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
136 NORTH THIRD STREET, HAMILTON, OHIO 45025
(Address of principal executive offices) (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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value as of March 1, 1998 of the voting stock held by
non-affiliates of the registrant was $1,416,224,864.
On March 1, 1998 there were 33,629,908 shares outstanding.
Page 1 of 102
INDEX TO EXHIBITS ON PAGES 31-32
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DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the registrant's fiscal year ended December
31, 1997 is incorporated herein by reference for the following items:
PART I
Item 1. Business.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 8. Financial Statements and Supplementary Data.
The Proxy Statement of the Board of Directors for the fiscal year ended December
31, 1997 for the Annual Shareholders meeting to be held April 15, 1998 is
incorporated herein by reference for the following items:
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Ohio Casualty Corporation (the Corporation) was incorporated under the laws of
Ohio in August, 1969. The Corporation operates primarily as a holding company
and is principally engaged, through its direct and indirect subsidiaries, in the
business of property and casualty insurance and insurance premium finance.
The Corporation has two industry segments: property and casualty insurance and
insurance premium finance. The Corporation conducts its property and casualty
insurance business through The Ohio Casualty Insurance Company ("Ohio
Casualty"), an Ohio corporation organized in 1919, the Ohio Casualty's four
operating property and casualty insurance subsidiaries: West American Insurance
Company ("West American"), an Indiana corporation (originally incorporated under
the laws of the State of California) acquired in 1945; Ohio Security Insurance
Company ("Ohio Security"), an Ohio corporation acquired in 1962; American Fire
and Casualty Company ("American Fire"), an Ohio corporation (originally
incorporated under the laws of the State of Florida) acquired in 1969; and
Avomark Insurance Company ("Avomark"), an Indiana corporation created in 1997.
This group of companies presently underwrites most forms of property and
casualty insurance. The Corporation conducts its premium finance business
through Ocasco Budget, Inc. ("Ocasco"), an Ohio corporation (originally
incorporated under the laws of the State of California) organized in 1960.
Ocasco is a direct subsidiary of Ohio Casualty. On May 31, 1995 the states of
domicile of West American and Ocasco changed to Indiana and Ohio, respectively,
in connection with the withdrawal from property and casualty insurance
operations in California as previously announced and as discussed elsewhere
herein.
During 1995, the Corporation's third industry segment, life operations, was
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. The existing
blocks of business were reinsured through a 100% coinsurance arrangement with
Employer's Reassurance Corporation. 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 of this assumption, fourth quarter net income was
positively impacted by a partial recognition of unamortized ceding commission.
The after-tax impact was an increase to net income of $5.3 million. There
remains approximately $2.2 million in unamortized ceding commission. This will
continue to be amortized over the remaining life of the underlying policies. Net
income from discontinued operations amounted to $8.7 million or $.25 per share
in 1997 compared with $5.3 million or $.15 per share in 1996 and $4.4 million or
$.12 per share in 1995.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The revenues, operating profit and identifiable assets of each industry segment
for the three years ended December 31, 1997 are set forth in Note 12, Industry
Segment Information, in the Notes to the Consolidated Financial Statements on
page 29 of the Annual Report to Shareholders for the fiscal year ended December
31, 1997.
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ITEM 1. CONTINUED
PREMIUMS
The following table shows the total net premiums written (gross premiums less
premiums ceded pursuant to reinsurance treaties) by line of business by Ohio
Casualty, West American, American Fire, Avomark, Ohio Security and Ohio Life as
a group (collectively, the "Ohio Casualty Group") for the periods indicated.
Ohio Casualty Group
Net Premiums Written
By Line of Business
(in thousands)
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Auto liability $ 384,358 $ 386,121 $ 403,781 $ 420,031 $ 430,852
Auto physical damage 219,870 208,541 207,534 212,005 210,987
Homeowners
multiple peril 168,168 166,457 160,444 160,089 156,797
Workers' compensation 97,176 115,398 140,558 145,641 165,577
Commercial
multiple peril 141,931 132,808 131,553 135,595 136,559
Other liability 96,610 101,688 108,483 112,906 107,983
All other lines 98,708 97,059 96,842 98,714 95,562
----------- ----------- ----------- ----------- -----------
Property and casualty
premiums $ 1,206,821 $ 1,208,072 $ 1,249,195 $ 1,284,981 $ 1,304,317
=========== =========== =========== =========== ===========
Premium finance
revenues $ 1,511 $ 1,981 $ 2,314 $ 2,528 $ 2,887
=========== =========== =========== =========== ===========
Discontinued operations-
Statutory premiums:
Individual life $ 0 $ 0 $ (126,979) $ 22,238 $ 38,409
Annuity 0 0 (195,870) 18,104 19,530
Other 6 215 (22,012) 8,606 6,716
----------- ----------- ----------- ----------- -----------
Total 6 215 (344,861) 48,948 64,655
FAS 97 adjustments 0 0 (1,533) (26,173) (44,748)
----------- ----------- ----------- ----------- -----------
Discontinued operations
revenues $ 6 $ 215 $ (346,394) $ 22,775 $ 19,907
=========== =========== =========== =========== ===========
Property and casualty net premiums written decreased 0.1% in 1997. New Jersey
net premiums written decreased 2.3%, primarily due to a decline in the workers'
compensation, general liability and auto lines of business. Premiums written in
Pennsylvania declined 12.0% during 1997. This decline has primarily been driven
by competitive pricing conditions in commercial lines during 1997. The
Corporation is currently developing strategies to help counteract this decline.
Net premiums written increased in both Ohio and Kentucky during 1997. In Ohio,
premiums grew 4.8% in 1997. The growth has occurred in the auto and CMP lines of
business. In Kentucky, premiums grew 14.6% in 1997. This growth is seen in our
auto, homeowners and CMP lines of business.
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ITEM 1. CONTINUED
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Ohio Casualty Group is represented on a commission basis by approximately
4,442 independent insurance agents. In most cases, these agents also represent
other unaffiliated companies which may compete with the Ohio Casualty Group. The
34 claim and 13 underwriting and service offices operated by the Ohio Casualty
Group assist these independent agents in producing and servicing the Group's
business.
The following table shows consolidated direct premiums written for the Ohio
Casualty Group's ten largest states:
Ohio Casualty Group
Ten Largest States
Direct Premiums Written
From Continuing Operations
(in thousands)
Percent Percent Percent
1997 of Total 1996 of Total 1995 of Total
---- -------- ---- -------- ---- --------
New Jersey $220,588 18.0 New Jersey $218,553 18.0 New Jersey $220,373 17.6
Ohio 132,325 10.8 Ohio 125,675 10.3 Pennsylvania 128,603 10.3
Kentucky 101,341 8.3 Pennsylvania 114,998 9.5 Ohio 126,622 10.1
Pennsylvania 101,074 8.2 Kentucky 87,002 7.2 Kentucky 80,498 6.4
Illinois 63,347 5.2 Illinois 60,311 5.0 Illinois 64,352 5.1
Indiana 54,415 4.4 Maryland 52,204 4.3 Maryland 56,741 4.5
Maryland 46,660 3.8 Indiana 50,560 4.2 Indiana 49,353 3.9
Texas 42,005 3.4 Texas 37,678 3.1 Texas 43,036 3.4
North Carolina 37,383 3.0 Florida 36,995 3.0 Florida 42,061 3.4
Florida 34,570 2.8 North Carolina 34,108 2.8 North Carolina 33,955 2.7
--------- ----- --------- ------ --------- ------
$833,708 67.9 $818,084 67.4 $845,594 67.4
======== ==== ======== ==== ======== ====
INVESTMENT OPERATIONS
Each of the companies in the Ohio Casualty Group must comply with the insurance
laws of its domiciliary state and of the other states in which it is licensed
for business. Among other things, these laws prescribe the kind, quality and
concentration of investments which may be made by insurance companies. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages and real estate.
The distribution of invested assets of the Ohio Casualty Group is determined by
a number of factors, including insurance law requirements, the Corporation's
liquidity needs, tax position, and general market conditions. In addition, our
business mix and liability payout patterns are considered. Adjustments are made
to the asset allocation from time to time. The Corporation has no real estate
investments. Assets relating to property and casualty operations are invested to
maximize after-tax returns with appropriate diversification of risk.
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ITEM 1. CONTINUED
The following table sets forth the carrying values and other data of the
consolidated invested assets of the Ohio Casualty Group as of the end of the
years indicated:
Ohio Casualty Group
Distribution of Invested Assets
(in millions)
1997
Average % of % of % of
Rating 1997 Total 1996 Total 1995 Total
------- -------- ----- -------- ----- -------- -----
U.S. government AAA $ 69.8 2.2 $ 82.5 2.7 $ 116.5 3.8
Tax exempt bonds
and notes AA+ 875.7 27.8 794.5 25.8 898.5 29.1
Debt securities
issued by foreign
governments A+ 3.5 0.1 3.3 0.1 3.4 0.1
Corporate securities BBB+ 929.9 29.5 983.7 32.0 986.4 32.0
Mortgage backed
securities
U.S. government AAA 17.6 0.6 176.9 5.8 170.2 5.5
Other AA+ 329.5 10.4 270.0 8.8 232.9 7.6
-------- ----- -------- ----- -------- -----
Total bonds A+ 2,226.0 70.6 2,310.9 75.2 2,407.9 78.1
Common stocks 853.9 27.1 713.4 23.2 627.4 20.3
Preferred stocks 5.6 0.2 7.8 0.2 33.7 1.1
-------- ----- -------- ----- -------- -----
Total stocks 859.5 27.3 721.2 23.4 661.1 21.4
Short-term 65.9 2.1 41.5 1.4 14.4 0.5
-------- ----- -------- ----- -------- -----
Total investments $3,151.4 100.0 $3,073.6 100.0 $3,083.4 100.0
======== ===== ======== ===== ======== =====
Total market value
of investments $3,151.4 $3,073.6 $3,083.4
======== ======== ========
Total amortized cost
of investments $2,453.8 $2,573.9 $2,617.5
======== ======== ========
The consolidated fixed income portfolio (identified as "Total Bonds" in the
foregoing table) of the Ohio Casualty Group had a weighted average rating of
"A+" and an average stated maturity of twelve years as of December 31, 1997.
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) and unrated securities are summarized as follows:
1997 1996 1995
---- ---- ----
Below investment grade securities:
Carrying value $141.4 $184.6 $203.9
Amortized cost 135.6 180.0 203.7
Unrated securities:
Carrying value $242.8 $315.4 $286.3
Amortized cost 228.6 308.3 271.2
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ITEM 1. CONTINUED
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:
1997 1996 1995
---- ---- ----
Below investment grade securities at
carrying value $141.4 $184.6 $203.9
Other rating agencies categorizing
unrated securities as below
investment grade 8.1 27.3 28.9
--------- -------- --------
Below investment grade securities at
carrying value $149.5 $211.9 $232.8
All of the Corporation's below investment grade investments (based on carrying
value) are performing in accordance with contractual terms and are making
principal and interest payments as required. The securities in the Corporation's
below investment grade portfolio have been issued by 51 corporate borrowers in
approximately 36 industries. At December 31, 1997, the market value of the
Corporation's five largest investments in below investment grade securities
totaled $44.4 million, and had an approximate amortized cost of $41.2 million.
None of these holdings individually exceeded $15.9 million.
At December 31, 1997, the fixed income portfolio relating to property and
casualty operations totaled $2.2 billion which consisted of 89.1% investment
grade securities and 10.9% below investment grade and/or unrated securities. At
December 31, 1997, the fixed income portfolio relating to discontinued
operations totaled $18.2 million, all of which are classified as investment
grade securities.
Investments in below investment grade securities have greater risks than
investments in investment grade securities. The risk of default by borrowers
which issue securities rated below investment grade is significantly greater
because these securities are generally unsecured and often subordinated to other
debt and these borrowers are often highly leveraged and are more sensitive to
adverse economic conditions such as a recession or a sharp increase in interest
rates. Investment grade securities are also subject to significant adverse risks
including the risks of re-leveraging and changes in control of the issuer. In
most instances, investors are unprotected with respect to such risks, the
effects of which can be substantial.
Yield (based on cost of investments) for the taxable fixed income portfolio was
8.6% and 8.4% at December 31, 1997 and 1996, respectively. Below investment
grade securities were yielding 9.3% and 9.2% at December 31, 1997 and 1996,
respectively, while investment grade securities were yielding 8.5% in 1997 and
8.2% in 1996. Yield for tax exempt securities was 6.2% at December 31, 1997 and
1996, however, this yield is not directly comparable to taxable yield due to the
complexity of federal taxation of insurance companies.
The Corporation remains committed to a diversified common stock portfolio. As of
December 31, 1997, the portfolio consisted of 74 separate issues, diversified
across 53 different industries; and the largest single position was 10.2% of the
portfolio. The portfolio strategy with respect to common stocks has been to
invest in companies whose stocks have below average valuations, yet above
average growth prospects.
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ITEM 1. CONTINUED
Investment income is affected by the amount of new investable funds and
investable funds arising from maturities, prepayments, calls and exchanges as
well as the timing of receipt of such funds. In addition, other factors such as
interest rates at time of investment and the maturity, income tax status, credit
status and other risks associated with new investments are reflected in
investment income. Future changes in the distribution of investments and the
factors described above could affect overall investment income in the future;
however, the amount of any increase or decrease cannot be predicted. Further
details regarding investment distribution and investment income are described in
Note 2, Investments, in the Notes to Consolidated Financial Statements on pages
23 and 24 of the 1997 Annual Report to Shareholders.
Purchases of taxable fixed income securities in 1997 were as follows: $90.7
million of investment grade securities, $43.1 million of high yield securities
and $30.0 million of unrated securities. Purchases of tax-exempt and equity
securities in 1997 totaled $187.6 million and $66.4 million, respectively.
Disposals (including maturities, calls, exchanges and scheduled prepayments) of
taxable fixed income securities in 1997 were as follows: $200.9 million of
investment grade securities, $79.5 million of high yield securities and $68.8
million of unrated securities. Dispositions of tax-exempt and equity securities
in 1997 totaled $96.2 million and $154.7 million, respectively.
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 variable rate loan.
Consolidated net realized investment gains (before taxes) in 1997 totaled $50.7
million, $1.48 per share. Included in this amount are approximately $7.0 million
in writedowns of the carrying values of certain securities the Corporation
determined had an other than temporary decline in value.
SHARE REPURCHASES
During 1990 the Board of Directors of Ohio Casualty Corporation authorized the
additional purchase of as many as 3,000,000 (as adjusted for 1994 stock split)
shares of its common stock through open market or privately negotiated
transactions. During 1997, 1,544,688 shares were repurchased for $64.9 million.
This compares with 264,600 shares repurchased in 1996 for $9.2 million and
613,900 shares repurchased in 1995 for $20.9 million. In November 1997, the
Board of Directors authorized an additional 1.5 million shares to be
repurchased. This brings the remaining repurchase authorization to 2,026,812
shares as of December 31, 1997.
LIABILITIES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Liabilities for loss and loss adjustment expenses are established for the
estimated ultimate costs of settling claims for insured events, both reported
claims and incurred but not reported claims, based on information known as of
the evaluation date. As more information becomes available and claims are
settled, the estimated liabilities are adjusted upward or downward with the
effect of increasing or decreasing net income at the time of adjustments. Such
estimated liabilities include direct costs of the loss under terms of insurance
policies as well as legal fees and
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ITEM 1. CONTINUED
general expenses of administering the claims adjustment process. The liabilities
for claims incurred in accident years 1996, 1995 and 1994 were reduced in the
subsequent year as shown below:
Accident Year Loss and Loss Adjustment Expense Liabilities
Subsequent Year Adjustment
(in millions)
1996 1995 1994
---- ---- ----
Property $ 2 $27 $ 11
Auto 12 14 30
Workers' compensation
and other liability 6 37 35
----- ----- -----
Total reduction $20 $78 $76
===== ===== =====
In the normal course of business, the Ohio Casualty Group is involved in
disputes and litigation regarding terms of insurance contracts and the amount of
liability under such contracts arising from insured events. The liabilities for
loss and loss adjustment expenses include estimates of the amounts for which the
Ohio Casualty Group may be liable upon settlement or other conclusion of such
litigation.
Because of the inherent future uncertainties in estimating ultimate costs of
settling claims, actual loss and loss adjustment expenses may deviate
substantially from the amounts recorded in the Corporation's consolidated
financial statements. Furthermore, the timing, frequency and extent of
adjustments to the estimated liabilities cannot be accurately predicted since
conditions and events which established historical loss and loss adjustment
expense development and which serve as the basis for estimating ultimate claims
cost may not occur in the future in exactly the same manner, if at all.
The anticipated effect of inflation is implicitly considered when estimating the
liability for losses and loss adjustment expenses based on historical loss
development trends adjusted for anticipated changes in underwriting standards,
policy provisions and general economic trends.
The following table presents an analysis of losses and loss adjustment expenses
and related liabilities for the periods indicated. The accounting policies used
to estimate liabilities for losses and loss adjustment expenses are described in
Note 9, Losses and Loss Reserves, in the Notes to Consolidated Financial
Statements on pages 28 and 29 of the 1997 Annual Report to Shareholders.
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ITEM 1. CONTINUED
Reconciliation of Liabilities for Losses and Loss Adjustment Expense
(in thousands)
1997 1996 1995
---- ---- ----
Net liabilities, beginning of year $1,486,622 $1,557,065 $1,606,487
Provision for current accident year
claims 922,065 1,009,086 1,008,321
Increase (decrease)in provisions for
prior accident year claims (53,615) (76,920) (104,998)
---------- ---------- ----------
868,450 932,166 903,323
Payments for claims occurring during:
Current accident year 484,402 515,025 444,558
Prior accident years 484,866 487,584 508,187
---------- ---------- ----------
933,268 1,002,609 952,745
Net liabilities, end of year 1,421,804 1,486,622 1,557,065
Reinsurance recoverable 62,003 70,048 74,119
---------- ---------- ----------
Gross liabilities, end of year $1,483,807 $1,556,670 $1,631,184
========== ========== ==========
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Property and Casualty Insurance Operations
Analysis of Development of Loss and Loss Adjustment Expense Liabilities
(In thousands)
Year Ended December 31 1987 1988 1989 1990 1991 1992 1993
- ---------------------- ---- ---- ---- ---- ---- ---- ----
Liability as originally
estimated: $ 1,171,392 $ 1,252,404 $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,205 $ 1,692,895
Cumulative payments as of:
One year later 438,195 440,173 489,562 506,246 526,973 561,133 533,634
Two years later 667,894 695,364 745,766 783,948 822,634 869,620 833,399
Three years later 828,325 845,472 902,081 955,666 1,007,189 1,060,433 1,017,893
Four years later 922,744 937,034 1,000,299 1,063,507 1,123,591 1,176,831 1,147,266
Five years later 977,575 996,353 1,061,173 1,131,012 1,201,317 1,264,900
Six years later 1,015,889 1,033,508 1,100,683 1,182,110 1,266,605
Seven years later 1,041,563 1,055,972 1,134,145 1,235,315
Eight years later 1,057,509 1,078,561 1,177,259
Nine years later 1,076,321 1,112,120
Ten years later 1,105,530
Liability reestimated as of:
One year later 1,131,539 1,179,052 1,285,233 1,403,172 1,515,129 1,601,406 1,539,178
Two years later 1,139,684 1,175,861 1,299,428 1,407,197 1,500,890 1,555,452 1,510,943
Three years later 1,139,584 1,193,127 1,296,215 1,388,381 1,467,256 1,524,054 1,515,114
Four years later 1,156,930 1,195,712 1,281,246 1,368,530 1,449,789 1,559,492 1,525,493
Five years later 1,160,997 1,186,680 1,268,193 1,366,676 1,498,881 1,561,763
Six years later 1,159,372 1,178,126 1,270,734 1,423,277 1,499,009
Seven years later 1,154,169 1,184,233 1,327,228 1,420,105
Eight years later 1,162,837 1,233,809 1,325,938
Nine years later 1,208,920 1,230,778
Ten years later 1,204,196
Decrease (increase) in
original estimates: $ (32,804) $ 21,626 $ 44,116 $ 63,880 $ 67,130 $ 111,442 $ 167,402
Year Ended December 31 1994 1995 1996 1997
- ---------------------- ---- ---- ---- ----
Liability as originally
estimated: $ 1,605,526 $ 1,553,131 $ 1,482,900 $ 1,421,704
Cumulative payments as of:
One year later 510,219 486,168 483,574
Two years later 803,273 772,670
Three years later 997,027
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Liability reestimated as of:
One year later 1,500,528 1,474,795 1,427,992
Two years later 1,501,530 1,441,081
Three years later 1,486,455
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Decrease (increase) in
original estimates: $ 119,071 $ 112,050 $ 54,908
This table presents the current period effects of changes in estimated loss and
loss adjustment expense liabilities of the most recent and all prior accident
years. Since conditions and trends that have affected loss and loss adjustment
expense development in the past may not occur in the future in exactly the same
manner, if at all, future results may not be reliably predicted by extrapolation
of the data presented.
1995 1996 1997
---- ---- ----
Gross liability - end of year $ 1,624,197 $ 1,547,595 $ 1,481,657
Reinsurance recoverable 71,066 64,695 59,952
Net liability - end of year 1,553,131 1,482,900 1,421,704
Gross re-estimated liability - latest 1,532,567 1,481,399
Re-estimated recoverable - latest 57,772 53,407
Net re-estimated liability - latest 1,474,795 1,427,992
Gross cumulative deficiency 91,630 66,196
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ITEM 1. CONTINUED
COMPETITION
More than 2,400 property and casualty insurance companies compete in the United
States and no one company or company group has a market share greater than
approximately 13%. The Ohio Casualty Group ranked as the forty-fifth largest
property and casualty insurance groups in the United States based on net
insurance premiums written in 1996, the latest year for which statistics are
available. The Ohio Casualty Group competes with other companies on the basis of
service, price and coverage.
STATE INSURANCE REGULATION
GENERAL. The Corporation and the Ohio Casualty Group are subject to regulation
under the insurance statutes, including the holding company statutes, of various
states. Ohio Casualty, American Fire and Ohio Security are all domiciled in
Ohio. West American and Avomark are domiciled in Indiana. Collectively, the Ohio
Casualty Group is authorized to transact the business of insurance in the
District of Columbia and all states except Maine. The Ohio Casualty Group is
subject to examination of their affairs by the insurance departments of the
jurisdictions in which they are licensed.
State laws also require prior notice or regulatory agency approval of changes in
control of an insurer or its holding company and of certain material
intercorporate transfers of assets within the holding company structure. Under
applicable provisions of the Indiana insurance statutes ("Indiana Insurance
Law") and the Ohio insurance statutes (the "Ohio Insurance Law"), a person would
not be permitted to acquire direct or indirect control of the Corporation or any
of the Ohio Casualty Group companies domiciled in such state, unless such person
had obtained prior approval of the Indiana Insurance Commissioner and the Ohio
Superintendent of Insurance, respectively, for such acquisition. For the
purposes of the Indiana Insurance Law and the Ohio Insurance Law, any person
acquiring more than 10% of the voting securities of a company is presumed to
have acquired "control" of such company.
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 $59.9 million for Proposition 103
assessment. In February 1995, California revised this billing to $47.3 million
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 to $42.1 million plus interest.
The Corporation is currently involved in hearings 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 below $30.0 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
12
13
ITEM 1. CONTINUED
calculations should the Department of Insurance prevail. As a result, the
Corporation's reserve for this alleged liability is $66.9 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. To date, the Corporation has
paid $4.0 million in legal costs related to the withdrawal, Proposition 103 and
Fair Plan assessments.
The State of New Jersey has historically been a profitable state for the
Corporation. In recent years, however, the legislative environment in that state
has become more difficult. Due to legislative rules and regulations designed to
make insurance less expensive and more easily obtainable for New Jersey
residents, our results have been adversely impacted. In order to meet our state
imposed assessment obligations under the Fair Automobile Insurance Reform Act
and the Unsatisfied Claim and Judgment fund, the Corporation has incurred
expenses of $3.3 million in 1997, $3.6 million in 1996 and $3.7 million in 1995.
These assessments have negatively affected our combined ratios by .3 points in
each of the three years.
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS. The National Association of
Insurance Commissioners (the "NAIC") annually calculates a number of financial
ratios to assist state insurance regulators in monitoring the financial
condition of insurance companies. A "usual range" of results for each ratio is
used as a benchmark. Departure from the usual range on four or more of the
ratios could lead to inquiries from individual state insurance commissioners as
to certain aspects of a company's business. None of the property and casualty
companies of the Ohio Casualty Group had more than three NAIC financial ratios
that were outside the usual range in the last five calendar years.
Beginning in 1994, the NAIC required inclusion of a risk-based capital
calculation in the Annual Statements. The risk-based capital model is used to
establish standards which relate insurance company statutory surplus to 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
reserves 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.
The States of Ohio and Indiana have adopted the NAIC model law limiting dividend
payments by insurance companies. This law allows dividends to equal the greater
of 10% of policyholders' surplus or net income determined as of the preceding
year end without prior approval of the Insurance Department. For 1997, $170.1
million of policyholders' surplus is not subject to restrictions or prior
dividend approval.
EMPLOYEES
At December 31, 1997, the Ohio Casualty Group had approximately 3,280 employees
of which approximately 1,250 were located in Hamilton, Ohio.
YEAR 2000
The year 2000 is a point of concern within the industry as regards the extent of
liability for coverages under various property, general liability and directors
and officers liability policies. The Corporation believes that no coverage
exists under current liability contracts except as regards certain possible
products exposures. However, this exposure is minimal as our
13
14
ITEM 1. CONTINUED
commercial lines business has historically excluded any heavy manufacturing
risks which might produce computer or computer dependent products. Furthermore,
in analyzing our property forms, the Corporation has found that there is no
coverage under our current contracts.
The Insurance Services Office (ISO) recently developed policy language that
clarifies that there is no coverage for certain year 2000 occurrences. The
liability exclusion has been accepted in 40 states and a companion filing for
property has been accepted in at least 20 states at this time. Several states
have not adopted or approved the property exclusion form sighting specifically
that there is no coverage under the current property contracts and therefore,
there is no reason to accept a clarifying endorsement. It is our intention to
include the ISO clarification language in all of our applicable general
liability and property policies written in mid-1998 and thereafter.
Directors and officers could be held liable if a company in their control failed
to take necessary actions to fix any year 2000 problems and that failure results
in a material financial loss to the company. The Corporation has written
directors' and officers' liability policies since 1995, with approximately $.9
million in premiums written in 1997. The Corporation is managing its D&O year
2000 exposure through a combination of underwriting guidelines which address
year 2000 issues in the application process and reinsurance policies which
provide coverage for any loss in excess of $.3 million.
For a discussion of the Corporation's preparedness for year 2000 issues, please
see page 18 of the 1997 Annual Report to Shareholders.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 130 "Reporting Comprehensive Income". This
statement requires display of comprehensive income in a set of general-purpose
financial statements. 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 major component for the Corporation will be unrealized
gains and losses from changes in market values for investments. The Corporation
will display comprehensive income in quarterly and annual reports for fiscal
periods beginning after December 15, 1997. If the Corporation reported
comprehensive income for 1997 it would have been $261.2 million.
Also in June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 131 "Disclosures about Segments of an Enterprise
and Related Information". This statement requires selected information to be
reported on the Corporation's operating segments. Operating segments are
determined by the way management structures the segments in making operating
decisions and assessing performance. The Corporation is currently reviewing what
changes, if any, this will require on the presentation of the financial
statements for fiscal periods beginning after December 15, 1997.
In December 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-3 "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments". This statement provides guidance on accounting
for insurance related assessments and required disclosure information. This
statement is effective for fiscal years beginning after December 15, 1998. The
Corporation does not believe that this statement will materially affect the
Corporation's financial statements or disclosures.
14
15
ITEM 1. CONTINUED
During 1997, the SEC issued Financial Reporting Release 48 " Disclosures about
Derivatives and Other Financial Instruments" which is effective for periods
ending after June 15, 1997 for registrants with market capitalizations in excess
of $2.5 billion and effective one year later for all other registrants. The
Corporation has a market capitalization of less than $2.5 billion. FRR 48 does
not impact the Corporation's financial statements but does require enhanced
disclosures about market risk inherent in derivatives and other financial
instruments. The additional information will be included in annual filings with
the SEC after June 15, 1998.
ITEM 2. PROPERTIES
The Ohio Casualty Group owns and leases office space in various parts of the
country. The principal office building consists of an owned facility in
Hamilton, Ohio.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Corporation or its
subsidiaries other than litigation arising in connection with settlement of
insurance claims as described on page 9 and Proposition 103 hearings described
on page 12.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of Shareholders through the solicitation of
proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is related to executive officers who are not
separately reported in the Corporation's Proxy Statement:
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Barry S. Porter 61 Chief Financial Officer and Treasurer of The Ohio Casualty
Corporation, The Ohio Casualty Insurance Company, American Fire and
Casualty Company, Ocasco Budget, Inc., The Ohio Life Insurance
Company, The Ohio Security Insurance Company and West American
Insurance Company since August 1993. Treasurer of Avomark since
September 1997.
15
16
ITEM 4. CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Michael L. Evans 54 Vice President of The Ohio Casualty Corporation and Executive Vice
President of The Ohio Casualty Insurance Company, American Fire and
Casualty Company, Ocasco Budget, Inc., The Ohio Life Insurance
Company, The Ohio Security Insurance Company and West American
Insurance Company since April 1995; prior thereto, Vice President of
The Ohio Casualty Insurance Company, American Fire and Casualty
Company, Ocasco Budget, Inc., The Ohio Life Insurance Company and West
American Insurance Company.
John S. Busby 52 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ohio Security Insurance Company and West
American Insurance Company since May 1991.
Donald J. Dehne 47 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996 and Avomark
since September 1997; prior thereto, Assistant Secretary of The Ohio
Casualty Insurance Company, American Fire and Casualty Company, Ocasco
Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company.
Steven J. Adams 43 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996; prior
thereto, Assistant Secretary of The Ohio Casualty Insurance Company,
American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security
Insurance Company and West American Insurance Company; prior thereto,
Commercial Lines Customer Strategist; prior thereto, Imaging
Technology Expert.
Thomas P. Prentice 45 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996 and Avomark
since September 1997; prior thereto, Assistant Secretary of The Ohio
Casualty Insurance Company, American Fire and Casualty Company, Ocasco
Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company; prior thereto, Personal Lines Customer Specialist;
prior thereto, Claims Manager.
16
17
ITEM 4. CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Coy Leonard, Jr. 53 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996; prior
thereto, Assistant Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio
Security Insurance Company and West American Insurance Company; prior
thereto, Manager of Strategic Planning and Technology.
Frederick W. Wendt 57 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ohio Security Insurance Company and West
American Insurance Company since January 1991.
Elizabeth M. Riczko 31 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996; prior
thereto, Assistant Secretary of The Ohio Casualty Insurance Company,
American Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security
Insurance Company and West American Insurance Company; prior thereto,
Corporate Actuarial Manager.
William E. Minor 43 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ohio Security Insurance Company and West
American Insurance Company since September 1996; prior thereto,
Account Director for Sire/Young and Rubicam.
Susan D. Dillon 42 Assistant Vice President of The Ohio Casualty Insurance Company,
American Fire and Casualty Company, Ohio Security Insurance Company
and West American Insurance Company since May 1995; prior thereto,
Branch Manager; prior thereto, Field Representative.
- ---------------------------------------
(1) Ages listed are as of the annual meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
See inside front cover and pages 1 and 12 of the Annual Report to Shareholders
for the fiscal year ended December 31, 1997.
17
18
ITEM 6. SELECTED FINANCIAL DATA
See pages 10 and 11 of the Annual Report to Shareholders for the fiscal year
ended December 31, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See pages 12 through 18 of the Annual Report to Shareholders for the fiscal year
ended December 31, 1997.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
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
the Management's Discussion and Analysis of Financial Condition and Results of
Operations portion of the 1997 Annual Report, which portion has been
incorporated herein by reference in response to Item 7 hereof, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedules.
(See Index to Financial Statements attached hereto.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See pages 4 through 6 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1997 and Executive Officers of the Registrant
separately captioned under Part I of this annual report.
18
19
ITEM 11. EXECUTIVE COMPENSATION
See pages 7 through 14 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See pages 1 through 4 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See page 6 of the Proxy Statement of the Board of Directors for the fiscal year
ended December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules required to
be filed by Item 8 of this Form and Regulation S-X
(b) Form 8-K announcing completion of initial assumption closing with
Great Southern Life Insurance Company in relation to Ohio Life
filed on November 25, 1997
(c) Exhibits. (See index to exhibits attached hereto.)
19
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
March 27, 1998 By: /s/ Lauren N. Patch
-------------------
Lauren N. Patch, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 27, 1998 /s/ Joseph L. Marcum
-------------------------------------------------------
Joseph L. Marcum, Chairman of the Board
March 27, 1998 /s/ William L. Woodall
-------------------------------------------------------
William L. Woodall, Vice Chairman of the Board
March 27, 1998 /s/ Lauren N. Patch
-------------------------------------------------------
Lauren N. Patch, President and Chief Executive Officer
March 27, 1998 /s/ Arthur J. Bennert
-------------------------------------------------------
Arthur J. Bennert, Director
March 27, 1998 /s/ Jack E. Brown
-------------------------------------------------------
Jack E. Brown, Director
March 27, 1998 /s/ Catherine E. Dolan
-------------------------------------------------------
Catherine E. Dolan, Director
March 27, 1998 /s/ Wayne R. Embry
-------------------------------------------------------
Wayne R. Embry, Director
March 27, 1998 /s/ Vaden Fitton
-------------------------------------------------------
Vaden Fitton, Director
March 27, 1998 /s/ Jeffery D. Lowe
-------------------------------------------------------
Jeffery D. Lowe, Director
March 27, 1998 /s/ Stephen S. Marcum
-------------------------------------------------------
Stephen S. Marcum, Director
March 27, 1998 /s/ Stanley N. Pontius
-------------------------------------------------------
Stanley N. Pontius, Director
March 27, 1998 /s/ Howard L. Sloneker III
-------------------------------------------------------
Howard L. Sloneker III, Director
March 27, 1998 /s/ Barry S. Porter
-------------------------------------------------------
Barry S. Porter, Chief Financial Officer and Treasurer
March 27, 1998 /s/ Michael L. Evans
-------------------------------------------------------
Michael L. Evans, Vice President
20
21
FORM 10-K, ITEM 14
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
OHIO CASUALTY CORPORATION
The following statements are incorporated by reference to the Annual Report to
Shareholders for registrant's fiscal year ended December 31, 1997:
Page Number
in Annual Report
----------------
Consolidated Balance Sheet at December 31, 1997, 1996, 1995 19
Statement of Consolidated Income for the years ended
December 31, 1997, 1996 and 1995 20
Statement of Consolidated Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 21
Statement of Consolidated Cash Flow for the years ended
December 31, 1997, 1996 and 1995 22
Notes to Consolidated Financial Statements 23-31
Report of Independent Accountants 32
Page Number
in this Report
--------------
The following financial statement schedules are included herein:
Schedule I - Consolidated Summary of Investments Other Than
Investments in Related Parties at December 31, 1997 23
Schedule II - Condensed Financial Information of Registrant for
the years ended December 31, 1997, 1996 and 1995 24
Schedule III - Consolidated Supplementary Insurance Information
for the years ended December 31, 1997, 1996 and 1995 25-27
Schedule IV - Consolidated Reinsurance for the years ended
December 31, 1997, 1996 and 1995 28
Schedule V - Valuation and Qualifying Accounts for the years
ended December 31, 1997, 1996 and 1995 29
Schedule VI - Consolidated Supplemental Information Concerning
Property and Casualty Insurance Operations for the
years ended December 31, 1997, 1996 and 1995 30
21
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Ohio Casualty Corporation
Our report on the consolidated financial statements of Ohio Casualty Corporation
has been incorporated by reference in this Form 10-K from page 32 of the 1997
Annual Report of Ohio Casualty Corporation. In connection with our audits of
such consolidated financial statements, we have also audited the related
financial statement schedules on pages 23 through 32 of this Form 10-K.
In our opinion, the financial statement schedules referred to above when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 30, 1998
22
23
Schedule I
Ohio Casualty Corporation and Subsidiaries
Consolidated Summary of Investments
Other than Investments in Related Parties
(In thousands)
December 31, 1997
Amount shown
Type of investment Cost Value in balance sheet
- ------------------ ---- ----- ----------------
Fixed maturities
Bonds:
United States govt. and
govt. agencies with auth $ 66,244 $ 69,844 $ 69,844
States, municipalities and
political subdivisions 835,355 875,741 875,741
Debt securities issued by
foreign governments 3,000 3,458 3,458
Corporate securities 872,904 929,924 929,924
Mortgage-backed securities:
U.S. government guaranteed 16,876 17,553 17,553
Other 317,912 329,510 329,510
---------- ---------- ----------
Total fixed maturities 2,112,291 2,226,030 2,226,030
Equity securities:
Common stocks:
Banks, trust and insurance
companies 56,116 276,626 276,626
Industrial, miscellaneous and
all other 214,777 577,225 577,225
Preferred stocks:
Non-redeemable 244 244 244
Convertible 4,500 5,380 5,380
---------- ---------- ----------
Total equity securities 275,637 859,475 859,475
Short-term investments 65,849 65,849 65,849
---------- ---------- ----------
Total investments $2,453,777 $3,151,354 $3,151,354
========== ========== ==========
23
24
Schedule II
Ohio Casualty Corporation
Condensed Financial Information of Registrant
(In thousands)
1997 1996 1995
---- ---- ----
Condensed Balance Sheet:
Investment in wholly-owned
subsidiaries, at equity $ 1,258,432 $ 1,167,237 $ 1,156,718
Investment in bonds/stocks 85,742 57,233 20,165
Cash and other assets 13,000 5,706 2,468
----------- ----------- -----------
Total assets 1,357,174 1,230,176 1,179,351
Bank note payable 40,000 50,000 60,000
Other liabilities 2,345 5,076 8,337
----------- ----------- -----------
Total liabilities 42,345 55,076 68,337
Shareholders' equity $ 1,314,829 $ 1,175,100 $ 1,111,014
=========== =========== ===========
Condensed Statement of Income:
Dividends from subsidiaries $ 169,988 $ 100,000 $ 80,018
Equity in subsidiaries (30,867) 3,957 21,431
Operating (expenses) (74) (1,500) (1,714)
----------- ----------- -----------
Net income $ 139,047 $ 102,457 $ 99,735
=========== =========== ===========
Condensed Statement of Cash Flows:
Cash flows from operations
Net distributed income $ 169,914 $ 98,500 $ 78,304
Other (805) 4,879 4,358
----------- ----------- -----------
Net cash from operations 169,109 103,379 82,662
Investing
Purchase of bonds/stocks (57,031) (34,458) (4,555)
Sales of bonds/stocks 28,147 7,190 7,723
----------- ----------- -----------
Net cash from investing (28,884) (27,268) 3,168
Financing
Note payable (10,000) (10,000) (10,000)
Exercise of stock options 371 135 578
Purchase of treasury stock (64,858) (9,168) (21,193)
Dividends paid to shareholders (57,456) (56,380) (54,335)
----------- ----------- -----------
Net cash from financing (131,943) (75,413) (84,950)
Net change in cash 8,282 698 880
Cash, beginning of year 3,375 2,677 1,797
----------- ----------- -----------
Cash, end of year $ 11,657 $ 3,375 $ 2,677
=========== =========== ===========
For complete disclosures see Notes to Consolidated Financial Statements on pages
23-31 of the 1997 Annual Report to Shareholders.
24
25
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1997
Deferred Future policy Benefits, Amortization
policy benefits Net losses and of deferred
acquisition losses and Unearned Premium investment loss acquisition
costs loss expenses premiums revenue income expenses costs
----------- ------------- ---------- ----------- ------------ ------------ ------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Automobile $ 38,082 $ 588,834 $ 186,886 $ 599,112 $ 483,171 $ 121,730
Workers' compensation 5,290 367,802 40,705 103,484 65,762 21,313
Gen. liability, A&H 14,036 254,159 43,030 98,971 55,331 33,731
Homeowners 26,582 64,681 94,752 166,474 125,136 44,666
CMP, fire and allied lines,
inland marine 33,537 193,885 103,751 200,330 131,499 64,520
Fidelity, surety, burglary 10,721 12,296 25,759 35,045 3,743 17,534
Miscellaneous Income 3,925
Investment 172,372
--------- ----------- --------- ----------- --------- --------- ---------
Total property and
casualty insurance 128,248 1,481,657 494,883 1,207,341 172,372 864,642 303,494
Life ins.(discontinued operations) (2,185) 36,298 23,865 3,954 268 15,049
Premium finance 193 1,632 65
Corporation 5,264
--------- ----------- --------- ----------- --------- --------- ---------
Total $ 126,063 $ 1,517,955 $ 495,076 $ 1,232,838 $ 181,655 $ 864,910 $ 318,543
========= =========== ========= =========== ========= ========= =========
General
operating Premiums
expenses written
----------- -----------
Segment
- -------
Property and
casualty insurance:
Underwriting $ 24,933 $ 604,228
Automobile 9,979 97,176
Workers' compensation 11,597 96,698
Gen. liability, A&H 15,897 168,168
Homeowners
CMP, fire and allied lines, 21,220 206,133
inland marine 5,220 34,418
Fidelity, surety, burglary
Miscellaneous Income
Investment -------- -----------
Total property and 88,846 1,206,821
casualty insurance
819 6
Life ins.(discontinued operations)
1,655 1,511
Premium finance
5,329
Corporation -------- -----------
$ 96,649 $ 1,208,338
Total ======== ===========
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on policy counts.
25
26
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1996
Deferred Future policy Benefits,
policy benefits Net losses and
acquisition losses and Unearned Premium investment loss
costs loss expenses premiums revenue income expenses
------------- -------------- ------------ ------------ ------------ ------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Automobile $ 36,325 $ 596,131 $ 181,834 $ 598,339 $ 495,278
Workers' compensation 7,990 387,951 47,012 124,157 80,975
Gen. liability, A&H 13,833 265,399 45,337 104,428 43,799
Homeowners 26,553 70,969 92,950 165,630 167,302
CMP, fire and allied lines,
inland marine 32,634 213,270 97,943 195,437 141,331
Fidelity, surety, burglary 10,835 13,867 26,312 34,135 1,904
Miscellaneous Income 2,410
Investment 179,407
--------- ----------- --------- ----------- --------- ---------
Total property and
casualty insurance 128,170 1,547,587 491,388 1,224,536 179,407 930,589
Life ins.(discontinued operations) (11,486) 289,086 4,582 4,812 693
Premium finance 225 2,115 293
Corporation 3,608
--------- ----------- --------- ----------- --------- ---------
Total $ 116,684 $ 1,836,673 $ 491,613 $ 1,231,233 $ 188,120 $ 931,282
========= =========== ========= =========== ========= =========
Amortization
of deferred General
acquisition operating Premiums
costs expenses written
------------- ------------ -------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Automobile $ 120,874 $ 34,268 $ 594,661
Workers' compensation 26,221 10,124 115,398
Gen. liability, A&H 34,829 14,081 101,793
Homeowners 46,149 12,641 166,457
CMP, fire and allied lines,
inland marine 62,688 20,364 195,290
Fidelity, surety, burglary 18,095 5,794 34,473
Miscellaneous Income
Investment
--------- --------- -----------
Total property and
casualty insurance 308,856 97,272 1,208,072
Life ins.(discontinued operations) 2,004 (193) 215
Premium finance 1,969 1,981
Corporation 5,907
--------- --------- -----------
Total $ 310,860 $ 104,955 $ 1,210,268
========= ========= ===========
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on policy counts.
26
27
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1995
Deferred Future policy Benefits,
policy benefits Net losses and
acquisition losses and Unearned Premium investment loss
costs loss expenses premiums revenue income expenses
------------ ------------- ------------- ------------- ------------ ------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Automobile $ 36,990 $ 608,689 $ 185,735 $ 620,866 $ $ 490,036
Workers' compensation 10,767 403,440 55,861 142,004 93,272
Gen. liability, A&H 14,736 335,428 48,042 110,487 67,201
Homeowners 27,209 74,599 92,099 161,116 123,140
CMP, fire and allied lines,
inland marine 32,270 225,004 98,098 195,014 123,179
Fidelity, surety, burglary 11,358 17,037 25,936 33,719 5,554
Miscellaneous Income 2,497
Investment 184,585
--------- ----------- --------- --------- --------- ---------
Total property and
casualty insurance 133,330 1,664,197 505,771 1,265,703 184,585 902,382
Life ins. (discontinued operations) (13,535) 367,061 7 (345,080) 4,143 (350,121)
Premium finance 257 2,370 522
Corporation 196 3,000
--------- ----------- --------- --------- --------- ---------
Total $ 119,795 $ 2,031,258 $ 506,035 $ 923,189 $ 192,250 $ 552,261
========= =========== ========= ========= ========= =========
Amortization
of deferred General
acquisition operating Premiums
costs expenses written
------------ ------------ --------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Automobile $ 129,058 $ 23,246 $ 611,315
Workers' compensation 30,196 10,806 140,558
Gen. liability, A&H 37,785 12,236 108,283
Homeowners 46,523 12,747 160,444
CMP, fire and allied lines,
inland marine 65,875 18,237 193,477
Fidelity, surety, burglary 17,618 4,904 35,118
Miscellaneous Income
Investment
--------- -------- ---------
Total property and
casualty insurance 327,055 82,176 1,249,195
Life ins. (discontinued operations) 4,097 1,471 (346,394)
Premium finance 1,819 2,314
Corporation 5,975
--------- -------- ---------
Total $ 331,152 $ 91,441 $ 905,115
========= ======== =========
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses
with the remainder allocated based on premium volume.
27
28
Schedule IV
Ohio Casualty Corporation and Subsidiaries
Consolidated Reinsurance
(In thousands)
December, 1997, 1996 and 1995
Percent of
amount
Ceded to Assumed assumed
Gross other from other Net to net
amount companies companies amount amount
------------ ------------ ------------ ------------ -------------
Year Ended December 31, 1997
Life insurance in force $ 547 $ 547 $ 0 $ 0 0.0%
Premiums
Property and casualty insurance $ 1,225,813 $ 31,298 $ 12,306 $ 1,206,821 1.0%
Life insurance (Discontinued operations) 18,359 18,359 0 0 0.0%
Accident and health insurance 1,392 1,575 189 6 3150.0%
------------ ------------ ------------ ------------
Total premiums 1,245,564 51,232 12,495 1,206,827 1.0%
Premium finance charges 1,511
Life insurance - FAS 97 adjustment 0
------------
Total premiums and finance charges written 1,208,338
Change in unearned premiums and finance charges (3,283)
------------
Total premiums and finance charges earned 1,205,055
Miscellaneous income 3,925
Discontinued operations - life insurance (6)
------------
Total premiums & finance charges earned - continuing operations $ 1,208,974
============
Year Ended December 31, 1996
Life insurance in force $ 4,623,435 $ 4,623,435 $ 0 $ 0 0.0%
============ ============ ============ ============
Premiums
Property and casualty insurance $ 1,211,695 $ 29,039 $ 25,416 $ 1,208,072 2.1%
Life insurance (Discontinued operations) 29,822 29,822 0 0 0.0%
Accident and health insurance 2,204 3,502 1,513 215 703.7%
------------ ------------ ------------ ------------
Total premiums 1,243,721 62,363 26,929 1,208,287 2.2%
Premium finance charges 1,981
------------
Total premiums and finance charges written 1,210,268
Change in unearned premiums and finance charges 14,182
------------
Total premiums and finance charges earned 1,224,450
Miscellaneous income 2,416
Discontinued operations - life insurance (215)
------------
Total premiums & finance charges earned - continuing operations $ 1,226,651
============
Year Ended December 31, 1995
Life insurance in force $ 5,207,297 $ 5,298,297 $ 91,000 $ 0 0.0%
============ ============ ============ ============
Premiums
Property and casualty insurance $ 1,251,079 $ 41,252 $ 39,692 $ 1,249,519 3.2%
Life insurance (Discontinued operations) 38,456 384,974 136 (346,382) 0.0%
Accident and health insurance 1,456 1,780 1,521 1,197 127.1%
------------ ------------ ------------ ------------
Total premiums 1,290,991 428,006 41,349 904,334 4.6%
Premium finance charges 2,314
Life insurance - FAS 97 adjustment (1,533)
------------
Total premiums and finance charges written 905,115
Change in unearned premiums and finance charges 14,263
------------
Total premiums and finance charges earned 919,378
Miscellaneous income 3,810
Discontinued operations - life insurance 345,081
------------
Total premiums & finance charges earned - continuing operations $ 1,268,269
============
28
29
Schedule V
Ohio Casualty Corporation and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
Balance at Balance at
beginning Charged to end of
of period expenses Deductions period
Year ended December 31, 1997
Reserve for bad debt 3,700 500 0 4,200
Year ended December 31, 1996
Reserve for bad debt 3,500 200 0 3,700
Year ended December 31, 1995
Reserve for bad debt 4,500 (1,000) 0 3,500
29
30
Schedule VI
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplemental Information Concerning Property and
Casualty Insurance Operations
(In thousands)
Claims and claim
Reserves for adjustment expenses
Deferred unpaid claims incurred related to
policy and claim Discount Net ------------------------
Affiliation with acquisition adjustment of Unearned Earned investment Current Prior
registrant costs expenses reserves premiums premiums income year years
---------- ----------- ---------- ----------- ----------- ---------- ------------ -----------
Property and casualty
subsidiaries
Year ended December 31,
1997 $ 128,248 $ 1,481,657 $ 0 $ 494,883 $1,207,341 $ 172,372 $ 921,818 $ (53,615)
========== =========== ========== =========== =========== ========== ============ ===========
Year ended December 31,
1996 $ 128,170 $ 1,547,587 $ 0 $ 491,388 $1,224,536 $ 179,407 $1,008,395 $ (76,920)
========== =========== ========== =========== =========== ========== ============ ===========
Year ended December 31,
1995 $ 133,330 $ 1,664,197 $ 0 $ 505,771 $1,265,703 $ 184,585 $1,007,380 $ (104,998)
========== =========== ========== =========== =========== ========== ============ ===========
Amortization Paid
of deferred claims
policy and claim
Affiliation with acquisition adjustment Premiums
registrant costs expenses written
------------ ----------- -----------
Property and casualty
subsidiaries
Year ended December 31,
1997 $ 303,494 $ 929,399 $ 1,206,821
============ =========== ===========
Year ended December 31,
1996 $ 308,856 $1,001,706 $ 1,208,072
============ =========== ===========
Year ended December 31,
1995 $ 327,055 $ 954,777 $ 1,249,195
============ =========== ===========
30
31
FORM 10-K
OHIO CASUALTY CORPORATION
INDEX TO EXHIBITS
Page
Number
------
Exhibit 13 Annual Report to Shareholders for the Registrant's fiscal year
ended December 31, 1997 33-68
Exhibit 21 Subsidiaries of Registrant 69
Exhibit 22 Proxy Statement of the Board of Directors for the fiscal year
ended December 31, 1997 70-86
Exhibit 23 Consent of Independent Accountants to incorporation of their
opinion by reference in Registration Statement on Form S-3 87
Exhibit 27 Financial Data Schedule 88
Exhibit 28 Information from Reports Furnished to State Insurance
Regulation Authorities 89-102
Exhibits incorporated by reference to previous filings:
Exhibit 3 Articles of Incorporation and By Laws amended 1986 and filed
with Form 8-K on January 15, 1987
Exhibit 3a Amendment to Amended Articles of Incorporation increasing
authorized number of shares to 150,000,000 common shares and
authorized 2,000,000 preferred shares, dated April 17, 1996
Exhibit 4a Rights Agreement amended as of April 1, 1994 between Ohio
Casualty Corporation and Mellon Bank, N.A. as rights agent
filed with Form 8-K on April 1, 1994
Exhibit 4b First Supplement to Rights Agreement filed with Form 8-K
on November 6, 1990
Exhibit 4c Second Supplement to Rights Agreement filed with
Form 8-K on November 6, 1990
Exhibit 4d Rights Agreement amended as of September 5, 1995 between
Ohio Casualty Corporation and First Chicago Trust Company of
New York as rights agent filed with Form 8-K on September 5,
1995
Exhibit 10 Credit Agreement dated as of October 25, 1994 between Ohio
Casualty Corporation and Chase Manhattan Bank, N.A., as agent,
filed with Form 10-Q on November 1, 1994
Exhibit 10a Ohio Casualty Corporation 1993 Stock Incentive Program
filed with Form 10-Q as Exhibit 10d on May 31, 1993
Exhibit 10a1 Ohio Casualty Corporation amended 1993 Stock Incentive
Program filed with Form 10-Q dated May 14, 1997
31
32
FORM 10-K
OHIO CASUALTY CORPORATION
INDEX TO EXHIBITS, CONTINUED
Exhibit 10b Coinsurance Life, Annuity and Disability Income Reinsurance
Agreement between Employer's Reassurance Corporation and
The Ohio Life Insurance Company dated as of October 2, 1995
Exhibit 10c Credit Agreement dated October 27, 1997 with Chase
Manhattan Bank, N.A. as agent, filed with Form 10-Q on
November 13, 1997
Exhibit 99.1 Press release dated November 25, 1997, announcing the
settlement with Great Southern Life Insurance Company
32