-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TukG7G/x8h35yQLDEA1axZVWLUy/B3DUxRqxfNZCHFQI0VejyMXyvvmHyMM2gjSC 9i8LlpYBUWT5cJB7rbNcpw== 0000073952-99-000009.txt : 19990329 0000073952-99-000009.hdr.sgml : 19990329 ACCESSION NUMBER: 0000073952-99-000009 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO CASUALTY CORP CENTRAL INDEX KEY: 0000073952 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310783294 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-05544 FILM NUMBER: 99573649 BUSINESS ADDRESS: STREET 1: 136 N THIRD ST CITY: HAMILTON STATE: OH ZIP: 45025 BUSINESS PHONE: 5138673000 MAIL ADDRESS: STREET 1: 136 N THIRD ST CITY: HAMILTON STATE: OH ZIP: 45025 8-K/A 1 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 ============================================================================== 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 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 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 5 EX-20.1 2 OHIO CASUALTY CORP FORM 8-K/A EXHIBIT 20.1 1 EXHIBIT 20.1 Ohio Casualty Corporation & Subsidiaries CONSOLIDATED BALANCE SHEET
December 31 (in thousands) 1998 1997 1996 ======================================================================================== 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 =========================================================================================
See notes to consolidated financial statements 5 EX-20.2 3 OHIO CASUALTY CORP FORM 8-K/A EXHIBIT 20.2 1 Exhibit 20.2 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED INCOME
Year ended December 31 (in thousands) 1998 1997 1996 ==================================================================================== 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 ====================================================================================
See notes to consolidated financial statements 6 EX-20.3 4 OHIO CASUALTY CORP FORM 8-K/A EXHIBIT 20.3 1 EXHIBIT 20.3 Ohio Casualty Corporation & Subsidiaries STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
Common Accumulated Additional stock other Total Common paid-in purchase comprehensive Retained Treasury shareholders' (in thousands) stock capital warrants income earnings stock equity =========================================================================================================================== 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 ============================================================================================================================
See notes to consolidated financial statements 7 EX-20.4 5 OHIO CASUALTY CORP FORM 8-K/A EXHIBIT 20.4 1 Ohio Casualty Corporation & Subsidiaries Exhibit 20.4 STATEMENT OF CONSOLIDATED CASH FLOWS
Year ended December 31 (in thousands) 1998 1997 1996 ====================================================================================== 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
See notes to consolidated financial statements 8 EX-20.5 6 OHIO CASUALTY CORP FORM 8-K/A EXHIBIT 20.5 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 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:
1998 1997 1996 - ----------------------------------------------------------------------------- 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 =============================================================================
The proceeds, gross realized gains and gross realized losses from sales of available-for-sale securities were as follows:
Gross Gross Net Realized Realized Realized December 31 Proceeds Gains Losses Gains - ------------------------------------------------------------------------------ 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
Unrealized gains (losses) on investment in securities are summarized as follows:
1998 1997 1996 - ----------------------------------------------------------------------------- Unrealized gains (losses): Securities $ 88,577 $188,081 $ 40,297 Deferred tax (31,002) (65,882) (13,304) - ----------------------------------------------------------------------------- $ 57,575 $122,199 $ 26,993 =============================================================================
The amortized cost and estimated market values of investments in debt and equity securities are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair 1998 Cost Gains Losses Value - -------------------------------------------------------------------------------------- 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 ======================================================================================
Gross Gross Estimated Amortized Unrealized Unrealized Fair 1997 Cost Gains Losses Value - -------------------------------------------------------------------------------------- Securities available for sale: U.S. Government $ 66,244 $ 3,601 $ (1) $ 69,844 States, municipalities and political subdivisions 835,355 40,405 (19) 875,741 Debt securities issued by foreign governments 3,000 458 0 3,458 Corporate securities 872,904 58,046 (1,026) 929,924 Mortgage-backed securities: U.S. Government Agency 16,876 678 (1) 17,553 Other 317,912 12,838 (1,240) 329,510 - -------------------------------------------------------------------------------------- Total fixed 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 ======================================================================================
10 3
Gross Gross Estimated Amortized Unrealized Unrealized Fair 1996 Cost Gains Losses Value - -------------------------------------------------------------------------------------- Securities available for sale: U.S. Government $ 80,822 $ 2,101 $ (382) $ 82,541 States, municipalities and political subdivisions 760,602 34,966 (1,029) 794,539 Debt securities issued by foreign governments 3,000 296 0 3,296 Corporate securities 940,540 50,126 (7,008) 983,658 Mortgage-backed securities: U.S. Government Agency 171,291 12,992 (7,377) 176,906 Other 269,262 14,274 (13,538) 269,998 - -------------------------------------------------------------------------------------- Total fixed maturities 2,225,517 114,755 (29,334) 2,310,938 Equity securities 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 ======================================================================================
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.
Estimated Amortized Fair Cost Value - --------------------------------------------------------------------------- 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 ==========================================================================
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:
Carrying Fair 1998 Amount Value - ------------------------------------------------------------------------- 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
Carrying Fair 1997 Amount Value - ------------------------------------------------------------------------- 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
Carrying Fair 1996 Amount Value - ------------------------------------------------------------------------- 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
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 4
1998 1997 1996 - ------------------------------------------------------------------------- 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 =========================================================================
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:
1998 1997 1996 - ------------------------------------------------------------------------- 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 =========================================================================
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:
1998 1997 1996 - ------------------------------------------------------------------------- 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) =========================================================================
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:
1998 1997 1996 - ------------------------------------------------------------------------- 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 =========================================================================
The pension benefit is determined as follows:
1998 1997 1996 - ------------------------------------------------------------------------- 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) =========================================================================
Changes in the benefit obligation during the year:
1998 1997 1996 - ------------------------------------------------------------------------- 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 =========================================================================
Changes in pension plan assets during the year:
1998 1997 1996 - ------------------------------------------------------------------------- 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 =========================================================================
Pension Plan funding at December 31: 12 5
1998 1997 1996 - -------------------------------------------------------------------------- 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%
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:
1998 1997 1996 - ------------------------------------------------------------------------------ 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 ==============================================================================
Changes in the postretirement benefit obligation during the year:
1998 1997 1996 - ------------------------------------------------------------------------------- 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 ===============================================================================
Accrued postretirement benefit liability at December 31:
1998 1997 1996 - ------------------------------------------------------------------------------- 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 ===============================================================================
Postretirement benefit weighted average rate assumptions at October 1:
1998 1997 1996 - ------------------------------------------------------------ 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%
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 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:
1998 1997 1996 - ------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted Avg Avg Avg Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price ------------------------ --------------------- ---------------------- 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
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 7
1998 1997 1996 - ------------------------------------------------------------------------------- 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
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:
1998 1997 1996 - ------------------------------------------------------------------------------- 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
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:
1998 1997 1996 - ----------------------------------------------------------------------------- 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 =============================================================================
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:
1998 1997 1996 - ----------------------------------------------------------------------------- Incurred losses $44,595 $21,389 $62,189 Loss ratio effect 3.6% 1.8% 5.1%
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 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:
1998 1997 1996 - ------------------------------------------------------------------------------- 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 ===============================================================================
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)
1998 First Second Third Fourth - --------------------------------------------------------------------------------- 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
1997 First Second Third Fourth - --------------------------------------------------------------------------------- Premiums and finance charges earned $302,479 $307,788 $300,252 $298,455 Net investment income 43,717 45,153 45,365 43,465 Investment gains (losses) realized 13,340 8,498 20,806 8,105 Income from continuing operations 31,257 32,962 25,324 40,849 Income from discontinued operations 1,458 1,143 (85) 6,139 Net income 32,715 34,105 25,239 46,988 Basic and diluted net income per share .94 1.00 .74 1.39
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 9 NOTE 12 -- Comprehensive Income Changes in accumulated other comprehensive income related to changes in unrealized gains(losses) on securities were as follows:
1998 1997 1996 - ------------------------------------------------------------------------------ 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 ==============================================================================
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.
Private Passenger Auto 1998 1997 1996 - ------------------------------------------------------------------ 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%
CMP, Fire, Inland Marine 1998 1997 1996 - ----------------------------------------------------------------- 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%
General Liability 1998 1997 1996 - ----------------------------------------------------------------- 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
Workers' Compensation 1998 1997 1996 - ----------------------------------------------------------------- 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
17 10
Commercial Auto 1998 1997 1996 - ----------------------------------------------------------------- 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%
Homeowners 1998 1997 1996 - ----------------------------------------------------------------- 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%
Fidelity & Surety 1998 1997 1996 - ------------------------------------------------------------------ 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
Total Property & Casualty 1998 1997 1996 - ------------------------------------------------------------------ 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%
All other 1998 1997 1996 - ------------------------------------------------------------------ Revenues $ 5,391 $ 6,833 $ 6,009 Expenses 6,663 6,880 7,223 - ------------------------------------------------------------------ Net income $ (1,272) $ (47) $ (1,214)
Reconciliation of Revenue 1998 1997 1996 - ------------------------------------------------------------------ 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 ==================================================================
Reconciliation of Underwriting gain/(loss) (before tax) 1998 1997 1996 - ------------------------------------------------------------------ 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 ================================================================== 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.
(Unaudited) 1998 1997 - -------------------------------------------------------------- Revenues $1,750,528 $1,775,556 Net income 58,866 130,206 Diluted earnings per share 1.79 3.80
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.
1998 1997 1996 - --------------------------------------------------------------------- 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
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 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 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:
1998 1997 1996 - --------------------------------------------------------------------- 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 =====================================================================
Assets and liabilities of the discontinued life insurance operations as of the years ended December 31 were as follows:
1998 1997 1996 - ----------------------------------------------------------------------- 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 =======================================================================
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 EX-20.6 7 OHIO CASUALTY CORPORATION FORM 8-K/A EXHIBIT 20.6 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 EX-23 8 OHIO CASUALTY CORP FORM 8-K/A EXHIBIT 23 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 -----END PRIVACY-ENHANCED MESSAGE-----