<PAGE> 1
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 16, 1999
-----------------
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-0783294
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
136 North Third Street, Hamilton, Ohio 45025
(Address of principal executive offices) (Zip Code)
(513) 867-3000
(Registrant's telephone number)
Not Applicable
(Former name or former address, if changed since last report)
Index to Exhibits - Page 4
Page 1 of 23 Pages
==============================================================================
<PAGE> 2
OHIO CASUALTY CORPORATION
FORM 8-K/A
Dated: March 26, 1999 (February 16, 1999)
CURRENT REPORT ON FORM 8-K
Dated: February 16, 1999
Ohio Casualty Corporation (the "Company") hereby amends its Current
Report on Form 8-K dated February 16, 1999 to include amended consolidated
financial statements of Ohio Casualty Corporation along with amended Notes
to Consolidated Financial Statements.
ITEM 5. Other Events
The consolidated financial statements of Ohio Casualty Corporation
and Subsidiaries for the year ended December 31, 1998, together
with the Notes to Consolidated Financial Statements filed as
Exhibit 20.1 through 20.5 and the Report of Independent
Accountants filed as Exhibit 20.6 to this Current Report on Form
8-K/A is incorporated by reference herein.
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Designation Description
- ----------- -----------
Exhibit 20.1 Ohio Casualty Corporation and Subsidiaries Consolidated Balance
Sheet for the year ended December 31, 1998
Exhibit 20.2 Ohio Casualty Corporation and Subsidiaries Statement of
Consolidated Income for the year ended December 31, 1998
Exhibit 20.3 Ohio Casualty Corporation and Subsidiaries Statement of
Consolidated Shareholders' Equity for the year ended
December 31, 1998
Exhibit 20.4 Ohio Casualty Corporation and Subsidiaries Statement of
Consolidated Cash Flows for the year ended December 31, 1998
Exhibit 20.5 Ohio Casualty Corporation and Subsidiaries Notes to
Consolidated Financial Statements for the year ended
December 31, 1998
Exhibit 20.6 Report of Independent Accountants
Exhibit 23 Consent of Independent Accountants
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)
March 26, 1999 /s/ Barry S. Porter
-------------------------------
Barry S. Porter, CFO/Treasurer
(on behalf of Registrant and as
Principal Accounting Officer)
3
<PAGE> 4
EXHIBIT INDEX
-------------
Current Report on Form 8-K/A
Dated March 26, 1999
OHIO CASUALTY CORPORATION
Exhibit No. Description Page
- ----------- ----------- ----
Exhibit 20.1 Ohio Casualty Corporation and Subsidiaries Consolidated 5
Balance Sheet for the year ended December 31, 1998
Exhibit 20.2 Ohio Casualty Corporation and Subsidiaries Statement of 6
Consolidated Income for the year ended December 31, 1998
Exhibit 20.3 Ohio Casualty Corporation and Subsidiaries Statement of 7
Consolidated Shareholders' Equity for the year ended
December 31, 1998
Exhibit 20.4 Ohio Casualty Corporation and Subsidiaries Statement of 8
Consolidated Cash Flows for the year ended December 31,
1998
Exhibit 20.5 Ohio Casualty Corporation and Subsidiaries Notes to 9-21
Consolidated Financial Statements for the year ended
December 31, 1998
Exhibit 20.6 Report of Independent Accountants 22
Exhibit 23 Consent of Independent Accountants 23
4
<PAGE> 5
<PAGE> 1
EXHIBIT 20.1
Ohio Casualty Corporation & Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997 1996
========================================================================================
<S> <C> <C> <C>
Assets
Investments:
Fixed maturities:
Available for sale, at fair value $2,415,904 $2,226,030 $2,310,938
(Cost: $2,307,734; $2,112,291; $2,225,517)
Equity securities, at fair value 924,906 859,475 721,152
(Cost: $245,129; $275,637; $297,727)
Short-term investments, at fair value 262,863 65,849 41,546
(Cost: $262,939; $65,849; $41,546)
- ----------------------------------------------------------------------------------------
Total investments 3,603,673 3,151,354 3,073,636
Cash 42,139 54,206 20,078
Premiums and other receivables, net of allowance
for bad debts of $8,739, $4,200 and $3,700,
respectively 301,943 193,615 186,676
Deferred policy acquisition costs 176,606 126,063 116,684
Property and equipment, net of accumulated
depreciation of $97,991, $87,232 and $77,427,
respectively 80,065 50,699 42,239
Reinsurance recoverable 186,861 108,962 362,683
Goodwill, net of accumulated amortization of
$1,031, $0 and $0, respectively 308,206 0 0
Other assets 102,771 93,883 87,985
- ----------------------------------------------------------------------------------------
Total assets $4,802,264 $3,778,782 $3,889,981
========================================================================================
Liabilities
Insurance reserves:
Unearned premiums $ 668,550 $ 495,076 $ 491,613
Losses 1,580,599 1,176,614 1,224,873
Loss adjustment expenses 376,340 307,193 331,797
Future policy benefits 25,518 34,148 280,002
Note payable 265,000 40,000 50,000
California Proposition 103 reserve 48,043 66,908 74,376
Deferred income taxes 140,730 95,389 27,993
Other liabilities 376,503 248,625 234,227
- ----------------------------------------------------------------------------------------
Total liabilities (See Notes 1 and 8) 3,481,283 2,463,953 2,714,881
- ----------------------------------------------------------------------------------------
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 4,186 3,923 3,603
Common stock purchase warrants 21,138 0 0
Accumulated other comprehensive income:
Unrealized gain on investments, net of applicable
income taxes 511,816 454,241 332,042
Retained earnings 1,185,349 1,158,308 1,076,545
Treasury stock, at cost
(Shares: 15,535,089; 13,182,240; 11,662,559) (407,358) (307,493) (242,940)
- -----------------------------------------------------------------------------------------
Total shareholders' equity 1,320,981 1,314,829 1,175,100
- -----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,802,264 $3,778,782 $3,889,981
=========================================================================================
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 1
Exhibit 20.2
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
====================================================================================
<S> <C> <C> <C>
Premiums and finance charges earned $1,268,824 $1,208,974 $1,226,651
Investment income less expenses 169,024 177,700 183,308
Investment gains realized, net 14,411 50,749 49,672
- ------------------------------------------------------------------------------------
Total revenues 1,452,259 1,437,423 1,459,631
Losses and benefits for policyholders 805,020 751,207 812,234
Loss adjustment expenses 115,253 113,435 118,354
General operating expenses 120,304 103,299 100,939
Amortization of goodwill 1,031 0 0
Amortization of deferred policy acquisition cost 316,516 303,494 308,856
Restructuring charge 10,000 0 0
California Proposition 103 reserve, including
interest (18,865) (7,469) 4,210
- ------------------------------------------------------------------------------------
Total expenses 1,349,259 1,263,966 1,344,593
- ------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 103,000 173,457 115,038
Income taxes
Current 6,258 44,263 10,173
Deferred 13,731 (1,198) 7,637
- ------------------------------------------------------------------------------------
Total income taxes 19,989 43,065 17,810
- ------------------------------------------------------------------------------------
Income before discontinued operations 83,011 130,392 97,228
Income from discontinued operations net of taxes
of $1,028, $4,661 and $2,633, respectively
(See Note 20) 1,916 8,655 5,229
- ------------------------------------------------------------------------------------
Net income $ 84,927 $ 139,047 $ 102,457
====================================================================================
Other comprehensive income, net of tax:
Net change in unrealized gains (losses), net of
income tax expense of $31,002, $65,882 and
$13,304, respectively 57,575 122,199 26,993
- ------------------------------------------------------------------------------------
Comprehensive income (See Note 12) 142,502 261,246 129,450
====================================================================================
Average shares outstanding - basic 32,904 34,228 35,247
Average shares outstanding - diluted 32,935 34,257 35,254
====================================================================================
Earnings per share (basic and diluted):
Income from continuing operations, per share $ 2.52 $ 3.81 $ 2.76
Income from discontinued operations, per share 0.06 0.25 0.15
-----------------------------------
Net income, per share $ 2.58 $ 4.06 $ 2.91
====================================================================================
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 1
EXHIBIT 20.3
Ohio Casualty Corporation & Subsidiaries
STATEMENT OF CONSOLIDATED
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Accumulated
Additional stock other Total
Common paid-in purchase comprehensive Retained Treasury shareholders'
(in thousands) stock capital warrants income earnings stock equity
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 $ 5,850 $ 3,422 $ 0 $ 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 $ 0 $ 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 $ 0 $ 454,241 $1,158,308 $ (307,493) $1,314,829
Unrealized gain 88,577 88,577
Deferred income tax on
net unrealized gain (31,002) (31,002)
Net issuance of treasury
stock under stock option
plan and by charitable
donation (10,051 shares) 263 126 389
Repurchase of treasury
stock (2,362,900 shares) (99,991) (99,991)
Issuance of warrants 21,138 21,138
Net income 84,927 84,927
Cash dividends paid
($1.76 per share) (57,886) (57,886)
- ----------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 $ 5,850 $ 4,186 $ 21,138 $ 511,816 $1,185,349 $ (407,358) $1,320,981
============================================================================================================================
</TABLE>
See notes to consolidated financial statements
7
<PAGE> 1
Ohio Casualty Corporation & Subsidiaries Exhibit 20.4
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
======================================================================================
<S> <C> <C> <C>
Cash flows from:
Operations
Net income $ 84,927 $ 139,047 $ 102,457
Adjustments to reconcile net income to
cash from operations:
Changes, net of effect of acquisition:
Insurance reserves (8,051) (315,255) (169,006)
Income taxes (978) 10,691 8,238
Premiums and other receivables 9,983 (6,939) 9,500
Deferred policy acquisition costs (13,171) (9,379) 3,111
Reinsurance recoverable (77,899) 253,720 83,484
Other assets (6,418) (22,339) 775
Other liabilities 52,440 20,677 (18,442)
California Proposition 103 reserves (18,865) (7,469) 4,209
Amortization of goodwill 1,031 0 0
Depreciation and amortization 15,902 16,035 12,388
Investment (gains) losses (14,339) (52,382) (50,674)
- ---------------------------------------------------------------------------------------
Net cash from operations 24,562 26,407 (13,960)
- ---------------------------------------------------------------------------------------
Investing
Purchase of securities:
Fixed income securities - available for sale (467,295) (351,393) (539,690)
Equity securities (32,502) (66,433) (74,243)
Proceeds from sales:
Fixed income securities - available for sale 425,355 342,193 501,394
Equity securities 51,217 144,688 122,970
Proceeds from maturities and calls:
Fixed income securities - available for sale 136,066 103,165 101,970
Equity securities 21,848 10,013 6,702
Property and equipment:
Purchases (40,642) (18,968) (7,340)
Sales 517 702 952
Cash paid in acquisition of business, net of
cash acquired (1,082) 0 0
- --------------------------------------------------------------------------------------
Net cash from investments 93,482 163,967 112,715
- --------------------------------------------------------------------------------------
Financing
Note payable:
Borrowing 230,000 0 0
Repayment (5,000) (10,000) (10,000)
Proceeds from exercise of stock options 1 371 135
Purchase of treasury stock (100,212) (64,858) (9,168)
Dividends paid to shareholders (57,886) (57,456) (56,380)
- ----------------------------------------------------------------------------------------
Net cash from financing 66,903 (131,943) (75,413)
- ----------------------------------------------------------------------------------------
Net change in cash and cash equivalents 184,947 58,431 23,342
Cash and cash equivalents, beginning of year 120,055 61,624 38,282
- ----------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 305,002 $ 120,055 $ 61,624
========================================================================================
Additional disclosures:
Interest paid $ 3,547 $ 3,147 $ 3,769
Income taxes paid 21,805 37,035 16,336
</TABLE>
See notes to consolidated financial statements
8
<PAGE> 1
Exhibit 20.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
NOTE 1 -- ACCOUNTING POLICIES
A. Nature of Business
------------------
Ohio Casualty Corporation is a property and casualty insurer whose primary
products consist of insurance for personal auto, commercial property,
homeowners, workers' compensation and other miscellaneous lines. The
Corporation operates through the independent agency system in over 40 states.
Of net premium written, approximately 16.6% was generated in the State of New
Jersey, 11.3% in Ohio and 9.1% in Kentucky.
B. Principles of Consolidation
---------------------------
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. The results of operations of the
acquisition of certain assets and liabilities of the Great American Insurance
Company Commercial Lines Division ("GAI") have been included in the
consolidated financial statements of the Corporation since the date of
acquisition, December 1, 1998 (See Note 14). All significant inter-company
transactions have been eliminated. All dollar amounts except share and per
share data are in thousands of dollars.
C. Investments
-----------
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 fair value. 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.
D. Premiums
--------
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.
E. Acquisition Costs
-----------------
Acquisition costs incurred at policy issuance net of applicable ceding
commissions are deferred and amortized over the term of the policy.
Acquisition costs deferred are commissions, brokerage fees, salaries and
benefits, and other underwriting expenses to include allocations for
inspections, taxes, rent and other expenses as deemed appropriate. Deferred
policy acquisition costs are reviewed to determine that they do not exceed
recoverable amounts, including anticipated investment income.
F. Property and Equipment
----------------------
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. As of January 1, 1998, the Corporation adopted
Statement of Position (SOP) 98-1 and began capitalizing costs incurred to
internally develop software products used in the Corporation's operations.
The Corporation amortizes these costs on a straight-line basis over the
estimated useful life of the product, generally not to exceed five years.
Unamortized software costs and accumulated amortization in the consolidated
balance sheet at December 31, 1998 were $8,013 and $184.
G. Goodwill
--------
The Corporation records goodwill for the excess of cost over the fair value of
net assets acquired. Goodwill is amortized on a straight-line basis over a
twenty-five year period. Goodwill will be evaluated periodically as events or
circumstances indicate a possible inability to recover their carrying amount.
Such evaluation will be based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing company businesses. The analyses will necessarily involve
significant management judgments to evaluate the capacity of an acquired
business to perform within projections. If future undiscounted cash flows are
insufficient to recover the carrying amount of the asset, an impairment loss
will be recognized.
H. 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.
Liabilities for future policy benefits are computed based on contract
terms and issue dates using interest rates ranging from 3 1/2% to 8 3/4%,
select and ultimate mortality experience and industry withdrawal experience.
Interest rates on $14,884 of such liabilities in 1998, $24,611 in 1997 and
$230,843 in 1996 are periodically adjusted based on market conditions. Fair
value is determined by discounting cash flows at current market interest rates.
9
<PAGE> 2
I. Deferred Income Taxes
---------------------
The Corporation records deferred tax assets and liabilities based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
J. Stock Options
-------------
The Corporation accounts for stock options issued to employees in accordance
with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees". Under APB 25, the Corporation recognizes expense based
on the intrinsic value of options.
K. Use of Estimates
----------------
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.
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.
NOTE 2 -- INVESTMENTS
Investment income is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income from:
Fixed maturities $155,153 $166,554 $173,664
Equity securities 15,533 13,776 14,135
Short-term securities 5,332 3,477 2,129
- -----------------------------------------------------------------------------
Total investment income 176,018 183,807 189,928
Investment expenses 6,994 6,107 6,620
- -----------------------------------------------------------------------------
Net investment income $169,024 $177,700 $183,308
=============================================================================
</TABLE>
The proceeds, gross realized gains and gross realized losses from sales
of available-for-sale securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Realized Realized Realized
December 31 Proceeds Gains Losses Gains
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $476,571 $22,531 $8,120 $14,411
1997 486,881 57,751 7,002 50,749
1996 624,364 56,214 6,542 49,672
</TABLE>
Unrealized gains (losses) on investment in securities are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses):
Securities $ 88,577 $188,081 $ 40,297
Deferred tax (31,002) (65,882) (13,304)
- -----------------------------------------------------------------------------
$ 57,575 $122,199 $ 26,993
=============================================================================
</TABLE>
The amortized cost and estimated market values of investments in debt and
equity securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for
sale:
U.S. Government $ 74,534 $ 5,340 $ (20) $ 79,854
States, municipalities
and political
subdivisions 800,945 38,668 (40) 839,573
Debt securities
issued by foreign
governments 3,000 636 0 3,636
Corporate securities 1,062,165 62,275 (6,965) 1,117,475
Mortgage-backed
securities:
U.S. Government
Agency 6,130 145 0 6,275
Other 360,960 9,226 (1,095) 369,091
- --------------------------------------------------------------------------------------
Total fixed maturities 2,307,734 116,290 (8,120) 2,415,904
Equity securities 245,129 686,715 (6,938) 924,906
Short-term
investments 262,939 5 (81) 262,863
- --------------------------------------------------------------------------------------
Total securities,
available for sale $2,815,802 $803,010 $(15,139) $3,603,673
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 maturities 2,112,291 116,026 (2,287) 2,226,030
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
======================================================================================
</TABLE>
10
<PAGE> 3
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 297,727 434,160 (10,735) 721,152
Short-term
investments 41,546 0 0 41,546
- --------------------------------------------------------------------------------------
Total securities,
available for sale $2,564,790 $ 548,915 $ (40,069) $3,073,636
======================================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1998, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
- ---------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 34,249 $ 34,324
Due after one year through five years 434,964 449,556
Due after five years through ten years 757,440 803,594
Due after ten years 713,991 753,064
Mortgage-backed securities:
U.S. Government Agency 6,130 6,275
Other 360,960 369,091
- --------------------------------------------------------------------------
Total fixed maturities $2,307,734 $2,415,904
==========================================================================
</TABLE>
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 $12,709, $14,433 and $19,456 during 1998,
1997 and 1996, respectively, representing a reduction in value of $4,469, $0
and $7,055 on fixed maturities and $8,240, $14,433 and $12,401 on equity
securities.
Proceeds from maturities and sales of investments in debt securities
during 1998, 1997 and 1996 were $561,420, $445,358 and $603,364, respectively.
Gross gains of $23,108, $12,665 and $14,257 and gross losses of $6,778,
$4,311 and $10,388 were realized on those maturities and sales in 1998, 1997
and 1996, respectively.
NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Corporation's financial instruments:
<TABLE>
<CAPTION>
Carrying Fair
1998 Amount Value
- -------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term
investments $ 305,078 $ 305,002
Securities - available for
sale 3,340,810 3,340,810
Liabilities
Future policy benefits $ 25,518 $ 25,518
Long-term debt 265,000 265,000
</TABLE>
<TABLE>
<CAPTION>
Carrying Fair
1997 Amount Value
- -------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term
investments $ 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
</TABLE>
<TABLE>
<CAPTION>
Carrying Fair
1996 Amount Value
- -------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term
investments $ 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
</TABLE>
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.
NOTE 4 -- DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are summarized as follows:
11
<PAGE> 4
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred, January 1 $126,063 $116,684 $119,795
- -------------------------------------------------------------------------
Additions:
Addition due to acquisition 37,371 0 0
Commissions and brokerage 207,747 190,029 190,461
Salaries and employee benefits 50,194 46,241 47,092
Other 70,654 67,301 66,143
- -------------------------------------------------------------------------
Deferral of expense 365,966 303,571 303,696
- -------------------------------------------------------------------------
Amortization to expense
Discontinued operations (1,093) (9,302) (2,049)
Continuing operations 316,516 303,494 308,856
- -------------------------------------------------------------------------
Deferred, December 31 $176,606 $126,063 $116,684
=========================================================================
</TABLE>
The above schedule includes deferred policy acquisition costs (net of
unamortized ceding commission) for discontinued life insurance operations of
$(1,093), $(2,185) and $(11,486) as of 1998, 1997 and 1996, respectively. See
Note 20 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 1998, 1997 and 1996 for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $ 36,050 $ 60,710 $ 40,263
Tax exempt interest (16,433) (16,522) (18,367)
Dividends received
deduction (DRD) (3,247) (3,239) (4,056)
Proration of DRD and tax
exempt interest 2,826 2,796 3,017
Reduction in provision for
audit issues 0 0 (3,000)
Miscellaneous 793 (679) (47)
- -------------------------------------------------------------------------
Actual tax $ 19,989 $ 43,065 $ 17,810
=========================================================================
</TABLE>
Tax years 1993 through 1995 are being examined by The Internal Revenue
Service. Management believes 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:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Unearned premium proration $ 35,209 $ 34,065 $ 33,833
Accrued expenses 48,549 52,520 59,217
Postretirement benefits 29,768 28,522 27,355
Discounted loss and loss expense
reserves 70,663 78,217 81,350
- -------------------------------------------------------------------------
Total deferred tax assets 184,189 183,968 201,755
- -------------------------------------------------------------------------
Deferred policy acquisition costs (49,765) (44,122) (51,129)
Unrealized gains on investments (275,154) (244,591) (178,619)
- -------------------------------------------------------------------------
Total deferred tax liabilities (324,919) (279,357) (229,748)
- -------------------------------------------------------------------------
Net deferred tax asset (liability) $(140,730) $ (95,389) $ (27,993)
=========================================================================
</TABLE>
NOTE 6 -- EMPLOYEE BENEFITS
The Corporation has a non-contributory defined benefit retirement plan, a
contributory health care, life and disability insurance plan and a savings
plan covering substantially all employees. Benefit expenses are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Employee benefit costs:
Pension plan $(1,610) $ (252) $ (136)
Health care 13,215 12,555 14,415
Life and disability
insurance 502 463 555
Savings plan 2,404 2,321 2,489
- -------------------------------------------------------------------------
$14,511 $15,087 $17,323
=========================================================================
</TABLE>
The pension benefit is determined as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost/(benefit) earned
during the year $ 6,011 $ 6,354 $ 6,256
Interest cost on projected
benefit obligation 15,068 15,003 13,927
Expected return on plan assets (19,871) (18,650) (17,360)
Amortization of unrecognized
net obligation (asset) (3,017) (3,017) (3,017)
Amortization of unrecognized
prior service cost 199 58 58
- -------------------------------------------------------------------------
Net pension benefit $ (1,610) $ (252) $ (136)
=========================================================================
</TABLE>
Changes in the benefit obligation during the year:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Benefit obligation at
beginning of year $213,720 $197,538 $191,008
- -------------------------------------------------------------------------
Service cost 6,011 6,354 6,256
Interest cost 15,068 15,003 13,927
Amendments 0 2,000 0
Actuarial loss (gain) 17,132 4,142 (2,990)
Benefits paid (12,638) (11,317) (10,663)
- -------------------------------------------------------------------------
Benefit obligation at end of
year $239,293 $213,720 $197,538
=========================================================================
</TABLE>
Changes in pension plan assets during the year:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of plan assets at
beginning of year $276,477 $225,681 $217,274
- -------------------------------------------------------------------------
Actual return on plan assets (12,038) 62,113 19,070
Benefits paid (12,215) (11,317) (10,663)
- -------------------------------------------------------------------------
Fair value of plan assets at
end of year $252,224 $276,477 $225,681
=========================================================================
</TABLE>
Pension Plan funding at December 31:
12
<PAGE> 5
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Funded status $12,931 $62,757 $28,143
Unrecognized net gain (loss) (6,697) 42,443 1,617
Unrecognized net assets 12,068 15,085 18,102
Unrecognized prior service
cost (2,308) (2,508) (566)
- ---------------------------------------------------------------------------
Accrued pension liability $9,868 $7,737 $8,990
===========================================================================
Expected long-term return on
plan assets 7.75% 8.25% 8.75%
Discount rate on plan benefit
obligations 6.75% 7.25% 7.75%
Expected future rate of salary
increases 5.25% 5.25% 5.25%
</TABLE>
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, 1998, 1997 and
1996. The maximum pension expense deductible for income tax purposes has been
funded. Plan assets at December 31, 1998 include $34,637 of the Corporation's
common stock at market value compared to $37,585 and $29,899 at December 31,
1997 and 1996, respectively.
Postretirement benefit cost at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,061 $ 1,739 $ 1,967
Interest cost 5,753 5,588 5,412
- ------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 7,814 $ 7,327 $ 7,379
==============================================================================
</TABLE>
Changes in the postretirement benefit obligation during the year:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Benefit obligation at
beginning of year $ 81,694 $ 71,797 $ 71,519
- -------------------------------------------------------------------------------
Service cost 2,061 1,739 1,967
Interest cost 5,753 5,588 5,412
Plan participants'
contributions (4,676) (3,912) (3,655)
Increase due to change in
discount rate or other
assumptions 5,731 8,467 (2,353)
Actuarial loss (gain) 1,368 (2,141) (1,177)
Prior service cost
unrecognized at year end 6,416 0 0
- -------------------------------------------------------------------------------
Benefit obligation at end of
year $ 98,347 $ 81,694 $ 71,797
===============================================================================
</TABLE>
Accrued postretirement benefit liability at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated
postretirement benefit
obligation $ 98,347 $ 81,694 $ 71,797
Unrecognized net gain
(loss) (6,642) (203) 6,203
Unrecognized prior service
cost (6,416) 0 0
- -------------------------------------------------------------------------------
Accrued postretirement
benefit liability $ 85,289 $ 81,491 $ 78,000
===============================================================================
</TABLE>
Postretirement benefit weighted average rate assumptions at October 1:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Medical trend rate 7% 8% 9%
Dental trend rate 5% 6% 7%
Ultimate health care
trend rate 5% 5% 5%
Discount rate 6.75% 8.00% 7.75%
</TABLE>
The above medical trend rates assumed for 1998, 1997 and 1996 were assumed
to decrease to the ultimate rate of 5% in 2, 3 and 4 years respectively. The
postretirement plan measurement date is October 1 for 1998, 1997 and 1996.
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, 1998 by approximately $ 19,669 and increase the postretirement
benefit cost for 1998 by $2,032. Likewise, decreasing the assumed health care
cost trend by 1 percentage point in each year would decrease the accumulated
postretirement benefit obligation as of December 31, 1998 by approximately
$12,785 and decrease the postretirement benefit cost for 1998 by $1,250.
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. 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. Benefit
costs are accrued based on actuarial projections of future payments. There
are currently 3,261 active employees and 1,416 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.
13
<PAGE> 6
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, 1998, 868,289 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,
1998, 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 1998 related to restricted stock awards was
$387 and $345 in 1997 before tax. There were no restricted stock awards in
1996. Currently there are 15,312 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 1998 was $551 and $517 in 1997 before tax. As of
December 31, 1998, 313,684 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 1998, 1997 and 1996, respectively: dividend yield of 4.5% for 1998, 1997
and 1996, expected volatility of 26.7% for 1998, 26.1% for 1997 and 25.3% for
1996, risk free interest rate of 5.63%, 6.87% and 6.34%, and expected life of
8 years. The following table summarizes information about the stock-based
compensation plan as of December 31, 1998, 1997 and 1996, and changes that
occurred during the year:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted
Avg Avg Avg
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------------------------ --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning of year 262 $37.38 173 $33.84 74 $30.02
Granted 123 46.97 120 41.44 127 34.93
Exercised (6) 35.00 (27) 33.33 (28) 28.75
Canceled 0 (4) 32.38 0
----- ----- -----
Outstanding end of 380 $40.53 262 $37.38 173 $33.84
year ===== ===== =====
Options exercisable
at year-end 160 81 52
Weighted-Avg fair
value of options
granted during the
year $10.60 $10.18 $8.14
</TABLE>
At year end 1998, 379,684 options were outstanding with an average
remaining contractual life of 7.94 years and weighted exercise price of
$40.53. Of the amount outstanding, 159,681 were exercisable with a weighted
average exercise price of $36.90. At year end 1997, 262,494 options were
outstanding with an average remaining contractual life of 8.35 years and a
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.
Had the Corporation adopted FAS 123, the amount of compensation expense
that would have been recognized in 1998, 1997 and 1996 respectively, would be
$1,164, $755 and $350. The Corporation's net income and earnings per share
would have been reduced to the pro forma amounts disclosed below:
14
<PAGE> 7
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income As Reported: $84,927 $139,047 $102,457
Pro Forma: $83,994 $138,411 $102,146
Basic/diluted earnings per share
As Reported: $2.58 $4.06 $2.91
Pro Forma: $2.55 $4.04 $2.90
</TABLE>
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 Corporation evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk to
minimize its exposure to significant losses from reinsurer insolvencies. The
following amounts are reflected in the financial statements as a result of
reinsurance ceded:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Ceded premiums earned, presented
net $35,334 $32,169 $30,534
Ceded losses incurred, presented
net 41,477 13,387 11,846
Reserve for unearned premiums 12,290 8,242 8,062
Reserve for losses 82,589 54,209 61,205
Reserve for future policy benefits 25,518 34,148 280,002
Reserve for loss adjustment
expenses 8,707 7,794 8,833
</TABLE>
Annuities are purchased from other insurers to pay certain claim
settlements. These payments are made directly to the claimants; 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 claim reserves are presented net of the related annuities on
the Corporation's balance sheet. The total amount of unpaid annuities was
$24,155, $25,123 and $25,139 at December 31, 1998, 1997 and 1996,
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 assets of the fixed income portfolio are
not carried on the Corporation's balance sheet as these are assets of
Employers' Reassurance Corporation. 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. As the market value fluctuates
from this amount, Ohio Casualty is required to make up any deficiency and is
entitled to receive any excess. Accordingly, the Corporation accrues any
deficiency or excess in makret value over the guaranteed amount of $163,615.
This results in either investment income or loss and is recorded in earnings
of the current period. At December 31, 1998, the market value of the account
exceeded the $163,615 required balance by $1,356 cmpared with excesses of
$2,080 in 1997 and $699 in 1996. The annual interest obligation of 7.25% was
also being adequately serviced by the portfolio assets.
NOTE 9 -- LOSSES AND LOSS RESERVES
The following table presents a reconciliation of liabilities for losses and
loss adjustment expenses:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, net of
reinsurance recoverables of
$62,003, $70,048 and
$74,119 $1,421,804 $1,486,622 $1,557,065
Addition related to acquisition 483,938 0 0
Incurred related to:
Current year 989,114 922,065 1,009,086
Prior years (66,119) (53,615) (76,920)
- -----------------------------------------------------------------------------
922,995 868,450 932,166
Paid related to:
Current year 513,292 448,402 515,025
Prior years 449,802 484,866 487,584
- -----------------------------------------------------------------------------
Total paid 963,094 933,268 1,002,609
Balance as of December 31,
net of reinsurance
recoverables of $91,296,
$62,003 and $70,048 $1,865,643 $1,421,804 $1,486,622
=============================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Incurred losses $44,595 $21,389 $62,189
Loss ratio effect 3.6% 1.8% 5.1%
</TABLE>
In 1998, 1997 and 1996 there were 37, 25 and 41 catastrophes
respectively. The largest catastrophe in each year was $7,300, $4,600 and
$13,700 in incurred losses. Additional catastrophes with over $1,000 in
incurred losses numbered 14, 3 and 10 in 1998, 1997 and 1996.
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.
15
<PAGE> 8
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 1998, 1997 and 1996, respectively, total
case, incurred but not reported and loss adjustment expense reserves were
$41,898, $40,121 and $40,956. Asbestos reserves were $10,364, $6,966 and
$5,215 and environmental reserves were $31,534, $33,155 and $35,741 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:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing
operations $83,011 $130,392 $97,228
Average common shares
outstanding - basic 32,904 34,228 35,247
Basic income from continuing
operations per average share $2.52 $3.81 $2.76
===============================================================================
Average common shares
outstanding 32,904 34,228 35,247
Effect of dilutive securities 31 29 7
- -------------------------------------------------------------------------------
Average common shares
outstanding - diluted 32,935 34,257 35,254
Diluted income from continuing
operations per average share $2.52 $3.81 $2.76
===============================================================================
</TABLE>
At December 31, 1998, 3,000 purchase warrants and 103 stock options were
not included in earnings per share calculations for 1998 as they were
antidilutive.
NOTE 11 -- Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1998 First Second Third Fourth
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and finance
charges earned $309,627 $311,663 $314,956 $332,406
Net investment
income 44,634 41,299 42,231 40,860
Investment gains
(losses) realized 4,082 8,151 3,537 (1,359)
Income from
continuing
operations 30,914 9,989 22,903 19,205
Income from
discontinued
operations 280 345 278 1,013
Net income 31,194 10,334 23,181 20,218
Basic and diluted net
income per share .93 .31 .71 .64
</TABLE>
<TABLE>
<CAPTION>
1997 First Second Third Fourth
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
The fourth quarter adjustments for 1998 included income of $12,262 after
tax for the reduction in Proposition 103 liability and an expense of $6,500
after tax for a restructuring charge.
16
<PAGE> 9
NOTE 12 -- Comprehensive Income
Changes in accumulated other comprehensive income related to changes in
unrealized gains(losses) on securities were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains
(losses) arising during the
period, net of tax $71,207 $143,794 $56,019
Less: Reclassification
adjustment for gains
included in net income,
net of taxes 13,632 21,595 29,026
- ------------------------------------------------------------------------------
Net unrealized gains(losses) on
securities, net of taxes $57,575 $122,199 $26,993
==============================================================================
</TABLE>
NOTE 13 -- SEGMENT INFORMATION
In 1998, the Corporation adopted Statement of Financial Accounting Standard
131, "Disclosures about Segments of an Enterprise and Related Information."
This statement supersedes Statement of Financial Accounting Standard 14,
"Financial Reporting for Segments of a Business Enterprise" and replaces
the industry segment approach with a management segment approach in
identifying reportable segments. The management segment approach focuses on
financial information that the Corporation's decision makers use to make
decisions about the operating segments. The accounting policies of the
property and casualty segments are based upon statutory accounting practices.
Statutory accounting principles differ from generally accepted accounting
principles primarily by deferred policy acquisition costs, required statutory
reserves, assets not admitted for statutory reporting, California Proposition
103 reserve and deferred federal income taxes.
The Corporation has determined its reportable segments based upon its
method of internal reporting which is organized by product line. The
property and casualty segments are personal automobile, commercial automobile,
homeowners, workers' compensation, fidelity and surety, general liability and
commercial property. These segments generate revenues by selling a wide
variety of personal, commercial and surety insurance products. The
Corporation also has an all other segment which derives its revenues from
premium financing, investment income, royalty income and discontinued life
insurance operations. The Corporation writes business in over 40 states in
conjunction with the independent agency system.
Each segment of the Corporation is managed separately. The property and
casualty segments are managed by assessing the performance and profitability
of the segments through analysis of industry financial measurements including
loss and loss adjustment expense ratios, combined ratio, premiums written,
underwriting gain/loss and the effect of catastrophe loses on the segment.
The following tables present this information by segment as it is reported
internally to management. Asset information by reportable segment is not
reported, since the Corporation does not produce such information internally.
<TABLE>
<CAPTION>
Private Passenger Auto 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $521,794 $464,693 $456,371
% Increase(decrease) 12.3% 1.8% -2.3%
Net premiums earned 500,785 460,029 457,121
% Increase(decrease) 8.8% 0.6% -3.6%
Underwriting gain/(loss)
(before tax) (24,220) (25,926) (46,951)
Loss ratio 68.8% 72.0% 75.7%
Loss expense ratio 10.3% 9.6% 10.6%
Underwriting expense ratio 24.7% 23.8% 24.0%
Combined ratio 103.8% 105.4% 110.3%
Impact of catastrophe losses on
combined ratio 1.2% 0.5% 0.9%
</TABLE>
<TABLE>
<CAPTION>
CMP, Fire, Inland Marine 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $225,749 $206,133 $195,290
% Increase(decrease) 9.5% 5.6% 0.8%
Net premiums earned 217,236 200,330 195,437
% Increase(decrease) 8.4% 2.5% 0.2%
Underwriting gain/(loss)
(before tax) (33,008) (17,812) (29,311)
Loss ratio 64.5% 58.7% 63.5%
Loss expense ratio 6.2% 7.0% 8.9%
Underwriting expense ratio 42.8% 42.0% 42.7%
Combined ratio 113.5% 107.7% 115.0%
Impact of catastrophe losses on
combined ratio 4.9% 2.5% 8.3%
</TABLE>
<TABLE>
<CAPTION>
General Liability 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $ 95,144 $ 96,698 $101,793
% Increase(decrease) -1.6% -5.0% -6.0%
Net premiums earned 96,535 98,971 104,428
% Increase(decrease) -2.5% -5.2% -5.5%
Underwriting gain/(loss)
(before tax) (819) (1,892) 12,622
Loss ratio 35.8% 36.6% 26.2%
Loss expense ratio 13.8% 19.3% 15.7%
Underwriting expense ratio 52.0% 47.1% 47.2%
Combined ratio 101.6% 103.0% 89.1%
Impact of catastrophe losses on
combined ratio N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Workers' Compensation 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $100,150 $ 97,176 $115,398
% Increase(decrease) 3.1% -15.8% -17.9%
Net premiums earned 100,336 103,484 124,157
% Increase(decrease) -3.0% -16.7% -12.6%
Underwriting gain/(loss)
(before tax) (9,606) 9,130 9,613
Loss ratio 69.1% 57.2% 59.3%
Loss expense ratio 8.2% 6.4% 5.9%
Underwriting expense ratio 32.3% 29.4% 29.1%
Combined ratio 109.6% 93.0% 94.3%
Impact of catastrophe losses on
combined ratio N/A N/A N/A
</TABLE>
17
<PAGE> 10
<TABLE>
<CAPTION>
Commercial Auto 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $139,087 $140,295 $139,420
% Increase(decrease) -0.9% 0.6% -4.8%
Net premiums earned 139,114 139,933 142,446
% Increase(decrease) -0.5% -1.8% -4.5%
Underwriting gain/(loss)
(before tax) (7,453) (18,146) (6,507)
Loss ratio 61.2% 69.3% 64.5%
Loss expense ratio 8.6% 10.2% 7.0%
Underwriting expense ratio 35.6% 33.3% 33.8%
Combined ratio 105.4% 112.9% 105.3%
Impact of catastrophe losses on
combined ratio 0.7% 0.3% 0.8%
</TABLE>
<TABLE>
<CAPTION>
Homeowners 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $180,697 $168,168 $166,457
% Increase(decrease) 7.5% 1.0% 3.7%
Net premiums earned 177,419 166,474 165,630
% Increase(decrease) 6.6% 0.5% 2.8%
Underwriting gain/(loss)
(before tax) (33,824) (19,254) (59,806)
Loss ratio 73.8% 66.5% 89.5%
Loss expense ratio 8.2% 8.7% 11.5%
Underwriting expense ratio 36.4% 36.0% 34.9%
Combined ratio 118.4% 111.2% 135.9%
Impact of catastrophe losses on
combined ratio 15.2% 8.1% 24.4%
</TABLE>
<TABLE>
<CAPTION>
Fidelity & Surety 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $ 37,022 $ 34,418 $ 34,473
% Increase(decrease) 7.6% -0.2% 0.9%
Net premiums earned 36,403 35,045 34,135
% Increase(decrease) 3.9% 2.7% 4.3%
Underwriting gain/(loss)
(before tax) 6,351 8,663 8,866
Loss ratio 10.3% 7.9% 5.8%
Loss expense ratio 5.2% 2.8% -0.3%
Underwriting expense ratio 65.9% 65.8% 67.8%
Combined ratio 81.4% 76.5% 73.4%
Impact of catastrophe losses on
combined ratio N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Total Property & Casualty 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $1,299,643 $1,207,581 $1,209,202
% Increase(decrease) 7.6% -0.1% -3.3%
Net premiums earned 1,267,828 1,204,265 1,223,353
% Increase(decrease) 5.3% -1.56% -3.3%
Underwriting gain/(loss)
(before tax) (102,579) (65,237) (111,474)
Loss ratio 63.7% 62.7% 66.5%
Loss expense ratio 9.1% 9.4% 9.7%
Underwriting expense ratio 34.4% 33.2% 33.4%
Combined ratio 107.2% 105.3% 109.5%
Impact of catastrophe losses on
combined ratio 3.6% 1.8% 5.1%
</TABLE>
<TABLE>
<CAPTION>
All other 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 5,391 $ 6,833 $ 6,009
Expenses 6,663 6,880 7,223
- ------------------------------------------------------------------
Net income $ (1,272) $ (47) $ (1,214)
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Revenue 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net premiums earned for
reportable segments $1,267,828 $1,204,265 $1,223,353
Investment income 164,812 172,372 181,904
Realized gains 26,516 58,912 49,401
Miscellaneous income 162 453 647
- ------------------------------------------------------------------
Total property and casualty
revenues (Statutory basis) 1,459,318 1,436,002 1,455,305
Property and casualty statutory
to GAAP adjustment (12,450) (5,412) (1,683)
- ------------------------------------------------------------------
Total revenues property and
casualty (GAAP basis) 1,446,868 1,430,590 1,453,622
Other segment revenues 5,391 6,833 6,009
- ------------------------------------------------------------------
Total revenues $1,452,259 $1,437,423 $1,459,631
==================================================================
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Underwriting
gain/(loss) (before tax) 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Property and casualty under-
writing gain/(loss)
(before tax)
(Statutory basis) $(102,579) $ (65,237) $ (111,474)
Statutory to GAAP adjustment 28,528 15,597 (706)
- ------------------------------------------------------------------
Property and casualty under-
writing gain/(loss)(before tax)
(GAAP basis) (74,051) (49,640) (112,180)
Net investment income 169,024 177,700 183,308
Realized gains 14,411 50,749 49,672
Other income (6,384) (5,352) (5,762)
- ------------------------------------------------------------------
Income from continuing
operations before
income taxes $103,000 $173,457 $115,038
==================================================================
</TABLE)
NOTE 14 -- ACQUISITION OF COMMERCIAL LINES BUSINESS
On December 1, 1998, the Corporation acquired substantially all of the
Commercial Lines Division of Great American Insurance Company ("GAI"), an
insurance subsidiary of the American Financial Group, Inc. As part of the
transaction, the Corporation assumed responsibility for 650 employees of
GAI's Commercial Lines Division, as well as relationships with 1,700 agents.
The major lines of business included in the sale are workers' compensation,
commercial multi-peril, umbrella and commercial auto. Four commercial
operations as well as all California business and all pre-1987 environmental
claims were excluded from the transaction.
Under the asset purchase agreement, the Corporation assumed $645,813 of
commercial lines insurance liabilities, $62,639 in other liabilities and
acquired $287,900 of investments, $1,500 in cash and $119,052 in other assets.
This resulted in an assumption by the Corporation of a net statutory-basis
liability of $300,000 plus warrants to purchase 3 million shares of Ohio
Casualty Corporation common stock at a price of $45.01. In addition, if the
annualized production from the transferred agents at the end of eighteen
months equals or exceeds the production in the twelve months prior to closing,
GAI will receive an additional $40,000. This bonus payment grades down
ratably where if eighteen-month annualized production equals 71% or less of
previous production, no bonus payment is
18
<PAGE> 11
required. The bonus payment will be accrued as additional goodwill when
minimum contingency is achieved.
The transaction was accounted for using the purchase method of accounting.
The Corporation has recorded goodwill of $309,237 relating to this transaction,
consisting of $285,517 of net liabilities assumed under generally accepted
accounting principles, $21,138 in warrants given and $2,582 in acquisition
expenses. Deferred policy acquisition costs of $37,371 were also recorded as
a result of the transaction. The Corporation follows the practice of
allocating purchase price to specifically identifiable intangible assets based
on their estimated values as determined by appropriate valuation methods. In
the GAI acquisition, no allocation of purchase price was made to specifically
identifiable intangible assets other than goodwill and deferred policy
acquisition costs as the Corporation believes it did not acquire any other
significant specifically identifiable intangible assets.
The warrants which were issued in connection with the transaction provide
for the purchase of the Corporation's common stock at $45.01 per share and
expire in December 2003. The warrants may be settled through physical or net
share settlement and thus have been recorded as equity in the financial
statements at their estimated fair value. Estimated fair value was determined
based on a third party appraisal of the warrants.
The following table presents the unaudited proforma results of operations
had the acquisition occurred at the beginning of each year.
</TABLE>
<TABLE>
<CAPTION>
(Unaudited) 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Revenues $1,750,528 $1,775,556
Net income 58,866 130,206
Diluted earnings per
share 1.79 3.80
</TABLE>
NOTE 15 -- RESTRUCTURE CHARGE
During December 1998, the Corporation adopted a plan to restructure its branch
operations. To continue in the Corporation's efforts to reduce expenses,
personal lines business centers will be reduced from five to three locations.
Underwriting branch locations will be reduced from seventeen to eight locations
and claims branches will be reduced from thirty-eight to six locations. The
Corporation recognized $10,000 in expense in its income statement to reflect
one-time charges related to its branch office consolidation plan. These
charges consisted solely of future contractual lease payments related to
abandoned facilities. The activities under the plan are expected to be
completed in 1999.
NOTE 16 -- 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, goodwill and deferred federal income
taxes.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty Insurance
Statutory net income $ 82,044 $ 142,457 $ 104,137
Statutory policyholders'
surplus 1,027,105 1,109,517 984,859
Life Insurance
Statutory net income 6,675 29,794 4,885
Statutory policyholders'
surplus 14,943 29,971 58,511
</TABLE>
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 and 1998 the principal
reduction in the Proposition 103 liability was taken as an increase to
statutory surplus and not included in the 1997 or 1998 statutory statements of
operations.
For statutory purposes, goodwill related to the GAI acquisition was taken
as a direct charge to surplus.
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, 1998, approximately $112,129 of retained
earnings are not subject to restriction or prior dividend approval
requirements.
NOTE 17 -- BANK NOTE PAYABLE
During 1997, the Corporation signed a credit facility that makes available a
$300,000 revolving line of credit. This line of credit was accessed in 1997
to refinance the outstanding term loan balance the Corporation had at that
time. In 1998, the line of credit was used for capital
19
<PAGE> 12
infusion of $200,000 into the property and casualty subsidiaries due to the
acquisition. The line of credit was again accessed during 1998 for the
purchase of a building and to purchase treasury shares. The credit agreement
contains financial covenants and provisions customary for such arrangements.
The agreement expires in October 2002, with any outstanding loan balance due
at that time. The revolving line of credit maintains an interest rate swap
that existed on the previous term loan. The effect of the swap agreement was
to establish a fixed rate of 6.34% on $20,000 of the outstanding balance
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 (5.82% at December 31, 1998). 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
$3,547, $3,147 and $3,769 in 1998, 1997 and 1996, respectively. Under the
loan agreement, the maximum permissible consolidated funded debt cannot
exceed 30% of consolidated tangible net worth.
NOTE 18 -- CALIFORNIA WITHDRAWAL
Proposition 103 was passed in the State of California in 1988 in an attempt to
legislate premium rates for that state. As construed by the California
Supreme Court, the proposition requires premium rate rollbacks for 1989
California policyholders while allowing for a "fair" return for insurance
companies. 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 assessed the Corporation $59,867 for Proposition 103. In February
1995, California revised this billing to $47,278 due to California Senate Bill
905 which permits reduction of the rollback due to actual commissions and
premium taxes paid. The assessment was revised again in August 1995 to
$42,100 plus interest. In December 1997, during Administrative Law hearings,
the California Department of Insurance filed two revised rollback calculations.
These calculations indicated rollback liabilities of either $35,900 or $39,900
plus interest.
In 1998, the Administrative Law Judge finally issued a proposed ruling
with a rollback liability of $24,428 plus interest. Her ruling was sent to
the California Commissioner of Insurance to be accepted, rejected or modified.
The Corporation expected the commissioner to rule sometime after the election
in November, but he has so far failed to do so. In light of this failure to
rule, the Corporation consulted extensively with outside counsel to determine
the range of liability asserted by the Department. The asserted rollbacks to
date have ranged from $24,428 to $61,197. The Administrative Law Judge
indicates clearly in her ruling that by her calculation the Corporation would
have lost approximately $1,000 on 1989 operations if a rollback of $24,428
were imposed. Given that conclusion, it is clear that any assessment greater
than $24,428 would strengthen the Corporation's Constitutional argument that
this rollback is confiscatory. Since the Corporation does not believe it is
possible to pinpoint a specific rollback within the California Department of
Insurance's asserted range that is the most probable, the Corporation has
established a contingent liability for Proposition 103 rollback at $24,428
plus simple interest at 10% from May 8, 1989. This brings the total reserve
to $48,043 at December 31, 1998.
The Corporation will continue to challenge the validity of any rollback.
To date, the Corporation has paid $4,755 in legal costs related to the
withdrawal, Proposition 103, and Fair Plan assessments.
In December 1992, the Corporation stopped writing business in California
due to a lack of profitability and a difficult regulatory environment. In
April 1995, the California Department of Insurance gave final approval for
withdrawal. Currently, subsidiary American Fire and Casualty remains in the
state to wind down the affairs of the group.
NOTE 19 -- SHAREHOLDER RIGHTS PLAN
In December 1989, the Board of Directors adopted a Shareholder Rights Plan
(the Plan) declaring a dividend of one-half of one Common Share Purchase
Right, expiring in 2009, for each outstanding share of common stock. The Plan
is designed to deter coercive or unfair takeover tactics and to prevent a
person or persons from gaining control of the Corporation without offering a
fair price to all shareholders.
Under the terms of the Plan, each whole right entitles the registered
holder (except the acquirer) to purchase from the Corporation one share of
common stock at a price of $250 per share, subject to adjustment. Each right
entitles its holder to purchase at the right's then current exercise price, a
number of the Corporation's common shares having a market value of twice such
price. The rights become exerciseable for a 60 day period commencing 11
business days after a public announcement that a person or group has acquired
shares representing 20 percent or more of the outstanding shares of common
stock, without the prior approval of the board of directors; or 11 business
days following commencement of a tender or exchange of 20 percent or more of
such outstanding shares of common stock.
If after the rights become exercisable, the Corporation is involved in a
merger, other business consolidation or 50 percent or more of the assets or
earning power of the Corporation is sold, the rights will then entitle the
rightholders, upon exercise of the rights, to receive shares of common stock
of the acquiring company with a market value equal to twice the exercise price
of each right.
20
<PAGE> 13
The Corporation can redeem the rights for $0.01 per right at any time
prior to becoming exercisable.
NOTE 20 -- DISCONTINUED OPERATIONS (LIFE INSURANCE)
Discontinued operations include the operations of Ohio Life, a subsidiary of
the Ohio Casualty Insurance Company.
During 1995, the Corporation committed to a plan to exit the life
insurance business. On October 2, 1995, the Corporation 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 ("Great
Southern"). 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 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 of 1997 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.
At December 31, 1998, Great Southern had assumed 95% of the life insurance
policies subject to the 1995 agreement. As a result, the Corporation
recognized an additional amount of unamortized ceding commission of $1,093
before tax during the fourth quarter 1998. There remains approximately
$1,093 in unamortized ceding commission. This will continue to be amortized
over the remaining life of the underlying policies.
Great Southern Life Insurance Company and Employers' Reassurance
Corporation have entered into a modified coinsurance arrangement whereby all
Ohio Life policies that were assumed by Employers' Reassurance are, in turn,
retroceded to Great Southern Life Insurance Company. This gives the
Corporation additional protection since the Corporation would first look for
recovery from Employers' Reassurance which is rated A++ by A.M. Best. As
part of the agreement, Americo Life Inc., the parent of Great Southern Life,
acts as the third party administrator for Ohio Life for all unassumed
policies. This arrangement lasts until the policies are assumed or lapse.
Under the marketing agreement, Great Southern was permitted to market life
insurance products through the Corporation's independent agency distribution
system. This agreement was terminated in 1996 by mutual consent of the
parties.
Results of the discontinued life insurance operations for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Gross premiums written $ 0 $ 1,267 $ 1,428
Net premiums earned 3,708 23,865 4,582
Net investment income 2,288 3,954 4,812
Realized investment gains (72) 1,633 1,002
- ---------------------------------------------------------------------
Total income 5,924 29,452 10,396
Income before income
taxes 2,944 13,316 7,892
- ---------------------------------------------------------------------
Provision for income
taxes 1,029 4,661 2,663
- ---------------------------------------------------------------------
Net income $ 1,916 $ 8,655 $ 5,229
=====================================================================
</TABLE>
Assets and liabilities of the discontinued life insurance operations as
of the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Cash $ 24 $ 9,214 $ 1,150
Investments 13,917 21,320 71,313
Deferred policy
acquisition costs, net of
unamortized ceding commission (1,093) (2,185) (11,486)
Reinsurance receivable 36,599 36,198 285,354
Other assets 3,191 4,219 7,376
- -----------------------------------------------------------------------
Total assets $ 52,638 $ 68,766 $ 353,707
=======================================================================
Future policy benefits $ 25,518 $ 34,148 $ 280,002
Deferred income tax (1,215) (1,357) 1,728
Other liabilities 46,822 35,512 17,505
- -----------------------------------------------------------------------
Total liabilities $ 71,125 $ 68,303 $ 299,235
=======================================================================
</TABLE>
NOTE 21 -- NEW ACCOUNTING STANDARDS
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.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 133 "Accounting for Derivative Instruments
and Hedging Activities." This statement standardizes the accounting for
derivative instruments by requiring those items to be recognized as assets or
liabilities with changes in fair value reported in earnings or other
comprehensive income in the current period. The Corporation expects the
adoption of FAS 133 to have an immaterial impact on the financial results due
to its limited use of derivative instruments. This statement is effective for
fiscal quarters of fiscal years beginning after June 15, 1999 (January 1, 2000
for the Corporation).
21
<PAGE> 1
Exhibit 20.6
Report of Independent Accountants
To the Board of Directors and Shareholders of
Ohio Casualty Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Ohio
Casualty Corporation and its subsidiaries at December 31, 1998, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 4 , 1999
22
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Ohio Casualty Corporation on Form S-8 (File Nos. 333-69895 and 33-67962) and
Form S-3 (File Nos. 333-70761 and 333-29483) of our report dated February 4,
1999, on our audits of the consolidated financial statements of Ohio Casualty
Corporation as of and for the years ended December 31, 1998, 1997 and 1996,
which report is included in the Ohio Casualty Corporation Current Report on
Form 8-K/A dated March 26, 1999.
/s/PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Cincinnati, Ohio
March 24, 1999
