<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, 1997
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO
(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, 1997 of the voting stock held
by non-affiliates of the registrant was $1,440,352,922.
On August 1, 1997 there were 34,083,413 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>
June 30, December 31,
1997 1996
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale, at fair value
(cost: $2,161,614 and $2,225,517) $2,237,305 $2,310,938
Equity securities, at fair value
(cost: $300,423 and $306,865) 819,526 721,152
Short-term investments at cost 24,532 41,546
---------- ----------
Total investments 3,081,363 3,073,636
Cash 29,290 20,078
Premiums and other receivables 212,058 186,676
Deferred policy acquisition costs 120,916 116,684
Property and equipment 43,778 42,239
Reinsurance recoverable 353,769 362,683
Other assets 91,022 87,985
---------- ----------
Total assets $3,932,196 $3,889,981
========== ==========
Liabilities
Insurance reserves:
Unearned premiums $ 513,712 $ 491,613
Losses 1,185,620 1,224,873
Loss adjustment expenses 323,712 331,797
Future policy benefits 278,468 280,002
Note payable 45,000 50,000
California Proposition 103 reserve 76,481 74,376
Deferred income taxes 68,591 27,993
Other liabilities 214,377 234,227
---------- ---------
Total liabilities 2,705,961 2,714,881
Shareholders' equity
Common stock, $.125 par value
Authorized: 150,000,000 shares
Issued: 46,803,872 5,850 5,850
Additional paid-in capital 3,876 3,603
Unrealized gain on investments, net of applicable
income taxes 387,557 332,042
Retained earnings 1,114,488 1,076,545
Treasury stock, at cost:
(Shares: 12,699,559 ; 11,662,559) (285,536) (242,940)
------------ ------------
Total shareholders' equity 1,226,235 1,175,100
------------ ------------
Total liabilities and shareholders' equity $ 3,932,196 $ 3,889,981
=========== ============
2
</TABLE>
<PAGE> 3
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<CAPTION>
Three Months
Ended June 30,
1997 1996
<S> <C> <C>
Premiums and finance charges earned $ 307,788 $ 304,641
Investment income less expenses 45,153 43,302
Investment gains realized 8,498 14,948
--------- ---------
Total income 361,439 362,891
Losses and benefits for policyholders 183,254 208,443
Loss adjustment expenses 29,874 36,379
General operating expenses 27,836 27,527
California Proposition 103 reserve 1,053 1,053
Amortization of deferred policy acquisition costs 76,080 77,601
--------- ---------
Total expenses 318,097 351,002
Income before income taxes 43,342 11,889
Income taxes
Current 7,423 (1,370)
Deferred 2,957 607
--------- ----------
Total income taxes 10,380 (763)
Income from continuing operations 32,962 12,652
Income from discontinued operations 1,143 2,181
-------- ---------
Net income $ 34,105 $ 14,833
======== =========
Average shares outstanding 34,222 35,285
======== =========
Income from continuing operations, per share $ 0.96 $ 0.37
Income from discontinued operations, per share 0.04 0.06
-------- ---------
Net income, per share $ 1.00 $ 0.43
Cash dividends, per share $ 0.42 $ 0.40
======== =========
</TABLE>
3
<PAGE> 4
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In thousands)
(Unaudited)
<CAPTION>
Six Months
Ended June 30,
1997 1996
<S> <C> <C>
Premiums and finance charges earned $ 610,267 $ 614,858
Investment income less expenses 88,871 88,290
Investment gains (losses) realized 21,838 20,902
--------- ---------
Total income 720,976 724,050
Losses and benefits for policyholders 369,435 428,781
Loss adjustment expenses 60,129 76,911
General operating expenses 53,108 51,648
California Proposition 103 reserve 2,105 2,105
Amortization of deferred policy acquisition costs 151,781 156,147
--------- ---------
Total expenses 636,558 715,591
Income before income taxes 84,418 8,459
Income taxes
Current 19,091 (5,609)
Deferred 1,108 (1,419)
--------- ----------
Total income taxes 20,199 (7,028)
Income from continuing operations 64,219 15,487
Income from discontinued operations 2,601 2,894
--------- ----------
Net income $ 66,820 $ 18,381
========= ==========
Average shares outstanding 34,561 35,336
========= ==========
Income from continuing operations, per share $ 1.86 $ 0.43
Income from discontinued operations, per share 0.07 0.08
--------- ----------
Net income, per share $ 1.93 $ 0.51
Cash dividends, per share $ 0.84 $ 0.80
========= ==========
</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 investment earnings stock equity
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 $5,850 $3,422 $305,049 $1,030,468 $(233,775) $1,111,014
Unrealized gain (35,277) (35,277)
Deferred income tax on
net unrealized gain 11,105 11,105
Net issuance of treasury
stock under stock option
(7,175 shares) 67 115 182
Repurchase of treasury
stock (113,500 shares) (6,317) (6,317)
Net income 18,381 18,381
Cash dividends paid
($.80 per share) (28,270) (28,270)
- --------------------------------------------------------------------------------------------------------------
Balance,
June 30, 1996 $5,850 $3,489 $280,877 $1,020,579 $(239,977) $1,070,818
==============================================================================================================
Balance
January 1, 1997 $5,850 $3,603 $332,042 $1,076,545 $(242,940) $1,175,100
Unrealized gain 87,885 87,885
Deferred income tax on
net unrealized gain (32,370) (32,370)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (20,288 shares) 273 173 220 666
Repurchase of treasury
stock (1,057,288 shares) (42,816) (42,816)
Net income 66,820 66,820
Cash dividends paid
($.84 per share) (29,050) (29,050)
- --------------------------------------------------------------------------------------------------------------
Balance,
June 30, 1997 $5,850 $3,876 $387,557 $1,114,488 $(285,536) $1,226,235
==============================================================================================================
</TABLE>
5
<PAGE> 6
<TABLE>
OHIO CASUALTY CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months
Ended June 30,
1997 1996
<S> <C> <C>
Cash flows from:
Operations
Net income $ 66,820 $ 18,380
Adjustments to reconcile net income to cash from operations:
Changes in:
Insurance reserves (26,774) (44,218)
Income taxes (9,751) (18,711)
Premiums and other receivables (25,382) (10,451)
Deferred policy acquisition costs (4,232) 1,419
Reinsurance recoverable 8,913 44,067
Other assets (13,272) (2,278)
Other liabilities (9,553) (3,690)
Depreciation and amortization 11,134 6,670
Investment gains and losses (22,562) (21,586)
California Proposition 103 2,105 2,105
--------- ---------
Net cash generated by operations (22,554) (28,293)
Investments
Purchase of investments:
Fixed income securities - available for sale (136,360) (298,342)
Equity securities (14,210) (43,862)
Proceeds from sales:
Fixed income securities - available for sale 144,780 274,678
Equity securities 64,793 47,616
Proceeds from maturities and calls:
Fixed income securities - available for sale 27,740 57,420
Equity securities 2,784 9,512
--------- ---------
Net cash from investments 89,527 47,022
Financing
Note payable (5,000) (5,000)
Proceeds from exercise of stock options 318 142
Purchase of treasury stock (41,043) (6,317)
Dividends paid to shareholders (29,050) (28,270)
Net cash used in financing activity (74,775) (39,445)
Net change in cash and cash equivalents (7,802) (20,716)
Cash and cash equivalents, beginning of period 61,624 38,282
--------- ----------
Cash and cash equivalents, end of period $ 53,822 $ 17,566
========= ==========
Footnotes: For complete disclosures see Notes to Consolidated Financial
Statements on pages 28-34 of Annual Report.
Note 1 - During 1996, the Corporation entered into an interest rate swap. The
effect of the swap agreement is to establish a hedge against future interest
rate swings on its variable rate term loan. Net proceeds or payments from the
swap are charged to interest expense in the current period.
Covered call options are written on stocks and bonds held in the investment
portfolio. Changes in the values of the covered call options are recognized
in shareholders equity as unrealized appreciation or depreciation.
Note 2 - 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, 1997 were $23.9 million, $0.69 per share, compared with $97.9
million, $2.77 per share for the same period in 1996. Gross premiums for the
first six months of 1997 remained essentially unchanged for all lines of
business. Commercial lines decreased 2.3% and personal lines increased 1.6%
for the first six months of 1997. Property and casualty net premiums
increased 2.5% for the second quarter of 1997 over 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 increased
5.5% over the same period last year. New Jersey is our largest state with
18.2% 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. This leads to
a greater risk concentration in the state than the Corporation would otherwise
accept. New Jersey also requires assessments to be paid for the New Jersey
Unsatisfied Claim and Judgment Fund (UCJF). The assessment for 1997 is
approximately $4.2 million compared with $4.4 million in 1996. On August 11
the governor of New Jersey, Christie Whitman, called for guaranteed rate
reductions on personal auto insurance of up to 25%. Her proposals are
currently pending in the New Jersey Legislature and it is uncertain what
impact, if any, they will have on the Corporation. Through June of 1997, New
Jersey private passenger auto premium totaled $55.4 million which is 8.8% of
total premium and 23.8% of total private passenger auto premium for the
Corporation.
As part of its reinsurance transactions, the Corporation participates in an
experience rated First Casualty Excess of Loss Treaty. In accordance with
FASB 113 (Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts), anticipated profits from this agreement are recorded as
returned premium. As of June 30, 1997, due to unanticipated favorable
development in our liability lines, the actuarial projections of the estimated
profit from this agreement were updated to $10.3 million. Of this amount,
$7.3 million was recognized as return premium in the second quarter with $3.0
million recognized as return premium in the first quarter.
The combined ratio for the first six months decreased 11.9 points to 103.6%
from 115.5% from the same period last year. The six-month combined ratio for
homeowners decreased 44.5 points to 114.8% from 159.3% in the same period last
year. Personal automobile, the Corporation's largest line, recorded a 1997
six-month combined ratio of 103.0%, down 9.8 points from 112.8% in 1996.
During the first six months of 1996, results for both homeowners and personal
automobile were negatively impacted by a series of severe winter storms that
occurred throughout the Midwest. Workers' compensation combined ratio for the
first six months of 1997 decreased 17.6 points to 84.5% from 102.1% during the
same period last year. The improvements in workers' compensation were seen in
both frequency and severity.
The general liability combined ratio for the second quarter increased 1.5
points to 103.0% from 101.5% in 1996. The six-month combined ratio increased
3.8 points to 100.9% from 97.1% in the same period of 1996. The six-month
combined ratio for CMP, fire and inland marine decreased 13.5 points to 106.1%
from 119.6% in 1996 due primarily to reduced weather related losses.
Second quarter catastrophe losses were $4.6 million and accounted for 1.5
points on the combined ratio. This compares with $19.7 million and 6.4 points
for the same period in 1996. Year to date catastrophe losses decreased $27.2
million from $37.1 million in 1996 to $9.9 million in 1997.
In 1996, the Corporation analyzed incurred but not reported reserves for
general liability and commercial multiple peril to segregate between asbestos
and environmental losses and all other losses. As a result of this analysis,
$27.4 million in incurred but not reported reserves were segregated as
asbestos and environmental related. This brings total asbestos and
environmental reserves as of June 30, 1997 to $41.0 million.
7
<PAGE> 8
For the quarter, property and casualty before tax investment income was $44.1
million, $1.29 per share, increasing slightly from $42.7 million, $1.21 per
share, for the same period last year. The effective tax rate on investment
income for the second quarter of 1997 was 24.1% compared with 23.5% for the
comparable period in 1996. Additional discussion of the Corporation's
investment tax planning strategy is included in the 1996 Annual Report to
Shareholders.
Net cash used by operations was $22.6 million for the first six months of the
year compared with net cash used of $28.3 million from operations for the same
period in 1996. Shareholder dividend payments were $29.0 million in the first
six months of 1997 compared with $28.3 million for the same period of 1996.
During the first six months of 1997, Ohio Casualty continued its share
repurchase program. The total number of shares acquired during the period was
1,057,288, or 3.1% of outstanding shares, at an average price of $40.50 per
share for a total cash outflow of $42.8 million. The Company has remaining
authorization to repurchase 1,014,212 additional shares.
In 1995, the Corporation reinsured substantially all of its life insurance and
related businesses to Great Southern Life Insurance Company. Great Southern
is expected to replace Ohio Life as the primary carrier through an assumption
and novation sometime during the third quarter. The ultimate timing of the
assumption is dependent upon receipt of state approval from each state in
which the life business is located. A minimum of 75% of the business will be
assumed by Great Southern and Great Southern is required to ultimately assume
100% of the outstanding business. When the assumption occurs, a percentage of
the unamortized ceding commission equal to the percentage of business assumed
will be recognized in that period's income. The current unamortized balance
of the ceding commission is $12.1 million.
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) had an aggregate carrying value of $152.0 million and an aggregate
amortized cost of $145.3 million at June 30, 1997. Unrated securities had an
aggregate carrying value of $259.4 million and an aggregate amortized cost of
$250.3 million. At year-end 1996 the aggregate carrying value of below
investment grade securities was $184.6 million and the aggregate amortized
cost was $180.0 million. At year-end 1996, the aggregate carrying value of
unrated securities was $315.4 million and the aggregate amortized cost was
$308.3 million. Utilizing ratings provided by other agencies such as the
National Association of Insurance Commissioners, categorizes $22.2 million of
$259.4 million in unrated securities as non-investment grade. This brings the
aggregate market value of non-investment grade securities to $174.2 million at
June 30, 1997, compared with $211.9 million at year-end 1996.
All of the Corporation's below investment grade securities (based on carrying
value) are performing in accordance with contractual terms and are making
principal and interest payments as required. The securities in the
Corporation's below investment grade portfolio have been issued by 64
corporate borrowers in approximately 36 industries.
In 1996 the Insurance Services Office (ISO) elected to become a public
corporation. As such, each member of ISO was allocated an equity stake in the
new entity. Effective January 1, 1997, ISO became a for-profit corporation
and Ohio Casualty received 138,899 shares valued at $25 per share for a total
value of $3.5 million. The receipt of these shares was recorded as
miscellaneous income and the value of the shares was added to our equity
portfolio.
For further discussion of the Corporation's investments, see Item 1 of the
Corporation's Form 10-K for the year ended December 31, 1996.
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 four times the necessary capital
to conform with the risk-based capital model.
8
<PAGE> 9
The Corporation continues to have no exposure to futures, forwards, caps,
floors, or similar derivative instruments as defined by Statement of Financial
Accounting Standards No. 119. However, as noted in footnote number 13 on page
34 of the Annual Report to Shareholders, we have an interest rate swap with
Chase Manhattan Bank covering our term loan. This swap is not classified as
an investment but rather as a hedge against a portion of the Corporation's
variable rate note payable.
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 (as defined by FRR 48). The additional information will
be included in the footnotes to the Annual Report and quarterly filings with
the SEC after June 15, 1998.
The Corporation has reserved $76.5 million (including interest) for a
Proposition 103 liability asserted by the California Department of Insurance.
The Corporation is currently involved in hearings with the State of
California. The final arguments concluded in the first quarter of 1997 but
were recently reopened for additional testimony on loss development. A ruling
from the Administrative Law Judge is expected before the end of 1997. At that
time, the Insurance Commissioner will have 60 days to take the ruling under
advisement and return with a final ruling. The Corporation will continue to
challenge the validity of any rollback and plans to continue negotiations with
Department officials. It is uncertain when this will be resolved. For
further discussion of the Corporation's California withdrawal, see footnote 14
in the Corporation's Annual Report to Shareholders.
Recently the FASB issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which supersedes APB Opinion No. 15, Earnings Per Share.
This standard replaces the primary EPS requirements with a basic EPS
computation and requires a dual presentation of basic and diluted EPS for
those companies with complex capital structures. The Corporation intends to
adopt the standards of Statement No. 128 for financial statements issued after
December 15, 1997. The impact of this statement is expected to be immaterial
on the Corporation's EPS calculation.
9
<PAGE> 10
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 14, 1997 /s/ Barry S. Porter
--------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
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<PERIOD-END> JUN-30-1997
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<EQUITIES> 819525604
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<RECOVER-REINSURE> 353769332
<DEFERRED-ACQUISITION> 120916281
<TOTAL-ASSETS> 3932195635
<POLICY-LOSSES> 1509331629
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</TABLE>
