<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
31-0783294
(I.R.S. Employer Identification No.)
136 North Third Street, Hamilton, Ohio
(Address of principal executive offices)
45025
(Zip Code)
(513) 867-3000
(Registrant's telephone number)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Par Value $.125 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The aggregate market value as of November 1, 1995 of the voting stock held
by non-affiliates of the registrant was $1,109,193,173.
On November 1, 1995 there were 35,589,781 shares outstanding.
Page 1 of 10
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<TABLE>
PART I
ITEM 1. FINANCIAL STATEMENTS
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
Assets
Investments:
Fixed maturities - available for sale
(Amortized cost: $2,532,333 and $2,585,927) $ 2,623,485 $ 2,509,961
Equity securities
(Cost: $335,829 and $337,814) 645,474 520,025
Short-term investments 48,243 13,550
------------ ------------
Total investments 3,317,202 3,043,536
Cash 34,414 15,106
Premiums and other receivables 207,939 199,167
Deferred policy acquisition costs 161,677 165,633
Property and equipment 39,730 35,404
Deferred income taxes 24,271 118,370
Other assets 163,314 161,740
------------ ------------
Total assets $ 3,948,547 $ 3,738,956
============ ============
Liabilities
Insurance reserves:
Unearned premiums $ 523,807 $ 518,075
Losses 1,288,040 1,304,514
Loss adjustment expenses 365,157 367,309
Future policy benefits 360,115 352,400
Note payable 65,000 70,000
California Proposition 103 reserve 70,328 47,278
Other liabilities 232,239 228,590
------------ ------------
Total liabilities 2,904,686 2,888,166
------------ ------------
Shareholders' equity
Common stock, $.125 par value
Authorized: 70,000,000 shares
Issued: 46,803,872 5,850 5,850
Additional paid-in capital 3,347 3,271
Unrealized gain on investments 263,239 69,610
Retained earnings 997,719 985,068
Treasury stock, at cost: 11,214 shares
and 10,811 shares (226,294) (213,009)
------------ -----------
Total shareholders' equity 1,043,861 850,790
------------ ------------
Total liabilities and shareholders' equity $ 3,948,547 $ 3,738,956
============ ============
</TABLE>
2
<PAGE> 3
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<CAPTION>
Three months
Ended September 30,
1995 1994
<S> <C> <C>
Premiums and finance charges earned $ 317,165 $ 329,421
Investment income less expenses 47,004 46,743
Investment gains realized (430) 7,361
------------ -----------
Total income 363,739 383,525
Losses and benefits for policyholders 191,266 193,466
Loss adjustment expenses 33,730 35,193
General operating expenses 22,513 22,759
Amortization of deferred policy acquisition costs 81,515 84,974
California Proposition 103 21,514 0
------------ -----------
Total expenses 350,538 336,392
Income before income taxes 13,201 47,133
Income taxes
Current 10,324 11,314
Deferred (7,398) 1,869
------------ -----------
Total income taxes 2,926 13,183
------------ -----------
Income before discontinued operations $ 10,275 $ 33,950
Income from discontinued operations 2,942 70
------------ -----------
Net income $ 13,217 $ 34,020
============ ===========
Average shares outstanding 35,705 36,038
Net income per share $ 0.37 $ 0.94
Cash dividends per share $ 0.38 $ 0.365
</TABLE>
3
<PAGE> 4
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<CAPTION>
Nine Months
Ended September 30,
1995 1994
<S> <C> <C>
Premiums and finance charges earned $ 957,164 $ 972,854
Investment income less expenses 141,494 139,794
Investment gains (losses) realized (1,441) 24,943
------------ -----------
Total income 1,097,217 1,137,591
Losses and benefits for policyholders 597,557 616,673
Loss adjustment expenses 104,378 102,779
General operating expenses 65,871 59,490
Amortization of deferred policy acquisition costs 247,244 253,593
California Proposition 103 23,050 0
------------ -----------
Total expenses 1,038,100 1,032,535
Income before income taxes 59,117 105,056
Income taxes
Current 16,529 18,667
Deferred (7,636) 5,399
------------ -----------
Total income taxes 8,893 24,066
------------ -----------
Income before discontinued operations
and accounting changes 50,224 80,990
Income from discontinued operations 4,014 3,354
Cumulative effect of accounting changes 0 (319)
------------ -----------
Net income $ 54,238 $ 84,025
============ ===========
Average shares outstanding 35,825 36,038
Cumulative effect of accounting changes per share $ 0.00 $ (0.01)
Net income per share $ 1.51 $ 2.33
Cash dividends per share $ 1.14 $ 1.095
</TABLE>
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<PAGE> 5
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<CAPTION>
Additional Unrealized Total
Common paid-in gain (loss) Retained Treasury shareholders'
stock capital on investments earnings stock equity
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $2,925 $ 6,185 $ 124,284 $ 940,774 $(211,830) $ 862,338
Unrealized gain (189,855) (13,857) (203,712)
Deferred income tax on
net unrealized gain 66,375 66,375
Cumulative effect of
accounting changes 116,144 116,144
Net issuance of treasury stock
under stock option plan
(8,292 shares) 18 (30) 136 124
Net income 84,025 84,025
Cash dividends paid
($1.095 per share) (39,461) (39,461)
Stock split 2,925 (2,925) 0
- ---------------------------------------------------------------------------------------------------------------
BALANCE, SEPT 30, 1994 $5,850 $ 3,278 $ 116,948 $ 971,451 $(211,694) $ 885,833
===============================================================================================================
Balance, January 1, 1995 $5,850 $ 3,271 $ 69,610 $ 985,068 $(213,009) $ 850,790
Unrealized gain 296,604 296,604
Deferred income tax on
net unrealized gain (102,975) (102,975)
Net issuance of treasury stock
under stock option plan
(11,525 shares) 76 179 255
Repurchase of treasury
stock (415,100 shares) (761) (13,464) (14,225)
Net income 54,238 54,238
Cash dividends paid
($1.14 per share) (40,826) (40,826)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, SEPT 30, 1995 $5,850 $ 3,347 $ 263,239 $ 997,719 $(226,294) $1,043,861
===============================================================================================================
</TABLE>
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<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands) (Unaudited)
<CAPTION>
Nine Months
Ended September 30,
1995 1994
<S> <C> <C>
Cash flows from:
Operations
Net income $ 54,238 $ 84,025
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves (5,179) (15,388)
Income taxes (16,842) 13,078
Premiums and other receivables (8,770) (12,189)
Deferred policy acquisition costs 3,956 (4,620)
Other assets (8,850) (8,188)
Other liabilities (3,770) (6,862)
Depreciation and amortization 9,346 8,242
Investment gains and losses (312) (26,495)
California Proposition 103 21,514 0
------------ -----------
Net cash generated by operations 45,331 31,603
Investments
Purchase of investments:
Fixed income securities (723,733) (642,180)
Equity securities (63,895) (83,619)
Proceeds from sales:
Fixed income securities 691,899 571,411
Equity securities 29,073 44,594
Proceeds from maturities and calls:
Fixed income securities 97,856 141,930
Equity securities 36,529 28,454
------------ -----------
Net cash from investments 67,729 60,590
Financing
Note payable (5,000) (34,000)
Proceeds from exercise of stock options 230 124
Purchase of treasury stock (13,464) 0
Dividends paid to shareholders (40,825) (39,461)
------------ -----------
Net cash used in financing activity (59,059) (73,337)
Net change in cash and cash equivalents 54,001 18,856
Cash and cash equivalents, beginning of period 28,656 30,426
------------ -----------
Cash and cash equivalents, end of period $ 82,657 $ 49,282
============ ===========
Footnotes: For complete disclosures see Notes to Consolidated Financial
Statements on pages 26-30 of Annual Report.
Note 1 - It is believed that all material adjustments necessary to present a
fair statement of the results of the interim period covered are reflected in
this report.
Note 2 - Share, per share, and shareholders' equity amounts on statements
presented are adjusted to reflect the April 22, 1994 2-for-1 stock split.
</TABLE>
6
<PAGE> 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Property and casualty pre-tax underwriting losses for the nine months ended
September 30, 1995 were $77.2 million, $2.15 per share, compared with $56.0
million, $1.55 per share for the same period in 1994. Underwriting losses for
the third quarter of 1995 amounted to $32.1 million, $.90 per share, compared
with $5.7 million, $.16 per share for the third quarter of 1994. Gross
premiums for the first nine months of 1995 decreased 3.1% for all lines of
business. Commercial lines decreased 4.0% and personal lines decreased
2.2% from the same period last year. Property and casualty net premiums
decreased 2.2% in the first nine months and decreased 4.0% for the third
quarter of 1995.
The Corporation continues to reduce voluntary premium writings in those states
with unprofitable environments, such as Pennsylvania and Florida. New Jersey
is now our largest state with 18.0% of total premiums written during the year.
Legislation passed in 1992 requires automobile insurers operating in the state
to accept all risks that meet underwriting guidelines regardless of risk
concentration. New Jersey also requires assessments to be paid for the New
Jersey Unsatisfied Claim and Judgment Fund (UCJF). The assessment for 1995 is
approximately $1.0 million compared with $6.1 million in 1994.
<TABLE>
COMBINED RATIO
THIRD QUARTER 9 MONTHS ENDED
SEPTEMBER 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Automobile- Personal 96.9% 106.7% 100.5% 99.1%
- Commercial 105.9% 119.0% 113.0% 109.7%
------ ------ ------ ------
Automobile 98.9% 109.7% 103.5% 101.8%
Homeowners 122.4% 108.2% 118.8% 150.7%
Workers' Compensation 93.3% 76.7% 94.9% 83.3%
General Liability 110.0% 103.7% 111.2% 89.1%
Fidelity and Surety 73.0% 81.9% 85.9% 71.1%
CMP, Fire, Inland Marine 110.1% 98.0% 109.6% 118.2%
------ ------ ------ ------
Total 103.3% 102.9% 105.8% 106.2%
At September 30, 1995 the combined ratio remained stable relative to 1994,
increasing only .4 points for the quarter to 103.3%, and decreasing .4 points
for the first nine months to 105.8%. The combined ratio for homeowners was
negatively impacted 18.0 points during the first nine months of 1994 due
primarily to first quarter winter storm-related losses. The combined ratio
declined over 30 points year-to-date due to significantly smaller catastrophe
losses during 1995.
The quarterly and year-to-date combined ratios for the workers' compensation
line show increases due to adverse claim developments in states that have been
de-emphasized and due to increases in National Council claims which represent
involuntary business. General liability combined ratios also increased
primarily due to adverse development in California. Although Ohio Casualty
has withdrawn from the state of California, the Statute of Limitations has not
yet expired for general liability claims, and the Corporation continues to
incur approximately 20 construction defect claims per week.
7
<PAGE> 8
The third quarter catastrophe losses were $5.7 million and accounted for 1.8
points on the combined ratio. This compares with $5.4 million and 1.6 points
for the same period in 1994. Catastrophes for the first nine months are $22.5
million or 2.3 points on the combined ratio compared with $34.3 million 3.5
points on the combined ratio representing a 34.5% decrease over the same
period last year.
The Corporation's reserves for environmental liability claims have not changed
materially since December 31, 1994, and continued to total just over $10.6
million. For a more complete discussion of this exposure see pages 21 and 29
of the Corporation's Annual Report to Shareholders.
Property and casualty investment income per share before tax increased .8% to
$3.87 for the first nine months of 1995 from $3.84 reported in the same period
in 1994. Third quarter investment income before income tax was $1.29 per
share for 1995 and $1.28 per share for 1994. Investment income after tax per
share remained unchanged in the first nine months and the third quarter
compared with the corresponding periods in 1994. With the continuation of low
interest rates and the cash outflows from weather related losses, investment
income is likely to show no growth over the balance of the year. The
effective tax rate on investment income for the first nine months of 1995 was
26.1% compared with 25.6% for the same period in 1994.
Net cash generated by operations was $45.3 million in the first nine months of
the year compared with $31.6 million for the same period in 1994 due to
improved underwriting results. Shareholder dividend payments were $40.8
million in the first nine months of 1995 and $39.5 million in 1994.
Consolidated investments at September 30, 1995 included taxable high yield and
unrated securities with an aggregate market value of $303.0 million and an
aggregate amortized value of $297.3 million. Comparable December 31, 1994
investments in taxable high yield and unrated securities had a market value of
$306.6 million and an amortized value of $322.7 million. At September 30,
1995, the fixed maturity portfolio relating to property and casualty
operations totaled $2.2 billion which consisted of 87.1% investment grade
securities, 10.6% high yield securities, and 2.3% unrated securities. Fixed
maturity portfolio relating to discontinued life insurance operations totaled
$375.5 million which consisted of 96.1% investment grade securities, 1.7% high
yield securities and 2.2% unrated securities. During the first nine months of
1995, $108.3 million of taxable high yield and unrated securities were
acquired and $120.5 million were disposed of through sales, calls, or
maturities resulting in net realized losses after tax of $2.6 million. In
addition, security values were written down by $8.6 million after tax due to
non-performance of the issuers of the securities.
At September 30, 1995, the securities in the Corporation's high yield and
unrated portfolio were issued by more than 117 corporate borrowers in
approximately 42 industries. At that time, approximately 93.8% of such
investments (based on amortized value) were performing in accordance with
contractual terms and were making principal and interest payments as required.
For further discussion of the Corporation's investments, see Item 1 of the
Corporation's Form 10-K for the year ended December 31, 1994.
In 1994, the National Association of Insurance Commissioners developed a risk-
based capital model to establish standards which will compare insurance
company statutory surplus to required minimum capital based on risks of
8
<PAGE> 9
operations and assist regulators in determining solvency requirements. The
model is based on four risk factors in two categories: asset risk consisting
of investment risk and credit risk; and underwriting risk composed of loss
reserve and premiums written risks. Based on current calculations, all of the
Ohio Casualty Group companies have at least twice the necessary capital to
conform with the risk-based capital model.
In 1994, Ohio Casualty adopted FAS 112 "Employers' Accounting for Post-
Employment Benefits". This standard requires accrual of liabilities for
benefits provided to former or inactive employees after employment, but before
retirement. The cumulative effect of this accounting change adopted as of
January 1, 1994 was a $.6 million after tax reduction of net income and
shareholders' equity.
In the first quarter of 1994, Ohio Casualty also adopted FAS 115 "Accounting
for Certain Investments in Debt and Equity Securities", which required the
investment portfolio to be divided into three categories: held to maturity,
available for sale or trading account. The Corporation placed all of its
holdings in the available for sale category. This necessitated them being
marked to market value for balance sheet purposes. The cumulative effect of
adoption of this accounting change as of January 1, 1994, was a $116.1 million
increase to shareholders' equity and a $.3 million after tax increase of net
income. The adoption of this accounting standard will lead to additional
volatility in shareholders' equity as the market price of bonds fluctuates.
Shareholders' equity increased $193.1 million from $850.8 million to $1,043.9
million since December 31, 1994 due in part to the market prices of bonds.
Ohio Casualty does not own any "derivative financial instruments" as defined
in FAS 119. The Corporation maintains a laddered maturity structure in our
fixed income portfolios. Though not a formal "hedge", such a strategy does
mitigate some interest rate swings.
In 1994, the Corporation closed on a renegotiation of its long term debt. The
terms of the loan are substantially similar to the previous loan with the
exception of the loan repayment schedule. Formerly, payments of $17.0 million
were made semi-annually with a final payment of $18.0 million due in July
1996. The new loan has scheduled principal payments of $5.0 million semi-
annually. The final payment is due October 25, 2001.
Interest on the loan is adjustable and is based on a spread from several
indices including the Federal Funds Rate, the Prime Rate, and the Eurodollar
Rate. Interest is payable quarterly beginning January 25, 1995. The interest
rate is 6.58% and is guaranteed through April 25, 1996. The Corporation
refinanced and extended this loan in order to maximize its capital flexibility
and permit the growth of its insurance subsidiaries without the strain of the
previous repayment schedule.
In December 1992, the Ohio Casualty Group of Property and Casualty Companies
stopped writing business in California and filed a withdrawal plan with the
California Department of Insurance. Effective April 12, 1995, the California
Department of Insurance approved our withdrawal applications for The Ohio
Casualty Insurance Company, West American Insurance Company and Ohio Security
Insurance Company. American Fire and Casualty Company will remain licensed
acting as reinsurer for the outstanding liabilities as they run off. Current
outstanding reserves total $87.2 million.
9
<PAGE> 10
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, the corporation has received a bill from the
state of California. The Corporation continues to challenge the validity of
any rollback and a tentative administrative hearing is scheduled for late
November. The current accrued liability is $70.3 million.
On October 2, 1995, Ohio Life closed on its administrative agreement with
Great Southern Life Insurance Company. Ohio Life transferred the servicing of
its existing life insurance business to Great Southern, which will process
existing business, issue new business, and assume administrative functions.
As part of this transaction, Ohio Life will receive a ceding commission of
$48.2 million. Based on accounting rules (SFAS 113), this ceding commission
and the corresponding deferred acquisition costs will be amortized over the
contract period of 15 months. The net income impact will be approximately
$4.5 million per quarter.
10
<PAGE> 11
PART II
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and reports on Form 8-K
A report on Form 8-K was filed September 15, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO CASUALTY CORPORATION
-------------------------
(Registrant)
November 10, 1995 /s/ Barry S. Porter
------------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 2671728403
<DEBT-CARRYING-VALUE> 2580575717
<DEBT-MARKET-VALUE> 2671728403
<EQUITIES> 645473630
<MORTGAGE> 0
<REAL-ESTATE> 22799605
<TOTAL-INVEST> 3340001638
<CASH> 34414280
<RECOVER-REINSURE> 86588464
<DEFERRED-ACQUISITION> 161676705
<TOTAL-ASSETS> 3948546694
<POLICY-LOSSES> 1653197276
<UNEARNED-PREMIUMS> 523806567
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 360114506
<NOTES-PAYABLE> 65000000
<COMMON> 0
0
0
<OTHER-SE> 46142390
<TOTAL-LIABILITY-AND-EQUITY> 3948546694
957164202
<INVESTMENT-INCOME> 141493345
<INVESTMENT-GAINS> (1440957)
<OTHER-INCOME> 0
<BENEFITS> 701935193
<UNDERWRITING-AMORTIZATION> 247243410
<UNDERWRITING-OTHER> 88921040
<INCOME-PRETAX> 59116947
<INCOME-TAX> 8892513
<INCOME-CONTINUING> 0
<DISCONTINUED> 4013706
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54238137
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
<RESERVE-OPEN> 1605526365
<PROVISION-CURRENT> 454197524
<PROVISION-PRIOR> 1132265387
<PAYMENTS-CURRENT> 307226206
<PAYMENTS-PRIOR> 413775324
<RESERVE-CLOSE> 1586462911
<CUMULATIVE-DEFICIENCY> (59485654)
</TABLE>
