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OHIO CASUALTY CORPORATION & SUBSIDIARIES Exhibit 13
SHAREHOLDER INFORMATION
STOCK PRICE AND DIVIDEND INFORMATION
(NASDAQ: OCAS)
Quarter 1st 2nd 3rd 4th
- -------------------------------------------------------------------
1997 HIGH 42 46 3/4 47 15/16 50 3/4
LOW 34 3/8 36 1/8 44 43 5/16
DIVIDEND
DECLARED $0.42 $0.42 $0.42 $0.42
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
1998 ANTICIPATED DIVIDEND SCHEDULE
DECLARATION DATE RECORD DATE PAYABLE DATE
- ----------------------------------------------------------------------------
February 19, 1998 March 2, 1998 March 10, 1998
May 21, 1998 June 1, 1998 June 10, 1998
August 20, 1998 September 1, 1998 September 10, 1998
November 19, 1998 December 1, 1998 December 10, 1998
DIVIDEND REINVESTMENT/STOCK PURCHASE PLAN
The Corporation offers a dividend reinvestment/stock purchase plan for all
registered holders of common stock. Under the Plan, shareholders may reinvest
their dividends to buy 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/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 Company
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 15, 1998, 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.
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OHIO CASUALTY CORPORATION & SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(IN THOUSANDS) 1997 1996 1995
============================================================================
Gross premiums and
finance charges $1,240,681 $1,240,354 $1,294,541
Investment income,
less expenses 177,700 183,308 188,107
Income before investment
gains 97,406 64,941 91,400
Realized investment gains,
after taxes 32,986 32,287 3,963
Income from discontinued
operations 8,655 5,229 4,372
Net income 139,047 102,457 99,735
Property and casualty
combined ratio 105.3% 109.5% 104.0%
BASIC AND DILUTED EARNINGS
PER COMMON SHARE
Income before investment
gains $ 2.85 $ 1.85 $ 2.56
Realized investment
gains, after taxes 0.96 0.91 0.11
Income from discontinued
operations 0.25 0.15 0.12
Net income 4.06 2.91 2.79
Book value 39.11 33.44 31.39
Dividends 1.68 1.60 1.52
FINANCIAL CONDITION
Assets $3,778,782 $3,889,981 $3,980,142
Shareholders' equity 1,314,829 1,175,100 1,111,014
Average shares
outstanding - basic 34,228 35,247 35,750
Average shares
outstanding - diluted 34,257 35,254 35,759
Shares outstanding
on December 31 33,622 35,141 35,396
Number of shareholders 6,200 6,500 6,100
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OHIO CASUALTY CORPORATION & SUBSIDIARIES
TEN-YEAR SUMMARY OF OPERATIONS
(IN MILLIONS) 1997 1996 1995 1994
================================================================================================================================
CONSOLIDATED OPERATIONS
Income after taxes
Operating income $ 97.4 $ 64.9 $ 91.4 $ 77.1
Realized investment gains (losses) 33.0 32.3 4.0 14.2
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 130.4 97.2 95.4 91.3
Discontinued operations 8.7 5.3 4.3 5.9
Cumulative effect of accounting changes 0.0 0.0 0.0 (0.3)
- --------------------------------------------------------------------------------------------------------------------------------
Net income 139.1 102.5 99.7 96.9
================================================================================================================================
Income after taxes per average share outstanding - BASIC
Operating income 2.85 1.85 2.56 2.14
Realized investment gains (losses) 0.96 0.91 0.11 0.40
Discontinued operations 0.25 0.15 0.12 0.16
Cumulative effect of accounting changes 0.00 0.00 0.00 (0.01)
- --------------------------------------------------------------------------------------------------------------------------------
Net income 4.06 2.91 2.79 2.69
================================================================================================================================
Average shares outstanding - BASIC 34.2 35.2 35.8 36.0
Income after taxes per average share outstanding - DILUTED
Operating income 2.85 1.85 2.56 2.14
Realized investment gains (losses) 0.96 0.91 0.11 0.40
Discontinued operations 0.25 0.15 0.12 0.16
Cumulative effect of accounting changes 0.00 0.00 0.00 (0.01)
- --------------------------------------------------------------------------------------------------------------------------------
Net income 4.06 2.91 2.79 2.69
================================================================================================================================
Average shares outstanding -DILUTED 34.3 35.3 35.8 36.0
Total assets 3,778.8 3,890.0 3,980.1 3,739.0
Shareholders' equity 1,314.8 1,175.1 1,111.0 850.8
Book value per share 39.11 33.44 31.39 23.64
Dividends paid per share 1.68 1.60 1.52 1.46
Percent increase over previous year 5.0% 5.3% 4.1% 2.8%
PROPERTY AND CASUALTY OPERATIONS
Net premiums written 1,207.6 1,209.0 1,250.6 1,286.4
Net premiums earned 1,204.3 1,223.4 1,264.6 1,297.7
GAAP underwriting gain (loss) before taxes (49.6) (112.2) (68.8) (92.9)
Loss ratio 62.7% 66.5% 61.2% 61.6%
Loss expense ratio 9.4% 9.7% 10.2% 10.0%
Underwriting expense ratio 33.2% 33.3% 32.6% 32.2%
Combined ratio 105.3% 109.5% 104.0% 103.8%
Investment income before taxes 172.4 179.4 184.6 183.8
Per average share outstanding 5.04 5.09 5.16 5.10
Property and casualty reserves
Unearned premiums 494.9 491.4 505.8 517.8
Losses 1,174.5 1,215.8 1,268.1 1,303.6
Loss adjustment expense 307.2 331.8 356.1 367.3
Statutory policyholders' surplus 1,109.5 984.9 876.9 660.0
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10-Year Compound
1993 1992 1991 1990 1989 1988 Annual Growth
================================================================================================================================
$ 51.5 $ 57.8 $ 99.1 $ 94.6 $ 109.3 $ 135.2 0.6%
28.7 35.1 9.8 (8.7) (10.5) (14.2) 0.0%
- --------------------------------------------------------------------------------------------------------------------------------
80.2 92.9 108.9 85.9 98.8 121.0 5.8%
6.8 4.1 (1.0) (1.8) 2.7 7.0 6.8%
0.0 1.5 0.0 0.0 0.0 0.0 0.0%
- --------------------------------------------------------------------------------------------------------------------------------
87.0 98.5 107.9 84.1 101.5 128.0 5.9%
================================================================================================================================
1.43 1.60 2.77 2.47 2.56 3.10 3.4%
0.80 0.98 0.27 (0.23) (0.25) (0.32) 0.0%
0.19 0.12 (0.03) (0.05) 0.06 0.16 9.6%
0.00 0.04 0.00 0.00 0.00 0.00 0.0%
- --------------------------------------------------------------------------------------------------------------------------------
2.42 2.74 3.01 2.19 2.37 2.94 8.8%
================================================================================================================================
36.0 36.0 35.8 38.4 42.8 43.6 (2.7)%
1.43 1.60 2.76 2.47 2.55 3.10 3.4%
0.79 0.98 0.27 (0.23) (0.25) (0.32) 0.0%
0.19 0.12 (0.03) (0.05) 0.06 0.16 9.6%
0.00 0.04 0.00 0.00 0.00 0.00 0.0%
- --------------------------------------------------------------------------------------------------------------------------------
2.41 2.74 3.00 2.19 2.36 2.94 8.8%
================================================================================================================================
36.0 36.0 35.9 38.5 42.9 43.6 (2.7)%
3,816.8 3,760.7 3,531.3 3,252.9 3,145.7 2,922.0 3.5%
862.3 825.2 774.5 651.2 775.0 718.5 7.9%
23.93 23.43 21.58 18.19 18.46 16.65 10.9%
1.42 1.34 1.24 1.16 1.04 0.94 7.2%
6.0% 8.1% 6.9% 11.5% 10.6% 11.9%
1,306.0 1,508.5 1,492.3 1,468.4 1,377.6 1,353.2 (1.2)%
1,379.4 1,517.6 1,469.1 1,438.0 1,364.2 1,339.6 (1.2)%
(147.3) (130.8) (74.5) (79.4) (62.6) (16.3)
64.9% 63.7% 60.4% 61.4% 58.4% 55.2%
11.8% 10.8% 10.6% 10.9% 12.1% 11.8%
33.6% 33.5% 33.9% 33.0% 33.2% 33.8%
110.3% 108.0% 104.9% 105.3% 103.7% 100.8%
190.4 194.6 191.6 176.7 187.7 169.8 0.9%
5.29 5.41 5.34 4.59 4.38 3.89 3.8%
529.6 596.1 605.2 582.0 551.6 538.2 (0.6)%
1,378.0 1,309.2 1,216.1 1,148.9 1,061.5 979.3 2.4%
390.6 364.0 350.0 335.1 308.5 273.1 2.4%
713.6 674.2 643.4 465.8 531.6 452.1 9.3%
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MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
Net income increased 35.7% for 1997 to $139.0 million or $4.06 per share
while the combined ratio decreased by 4.2 points to 105.3%. Losses were
negatively impacted by catastrophes with $21.4 million of catastrophe losses in
1997 versus $62.2 million in 1996. Underwriting expenses continued to decline in
1997, down, $2.1 million from 1996, which had declined over $3.8 million from
1995. General operating expenses, a component of underwriting expenses, have
increased over the period of 1995 to 1997. The increase in operating expenses is
primarily due to expenditures in two categories. First, advertising expenses
increased as part of the Corporation's efforts to increase name recognition of
its property and casualty companies. Second, the branch consolidation process
results in extra expenditures in the year of closing. We are beginning to see
the efficiencies that are produced through this process in declining statutory
underwriting expenses. Branch consolidation resulted in closing 16 branches in
1997, 7 branches in 1996 and 3 branches in 1995. We anticipate closing an
additional 3 branches in 1998.
Net premiums written were flat for the year. However, if the impact of
residual market and canceled agent reductions are excluded, there was an
increase of 5.3% of written premium from our active agents. Our growth campaign
continued to be led in 1997 by our key agents with a 7.1% increase in written
premium for the year.
Net cash produced from operations was $26.4 million compared with cash
used of $14.0 million in 1996 and cash used of $56.4 million in 1995. Investing
activities produced net cash of $164.0 million in 1997, compared with $112.7
million in 1996 and $151.0 million in 1995. Dividend payments were $57.5 million
in 1997 compared with $56.4 million in 1996 and $54.3 million in 1995. Total
cash used for financing activities was $131.9 million in 1997 compared with
$75.4 million in 1996 and $85.0 million in 1995. Overall, total cash generated
in 1997 was $58.4 million, compared with $23.3 million in 1996 and $9.6 million
in 1995.
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, 1997, our five-year average return on
equity was 15.5% compared with 13.4% calculated at December 31, 1996 compared
with 16.2% at December 31, 1995.
PROPERTY AND CASUALTY
Property and casualty operating income was $97.4 million, $2.84 per
share, in 1997 compared with $66.1 million, $1.88 per share, in 1996 and $92.5
million, $2.59 per share in 1995. Catastrophe losses in 1997 totaled $21.4
million compared with $62.2 million in 1996 and $27.3 million in 1995. There
were 25 separate catastrophes in 1997 compared with 39 catastrophes in 1996 and
34 in 1995. Catastrophe losses added 1.8 points to the combined ratio in 1997
compared with 5.1 points in 1996 and 2.2 points in 1995. The 1996 losses were
largely due to winter and spring storms in the Midwest.
Statutory surplus, a traditional insurance industry measure of strength
and underwriting capacity, was $1,109.5 million at December 31, 1997 compared
with $984.9 million at December 31, 1996 and $876.9 million at December 31,
1995. The increases 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 1.1 to 1. Ratios below 3 to 1 generally
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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.
In a continuing effort to maximize the use of technology in our industry,
we are furthering the expansion of our Internet applications. This is being
accomplished with our newest subsidiary, Avomark, which began operations on
January 1, 1998. Targeting two New York locales, the company plans to reach
those consumers who find ease and convenience in buying our product through use
of the Internet and direct telemarketing.
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 increasing retention. By retaining valued
customers, the Corporation is able to increase premium volume while limiting the
higher expense associated with new business underwriting.
PREMIUM DISTRIBUTIONS BY TOP STATES
1997 1996 1995
New Jersey 17.9% 18.3% 18.1%
Ohio 10.7% 10.2% 9.6%
Pennsylvania 8.3% 9.4% 10.0%
Kentucky 8.2% 7.2% 6.5%
Illinois 5.2% 5.0% 5.1%
After declining in 1995, premiums written increased in both Ohio and
Kentucky in 1996 and 1997. In Ohio, premiums grew 4.8% in 1997, 1.6% in 1996,
and declined 3.3% in 1995. Primarily, this growth has come from the auto and CMP
lines of business. Net written premiums in Ohio totaled $129.8 million in 1997,
$123.8 million in 1996 and $120.4 million in 1995. In Kentucky, premiums grew
14.6% in 1997, 6.1% in 1996 and declined .2% in 1995. Net written premiums in
Kentucky totaled $99.1 million in 1997, $86.5 million in 1996 and $81.7 million
in 1995.
New Jersey showed a small decline in premiums written of 2.3% during
1997. Net premiums written were $216.0 million compared with $221.2 million in
1996 and $226.5 million in 1995. The reduction in premium growth is primarily
due to a decline in the workers compensation, general liability and auto lines
of business. New Jersey requires insurers to write all submitted auto business
that meets underwriting guidelines regardless of risk concentration.
Premiums written in Pennsylvania declined during 1997 to $99.8 million
compared with $113.5 million in 1996 and $125.7 million in 1995. 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. We remain committed to the state of Pennsylvania and
believe we can generate premium growth in all lines in 1998.
COMBINED RATIOS
1997 1996 1995 1994 1993
================================== ============== ============ ============ =========== ===========
Automobile 107.1% 109.1% 103.9% 101.9% 103.5%
Commercial Multiple Peril, Fire
and Inland Marine 107.7% 115.0% 105.7% 108.6% 124.2%
General Liability 103.0% 89.1% 105.3% 90.3% 120.6%
Workers' Compensation 93.0% 94.3% 93.7% 87.8% 111.3%
Homeowners 111.2% 135.9% 113.7% 135.7% 118.0%
Fidelity and Surety 76.5% 73.4% 84.5% 72.8% 79.1%
- ---------------------------------- -------------- ------------ ------------ ----------- -----------
Total 105.3% 109.5% 104.0% 103.8% 110.3%
================================== ============== ============ ============ =========== ===========
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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 with Great Southern Life
Insurance Company. The existing blocks of business were reinsured through a 100%
coinsurance arrangement.
During the fourth quarter of 1997, Great Southern Life Insurance Company
legally replaced Ohio Life as the primary insurer on approximately 76% of the
life insurance business subject to the 1995 reinsurance agreement with Ohio
Life. As a result of this assumption, fourth quarter net income for the
Corporation was positively impacted by a partial recognition of unamortized
ceding commission from the original agreement. The before-tax income impact for
the quarter was $8.1 million or $.24 per share. The after-tax impact was $5.3
million or $.16 per share. There remains approximately $2.2 million in
unamortized ceding commission. This will continue to be amortized over the
remaining life of the policies which have yet to be assumed by Great Southern.
Net income from discontinued operations amounted to $8.7 million or $.25
per share in 1997 compared with $5.2 million or $.15 per share in 1996 and $4.4
million or $.12 per share in 1995.
REINSURANCE
In order to preserve capital and shareholder value, Ohio Casualty
Corporation purchases reinsurance to protect the Corporation against large or
catastrophic losses. 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. Property reinsurance covers $15.0 million in excess of the
retention. 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. Casualty reinsurance covers $11.0 million in excess of the
retention; and workers' compensation reinsurance covers $74.0 million in excess
of the retention.
The Catastrophe Reinsurance contract protects the Corporation against an
accumulation of losses arising from one defined catastrophic occurrence or
series of events. The 1998 Catastrophe Program, similar to 1997, provides $150.0
million coverage in excess of the Corporation's $25.0 million retention. In
1997, a portion of the Catastrophe Program was again renewed with a multi-year
placement. In 1998, approximately 55% of our reinsurance program is on a
three-year placement. The multi-year placements maintain rates, continuity, and
each reinsurers' overall share on the 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 $31.5 million and $29.8 million, respectively. Both of these
losses exceeded our prior retention amount of $13.0 million. The Corporation
recovered $30.3 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 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 $1.5
billion at December 31, 1997 and $1.6 billion at December 31, 1996 and 1995.
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In 1997, the Corporation continued the use of a toll free number for
direct reporting of claims. The percentage of all claims handled by direct
reporting was approximately 55% in 1997. This compares with 50% in 1996 and 30%
in 1995. The Corporation continues to receive 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, 15% building/premises, 13% mercantile and only 5%
manufacturers. Within the manufacturing category, we have concentrated on the
light manufacturers which further limits our exposure to environmental claims.
Estimated asbestos and environmental reserves are composed of case
reserves, incurred but not reported reserves and reserves for loss adjustment
expense. For 1997, 1996 and 1995 respectively those reserves were $40.1 million,
$41.0 million and $40.7 million. Asbestos reserves were $7.0 million , $5.2
million and $5.2 million and environmental reserves were $33.2 million, $35.7
million and $35.5 million for those respective years. 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. At year end
1996, the state's assertion of the Corporation's liability was $42.1 million
plus accrued interest. An administrative hearing process is ongoing concerning
the potential rollback liability.
Upon the Administrative Law Judge's request that it submit what it now
asserts is the rollback liability for Ohio Casualty, 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
departments regulations, without consideration of Ohio Casualty's constitutional
challenge, that Ohio Casualty's liability should be below $30 million plus
interest. The commissioner may accept or reject the Judge's ultimate decision in
whole or in part, and his determination will be subject to de novo review by the
state superior court.
After consultation with outside counsel, the Corporation has determined
that the $35.9 million plus interest is the
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more reasonable of the two Department calculations should the Department of
Insurance prevail. Our current reserve of $66.9 million is based on this
testimony. We made no additions to reserves for principal amounts in 1997;
however, we continue to accrue interest on the assessed liability. Reducing this
alleged liability positively impacted net income by $4.9 million or $.14 per
share in 1997. Increases in reserve due to accruing interest negatively impacted
net income by $2.7 million or $.08 per share in 1996 and $14.9 million or $.42
per share in 1995.
The Corporation continues to challenge the validity of any rollback and
plans to continue negotiations with Department officials. While we anticipate an
administrative decision in 1998, it is uncertain when this matter will
ultimately be resolved.
INVESTMENTS
Consolidated pre-tax investment income from continuing operations
decreased 3.1% to $177.7 million in 1997 compared with $183.3 million in 1996
and $188.1 million in 1995. After-tax investment income totaled $133.6 million
in 1997 compared with $138.6 million in 1996 and $138.4 million in 1995. Pre-tax
and after-tax investment income comparisons are impacted by an increased
investment in municipal bonds beginning in 1996.
Cash flow from investment income has been impacted by our continued share
repurchase program. During 1997, Ohio Casualty Corporation purchased 1,544,688
shares of its common stock at a cost of $64.9 million compared with 264,600
shares for $9.2 million in 1996 and 613,900 shares for $20.9 million in 1995.
The Corporation is currently authorized to repurchase 2.0 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 12.2 million shares at an average cost of $24.55 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.
At year end 1997, consolidated investments had a carrying value of $3.2
billion. The excess of market value over cost was $697.6 million, compared with
a $499.7 million excess at year end 1996 and $465.9 million at year end 1995.
The increase in the excess of market value over cost in 1997 was attributable to
the strong performance of our equity and fixed income portfolios. After-tax
realized investment gains from continuing operations amounted to $33.0 million
in 1997 compared with $32.3 million in 1996 and $4.0 million in 1995.
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 14, we have an interest
rate swap with Chase Manhattan Bank covering the outstanding balance of our line
of credit. 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, 1997, Ohio
Casualty maintained a $347.1 million mortgage-backed securities portfolio
compared with $446.9 million at December 31, 1996 and $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. $5.8, $27.0, $27.8 million of this portfolio was
invested in more volatile bond classes (e.g.
interest-only, super-floaters, inverses) in 1997, 1996 and 1995, respectively.
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 is prudent to remain fully invested at all times, subject
only to our liquidity needs.
Tax exempt bonds were 39.4% of the fixed income portfolio at year end
1997 versus 34.4% at December 31, 1996 and 37.3% at December 31, 1995. This
higher average exposure to municipals reflects our internal tax planning
strategy as well as our belief that, coming into 1997, municipals
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were attractive relative to taxable bond alternatives.
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% in 1996 to 27.3% at year end 1997. 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 three years.
YEAR 2000
Recently, the "Year 2000 Problem" has received extensive press in the
insurance industry. According to published reports, many companies 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. This would obviously create havoc
with date related calculations such as policy premiums.
Ohio Casualty started very early 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 70% of our systems have been modified
for year 2000. We have added compliance testing to our year 2000 compliance
criteria. Compliance testing involves migrating our data forward and changing
the internal date in the computer to critical dates in late 1999 and early 2000.
With this addition to our criteria we are over 50% completed with the entire
year 2000 compliance process. Complete testing of year 2000 compliance for all
systems is set to be completed by the end of 1998. To date, we have spent
approximately $.7 million and expect to spend an additional $1.4 million to
complete our efforts.
The readiness of outside parties, such as vendors, agents or governmental
units, also play a role in the Company's exposure to the "Year 2000 Problem." In
1997, Ohio Casualty contacted those parties to request written verification that
their software will be compliant. As of year end 1997, over 50% have responded.
The Corporation expects this process to be completed by year end 1998.
11
OHIO CASUALTY CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
=======================================================================================================================
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value $ 2,226,030 $ 2,310,938 $ 2,407,853
(Cost: $2,112,291; $2,225,517; $2,276,150)
Equity securities, at fair value 859,475 721,152 661,154
(Cost: $275,637; $306,865; $326,999)
Short-term investments at cost 65,849 41,546 14,399
- -----------------------------------------------------------------------------------------------------------------------
Total investments 3,151,354 3,073,636 3,083,406
Cash 54,206 20,078 23,883
Premiums and other receivables 193,615 186,676 196,175
Deferred policy acquisition costs 126,063 116,684 119,795
Property and equipment 50,699 42,239 43,846
Reinsurance recoverable 108,962 362,683 446,167
Other assets 93,883 87,985 66,870
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 3,778,782 $ 3,889,981 $ 3,980,142
=======================================================================================================================
LIABILITIES
Insurance reserves:
Unearned premiums $ 495,076 $ 491,613 $ 506,035
Losses 1,176,614 1,224,873 1,275,077
Loss adjustment expenses 307,193 331,797 356,107
Future policy benefits 34,148 280,002 360,074
Note payable 40,000 50,000 60,000
California Proposition 103 reserve 66,908 74,376 70,167
Deferred income taxes 95,389 27,993 2,112
Other liabilities 248,625 234,227 239,556
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 2,463,953 2,714,881 2,869,128
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
Additional paid-in capital 3,923 3,603 3,422
Unrealized gain on investments,
net of applicable income taxes 454,241 332,042 305,049
Retained earnings 1,158,308 1,076,545 1,030,468
Treasury stock, at cost
(Shares: 13,182,240; 11,662,559; 11,407,745) (307,493) (242,940) (233,775)
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,314,829 1,175,100 1,111,014
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 3,778,782 $ 3,889,981 $ 3,980,142
=======================================================================================================================
See notes to consolidated financial statements
12
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
===============================================================================================================
Premiums and finance charges earned $ 1,208,974 $ 1,226,651 $ 1,268,269
Investment income less expenses 177,700 183,308 188,107
Investment gains realized, net 50,749 49,672 6,096
- ---------------------------------------------------------------------------------------------------------------
Total income 1,437,423 1,459,631 1,462,472
Losses and benefits for policyholders 751,207 812,234 774,282
Loss adjustment expenses 113,435 118,354 128,099
General operating expenses 103,299 100,939 89,970
Amortization of deferred policy
acquisition costs 303,494 308,856 327,055
California Proposition 103 reserve,
including interest (7,469) 4,210 22,889
- ---------------------------------------------------------------------------------------------------------------
Total expenses 1,263,966 1,344,593 1,342,295
Income from continuing operations
before income taxes 173,457 115,038 120,177
Income taxes
Current 44,263 10,173 23,514
Deferred (1,198) 7,637 1,300
- ---------------------------------------------------------------------------------------------------------------
Total income taxes 43,065 17,810 24,814
- ---------------------------------------------------------------------------------------------------------------
Income before discontinued operations 130,392 97,228 95,363
Income from discontinued operations
net of taxes of $4,661, $2,663 and
$4,345 (see Note 17) 8,655 5,229 4,372
- ---------------------------------------------------------------------------------------------------------------
Net income $ 139,047 $ 102,457 $ 99,735
===============================================================================================================
Average shares outstanding 34,228 35,247 35,750
Basic and diluted earnings per share:
Income before discontinued operations $ 3.81 $ 2.76 $ 2.67
Income from discontinued operations 0.25 0.15 0.12
- ---------------------------------------------------------------------------------------------------------------
Net income per share $ 4.06 $ 2.91 $ 2.79
===============================================================================================================
See notes to consolidated financial statements
13
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN GAIN (LOSS) RETAINED TREASURY SHAREHOLDERS'
(IN THOUSANDS) STOCK CAPITAL ON INVESTMENTS EARNINGS STOCK EQUITY
====================================================================================================================================
Balance,
January 1, 1995 $ 5,850 $ 3,271 $ 69,610 $ 985,068 $ (213,009) $ 850,790
Unrealized gain 360,372 360,372
Deferred income tax on
net unrealized loss (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
Unrealized gain 188,081 188,081
Deferred income tax on
net unrealized gain (65,882) (65,882)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (25,007 shares) 320 172 305 797
Repurchase of treasury
stock (1,544,688 shares) (64,858) (64,858)
Net income 139,047 139,047
Cash dividends paid
($1.68 per share) (57,456) (57,456)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1997 $ 5,850 $ 3,923 $ 454,241 $ 1,158,308 $ (307,493) $ 1,314,829
===================================================================================================================================
See notes to consolidated financial statements
14
OHIO CASUALTY CORPORATION & SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
===============================================================================================================================
CASH FLOWS FROM:
Operations
Net income $ 139,047 $ 102,457 $ 99,735
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves (315,255) (169,006) 116,397
Income taxes 10,691 8,238 (7,157)
Premiums and other receivables (6,939) 9,500 2,993
Deferred policy acquisition costs (9,379) 3,111 45,838
Reinsurance recoverable 253,720 83,484 (358,418)
Other assets (22,339) 775 6,871
Other liabilities 20,677 (18,442) 14,577
California Proposition 103 reserves (7,469) 4,209 21,353
Depreciation and amortization 16,035 12,388 12,600
Investment (gains) losses (52,382) (50,674) (11,199)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from operations 26,407 (13,960) (56,410)
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING
Purchase of securities:
Fixed income securities - available for sale (351,393) (539,690) (944,077)
Equity securities (66,433) (74,243) (86,517)
Proceeds from sales:
Fixed income securities - available for sale 342,193 501,394 929,890
Equity securities 144,688 122,970 89,771
Proceeds from maturities and calls:
Fixed income securities - available for sale 103,165 101,970 132,572
Equity securities 10,013 6,702 47,605
Property and equipment:
Purchases (18,968) (7,340) (19,071)
Sales 702 952 813
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from investments 163,967 112,715 150,986
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING
Note payable repayment (10,000) (10,000) (10,000)
Proceeds from 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 used in financing activities (131,943) (75,413) (84,950)
- -------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 58,431 23,342 9,626
Cash and cash equivalents, beginning of year 61,624 38,282 28,656
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 120,055 $ 61,624 $ 38,282
===============================================================================================================================
See notes to consolidated financial statements
15
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. Investment securities are 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.
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 $24,611 of such liabilities in 1997, $230,843 in 1996 and $293,732 in 1995
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 17.9% was generated
in the State of New Jersey, 10.8% in Ohio and 8.3% 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. The Corporation believes that the fair value of long-term debt is
approximately equal to its carrying value due to the market-based variable
interest rates associated with the debt.
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, 1997, approximately $170,115 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:
1997 1996 1995
- ---------------------------------------------------------------
Investment income from:
Fixed maturities $166,554 $176,160 $177,621
Equity securities 13,776 14,135 14,721
Short-term securities 3,477 2,129 3,096
- ---------------------------------------------------------------
Total investment income 183,807 192,424 195,438
Investment expenses 6,107 9,116 7,331
- ---------------------------------------------------------------
Net investment income $177,700 $183,308 $188,107
===============================================================
16
Realized and unrealized gains (losses) on investments in securities are
summarized as follows:
1997 1996 1995
- ---------------------------------------------------------------
Realized gains (losses):
Fixed maturities $ 9,317 $ 4,567 $ (8,104)
Equity securities 42,956 41,278 16,913
Other investments (1,524) 3,827 (2,713)
- ---------------------------------------------------------------
$ 50,749 $ 49,672 $ 6,096
===============================================================
Unrealized gains (losses):
Securities $ 188,081 $ 40,297 $ 360,372
Deferred tax (65,882) (13,304) (124,933)
- ---------------------------------------------------------------
$ 122,199 $ 26,993 $ 235,439
===============================================================
The amortized cost and estimated market values of investments in debt and
equity securities are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------
Securities available for
sale:
U.S. Government $66,244 $3,601 $(1) $69,844
States, municipalities
and political
subdivisions 835,355 40,405 (19) 875,741
Debt securities
issued by
foreign
governments 3,000 458 0 3,458
Corporate securities 872,904 58,046 (1,026) 929,924
Mortgage-backed
securities:
U.S. Government
Agency 16,876 678 (1) 17,553
Other 317,912 12,838 (1,240) 329,510
- ---------------------------------------------------------------------------------
Total fixed 2,112,291 116,026 (2,287) 2,226,030
maturities
Equity securities 275,637 597,803 (13,965) 859,475
Short-term
investments 65,849 0 0 65,849
- ---------------------------------------------------------------------------------
Total securities,
available for sale $2,453,777 $713,829 $(16,252) $3,151,354
=================================================================================
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
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
1995 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
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
================================================================================
The amortized cost and estimated fair value of debt securities at December
31, 1997, 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.
17
ESTIMATED
AMORTIZED FAIR
COST VALUE
- --------------------------------------------------------------
Due in one year or less $ 21,712 $ 21,869
Due after one year through five years 337,931 356,217
Due after five years through ten years 736,400 779,447
Due after ten years 681,460 721,434
Mortgage-backed securities:
U.S. Government Agency 16,876 17,553
Other 317,912 329,510
- --------------------------------------------------------------
Total fixed maturities $2,112,291 $2,226,030
==============================================================
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 $14,433, $19,456 and $26,290 during 1997, 1996 and 1995,
respectively, representing a reduction in value of $0, $7,055 and $9,696 on
fixed maturities and $14,433, $12,401 and $16,595 on equity securities.
Proceeds from maturities and sales of investments in debt securities during
1997, 1996 and 1995 were $445,358, $603,364 and $1,062,462, respectively. Gross
gains of $12,665, $14,257 and $20,834 and gross losses of $4,311, $10,388 and
$24,500 were realized on those maturities and sales in 1997, 1996 and 1995,
respectively.
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
1997 AMOUNT VALUE
- -----------------------------------------------------------
Assets
Cash and cash equivalents $ 120,055 $ 120,055
Securities - available for sale 3,085,505 3,085,505
Liabilities
Future policy benefits $ 34,148 $ 34,148
Long-term debt 40,000 40,000
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
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:
1997 1996 1995
- ---------------------------------------------------------------
Deferred, January 1 $116,684 $119,795 $165,633
- ---------------------------------------------------------------
Additions:
Commissions and brokerage 190,029 190,461 204,594
Salaries and employee 46,241 47,092 43,867
benefits
Other 67,301 66,143 73,090
- ---------------------------------------------------------------
Deferral of expense 303,571 303,696 321,551
- ---------------------------------------------------------------
Amortization to expense
Discontinued operations (9,302) (2,049) 40,333
Continuing operations 303,494 308,856 327,055
- ---------------------------------------------------------------
Deferred, December 31 $126,063 $116,684 $119,795
===============================================================
The above schedule includes deferred policy acquisition costs (net of
unamortized ceding commission) for discontinued life insurance operations of
$(2,185), $(11,486) and $(13,535) as of 1997, 1996 and 1995, 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 1997, 1996 and 1995 for the following reasons:
1997 1996 1995
- --------------------------------------------------------------
Tax at statutory rate $ 60,710 $ 40,263 $ 42,062
Tax exempt interest (16,522) (18,367) (16,150)
Dividends received deduction
(DRD) (3,239) (4,056) (3,446)
Proration of DRD and tax
exempt interest 2,796 3,017 3,319
Reduction in provision for
audit issues 0 (3,000) 0
Miscellaneous (680) (47) (971)
- --------------------------------------------------------------
Actual tax $ 43,065 $ 17,810 $ 24,814
==============================================================
Tax years 1993 through 1995 are being examined by The Internal Revenue
Service. Management believes
18
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:
1997 1996 1995
- -------------------------------------------------------------
Unearned premium proration $ 34,065 $ 33,833 $ 34,823
Accrued expenses 43,164 59,217 64,658
Postretirement benefits 28,522 27,355 26,331
Discounted loss and loss
expense reserves 78,217 81,350 88,589
- -------------------------------------------------------------
Total deferred tax assets 183,968 201,755 214,401
Deferred policy
acquisition costs (44,122) (51,129) (53,616)
Unrealized gains on
investments (235,235) (178,619) (162,897)
- -------------------------------------------------------------
Total deferred tax
liabilities (279,357) (229,748) (216,513)
- -------------------------------------------------------------
Net deferred tax asset
(liability) $ (95,389) $ (27,993) $ (2,112)
=============================================================
Taxes paid amounted to $37,035 in 1997, $16,336 in 1996 and $37,346 in 1995.
NOTE 6 -- EMPLOYEE BENEFITS
The Corporation has a non-contributory defined benefit retirement plan,
contributory health care, life and disability insurance and savings plans
covering substantially all employees. Benefit expenses are as follows:
1997 1996 1995
- --------------------------------------------------------------
Employee benefit costs:
Retirement $ (252) $ (136) $(1,689)
Health care 12,555 14,415 13,339
Life and disability
insurance 463 555 594
Savings plan 2,321 2,489 2,586
- --------------------------------------------------------------
$15,087 $17,323 $14,830
==============================================================
The pension benefit is determined as follows:
1997 1996 1995
- --------------------------------------------------------------
Service cost/(benefit) earned
during the year $ 6,354 $ 6,256 $ 5,701
Interest cost on projected
benefit obligation 15,003 13,927 13,262
Actual return on plan assets (62,113) (19,070) (34,448)
Amortization of unrecognized
net asset existing at 40,504 (1,249) 13,796
January 1
- --------------------------------------------------------------
Net pension benefit $ (252) $ (136) $ (1,689)
==============================================================
Pension plan funding at December 31:
1997 1996 1995
- --------------------------------------------------------------
Plan assets at fair value
(primarily fixed income
and equity securities) $276,477 $225,681 $217,274
- --------------------------------------------------------------
Plan benefit obligations:
Vested benefits 179,601 160,667 157,371
Non-vested benefits 3,061 2,780 3,046
Future benefits due to
salary increases 31,058 34,091 30,591
- --------------------------------------------------------------
Total 213,720 197,538 191,008
- --------------------------------------------------------------
Excess plan assets over
obligations $ 62,757 $ 28,143 $ 26,266
==============================================================
Unrecognized net gain
(loss) $ 42,443 $ 1,617 $ (3,082)
Unrecognized net assets 15,085 18,102 21,119
Unrecognized prior service
cost (2,508) (566) (624)
Expected long-term return
on plan assets 8.25% 8.75% 8.50%
Discount rate on plan
benefit obligations 7.25% 7.75% 7.50%
Expected future rate of
salary increases 5.25% 5.25% 5.25%
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 1997, 1996 and 1995. The
maximum pension expense deductible for income tax purposes has been funded. Plan
assets at December 31, 1997 include $37,585 of the Corporation's common stock at
market value compared to $29,899 and $32,637 at December 31, 1996 and 1995,
respectively.
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:
1997 1996 1995
- -------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(46,119) $(40,313) $(39,084)
Active employees (35,575) (31,484) (32,435)
- -------------------------------------------------------------
Total (81,694) (71,797) (71,519)
Unrecognized net loss (gain) 203 (6,203) (2,481)
- -------------------------------------------------------------
Accrued postretirement
benefit liability $(81,491) $(78,000) $(74,000)
=============================================================
Postretirement benefit cost at December 31:
1997 1996 1995
- -------------------------------------------------------------
Service cost $1,739 $1,967 $1,883
Interest cost 5,588 5,412 5,144
- -------------------------------------------------------------
Net periodic
postretirement benefit
cost $7,327 $7,379 $7,027
=============================================================
19
Postretirement benefit rate assumptions at October 1:
1997 1996 1995
- ---------------------------------------------------------------
Medical trend rate 8% 9% 10%
Dental trend rate 6% 7% 8%
Ultimate health care trend rate 5% 5% 5%
Discount rate 8.00% 7.75% 8.00%
The postretirement plan measurement date is October 1 for 1997, 1996 and
1995.
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, 1997 by approximately $14,705 and increase the postretirement
benefit cost for 1997 by $1,685.
The Corporation's health care plan is 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 3,000 active employees and 1,378 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.
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, directors, and other full time salaried
employees 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 either 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, 1997,
988,289 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. At December 31, 1997, there were no
outstanding stock appreciation rights.
Restricted stock awards are occasionally issued by the Corporation. The
common shares covered by a restricted stock award may be sold or otherwise
disposed of only after a minimum of six months from the grant date of the award.
The difference between issue price and the fair market value on the date of
issuance is recorded as compensation expense. The amount of compensation expense
recognized in 1997 related to restricted stock awards was $345 before tax. There
were no restricted stock awards in 1996 or 1995. Currently there are 7,136
shares of restricted stock outstanding.
The Corporation also issues, at its discretion, dividend payment rights in
connection with the grant of stock options. These rights entitle the holder to
receive, for each dividend payment right, an amount in cash equal to the
aggregate amount of dividends that the Corporation has paid on each common share
from the date on which such right becomes effective through the payout date. One
third of these rights becomes vested on each anniversary after the grant.
Dividends accrue and payments are made when the rights are fully vested by the
rightholder. The Corporation recognizes compensation expense accordingly. The
amount of compensation expense related to dividend payment rights recognized in
1997 was $517 before tax. There was not any compensation expense recognized in
1996 or 1995 related to dividend payment rights. As of December 31, 1997,
213,000 dividend payment rights were outstanding.
The Corporation continues to elect APB 25 for recognition of stock-based
compensation expense. Under APB 25, expense is recognized based on the intrinsic
value of the options. 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 1997, 1996 and 1995,
respectively: dividend yield of 4.5% for 1997, 1996 and 1995, expected
volatility of 26.1% for 1997 and 25.3% for both 1996 and 1995, risk free
interest rate of 6.87%, 6.34% and 6.20%, and expected life of 8 years. The
following table summarizes information about the stock-based compensation plan
as of December 31, 1997, 1996 and 1995, and changes that occurred during the
year:
20
1997 1996 1995
--------------------------------------------------------------
Weighted- Weighted- Weighted-
Avg Avg Avg
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
--------------------------------------------------------------
Outstanding
beginning of year 173 $33.84 74 $30.02 91 $28.71
Granted 120 41.44 127 34.93 12 30.50
Exercised (27) 33.33 (28) 28.75 (29) 26.11
Canceled (4) 32.38 0 0
------ ------ ------
Outstanding
end of year 262 $37.38 173 $33.84 74 $30.02
====== ====== ======
Options exercisable
at year-end 81 52 74
Weighted-Avg
fair value of
options granted
during the year $10.18 $ 8.14 $ 7.02
At year end 1997, 262,494 options were outstanding with an average
remaining contractual life of 8.35 years and weighted exercise price of $37.38.
Of the amount outstanding, 81,493 were exercisable with a weighted average
exercise price of $34.05. At year end 1996, 172,500 options were outstanding
with an average remaining contractual life of 8.49 years and a weighted exercise
price of $33.84. Of the amount outstanding, 51,500 were exercisable with a
weighted average exercise price of $31.23. At year end 1995, 73,800 options were
outstanding with an average remaining contractual life of 5.81 years and a
weighted exercise price of $30.02. Of the amount outstanding, 73,800 were
exercisable with a weighted average exercise price of $30.02.
Had the Corporation adopted FAS 123, the amount of compensation expense
that would have been recognized in 1997, 1996 and 1995 respectively, would be
$755, $350 and $84. The Corporation's net income and earnings per share would
have been reduced to the pro forma amounts disclosed below:
1997 1996 1995
- ----------------------------------------------------------------
Net Income As Reported: $139,047 $102,457 $99,735
Pro Forma: $138,557 $102,229 $99,680
Basic/diluted earnings per share
As Reported: $4.06 $2.91 $2.79
Pro Forma: $4.05 $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:
1997 1996 1995
- ---------------------------------------------------------------
Premiums earned $32,169 $ 30,534 $ 41,012
Losses incurred 13,387 11,846 22,030
Reserve for unearned
premiums 8,242 8,062 8,294
Reserve for losses 54,209 61,205 62,847
Reserve for future policy
benefits 34,148 280,002 360,074
Reserve for loss adjustment
expenses 7,794 8,833 11,272
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 $25,123,
$25,139 and $24,300 at December 31, 1997, 1996 and 1995, 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. In October 1997,
this obligation was transferred from Ohio Casualty Insurance Company to Ohio
Casualty Corporation. At December 31, 1997, the market value of the account
exceeded the $163,615 required balance by $2,080 compared with $699 in 1996 and
$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.
21
1997 1996 1995
- -----------------------------------------------------------------------
Balance as of January 1, net of
reinsurance recoverables of
$70,048, $74,119 and
$65,336 $1,486,622 $1,557,065 $1,606,487
Incurred related to:
Current year 922,065 1,009,086 1,008,321
Prior years (53,615) (76,920) (104,998)
- -----------------------------------------------------------------------
868,450 932,166 903,323
Paid related to:
Current year 448,402 515,025 444,558
Prior years 484,866 487,584 508,187
- -----------------------------------------------------------------------
Total paid 933,268 1,002,609 952,745
Balance as of December 31, net
of reinsurance recoverables
of $62,003, $70,048 and
$74,119 $1,421,804 $1,486,622 $1,557,065
========================================================================
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:
1997 1996 1995
- -----------------------------------------------------------
Incurred losses $21,389 $62,189 $27,277
Loss ratio effect 1.8% 5.1% 2.2%
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 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 asbestos and environmental reserves are composed of case reserves,
incurred but not reported reserves and reserves for loss adjustment expense. For
1997, 1996 and 1995, respectively, total case, incurred but not reported and
loss adjustment expense reserves were $40,121, $40,956 and $40,719. Asbestos
reserves were $6,966, $5,215 and $5,215 and environmental reserves were $33,155,
$35,741 and $35,504 for those respective years.
NOTE 10 -- EARNINGS PER SHARE
During 1997, the Corporation adopted Statement of Financial Accounting Standard
128 "Earnings Per Share". Basic earnings per share is computed using weighted
average number of common shares outstanding. Diluted earnings per share is
computed similar to basic earnings per share except that the weighted average
number of shares outstanding is increased to include the number of additional
common shares that would have been issued if all dilutive outstanding stock
options would have been exercised. All prior periods were recalculated under the
new definition of basic and diluted earnings per share.
Basic and diluted earnings per share are summarized as follows:
1997 1996 1995
- ---------------------------------------------------------------
Income from continuing
operations $130,392 $97,228 $95,363
Average common shares
outstanding - basic 34,228 35,247 35,750
Basic income from continuing
operations per average share $3.81 $2.76 $2.67
===============================================================
Average common shares
outstanding 34,228 35,247 35,750
Effect of dilutive securities 29 7 9
- ---------------------------------------------------------------
Average common shares
outstanding - diluted 34,257 35,254 35,759
Diluted income from
continuing operations per
average share $3.81 $2.76 $2.67
===============================================================
NOTE 11 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1997 FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------
Premiums and
finance charges
earned $302,479 $307,788 $300,252 $298,455
Net investment
income 43,717 45,153 45,365 43,465
Investment gains
(losses) realized 13,340 8,498 20,806 8,105
Income from
continuing
operations 31,257 32,962 25,324 40,849
Income from
discontinued
operations 1,458 1,143 (85) 6,139
Net income 32,715 34,105 25,239 46,988
Basic and diluted
net income per
share .94 1.00 .74 1.39
22
1996 First Second Third Fourth
- --------------------------------------------------------------
Premiums and
finance charges $310,217 $304,641 $301,054 $310,739
earned
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
Basic and diluted
net income per
share .10 .43 .81 1.58
NOTE 12 -- INDUSTRY SEGMENT INFORMATION
1997 1996 1995
- -----------------------------------------------------------------------
Property and Casualty Insurance
Revenue $1,430,590 $1,453,623 $1,456,242
Income before taxes 173,608 116,906 121,741
Identifiable assets 3,585,030 3,437,622 3,457,750
Premium Finance and Other
Revenue 6,833 6,008 6,230
Loss before taxes (151) (1,868) (1,564)
Identifiable assets 108,858 65,039 26,939
Discontinued Operations
(Life insurance)
Revenue 29,452 10,396 (335,835)
Income before taxes 13,316 7,892 8,717
Identifiable assets 65,337 347,477 511,818
NOTE 13 -- 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.
1997 1996 1995
- -----------------------------------------------------------
Property and Casualty
Insurance
Statutory net income $ 142,457 $104,137 $103,802
Statutory policyholders'
surplus 1,109,517 984,859 876,918
Life Insurance
Statutory net income 29,794 4,885 38,981
Statutory
policyholders' surplus 29,971 58,511 92,297
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 statutory statement of
operations. Following this same treatment, during 1997 the principal reduction
in the Proposition 103 liability was taken as an increase to statutory surplus
and not included in the 1997 statutory statement of operations.
23
NOTE 14 -- BANK NOTE PAYABLE
In 1994, $70,000 was borrowed under a term loan credit facility. During 1997,
the Corporation signed a new credit facility that makes available a $300,000
revolving line of credit which was immediately accessed to refinance the
outstanding term loan balance. The credit agreement contains financial covenants
and provisions customary for such arrangements. The agreement expires in 2002,
with any outstanding loan balance due at that time. The revolving line of credit
maintains the interest rate swap that existed on the term loan. The effect of
the swap agreement was to establish a fixed rate of 6.34% on $20,000 of the
outstanding balance of $40,000 converted to the revolving line of credit. The
remaining balance and any additional borrowings under the line of credit bear
interest at a periodically adjustable rate. The interest rate was 6.08% at
December 31, 1997. 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 $3,147, $3,769 and $4,474 in 1997,
1996 and 1995 respectively. Under the loan agreement, statutory surplus is
$359,517 in excess of the minimum amount required to be maintained at December
31, 1997.
NOTE 15 -- 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
24
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, to $42,100
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 his determination will be subject to
de novo review by the State Superior Court. After consultation with outside
counsel, the Corporation has determined that $35.9 million plus interest is the
more reasonable of the two Department calculations should the Department of
Insurance prevail. As a result, the Corporation's reserve for this alleged
liability is $66,908. 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 $3,955 in legal costs related to the withdrawal,
Proposition 103, and Fair Plan assessments.
NOTE 16 -- SHAREHOLDER RIGHTS PLAN
In December 1989, the Board of Directors adopted a Shareholder Rights Plan
declaring a dividend of one Common Share Purchase Right for each outstanding
share of common stock. This plan was amended by the Board of Directors on
February 19, 1998 which extended the expiration of the rights from 1999 to 2009.
Each right entitles the registered holder, under certain conditions, to purchase
one share of common stock at a price of $250, 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 by the
rightholder for one cent per right at any time prior to becoming exercisable.
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.
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 $5,300. There remains approximately $2,200 in
unamortized ceding commission. This will continue to be amortized over the
remaining life of the underlying policies.
Results of the discontinued life insurance operations for the years ended
December 31 were as follows:
1997 1996 1995
- ------------------------------------------------------------
Gross premiums written $ 1,267 $ 1,428 $ 38,580
Net premiums earned 23,865 4,582 (345,080)
Net investment income 3,954 4,812 4,143
Realized investment
gains 1,633 1,002 5,102
- ------------------------------------------------------------
Total income 29,452 10,396 (335,835)
Income before income
taxes 13,316 7,892 8,717
- ------------------------------------------------------------
Provision for income
taxes 4,661 2,663 4,345
- ------------------------------------------------------------
Net income $ 8,655 $ 5,229 $ 4,372
============================================================
Assets and liabilities of the discontinued life insurance operations as of
the years ended December 31 were as follows:
25
1997 1996 1995
- --------------------------------------------------------------
Cash $ 9,214 $ 1,150 $ 9,793
Investments 21,320 71,313 107,603
Receivables 0 (4) 5,165
Deferred policy
acquisition costs,
net of unamortized
ceding commission (2,185) (11,486) (13,535)
Reinsurance receivable 36,198 285,354 363,127
Other assets 4,219 7,380 3,570
- --------------------------------------------------------------
Total assets $68,766 $353,707 $475,723
==============================================================
Future policy benefits $34,148 $280,002 $360,074
Deferred income tax (1,357) 1,728 11,172
Other liabilities 35,512 17,505 18,196
- --------------------------------------------------------------
Total liabilities $68,303 $299,235 $389,442
==============================================================
NOTE 18 -- NEW 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 Corporation will display comprehensive income in
quarterly and annual reports for fiscal periods beginning after December 15,
1997.
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.
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.