<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 June 30, 1996
[ ] 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 August 1, 1996 of the voting stock held by
non-affiliates of the registrant was $1,043,638,464.
On August 1, 1996 there were 35,223,083 shares outstanding.
Page 1 of 9
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<TABLE>
PART I
ITEM 1. FINANCIAL STATEMENTS
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,267,741 and $2,290,549) $ 2,318,975 $ 2,407,853
Equity securities, at fair value
(cost: $311,076 and $326,999) 686,488 661,154
Short-term investments at cost 3,936 14,399
Total investments 3,009,399 3,083,406
Cash 13,630 23,883
Premiums and other receivables 206,627 196,175
Deferred policy acquisition costs 118,376 119,795
Property and equipment 44,785 43,846
Reinsurance recoverable 402,100 446,167
Deferred income taxes 9,808 0
Other assets 78,677 66,870
------------ ------------
Total assets $ 3,883,402 $ 3,980,142
============ ============
Liabilities
Insurance reserves:
Unearned premiums $ 510,351 $ 506,035
Losses 1,276,123 1,275,077
Loss adjustment expenses 363,482 356,107
Future policy benefits 303,119 360,074
Note payable 55,000 60,000
California Proposition 103 reserve 72,271 70,167
Deferred income taxes 0 2,112
Other liabilities 232,238 239,556
------------ ------------
Total liabilities 2,812,584 2,869,128
Shareholders' equity
Common stock, $.125 par value
Authorized: 150,000,000 shares
Issued: 5,850 5,850
Additional paid-in capital 3,489 3,422
Unrealized gain on investments, net of applicable
income taxes 280,875 305,049
Retained earnings 1,020,580 1,030,468
Treasury stock, at cost:
(Shares: 11,580,974; 11,407,745) (239,976) (233,775)
------------ -----------
Total shareholders' equity 1,070,818 1,111,014
------------ -----------
Total liabilities and shareholders' equity $ 3,883,402 $ 3,980,142
============ ============
</TABLE>
2
<PAGE> 3
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<CAPTION>
Three Months
Ended June 30,
1996 1995
<S> <C> <C>
Premiums and finance charges earned $ 304,641 $ 317,937
Investment income less expenses 43,302 47,106
Investment gains realized 14,949 (1,904)
------------ -----------
Total income 362,892 363,139
Losses and benefits for policyholders 208,443 197,920
Loss adjustment expenses 36,379 28,276
General operating expenses 27,527 22,880
California Proposition 103 reserve 1,052 768
Amortization of deferred policy acquisition costs 77,602 82,581
------------ -----------
Total expenses 351,003 332,425
Income before income taxes 11,889 30,714
Income taxes
Current (1,371) 4,049
Deferred 608 1,121
------------ -----------
Total income taxes (763) 5,170
------------ -----------
Income from continuing operations 12,652 25,544
Income from discontinued operations 2,180 365
Net income $ 14,832 $ 25,909
============ ===========
Average shares outstanding 35,285 35,814
Income from continuing operations, per share $ 0.36 $ 0.71
Income from discontinued operations, per share 0.06 0.01
------------ -----------
Net income, per share $ 0.42 $ 0.72
============ ===========
Cash dividends, per share $ 0.40 $ 0.38
</TABLE>
3
<PAGE> 4
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<CAPTION>
Six Months
Ended June 30,
1996 1995
<S> <C> <C>
Premiums and finance charges earned $ 614,858 $ 639,999
Investment income less expenses 88,290 94,490
Investment gains (losses) realized 20,902 (1,011)
------------ -----------
Total income 724,050 733,478
Losses and benefits for policyholders 428,781 406,291
Loss adjustment expenses 76,911 70,648
General operating expenses 51,648 43,358
California Proposition 103 reserve 2,105 1,536
Amortization of deferred policy acquisition costs 156,147 165,729
------------ -----------
Total expenses 715,592 687,562
Income before income taxes 8,458 45,916
Income taxes
Current (5,609) 6,205
Deferred (1,419) (238)
------------ -----------
Total income taxes (7,028) 5,967
------------ -----------
Income from continuing operations 15,486 39,949
Income from discontinued operations 2,894 1,072
Net income $ 18,380 $ 41,021
============ ===========
Average shares outstanding 35,336 35,887
Income from continuing operations, per share $ 0.44 $ 1.11
Income from discontinued operations, per share 0.09 0.03
------------ -----------
Net income, per share $ 0.53 $ 1.14
============ ===========
Cash dividends, per share $ 0.80 $ 0.76
</TABLE>
4
<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, 1995 $5,850 $ 3,271 $ 69,610 $ 985,068 $ (213,009) $ 850,790
Unrealized gain 243,175 243,175
Deferred income tax on
net unrealized gain (84,480) (84,480)
Net issuance of treasury stock
under stock option plan
( 9,106 shares) 92 131 223
Repurchase of treasury
stock (258,100 shares) (761) (8,458) (9,219)
Net income 41,021 41,021
Cash dividends paid
($.38 per share) (27,263) (27,263)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 $5,850 $ 3,363 $ 228,305 $ 998,065 $ (221,336) $ 1,014,247
==================================================================================================================
Balance, January 1, 1996 $5,850 $ 3,422 $ 305,049 $1,030,468 $ (233,775) $ 1,111,014
Unrealized gain (35,277) (35,277)
Deferred income tax on
net unrealized gain 11,105 11,105
Net issuance of treasury stock
under stock option plan
(7,175 shares) 67 115 182
Repurchase of treasury
stock (113,500 shares) (6,317) (6,317)
Net income 18,381 18,381
Cash dividends paid
($.40 per share) (28,270) (28,270)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 $5,850 $ 3,489 $ 280,877 $1,020,579 $ (239,977) $ 1,070,818
==================================================================================================================
</TABLE> 5
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<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months
Ended June 30,
1996 1995
<S> <C> <C>
Cash flows from:
Operations
Net income $ 18,380 $ 41,021
Adjustments to reconcile net income to
cash from operations:
Changes in:
Insurance reserves (44,218) 7,440
Income taxes (18,711) (12,286)
Premiums and other receivables (10,451) (22,094)
Deferred policy acquisition costs 1,419 1,482
Reinsurance recoverable 44,067 3,079
Other assets (2,278) (12,588)
Other liabilities (3,690) (4,620)
Depreciation and amortization 6,670 6,045
Investment gains and losses (21,586) 1,472
California Proposition 103 2,105 1,536
---------- ----------
Net cash generated by operations (28,293) 10,487
Investments
Purchase of investments:
Fixed income securities-available for sale (298,342) (322,230)
Equity securities (43,862) (46,102)
Proceeds from sales:
Fixed income securities-available for sale 274,678 380,924
Equity securities 47,616 13,647
Proceeds from maturities and calls:
Fixed income securities-available for sale 57,420 49,945
Equity securities 9,512 36,529
---------- ----------
Net cash from investments 47,022 112,713
Financing
Note payable (5,000) (5,000)
Proceeds from exercise of stock options 142 208
Purchase of treasury stock (6,317) (8,458)
Dividends paid to shareholders (28,270) (27,262)
---------- ----------
Net cash used in financing activity (39,445) (40,512)
Net change in cash and cash equivalents (20,716) 82,688
Cash and cash equivalents, beginning of period 38,282 28,656
---------- ----------
Cash and cash equivalents, end of period $ 17,566 $ 111,344
========== ==========
Footnotes: For complete disclosures see Notes to Consolidated Financial
Statements on pages 28-34 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.
</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 six months ended
June 30, 1996 were $97.9 million, $2.77 per share, compared with $45.0
million, $1.26 per share for the same period in 1995. Gross premiums for the
first six months of 1996 decreased 6.0% for all lines of business. Commercial
lines decreased 6.0% and personal lines decreased 3.2% from the same period
last year. Property and casualty net premiums decreased 4.3% for the second
quarter of 1996 from the same period a year ago.
Premium writings continue to demonstrate the impact of our agency
repositioning strategy of last year. Premium from active agents was
essentially unchanged, period over period. New Jersey is 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 1996 is approximately $4.4
million compared with $1.0 million in 1995.
The combined ratio this year was inflated due to severe weather related losses
in the first six months. The combined ratio for the first six months
increased 8.6 points to 115.5% from 106.9%. The six-month combined ratio for
homeowners increased 42.3 points to 159.3% from 117.0% in the same period last
year. Personal automobile, the Corporation's largest line, recorded a 1996
six-month combined ratio of 112.8%, up 10.5 points from 102.3% in 1995.
Workers' compensation combined ratio for the first six months of 1996
increased 6.4 points to 102.1% from 95.7% during the same period last year.
Last year's results were impacted positively by favorable accident year
results.
The general liability combined ratio for the second quarter increased 20
points to 101.5% from 81.5% in 1995. The six-month combined ratio decreased
14.9 points to 97.1% from 112.0% in the same period of 1995. The six-month
combined ratio for CMP, fire and inland marine increased 10.2 points to 119.6%
from 109.4% in 1995. This increase is due to the higher catastrophe losses
experienced so far during 1996.
Second quarter catastrophe losses were $19.7 million and accounted for 6.4
points on the combined ratio. This compares with $16.3 million and 5.1 points
for the same period in 1995. Year to date catastrophe losses increased $20.3
million from $16.7 million in 1995 to $37.0 million in 1996.
The Corporation's reserves for environmental liability claims have not changed
materially since December 31, 1995, and continued to total approximately $14.4
million. For more complete discussion of this exposure see pages 21 and 29 of
the Corporation's Annual Report to Shareholders.
For the second quarter, property and casualty investment income was $42.7
million down from $46.4 million for the same period last year. The investment
income per share before tax decreased slightly from $1.29 to $1.21 for the
second quarter and from $2.59 to $2.46 for the first six months of 1996. The
effective tax rate on investment income for the first six months of 1996 was
23.5% compared with 24.1% for the comparable period in 1995. This decline
reflects the Corporation's increased investment in tax exempt municipal bonds.
Net cash used by operations was $28.3 million for the first six months of the
year compared with net cash generated of $10.5 million from operations for the
same period in 1995. Shareholder dividend payments were $28.3 million in the
first six months of 1996 compared with $27.3 million for the same period of
1995.
Consolidated investments at June 30, 1996 included taxable high yield and
unrated securities with an aggregate market value of $466.5 million and an
aggregate amortized value of $465.9 million. Comparable December 31, 1995
investments in taxable high yield and unrated securities had a market value of
$490.2 million and an amortized value of $475.0 million. At June 30, 1996,
the fixed maturity portfolio relating to property and casualty operations
totaled $2.2 billion which consisted of 79.5% investment grade securities,
8.2% high yield securities and 12.3% unrated securities. The fixed maturity
portfolio relating to life insurance operations totaled $55.4 million which
consisted of 66.9% investment grade securities, 2.6% high yield securities and
30.5% unrated securities.
7
<PAGE> 8
At June 30, 1996, the securities in the Corporation's high yield and unrated
portfolio were issued by more than 180 corporate borrowers in approximately 44
industries. At that time, approximately 99.9% 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, 1995.
In 1994, the National Association of Insurance Commissioners developed a risk-
based capital model to establish standards which will compare insurance
company statutory surplus to required minimum capital based on risks of
operations and assist regulators in determining solvency requirements. The
model is based on four risk factors in two categories: asset risk consisting
of investment risk and credit risk; and underwriting risk composed of loss
reserve and premiums written risks. Based on current calculations, all of the
Ohio Casualty Group companies have at least twice the necessary capital to
conform with the risk-based capital model.
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.
The Corporation has reserved $72.3 million for both principal and interest for
a Proposition 103 liability asserted by the California Department of
Insurance. The Corporation continues to challenge the validity of any
rollback. Hearings before an Administrative Law Judge began June 3. A
decision from these hearings is not expected until sometime in the fourth
quarter of this year. For further discussion of the Corporation's California
withdrawal, see page 21 and footnote 13 in the Corporation's Annual Report to
Shareholders.
On July 29, 1996, Ohio Casualty accessed its line of credit for $8 million to
capitalize on investment opportunities available at that time. This loan was
repaid on August 2, 1996 with scheduled investment maturities.
8
<PAGE> 9
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 - None
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)
August 9, 1996 /S/ Barry S. Porter
-------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
9
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 2322911010
<DEBT-CARRYING-VALUE> 2322911010
<DEBT-MARKET-VALUE> 2322911010
<EQUITIES> 686487657
<MORTGAGE> 0
<REAL-ESTATE> 23657739
<TOTAL-INVEST> 3033056406
<CASH> 13629557
<RECOVER-REINSURE> 402100119
<DEFERRED-ACQUISITION> 118376479
<TOTAL-ASSETS> 3883401679
<POLICY-LOSSES> 1639605033
<UNEARNED-PREMIUMS> 510350963
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 303119039
<NOTES-PAYABLE> 55000000
<COMMON> 5850484
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<INVESTMENT-INCOME> 88290404
<INVESTMENT-GAINS> 20902099
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<UNDERWRITING-AMORTIZATION> 156147157
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<INCOME-PRETAX> 8459117
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<INCOME-CONTINUING> 15486941
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</TABLE>
