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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 0-5544
OHIO CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 31-0783294
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
136 NORTH THIRD STREET, HAMILTON, OHIO 45025
(Address of principal executive offices) (Zip Code)
(513) 867-3000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares, Par Value $.125 Each
(Title of Class)
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value as of March 1, 1999 of the voting stock held by
non-affiliates of the registrant was $1,067,342,306.
On March 1, 1999 there were 31,221,531 shares outstanding.
Page 1 of 111
INDEX TO EXHIBITS ON PAGE 74
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DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement of the Board of Directors for the fiscal year ended December
31, 1998 for the Annual Shareholders meeting to be held April 21, 1999 is
incorporated herein by reference for the following items:
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Ohio Casualty Corporation (the Corporation) was incorporated under the laws of
Ohio in August, 1969. The Corporation operates primarily as a holding company
and is principally engaged, through its direct and indirect subsidiaries, in the
business of property and casualty insurance and insurance premium finance.
The Corporation has two industry segments: property and casualty insurance and
insurance premium finance. The Corporation conducts its property and casualty
insurance business through The Ohio Casualty Insurance Company ("Ohio
Casualty"), an Ohio corporation organized in 1919, the Ohio Casualty's five
operating property and casualty insurance subsidiaries: West American Insurance
Company ("West American"), an Indiana corporation (originally incorporated under
the laws of the State of California) acquired in 1945; Ohio Security Insurance
Company ("Ohio Security"), an Ohio corporation acquired in 1962; American Fire
and Casualty Company ("American Fire"), an Ohio corporation (originally
incorporated under the laws of the State of Florida) acquired in 1969; Avomark
Insurance Company ("Avomark"), an Indiana corporation created in 1997 and Ohio
Casualty of New Jersey, Inc. ("OCNJ"), an Ohio corporation created in 1998. This
group of companies presently underwrites most forms of property and casualty
insurance. The Corporation conducts its premium finance business through Ocasco
Budget, Inc. ("Ocasco"), an Ohio corporation (originally incorporated under the
laws of the State of California) organized in 1960. Ocasco is a direct
subsidiary of Ohio Casualty. On May 31, 1995 the states of domicile of West
American and Ocasco changed to Indiana and Ohio, respectively, in connection
with the withdrawal from property and casualty insurance operations in
California as previously announced and as discussed elsewhere herein.
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 were 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 $645.8 million of
commercial lines insurance liabilities, $62.6 million in other liabilities and
acquired $287.9 million of investments, $1.5 million in cash and $119.1 million
in other assets. This resulted in an assumption by the Corporation of a net
statutory-basis liability of $300.0 million 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 $40.0 million. This bonus payment grades
down ratably where if eighteen-month annualized production equals 71% or less of
previous production, no bonus payment is required. The bonus payment will be
accrued as additional goodwill when minimum contingency is achieved. Additional
information related to the accounting treatment of the acquisition as well as
proforma results are set forth in Note 14, Acquisition of Commercial Lines
Business, in the Notes to the Consolidated Financial Statements in Item 14 on
pages 57 and 58 of this Form 10-K.
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ITEM 1. CONTINUED
During 1995, the Corporation's life insurance operations were discontinued. We
found it increasingly difficult to achieve our targeted 16% rate of return in
this segment of our business. After extensive analysis, it was determined that a
16% return could not be achieved without substantial capital contributions and a
dramatic overhaul of the life operations. It was decided that this would not be
a prudent use of our capital. Therefore, on October 2, 1995, the Corporation
signed the final documents to reinsure the existing blocks of business and enter
a marketing agreement with Great Southern Life Insurance Company. The existing
blocks of business were reinsured through a 100% coinsurance arrangement with
Employer's Reassurance Corporation. During the fourth quarter of 1997, Great
Southern Life Insurance Company 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 net income was
positively impacted by a partial recognition of unamortized ceding commission.
The after-tax impact was an increase to net income of $5.3 million. 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 $1.1 million before tax during the
fourth quarter 1998. There remains approximately $1.1 million in unamortized
ceding commission. This will continue to be amortized over the remaining life of
the underlying policies. Net income from discontinued operations amounted to
$1.9 million or $.06 per share in 1998 compared with $8.7 million or $.25 per
share in 1997 and $5.3 million or $.15 per share in 1996. Additional information
related to the discontinued life insurance operations is included in Item 14,
Note 20 Discontinued Operations on page 60 of this Form 10-K.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The revenues, operating profit and combined ratios of each industry segment for
the three years ended December 31, 1998 are set forth in Item 14, Note 13,
Segment Information, in the Notes to the Consolidated Financial Statements on
pages 56 and 57 of this Form 10-K.
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ITEM 1. CONTINUED
PREMIUMS
The following table shows the total net premiums written (gross premiums less
premiums ceded pursuant to reinsurance treaties) by line of business by Ohio
Casualty, West American, American Fire, Avomark, Ohio Security, OCNJ and Ohio
Life as a group (collectively, the "Ohio Casualty Group") for the periods
indicated.
Ohio Casualty Group
Net Premiums Written
By Line of Business
(in thousands)
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
Auto liability $ 403,179 $ 384,358 $ 386,121 $ 403,781 $ 420,031
Auto physical damage 257,170 219,870 208,541 207,534 212,005
Homeowners
multiple peril 180,697 168,168 166,457 160,444 160,089
Workers' compensation 100,150 97,176 115,398 140,558 145,641
Commercial
multiple peril 157,103 141,931 132,808 131,553 135,595
Other liability 95,144 96,610 101,688 108,483 112,906
All other lines 105,668 98,708 97,059 96,842 98,714
Property and casualty
----------- ----------- ----------- ----------- -----------
premiums $ 1,299,111 $ 1,206,821 $ 1,208,072 $ 1,249,195 $ 1,284,981
============ =========== =========== =========== ============
Premium finance
revenues $ 1,170 $ 1,511 $ 1,981 $ 2,314 $ 2,528
============ =========== =========== =========== ============
Discontinued operations
Statutory premiums:
Individual life $ 0 $ 0 $ 0 $ (126,979) $ 22,238
Annuity 0 0 0 (195,870) 18,104
Other 0 6 215 (22,012) 8,606
----------- ----------- ----------- ----------- -----------
Total 0 6 215 (344,861) 48,948
FAS 97 adjustments 0 0 0 (1,533) (26,173)
----------- ----------- ----------- ----------- -----------
Discontinued operations
revenues $ 0 $ 6 $ 215 $ (346,394) $ 22,775
============ =========== =========== =========== ============
Property and casualty net premiums written increased 7.6% in 1998. This increase
includes $31.6 million in net premium written from the acquisition of the
Commercial Lines business of GAI. Excluding GAI effects, net premiums written
increased 5.5%. This increase is primarily due to the Corporation's successful
year in personal auto, homeowners and CMP.
Excluding the effects of the GAI acquisition, New Jersey net premiums written
decreased 1.4%, primarily due to a decline in the workers' compensation, general
liability and commercial auto lines of business. Ohio and Kentucky net premiums
written increased 12.8% and 18.8%, respectively. These results are largely due
to the successful growth in our auto and homeowners lines of business.
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ITEM 1. CONTINUED
(C) NARRATIVE DESCRIPTION OF BUSINESS
The Ohio Casualty Group is represented on a commission basis by approximately
5,433 independent insurance agents. In most cases, these agents also represent
other unaffiliated companies which may compete with the Ohio Casualty Group. The
34 claim and 12 underwriting and service offices operated by the Ohio Casualty
Group assist these independent agents in producing and servicing the Group's
business.
The following table shows consolidated direct premiums written for the Ohio
Casualty Group's ten largest states:
Ohio Casualty Group
Ten Largest States
Direct Premiums Written
From Continuing Operations
(in thousands)
Percent Percent Percent
1998 of Total 1997 of Total 1996 of Total
---- -------- ---- -------- ---- --------
New Jersey $219,518 17.0 New Jersey $220,588 18.0 New Jersey $218,553 18.0
Ohio 147,285 11.4 Ohio 132,325 10.8 Ohio 125,675 10.3
Kentucky 120,309 9.3 Pennsylvania 101,341 8.3 Pennsylvania 114,998 9.5
Pennsylvania 96,932 7.5 Kentucky 101,074 8.2 Kentucky 87,002 7.2
Illinois 73,794 5.7 Illinois 63,347 5.2 Illinois 60,311 5.0
Indiana 65,681 5.1 Maryland 54,415 4.4 Maryland 52,204 4.3
Maryland 41,526 3.2 Indiana 46,660 3.8 Indiana 50,560 4.2
Texas 40,537 3.1 Texas 42,005 3.4 Texas 37,678 3.1
North Carolina 37,856 2.9 Florida 37,383 3.0 Florida 36,995 3.0
Florida 32,649 2.5 North Carolina 34,570 2.8 North Carolina 34,108 2.8
--------- ----- --------- ----- --------- ------
$876,087 67.7 $833,708 67.9 $818,084 67.4
======== ==== ======== ==== ======== ====
INVESTMENT OPERATIONS
Each of the companies in the Ohio Casualty Group must comply with the insurance
laws of its domiciliary state and of the other states in which it is licensed
for business. Among other things, these laws prescribe the kind, quality and
concentration of investments which may be made by insurance companies. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages and real estate.
The distribution of invested assets of the Ohio Casualty Group is determined by
a number of factors, including insurance law requirements, the Corporation's
liquidity needs, tax position, and general market conditions. In addition, our
business mix and liability payout patterns are considered. Adjustments are made
to the asset allocation from time to time. The Corporation has no real estate
investments. Assets relating to property and casualty operations are invested to
maximize after-tax returns with appropriate diversification of risk.
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7
ITEM 1. CONTINUED
The following table sets forth the carrying values and other data of the
consolidated invested assets of the Ohio Casualty Group as of the end of the
years indicated:
Ohio Casualty Group
Distribution of Invested Assets
(in millions)
1998
Average % of % of % of
Rating 1998 Total 1997 Total 1996 Total
--------- -------------- ----------- ------------- ---------- ------------- ---------
U.S. government AAA $ 79.8 2.2 $ 69.8 2.2 $ 82.5 2.7
Tax exempt bonds
and notes AA+ 839.6 23.3 875.7 27.8 794.5 25.8
Debt securities
issued by foreign
governments A+ 3.6 0.1 3.5 0.1 3.3 0.1
Corporate securities BBB+ 1,117.5 31.0 929.9 29.5 983.7 32.0
Mortgage backed
securities
U.S. government AAA 6.3 0.2 17.6 0.6 176.9 5.8
Other AA+ 369.1 10.2 329.5 10.4 270.0 8.8
-------- ------- --------- ------- -------- ------
Total bonds A+ 2,415.9 67.0 2,226.0 70.6 2,310.9 75.2
Common stocks 919.8 25.5 853.9 27.1 713.4 23.2
Preferred stocks 5.1 0.2 5.6 0.2 7.8 0.2
-------- ------- --------- ------- -------- ------
Total stocks 924.9 25.7 859.5 27.3 721.2 23.4
Short-term 262.9 7.3 65.9 2.1 41.5 1.4
-------- ------- --------- ------- -------- ------
Total investments $3,603.7 100.0 $3,151.4 100.0 $3,073.6 100.0
======== ======= ========= ======= ======== ======
Total market value
of investments $3,603.7 $3,151.4 $3,073.6
======== ========= ========
Total amortized cost
of investments $2,815.8 $2,453.8 $2,564.8
======== ========= ========
The consolidated fixed income portfolio (identified as "Total Bonds" in the
foregoing table) of the Ohio Casualty Group had a weighted average rating of
"A+" and an average stated maturity of 10.3 years as of December 31, 1998.
Investments in below investment grade securities (Standard and Poor's rating
below BBB-) and unrated securities are summarized as follows:
1998 1997 1996
---- ---- ----
Below investment grade securities:
Carrying value $207.3 $141.4 $184.6
Amortized cost 208.8 135.6 180.0
Unrated securities:
Carrying value $281.8 $242.8 $315.4
Amortized cost 264.8 228.6 308.3
7
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ITEM 1. CONTINUED
Utilizing ratings provided by other agencies, such as the NAIC, categorizes
additional unrated securities into below investment grade ratings. The following
summarizes the additional unrated securities that are rated in the below
investment grade category by other rating agencies:
1998 1997 1996
---- ---- ----
Below investment grade securities at
carrying value $207.3 $141.4 $184.6
Other rating agencies categorizing
unrated securities as below
investment grade 7.7 8.1 27.3
--------- --------- --------
Below investment grade securities at
carrying value $215.0 $149.5 $211.9
All of the Corporation's below investment grade investments (based on carrying
value) are performing in accordance with contractual terms and are making
principal and interest payments as required. The securities in the Corporation's
below investment grade portfolio have been issued by 63 corporate borrowers in
approximately 42 industries. At December 31, 1998, the market value of the
Corporation's five largest investments in below investment grade securities
totaled $35.5 million, and had an approximate amortized cost of $36.1 million.
None of these holdings individually exceeded $10.3 million.
At December 31, 1998, the fixed income portfolio relating to property and
casualty operations totaled $2.4 billion which consisted of 91.1% investment
grade securities and 8.9% below investment grade and/or unrated securities. At
December 31, 1998, the fixed income portfolio relating to discontinued
operations totaled $9.4 million, all of which are classified as investment grade
securities.
Investments in below investment grade securities have greater risks than
investments in investment grade securities. The risk of default by borrowers
which issue securities rated below investment grade is significantly greater
because these securities are generally unsecured and often subordinated to other
debt and these borrowers are often highly leveraged and are more sensitive to
adverse economic conditions such as a recession or a sharp increase in interest
rates. Investment grade securities are also subject to significant adverse risks
including the risks of re-leveraging and changes in control of the issuer. In
most instances, investors are unprotected with respect to such risks, the
effects of which can be substantial.
Yield (based on cost of investments) for the taxable fixed income portfolio was
8.9% and 8.6% at December 31, 1998 and 1997, respectively. Below investment
grade securities were yielding 8.8% and 9.3% at December 31, 1998 and 1997,
respectively, while investment grade securities were yielding 8.9% in 1998 and
8.5% in 1997. Yield for tax exempt securities was 6.0% and 6.2% at December 31,
1998 and 1997, respectively, however, this yield is not directly comparable to
taxable yield due to the complexity of federal taxation of insurance companies.
The Corporation remains committed to a diversified common stock portfolio. As of
December 31, 1998, the portfolio consisted of 58 separate issues, diversified
across 42 different industries; and the largest single position was 13.2% of the
portfolio. The portfolio strategy with respect to common stocks has been to
invest in companies whose stocks have below average valuations, yet above
average growth prospects.
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9
ITEM 1. CONTINUED
Investment income is affected by the amount of new investable funds and
investable funds arising from maturities, prepayments, calls and exchanges as
well as the timing of receipt of such funds. In addition, other factors such as
interest rates at time of investment and the maturity, income tax status, credit
status and other risks associated with new investments are reflected in
investment income. Future changes in the distribution of investments and the
factors described above could affect overall investment income in the future;
however, the amount of any increase or decrease cannot be predicted. Further
details regarding investment distribution and investment income are described in
Item 14, Note 2, Investments, in the Notes to Consolidated Financial Statements
on pages 49 and 50 of this Form 10-K.
Purchases of taxable fixed income securities in 1998 were as follows: $172.5
million of investment grade securities, $119.1 million of high yield securities
and $54.4 million of unrated securities. Purchases of tax-exempt and equity
securities in 1998 totaled $121.3 million and $32.5 million, respectively.
Disposals (including maturities, calls, exchanges and scheduled prepayments) of
taxable fixed income securities in 1998 were as follows: $274.9 million of
investment grade securities, $58.7 million of high yield securities and $94.0
million of unrated securities. Dispositions of tax-exempt and equity securities
in 1998 totaled $133.8 million and $73.1 million, respectively.
The Corporation continues to have no exposure to futures, forwards, caps,
floors, or similar derivative instruments as defined by Statement of Financial
Accounting Standards No. 119. However, as noted in Item 14, Note 17 on pages 58
and 59 of this Form 10-K, we have an interest rate swap with Chase Manhattan
Bank covering $15.0 million of the outstanding balance of the revolving line of
credit. This swap is not classified as an investment but rather as a hedge
against a portion of the variable rate loan.
Consolidated net realized investment gains (before taxes) in 1998 totaled $14.4
million, $.44 per share. Included in this amount are approximately $8.1 million
in writedowns of the carrying values of certain securities the Corporation
determined had an other than temporary decline in value.
SHARE REPURCHASES
During 1990 the Board of Directors of Ohio Casualty Corporation authorized the
additional purchase of as many as 3,000,000 (as adjusted for 1994 stock split)
shares of its common stock through open market or privately negotiated
transactions. In November 1997, the Board of Directors authorized an additional
1,500,000 shares to be repurchased and again in 1998 an additional authorization
of 1,400,000 shares. During 1998, 2,362,900 shares were repurchased for $100
million. This compares with 1,544,688 shares repurchased in 1997 for $64.9
million and 264,600 shares repurchased in 1996 for $9.2 million. This brings the
remaining repurchase authorization to 1,063,912 shares as of December 31, 1998.
LIABILITIES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Liabilities for loss and loss adjustment expenses are established for the
estimated ultimate costs of settling claims for insured events, both reported
claims and incurred but not reported claims, based on information known as of
the evaluation date. As more information becomes available and claims are
settled, the estimated liabilities are adjusted upward or downward with the
effect of
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ITEM 1. CONTINUED
increasing or decreasing net income at the time of adjustments. Such estimated
liabilities include direct costs of the loss under terms of insurance policies
as well as legal fees and general expenses of administering the claims
adjustment process. The liabilities for claims incurred in accident years 1997,
1996 and 1995 were reduced in the subsequent year as shown below:
Accident Year Loss and Loss Adjustment Expense Liabilities
Subsequent Year Adjustment
(in millions)
1997 1996 1995
---- ---- ----
Property $12 $ 2 $27
Auto 24 12 14
Workers' compensation
and other liability 5 6 37
----- ----- -----
Total reduction $41 $20 $78
===== ===== =====
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. In 1998, 1997 and 1996 there were 37, 25 and 41
catastrophes, respectively. The largest catastrophe in each year was $7.3
million, $4.6 million and $13.7 million in incurred losses. Additional
catastrophes with over $1.0 million in incurred losses number 14, 3 and 10 in
1998, 1997 and 1996, respectively. For additional discussion of catastrophe
losses, refer to Item 14, Note 9, Losses and Loss Reserves in the Notes to the
Consolidated Financial Statements on pages 54 and 55 of this Form 10-K.
In the normal course of business, the Ohio Casualty Group is involved in
disputes and litigation regarding terms of insurance contracts and the amount of
liability under such contracts arising from insured events. The liabilities for
loss and loss adjustment expenses include estimates of the amounts for which the
Ohio Casualty Group may be liable upon settlement or other conclusion of such
litigation.
Because of the inherent future uncertainties in estimating ultimate costs of
settling claims, actual loss and loss adjustment expenses may deviate
substantially from the amounts recorded in the Corporation's consolidated
financial statements. Furthermore, the timing, frequency and extent of
adjustments to the estimated liabilities cannot be accurately predicted since
conditions and events which established historical loss and loss adjustment
expense development and which serve as the basis for estimating ultimate claims
cost may not occur in the future in exactly the same manner, if at all.
The anticipated effect of inflation is implicitly considered when estimating the
liability for losses and loss adjustment expenses based on historical loss
development trends adjusted for anticipated changes in underwriting standards,
policy provisions and general economic trends.
The following tables present an analysis of losses and loss adjustment expenses
and related liabilities for the periods indicated. The accounting policies used
to estimate liabilities for losses and loss adjustment expenses are described in
Item 14, Notes 1H, Accounting Policies and 9, Losses and Loss Reserves, in the
Notes to Consolidated Financial Statements on pages 48 and 54 and 55 of this
Form 10-K.
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ITEM 1. CONTINUED
Reconciliation of Liabilities for Losses and Loss Adjustment Expense
(in thousands)
1998 1997 1996
---- ---- ----
Net liabilities, beginning of year $1,421,804 $1,486,622 $1,557,065
Addition related to acquisition 483,938 0 0
Provision for current accident year
claims 989,114 922,065 1,009,086
Increase (decrease)in provisions for
prior accident year claims (66,119) (53,615) (76,920)
----------- ----------- -----------
922,995 868,450 932,166
Payments for claims occurring during:
Current accident year 513,292 448,402 515,025
Prior accident years 449,802 484,866 487,584
----------- ----------- -----------
963,094 933,268 1,002,609
Net liabilities, end of year 1,865,643 1,421,804 1,486,622
Reinsurance recoverable 91,296 62,003 70,048
----------- ----------- -----------
Gross liabilities, end of year $1,956,939 $1,483,807 $1,556,670
=========== =========== ===========
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12
ITEM 1. CONTINUED
Analysis of Development of Loss and Loss Adjustment Expense Liabilities
(In thousands)
Year Ended December 31 1988 1989 1990 1991 1992 1993 1994
- ---------------------- ---- ---- ---- ---- ---- ---- ----
Net liability as originally
estimated: $ 1,252,404 $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,868 $ 1,693,551 $ 1,606,487
Life Operations Liability 663 656 961
P&C Operations Liability $ 1,252,404 $ 1,370,054 $ 1,483,985 $ 1,566,139 $ 1,673,205 $ 1,692,895 $ 1,605,526
Net cumulative payments as of:
One year later 440,173 489,562 506,246 526,973 561,133 533,634 510,219
Two years later 695,364 745,766 783,948 822,634 869,620 833,399 803,273
Three years later 845,472 902,081 955,666 1,007,189 1,060,433 1,017,893 997,027
Four years later 937,034 1,000,299 1,063,507 1,123,591 1,176,831 1,147,266 1,106,361
Five years later 996,353 1,061,173 1,131,012 1,201,317 1,264,900 1,218,916
Six years later 1,033,508 1,100,683 1,182,110 1,266,605 1,316,756
Seven years later 1,055,972 1,134,145 1,235,315 1,302,313
Eight years later 1,078,561 1,177,259 1,262,187
Nine years later 1,112,120 1,195,615
Ten years later 1,124,964
Gross cumulative payments as of:
One year later 586,869 547,377 522,811
Two years later 904,911 859,142 827,232
Three years later 1,107,980 1,051,915 1,030,701
Four years later 1,231,386 1,190,466 1,158,798
Five years later 1,328,478 1,278,602
Six years later 1,394,890
Year Ended December 31 1995 1996 1997 1998
- ---------------------- ---- ---- ---- ----
Net liability as originally
estimated: $ 1,557,065 $ 1,486,622 $ 1,421,804 $ 1,865,643
Life Operations Liability 3,934 3,722 100 98
P&C Operations Liability $ 1,553,131 $ 1,482,900 $ 1,421,704 $ 1,865,545
Net cumulative payments as of:
One year later 486,168 483,574 449,802
Two years later 772,670 747,374
Three years later 944,294
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Gross cumulative payments as of:
One year later 500,150 498,274 469,933
Two years later 798,078 781,853
Three years later 988,674
Four years later
Five years later
Six years later
12
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ITEM 1. CONTINUED
Analysis of Development of Loss and Loss Adjustment Expense Liabilities (continued)
(In thousands)
Year Ended December 31 1988 1989 1990 1991 1992 1993 1994
- ---------------------- ---- ---- ---- ---- ---- ---- ----
Net liability re-estimated as of:
One year later 1,179,052 1,285,233 1,403,172 1,515,129 1,601,406 1,539,178 1,500,528
Two years later 1,175,861 1,299,428 1,407,197 1,500,890 1,555,452 1,510,943 1,501,530
Three years later 1,193,127 1,296,215 1,388,381 1,467,256 1,524,054 1,515,114 1,486,455
Four years later 1,195,712 1,281,246 1,368,530 1,449,789 1,559,492 1,525,493 1,507,331
Five years later 1,186,680 1,268,193 1,366,676 1,498,881 1,561,763 1,551,024
Six years later 1,178,126 1,270,734 1,423,277 1,499,009 1,588,063
Seven years later 1,184,233 1,327,228 1,420,105 1,526,136
Eight years later 1,233,809 1,325,938 1,444,589
Nine years later 1,230,778 1,342,741
Ten years later 1,242,601
Decrease (increase) in
original estimates: $ 9,803 $ 27,313 $ 39,396 $ 40,003 $ 85,142 $ 141,871 $ 98,196
Net liability as originally
estimated: $1,673,205 $1,692,895 $1,605,526
Reinsurance recoverable on
unpaid losses and LAE 80,114 75,738 65,336
Gross liability as originally
estimated: $1,753,982 $1,769,289 $1,671,823
Life Operations Liability 663 656 961
P&C Operations Liability 1,753,319 1,768,633 1,670,862
One year later 1,692,044 1,609,429 1,572,435
Two years later 1,644,586 1,590,205 1,578,905
Three years later 1,622,842 1,600,667 1,565,580
Four years later 1,663,734 1,612,300 1,630,314
Five years later 1,666,556 1,680,806
Six years later 1,722,897
Decrease (increase) in
original estimates: 30,422 87,827 40,548
Year Ended December 31 1995 1996 1997 1998
- ---------------------- ---- ---- ---- ----
Net liability re-estimated as of:
One year later 1,474,795 1,427,992 1,355,586
Two years later 1,441,081 1,403,059
Three years later 1,445,738
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Decrease (increase) in
original estimates: $ 107,393 $ 79,841 $ 66,119
Net liability as originally
estimated: $ 1,553,131 $ 1,482,900 $ 1,421,704 $ 1,865,643
Reinsurance recoverable on
unpaid losses and LAE 71,066 64,695 59,952 80,215
Gross liability as originally
estimated: $ 1,631,184 $ 1,556,670 $ 1,483,807 $ 1,956,939
Life Operations Liability 6,987 9,075 2,150 11,081
P&C Operations Liability 1,624,197 1,547,595 1,481,657 1,945,858
One year later 1,544,461 1,496,100 1,447,044
Two years later 1,515,032 1,507,365
Three years later 1,561,675
Four years later
Five years later
Six years later
Decrease (increase) in
original estimates: 62,522 40,230 34,613
13
14
ITEM 1. CONTINUED
REINSURANCE
In order to preserve capital and shareholder value, Ohio Casualty Corporation
purchases reinsurance to protect the Corporation against large or catastrophic
losses. As a result of the Corporation's acquisition of the majority of the
commercial lines division of Great American Insurance Company, the Corporation's
reinsurance program was expanded to address the additional concentrations of
underwriting exposures. The Property Per Risk contract covers Ohio Casualty in
the event that an insured sustains a property loss in excess of $1.0 million in
a single insured event. Property reinsurance covers $29.0 million in excess of
the retention. The Casualty Per Occurrence contract covers the Corporation in
the event an insured sustains a liability loss in excess of $1.0 million in a
single insured event. Workers' compensation, umbrella and other casualty
reinsurance covers $100.0 million, $50.0 million and $24.0 million,
respectively, in excess of the retention. The Corporation also carries various
facultative reinsurance contracts protecting against certain individual risks.
The Catastrophe reinsurance contract protects the Corporation against an
accumulation of losses arising from one defined catastrophic occurrence or
series of events. The 1999 catastrophe program, similar to 1998, provides $150.0
million coverage in excess of the Corporation's $25.0 million retention. In
1998, a portion of the catastrophe program was again renewed with a multi-year
placement. The multi-year placements maintain rates, continuity and each
reinsurers' overall share of the program. Over the last twenty years, there were
two events that triggered coverage under our catastrophe reinsurance contract.
Losses and loss adjustment expenses from the Oakland Fires in 1991 and Hurricane
Andrew in 1992 totaled $35.6 million and $29.8 million, respectively. Both of
these losses exceeded our prior retention amount of $13.0 million. The
Corporation recovered $33.9 million from reinsurers as a result of these events.
Our reinsurance limits are designed to cover exposure to a catastrophic event
expected to occur once every 300 years.
Reinsurance contracts do not relieve the Corporation of its obligation to the
policyholders. The collectibility of reinsurance is subject to the solvency of
the reinsurers. Since the Corporation's reinsurance protection is an important
component in our financial plan, we closely monitor the financial health and
claims settlement performance of each of our reinsurers. Annually, financial
statements are reviewed and various ratios calculated to identify reinsurers who
have ceased to meet our high standards of financial strength. If any reinsurers
fail these tests, they are removed from the program at renewal. Currently, all
domestic reinsurers have an AM Best rating of A or better, and the financial
condition of all international reinsurers meet the Corporation's high standards.
Additionally, the Corporation utilizes a large base of reinsurers to mitigate
its concentration risk. In 1998 and 1997, no reinsurer accounted for more than
10% of total ceded premiums. In 1996, only three reinsurers exceeded 10% of
total ceded premiums: Everest Reinsurance Company, MidOcean Reinsurance Company
and Kemper Reinsurance Company accounted for 16.79%, 10.65% and 10.52% of total
ceded premiums, respectively. As a result of the Corporation's controls over
reinsurance, uncollectible amounts have not been significant.
COMPETITION
More than 2,400 property and casualty insurance companies compete in the United
States and no one company or company group has a market share greater than
approximately 12.6%. The Ohio Casualty Group ranked as the forty-fourth largest
property and casualty insurance groups in the United States based on net
insurance premiums written in 1997, the latest year for which statistics are
available. The Ohio Casualty Group competes with other companies on the basis of
service, price and coverage.
14
15
ITEM 1. CONTINUED
STATE INSURANCE REGULATION
GENERAL. The Corporation and the Ohio Casualty Group are subject to regulation
under the insurance statutes, including the holding company statutes, of various
states. Ohio Casualty, American Fire, Ohio Security and OCNJ are all domiciled
in Ohio. West American and Avomark are domiciled in Indiana. Collectively, the
Ohio Casualty Group is authorized to transact the business of insurance in the
District of Columbia and all states. The Ohio Casualty Group is subject to
examination of their affairs by the insurance departments of the jurisdictions
in which they are licensed.
State laws also require prior notice or regulatory agency approval of changes in
control of an insurer or its holding company and of certain material
intercorporate transfers of assets within the holding company structure. Under
applicable provisions of the Indiana insurance statutes ("Indiana Insurance
Law") and the Ohio insurance statutes (the "Ohio Insurance Law"), a person would
not be permitted to acquire direct or indirect control of the Corporation or any
of the Ohio Casualty Group companies domiciled in such state, unless such person
had obtained prior approval of the Indiana Insurance Commissioner and the Ohio
Superintendent of Insurance, respectively, for such acquisition. For the
purposes of the Indiana Insurance Law and the Ohio Insurance Law, any person
acquiring more than 10% of the voting securities of a company is presumed to
have acquired " control " of such company.
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 $59.9
million for Proposition 103. In February 1995, California revised this billing
to $47.3 million 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 $42.1 million 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 $35.9 million or $39.9 million plus interest.
In 1998, the Administrative Law Judge finally issued a proposed ruling with a
rollback liability of $24.4 million 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 $24.4 million to $61.2 million. The Administrative Law Judge
indicates clearly in her ruling that by her calculation the Corporation would
have lost approximately $1.0 million on 1989 operations if a rollback of $24.4
million were imposed. Given that conclusion, it is clear that any assessment
greater than $24.4 million 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 $24.4 million plus simple interest at 10% from May 8, 1989. This brings the
total reserve to $48.0 million at December 31, 1998.
15
16
ITEM 1. CONTINUED
The Corporation will continue to challenge the validity of any rollback. To
date, the Corporation has paid $4.8 million 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.
The State of New Jersey has historically been a profitable state for the
Corporation. In recent years, however, the legislative environment in that state
has become more difficult. Due to legislative rules and regulations designed to
make insurance less expensive and more easily obtainable for New Jersey
residents, our results have been adversely impacted. New Jersey passed the Fair
Automobile Insurance Reform Act which was an eight year assessment that began in
1990 and ended in 1997. In order to meet our state imposed assessment
obligations under the Fair Automobile Insurance Reform Act the Corporation has
incurred expenses of $3.3 million in 1997 and $3.6 million in 1996. The
Corporation's future obligations related to this act are minimal as only true-up
payments of less than $.1 million were made in 1998 and remaining future
true-ups are anticipated to be immaterial to the Corporation's results of
operations, financial position and liquidity in future years.
The Unsatisfied Claim and Judgment Fund is another assessment made by the State
of New Jersey. This assessment is based upon estimated future direct premium
written in that state. The Corporation has paid $3.4 million in 1999 for fiscal
year 2000 assessment and has paid $3.2 million, $4.2 million and $4.4 million in
1998, 1997 and 1996, respectively. The Corporation anticipates the future
assessments to be between $3.0 and $4.0 million dollars annually. The
Corporation anticipates future assessments will not materially affect the
Corporation's results of operations, financial position or liquidity.
Recently, the New Jersey State Senate passed an auto insurance reform bill that
mandates a 15% rate reduction for personal auto policies for drivers who agree
not to sue for "pain and suffering" unless they suffer permanent injury in an
accident. The bill was passed by the Assembly and signed by the governor. The
reform bill becomes effective on March 22, 1999. The anticipated impact on the
Corporation is a tradeoff of lower premium rates on personal auto policies for
presumably lower losses on these policies but the degree of offset, if any, is
uncertain at present. As of December 31, 1998, the Corporation had personal auto
net premium written of $114.5 million or 53.1% of total premium that the
Corporation writes in New Jersey. The maximum impact of this reform bill on the
Corporation would have been a decrease in premium of $17.2 million for the year
ended December 31, 1998 if all policyholders made this election on their
policies.
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS. The National Association of
Insurance Commissioners (the "NAIC") annually calculates a number of financial
ratios to assist state insurance regulators in monitoring the financial
condition of insurance companies. A "usual range" of results for each ratio is
used as a benchmark. Departure from the usual range on four or more of the
ratios could lead to inquiries from individual state insurance commissioners as
to certain aspects of a company's business. None of the property and casualty
companies of the Ohio Casualty Group had more than three NAIC financial ratios
that were outside the usual range in the last five calendar years.
16
17
ITEM 1. CONTINUED
Beginning in 1994, the NAIC required inclusion of a risk-based capital
calculation in the Annual Statements. The risk-based capital model is used to
establish standards which relate insurance company statutory surplus to risks of
operations and assist regulators in determining solvency requirements. The model
is based on four risk factors in two categories: asset risk, consisting of
investment risk and credit risk; and underwriting risk, composed of loss
reserves and premiums written risks. Based on current calculations, all of the
Ohio Casualty Group companies are in excess of levels that would require
regulatory action.
The States of Ohio and Indiana have adopted the NAIC model law limiting dividend
payments by insurance companies. This law allows dividends to equal the greater
of 10% of policyholders' surplus or net income determined as of the preceding
year end without prior approval of the Insurance Department. For 1998, $112.1
million of policyholders' surplus is not subject to restrictions or prior
dividend approval.
EMPLOYEES
At December 31, 1998, the Ohio Casualty Group had approximately 4,050 employees
of which approximately 1,370 were located in Hamilton, Ohio.
YEAR 2000
The Corporation is proceeding on schedule in its phased approach to convert its
computer systems to be Year 2000 compliant. The four phases included in this
approach are: awareness, planning, execution/testing and compliance. Two of the
phases, awareness and planning, are complete and the execution/testing and
compliance phases are substantially complete with only one system left to be
tested.
The Corporation began the awareness phase early in the 1990s, recognizing that
its systems and applications would need significant changes. From that time
forward all system development and major enhancements to existing systems took
Year 2000 processing requirements into consideration. This approach resulted in
some of our systems being converted and compliant long before there was any
business requirement or exposure to processing problems.
During 1995, the Information Systems Department (I/S) began the planning phase.
At that time Year 2000 compliance became a priority project with Project
Managers assigned specifically for converting our systems to be compliant. A
comprehensive inventory of our systems was completed, identifying the critical
date that each system must be compliant and an action plan was put together to
outline that the conversion was completed on time. The Corporation is currently
on schedule with this action plan.
As a result of the planning phase, dedicated staff and resources were assigned
to work on the Year 2000 project. This began our execution/testing phase of the
project which includes addressing the remediation of Year 2000 problems
identified in the planning phase and logical partition (LPAR) compliance
testing. LPAR compliance testing requires an isolated partition within the
computer that runs independently. Essentially it can be considered an entirely
separate computer. The Corporation's LPAR has a dedicated processor, disk and
tape storage. In this environment, data can be migrated forward and tested as
the internal date in the computer is changed to critical dates in 1999 and 2000.
This provides an excellent environment to test applications, system software and
hardware. This involves individual and integrated compliance testing. The first
step verifies that the systems are compliant when they run independently. The
17
18
ITEM 1. CONTINUED
second step verifies compliance when they are integrated with all other systems
with which they interface. Testing was performed throughout 1998 focusing
initially on systems critical to the daily business operation and followed by
all others. The Corporation has six major system areas: commercial lines,
claims, auto, personal property, management/financial reporting and human
resources. All of these areas are required to undergo LPAR compliance testing.
At this time, the auto, commercial lines, claims, personal property and human
resource systems have completed the LPAR compliance testing. The Corporation's
management/financial reporting system area has substantially completed LPAR
compliance testing with only one internal management reporting system left to be
tested. This is targeted for completion by the end of the first quarter 1999.
Following the completion of LPAR compliance testing, all systems will undergo
integrated testing of the production environment. Contingency plans include
compliance reverification of this integrated test early in the third quarter of
1999 and again early in the fourth quarter of 1999.
As of December 31, 1998, the total amount spent to date for I/S related costs on
the Year 2000 project is $2.3 million and the Corporation anticipates minimal
additional I/S related expenses to complete our efforts. These amounts do not
include any costs associated with efforts made to contact third parties or
related to contingency planning. As a result of the Corporation's efforts early
in the 1990s to begin making changes to systems and existing hardware and
software, the Corporation to date has not had to make an expensive effort to
identify and remedy its Year 2000 issues and does not anticipate that it will be
required to make substantial expenditures to address Year 2000 compliance in the
future.
During 1997, the Corporation began the compliance phase. The Year 2000 team is
currently in the process of identifying all significant vendors, suppliers and
agents of the Corporation and is completing the initial contact to obtain
written statements of their readiness and commitment to a date for their Year
2000 compliance. The Corporation will continue to monitor the Year 2000 status
of these entities and develop contingency plans to reduce the possible
disruption in business operations that may result from the failure of third
parties with which the Corporation has business relationships to address their
Year 2000 issues. Identification and initial contact for all significant
third-parties is expected to be complete by the first quarter of 1999 with
follow-up reviews scheduled throughout 1999. Should a third-party with whom the
Corporation transacts business have a system failure due to not being Year 2000
compliant, the Corporation believes this could result in a delay in processing
or reporting transactions of the Corporation, or a potential disruption in
service to its customers, notwithstanding the Corporation's intention to develop
contingency plans to respond to these potential system failures by such third
parties.
The Corporation is also addressing non information technology (non-IT) to ensure
Year 2000 compliance. At December 31, 1998, the Year 2000 team had completed a
preliminary assessment of the non-IT assets. The team identified the material
items that have a risk involving the safety of individuals, or that may cause
damage to property or the environment, or affect revenues. The team reported on
the identified non-IT assets in December 1998 to the Corporation's Executive
Management Team. Remediation and contingency planning is scheduled throughout
1999 with regular updates required to be given to the Executive Management Team.
The Corporation is currently assessing the status of Year 2000 readiness of the
business and assets that it acquired in the acquisition of substantially all the
Commercial Lines Division of Great American Insurance Company on December 1,
1998. For a period of at least 24 months
18
19
ITEM 1. CONTINUED
from the date of the acquisition, GAI will provide computer processing and
communication services to the Corporation in connection with the acquired
business pursuant to an Information Systems Agreement. Thus, the Corporation
will be dependent on GAI to address and remediate Year 2000 issues with respect
to the information technology systems utilized for the business being acquired
by the Corporation. The failure of GAI to satisfactorily correct a material Year
2000 problem in the computer processing systems being used to provide services
to the Corporation in connection with the acquired business could result in a
material adverse effect on the ability of the Corporation to integrate the
acquired business and to operate it on a profitable basis.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, the normal business operations of the
Corporation including the disruption or delay in premium or claim processing and
the disruption in service to its customers. Also the inability to be Year 2000
compliant of significant third-party providers of the Corporation could result
in an interruption in the normal business operations. Due to the general
uncertainty inherent in the Year 2000 problem, such failures could materially
and adversely affect the Corporation's financial position, results of operations
or liquidity.
The Year 2000 issue is also a concern from an underwriting standpoint regarding
the extent of liability for coverage under various general liability, property
and directors and officers liability products and policies. The Corporation is
managing this concern by directly providing educational information on Year 2000
to insureds and agents; adding clarification and exclusionary language to
certain policies; and by adjusting underwriting practices. The Corporation
believes that minimal coverage may be interpreted to exist under some current
liability and product policies. The Corporation has historically avoided
manufacturing risks which produce computer or computer-dependent products.
The Insurance Services Office (ISO) recently developed policy language that
clarifies that there is no coverage for certain Year 2000 occurrences. The
liability exclusion has been accepted in over 40 states and a companion filing
for property has been accepted in at least 20 states at this time. Several
states have not adopted or approved the property exclusion form citing
specifically that there is no coverage under the current property contracts and
therefore, there is no reason to accept a clarifying endorsement. The
Corporation is currently addressing the year 2000 issue by attaching the ISO
exclusionary language, where approved by regulators, to general liability
policies with a rating classification the Corporation believes could potentially
have Year 2000 losses. The ISO exclusionary language endorsement is included on
all property policies where approved by regulators. These actions should
minimize the Corporation's exposure to Year 2000 losses.
Directors and officers could be held liable if a company in their control fails
to take necessary actions to address any Year 2000 problems and that failure
results in a material financial loss to the Company. The Corporation has written
directors' and officers' liability policies since 1995, with approximately $.5
million in premiums written in 1998. The Corporation is managing its D&O Year
2000 exposure through a combination of underwriting guidelines which address
Year 2000 issues in the application process and reinsurance policies which
provide coverage for any loss in excess of $.3 million.
Management of the Corporation believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be "worst-case scenarios" in
19
20
ITEM 1. CONTINUED
which the Corporation could experience interruptions in normal business
operations. These "worst-case scenarios" include: disruption or delay in premium
and claim processing; disruption in service to customers; litigation for Year
2000 related claims, adverse affects on the Corporation's ability to integrate
the acquired business from Great American and loss of electrical, water and
other utility services which could result in a disruption in the Corporation's
services. The amount of potential liability and lost revenue cannot be
reasonably estimated.
IMPACT OF RECENTLY ISSUED 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).
ITEM 2. PROPERTIES
The Ohio Casualty Group owns and leases office space in various parts of the
country. The principal office buildings consist of facilities owned in Hamilton,
Ohio and Fairfield, Ohio.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Corporation or its
subsidiaries other than litigation arising in connection with settlement of
insurance claims as described on page 10 and Proposition 103 hearings described
on page 15 and 16.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of Shareholders through the solicitation of
proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is related to executive officers who are not
separately reported in the Corporation's Proxy Statement:
20
21
ITEM 4. CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Barry S. Porter 62 Chief Financial Officer and Treasurer of The Ohio Casualty
Corporation, The Ohio Casualty Insurance Company, American Fire and
Casualty Company, Ocasco Budget, Inc., The Ohio Life Insurance
Company, The Ohio Security Insurance Company and West American
Insurance Company since 1993. Chief Financial Officer and Treasurer
of Avomark since 1997 and Chief Financial Officer and Treasurer of
Ohio Casualty of New Jersey, Inc. since 1998.
Thomas A. Hayes 56 Executive Vice President and Chief Operating Officer of The Ohio
Casualty Insurance Company, The Ohio Security Insurance Company,
American Fire and Casualty Company, and West American Insurance
Company since 1998, prior thereto, Director and Senior Vice President
, Divisional President of Commercial Lines Division of Great American
Insurance Company
Michael L. Evans 55 Senior Vice President of The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, The Ohio Life Insurance Company, American
Fire and Casualty Company, West American Insurance Company and Ocasco
Budget, Inc., Executive Vice President of Avomark Insurance Company
and Ohio Casualty of New Jersey, Inc.; prior thereto, Vice President
of The Ohio Casualty Corporation and Executive Vice President of The
Ohio Casualty Insurance Company, American Fire and Casualty Company,
Ocasco Budget, Inc., The Ohio Life Insurance Company and Ohio Security
Insurance Company since April 1995; prior thereto, Vice President of
The Ohio Casualty Insurance Company, American Fire and Casualty
Company, Ocasco Budget, Inc., The Ohio Life Insurance Company and West
American Insurance Company.
John S. Busby 53 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ohio Security Insurance Company and West
American Insurance Company since May 1991. Vice President of Avomark
Insurance Company since 1997.
Donald J. Dehne 48 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996 and Avomark
since September 1997; prior thereto, Assistant Secretary of The Ohio
Casualty Insurance Company, American Fire and Casualty Company, Ocasco
Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company.
21
22
ITEM 4. CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Steven J. Adams 44 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996; Vice
President of Avomark Insurance Company since 1997; prior thereto,
Assistant Secretary of The Ohio Casualty Insurance Company, American
Fire and Casualty Company, Ocasco Budget, Inc., Ohio Security
Insurance Company and West American Insurance Company; prior thereto,
Commercial Lines Customer Strategist; prior thereto, Imaging
Technology Expert.
Thomas P. Prentice 46 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company, Ocasco Budget, Inc., Ohio Security Insurance
Company and West American Insurance Company since May 1996; Senior
Vice President of Avomark; prior thereto, Assistant Secretary of The
Ohio Casualty Insurance Company, American Fire and Casualty Company,
Ocasco Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company; prior thereto, Personal Lines Customer Specialist;
prior thereto, Claims Manager.
Coy Leonard, Jr. 54 Senior Vice President of The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company, Ocasco Budget, Inc., and Vice President of
Avomark Insurance Company; prior thereto, Vice President of The Ohio
Casualty Insurance Company, American Fire and Casualty Company, Ocasco
Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company; prior thereto, Assistant Vice President of The Ohio
Casualty Insurance Company, American Fire and Casualty Company, Ocasco
Budget, Inc., Ohio Security Insurance Company and West American
Insurance Company; prior thereto, Manager of Strategic Planning and
Technology.
22
23
ITEM 4. CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Elizabeth M. Riczko 32 Senior Vice President of The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company and Vice President of Avomark Insurance
Company; prior thereto, Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company, Ocasco Budget, Inc., Ohio
Security Insurance Company and West American Insurance Company since
May 1996; prior thereto, Assistant Secretary of The Ohio Casualty
Insurance Company, American Fire and Casualty Company, Ocasco Budget,
Inc., Ohio Security Insurance Company and West American Insurance
Company; prior thereto, Corporate Actuarial Manager.
William E. Minor 43 Senior Vice President of The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company, and Vice President of Avomark Insurance
Company; prior thereto, Vice President of The Ohio Casualty Insurance
Company, American Fire and Casualty Company, Ohio Security Insurance
Company and West American Insurance Company since September 1996;
prior thereto, Account Director for Sire/Young and Rubicam.
Susan D. Dillon 43 Assistant Vice President of The Ohio Casualty Insurance Company,
American Fire and Casualty Company, Ohio Security Insurance Company
and West American Insurance Company since May 1995; prior thereto,
Branch Manager; prior thereto, Field Representative.
Jerome S. Runnels 59 Senior Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company and
West American Insurance Company, prior thereto, Vice President of
Claims for Great American Insurance Company
John J. McGovern 66 Senior Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company and
West American Insurance Company, prior thereto, Senior Vice President
of Great American Insurance Company
23
24
ITEM 4. CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Ralph G. Goode 53 Senior Vice President of Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, and
West American Insurance Company, Vice President of Avomark Insurance
Company, prior thereto, Vice President of The Ohio Casualty Insurance
Company, Ohio Security Insurance Company, American Fire and Casualty
Company and West American Insurance Company, prior thereto, Assistant
Vice President of The Ohio Casualty Insurance Company, Ohio Security
Insurance Company, American Fire and Casualty Company and West
American Insurance Company
Barbara F. Aras 43 Vice President of Ohio Casualty Insurance Company, The Ohio Security
Insurance Company, The Ohio Life Insurance Company, American Fire and
Casualty Company, West American Insurance Company and Ocasco Budget,
Inc., prior thereto, President and CEO of Argus Advisors, LTD, prior
thereto, Director of Lexis-Nexis
Richard B. Kelly 44 Vice President of Ohio Casualty Insurance Company, The Ohio Security
Insurance Company, The Ohio Life Insurance Company, American Fire and
Casualty Company, West American Insurance Company, Ocasco Budget, Inc.
and Avomark Insurance Company, prior thereto, Assistant Vice President
of The Ohio Casualty Insurance Company, Ohio Security Insurance
Company, American Fire and Casualty Company, West American Insurance
Company, Avomark Insurance Company and Ohio Life Insurance Company
Michael E. Sullivan 36 Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company and
West American Insurance Company, prior thereto, Divisional Senior Vice
President, Divisional Vice President, Divisional Assistant Vice
President and Product Manager of Great American Insurance Company
Larry Les Chander 51 Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company and
West American Insurance Company, prior thereto, Division Senior Vice
President of Great American Insurance Company
24
25
ITEM 4 CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Lloyd E. Geary 44 Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company and West American Insurance Company, Assistant
Vice President of Avomark Insurance Company, prior thereto, Assistant
Vice President of The Ohio Casualty Insurance Company, American Fire
and Casualty Company and West American Insurance Company, prior
thereto, Assistant Secretary of The Ohio Casualty Insurance Company,
West American Insurance Company and Avomark Insurance Company
William G. Erickson 62 Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company and Avomark Insurance Company
Ronald R. Hutchison 66 Vice President of The Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company and Avomark Insurance Company, prior
thereto, Branch Manager of Orlando, FL.
John E. Bade, Jr. 44 Vice President of the Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company, and Avomark Insurance Company, prior
thereto, Assistant Vice President of Ohio Casualty Insurance Company,
American Fire and Casualty Company, Ohio Security Insurance Company,
West American Insurance Company and Avomark Insurance Company, prior
thereto, Branch Manager of Greensboro, NC
Harry E. Hunter 50 Vice President of the Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, West
American Insurance Company, Avomark Insurance Company and Ohio
Casualty of New Jersey, Inc. prior thereto, Assistant Vice President
of The Ohio Casualty Insurance Company, American Fire and Casualty
Company, and West American Insurance Company, prior thereto, Branch
Manager of Grand Rapids, MI
Jeffery L. Haniewich 52 Vice President of the Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, and
West American Insurance company, prior thereto, Divisional Senior Vice
President of Great American Insurance Company
25
26
ITEM 4. CONTINUED
Position with Company and/or
Principal Occupation or Employment
Name Age (1) During Last Five Years
---- ------- ----------------------
Lisa A. Hays 31 Assistant Vice President of Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, and
West American Insurance Company; prior thereto, Divisional Assistant
Vice President of Great American Insurance Company
Joseph L. Dzigiel 36 Assistant Vice President of Ohio Casualty Insurance Company, The Ohio
Security Insurance Company, American Fire and Casualty Company, and
West American Insurance Company, prior thereto, Assistant Vice
President of Great American Insurance Company, prior thereto,
Automation Manager of Great American Insurance Company, prior thereto,
Marketing Manager of Great American Insurance Company, prior thereto,
Agency of Operations of Great American Insurance Company
- ---------------------------------------
(1) Ages listed are as of the annual meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
See Item 14, on pages 29, 30 and 33 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
See Item 14, on pages 31 and 32 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See Item 14, on pages 33-43 of this Form 10-K.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
The Corporation publishes forward-looking statements relating to such matters as
anticipated financial performance, business prospects and plans, regulatory
developments and similar matters. The statements contained in this report that
are not historical information, are forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor under The
Securities Act of 1933 and The Securities Exchange Act of 1934 for
forward-looking statements. The risks and uncertainties that may affect
operations, performance, development and results of the Corporation's business
and the results of the acquisition described herein,
26
27
ITEM 7. CONTINUED
include the following: changes in property and casualty reserves; catastrophe
losses; premium and investment growth; product pricing environment; availability
of credit; changes in government regulation; performance of financial markets;
fluctuations in interest rates; availability of pricing reinsurance; litigation
and administrative proceedings; Year 2000 issues, including the Corporation's
ability to successfully identify and remediate Year 2000 system issues with its
own IT and non-IT assets, the ability of third parties with which the
Corporation has business relationships to address and resolve their Year 2000
issues and the ability of the Corporation to identify these third party issues;
Year 2000 issues relating to the commercial lines business acquired from the
Great American Insurance Company and the ability of the Corporation to implement
appropriate contingency plans to address Year 2000 problems which are not
successfully remediated; ability of Ohio Casualty to integrate the acquired
business and to retain the acquired insurance business; and general economic and
market conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 14, on page 40 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Schedules.
(See Index to Financial Statements attached hereto.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See pages 5 through 7 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1998 and Executive Officers of the Registrant
separately captioned under Part I of this annual report.
ITEM 11. EXECUTIVE COMPENSATION
See pages 8 through 15 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See pages 1 through 5 of the Proxy Statement of the Board of Directors for the
fiscal year ended December 31, 1998.
27
28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See page 7 of the Proxy Statement of the Board of Directors for the fiscal year
ended December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES REQUIRED TO
BE FILED BY ITEM 8 OF THIS FORM AND REGULATION S-X
28
29
ITEM 14. CONTINUED
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:30 a.m. on
Wednesday, April 21 1999, in the Ohio Casualty University Auditorium of the Ohio
Casualty Group Fairfield facility, 9450 Seward Road, Fairfield, OH 45014. Please
note this change in location from years past.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
The Corporation offers an automatic dividend reinvestment plan for all
registered holders of common stock. Under the plan, shareholders may reinvest
their dividends to buy additional shares of common stock, and may also make
voluntary cash payments of up to $60,000 yearly toward the purchase of Ohio
Casualty shares. Participation is entirely voluntary. More information on the
plan can be obtained by contacting the Transfer Agent listed below.
FORM 10-K ANNUAL REPORT
The Form 10-K Annual Report for 1998, as filed with the Securities and
Exchange Commission, is available without charge upon written request to:
Ohio Casualty Corporation
Office of the Chief Financial Officer
136 N. Third St.
Hamilton, OH 45025
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York, a division of EquiServe
P. O. Box 2500
Jersey City, NJ 07303-2500
1-800-317-4445
VISIT THE OHIO CASUALTY GROUP INTERNET WEB SITE
www.ocas.com
The site includes current financial data about Ohio Casualty Group as well as
other Corporate and product information.
1999 ANTICIPATED DIVIDEND SCHEDULE DIVIDENDS PER SHARE
(in thousands)
Declaration Date Record Date Payable Date
- -------------------------------------------------------------------------------------------------
1998 $1.76
February 18, 1999 March 1, 1999 March 10, 1999 1997 $1.68
May 20, 1999 June 1, 1999 June 10, 1999 1996 $1.60
August 19, 1999 September 1, 1999 September 10, 1999 1995 $1.52
November 18, 1999 December 1, 1999 December 10, 1999 1994 $1.46
29
30
ITEM 14. CONTINUED
Ohio Casualty Corporation & Subsidiaries
FINANCIAL HIGHLIGHTS
(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
Income before investment
gains 73,644 97,406 64,941
Realized investment gains,
after taxes 9,367 32,986 32,287
Income from discontinued
operations 1,916 8,655 5,229
Net income 84,927 139,047 102,457
Property and casualty
combined ratio 107.2% 105.3% 109.5%
BASIC AND DILUTED EARNINGS
PER COMMON SHARE
Income before investment
gains $ 2.24 $ 2.85 $ 1.85
Realized investment gains,
after taxes 0.28 0.96 0.91
Income from discontinued
operations 0.06 0.25 0.15
Net income 2.58 4.06 2.91
Book value 42.25 39.11 33.44
Dividends 1.76 1.68 1.60
FINANCIAL CONDITION
Assets $ 4,802,264 $ 3,778,782 $ 3,889,981
Shareholders' equity 1,320,981 1,314,829 1,175,100
Average shares
outstanding - basic 32,904 34,228 35,247
Average shares
outstanding - diluted 32,935 34,257 35,254
Shares outstanding
on December 31 31,269 33,622 35,141
Number of shareholders 6,100 6,200 6,500
30
31
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
TEN-YEAR SUMMARY OF OPERATIONS
(IN MILLIONS) 1998 1997 1996 1995
====================================================================================================================================
CONSOLIDATED OPERATIONS
Income after taxes
Operating income $ 73.6 $ 97.4 $ 64.9 $ 91.4
Realized investment gains (losses) 9.4 33.0 32.3 4.0
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 83.0 130.4 97.2 95.4
Discontinued operations 1.9 8.7 5.3 4.3
Cumulative effect of accounting changes 0.0 0.0 0.0 0.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 84.9 139.1 102.5 99.7
====================================================================================================================================
Income after taxes per average share outstanding - BASIC
Operating income 2.24 2.85 1.85 2.56
Realized investment gains (losses) 0.28 0.96 0.91 0.11
Discontinued operations 0.06 0.25 0.15 0.12
Cumulative effect of accounting changes 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 2.58 4.06 2.91 2.79
====================================================================================================================================
Average shares outstanding - BASIC 32.9 34.2 35.2 35.8
Income after taxes per average share outstanding - DILUTED
Operating income 2.24 2.85 1.85 2.56
Realized investment gains (losses) 0.28 0.96 0.91 0.11
Discontinued operations 0.06 0.25 0.15 0.12
Cumulative effect of accounting changes 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 2.58 4.06 2.91 2.79
====================================================================================================================================
Average shares outstanding -DILUTED 32.9 34.3 35.3 35.8
Total assets 4,802.3 3,778.8 3,890.0 3,980.1
Shareholders' equity 1,321.0 1,314.8 1,175.1 1,111.0
Book value per share 42.25 39.11 33.44 31.39
Dividends paid per share 1.76 1.68 1.60 1.52
Percent increase over previous year 4.8% 5.0% 5.3% 4.1%
PROPERTY AND CASUALTY OPERATIONS
Net premiums written 1,299.6 1,207.6 1,209.0 1,250.6
Net premiums earned 1,267.8 1,204.3 1,223.4 1,264.6
GAAP underwriting gain (loss) before taxes (74.1) (49.6) (112.2) (68.8)
Loss ratio 63.7% 62.7% 66.5% 61.2%
Loss expense ratio 9.1% 9.4% 9.7% 10.2%
Underwriting expense ratio 34.4% 33.2% 33.3% 32.6%
Combined ratio 107.2% 105.3% 109.5% 104.0%
Investment income before taxes 164.8 172.4 179.4 184.6
Per average share outstanding 5.01 5.04 5.09 5.16
Property and casualty reserves
Unearned premiums 668.6 494.9 491.4 505.8
Losses 1,580.6 1,174.5 1,215.8 1,268.1
Loss adjustment expense 376.3 307.2 331.8 356.1
Statutory policyholders' surplus 1,027.1 1,109.5 984.9 876.9
31
32
10-Year Compound
1994 1993 1992 1991 1990 1989 Annual Growth
=============================================================================================================================
$ 77.1 $ 51.5 $ 57.8 $ 99.1 $ 94.6 $ 109.3 (5.9)%
14.2 28.7 35.1 9.8 (8.7) (10.5) 0.0 %
- -----------------------------------------------------------------------------------------------------------------------------
91.3 80.2 92.9 108.9 85.9 98.8 (3.7)%
5.9 6.8 4.1 (1.0) (1.8) 2.7 (12.2)%
(0.3) 0.0 1.5 0.0 0.0 0.0 0.0 %
- -----------------------------------------------------------------------------------------------------------------------------
96.9 87.0 98.5 107.9 84.1 101.5 (4.0)%
=============================================================================================================================
2.14 1.43 1.60 2.77 2.47 2.56 (3.2)%
0.40 0.80 0.98 0.27 (0.23) (0.25) 0.0 %
0.16 0.19 0.12 (0.03) (0.05) 0.06 (9.3)%
(0.01) 0.00 0.04 0.00 0.00 0.00 0.0 %
- -----------------------------------------------------------------------------------------------------------------------------
2.69 2.42 2.74 3.01 2.19 2.37 (1.3)%
=============================================================================================================================
36.0 36.0 36.0 35.8 38.4 42.8 (2.8)%
2.14 1.43 1.60 2.76 2.47 2.55 (3.2)%
0.40 0.79 0.98 0.27 (0.23) (0.25) 0.0 %
0.16 0.19 0.12 (0.03) (0.05) 0.06 (9.3)%
(0.01) 0.00 0.04 0.00 0.00 0.00 0.0 %
- -----------------------------------------------------------------------------------------------------------------------------
2.69 2.41 2.74 3.00 2.19 2.36 (1.3)%
=============================================================================================================================
36.0 36.0 36.0 35.9 38.5 42.9 (2.8)%
3,739.0 3,816.8 3,760.7 3,531.3 3,252.9 3,145.7 5.1 %
850.8 862.3 825.2 774.5 651.2 775.0 6.3 %
23.64 23.93 23.43 21.58 18.19 18.46 9.8 %
1.46 1.42 1.34 1.24 1.16 1.04 6.5 %
2.8% 6.0% 8.1% 6.9% 11.5% 10.6% (8.7)%
1,286.4 1,306.0 1,508.5 1,492.3 1,468.4 1,377.6 (0.4)%
1,297.7 1,379.4 1,517.6 1,469.1 1,438.0 1,364.2 (0.5)%
(92.9) (147.3) (130.8) (74.5) (79.4) (62.6) 16.3 %
61.6% 64.9% 63.7% 60.4% 61.4% 58.4%
10.0% 11.8% 10.8% 10.6% 10.9% 12.1%
32.2% 33.6% 33.5% 33.9% 33.0% 33.2%
103.8% 110.3% 108.0% 104.9% 105.3% 103.7%
183.8 190.4 194.6 191.6 176.7 187.7 (0.3)%
5.10 5.29 5.41 5.34 4.59 4.38 2.6 %
517.8 529.6 596.1 605.2 582.0 551.6 2.2 %
1,303.6 1,378.0 1,309.2 1,216.1 1,148.9 1,061.5 4.9 %
367.3 390.6 364.0 350.0 335.1 308.5 3.3 %
660.0 713.6 674.2 643.4 465.8 531.6 8.6 %
32
33
ITEM 14. CONTINUED
MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
Net income decreased 38.9% for 1998 to $84.9 million or $2.58 per share
while the combined ratio increased by 1.9 points to 107.2%. Losses were
negatively impacted by catastrophes with $44.6 million of catastrophe losses in
1998 versus $21.4 million in 1997 and $62.2 million in 1996. Underwriting
expenses, as a percentage of earned premium, increased by 2.0% in 1998 compared
with increases of under 1% for both 1997 and 1996. General operating expenses, a
component of underwriting expenses, have increased over the period of 1996 to
1998. The increase in operating expense is primarily due to expenditures for
advertising as a part of the Corporation's efforts to increase name recognition
of its property and casualty companies.
Statutory net premiums written increased $229.7 million for 1998 to
$1.4 billion. $169.2 million of this increase is attributable to the acquisition
of substantially all of Great American Insurance Company's Commercial Lines
Division. The acquisition added $31.6 million in net written premium for the
month of December as well as $137.6 million in net written premium related to
the transfer of the unearned premium reserve. In addition, the Corporation's
premium growth continued to be led by our key agents with an 8% increase in
written premium for the year. The Corporation has established a very successful
key producer program for agencies who are willing to set and achieve goals in
production and other key areas. Excluding Great American, the largest increase
in premium occurred in the personal auto line of business with a 12.3% increase
and the largest premium increase by individual state came in Kentucky with an
$18.7 million increase or 18.8% over 1997.
Net cash produced from operations was $24.6 million compared with cash
produced of $26.4 million in 1997 and cash used of $14.0 million in 1996.
Investing activities produced net cash of $93.5 million in 1998, compared with
$164.0 million in 1997 and $112.7 million in 1996. Total cash produced from
financing activities was $66.9 million in 1998 compared with total cash used of
$131.9 million in 1997 and $75.4 million in 1996. The increase in 1998 compared
to 1997 primarily resulted from borrowing $225 million from the Corporation's
line of credit offset by dividends paid to shareholders and repurchases of
treasury stock. Dividend payments were $57.9 million in 1998 compared with $57.5
million in 1997 and $56.4 million in 1996. Overall, total cash generated in 1998
was $184.9 million, compared with $58.4 million in 1997 and $23.3 million in
1996.
In order to evaluate corporate performance relative to shareholders'
expectations, the Corporation calculates a five-year average return on equity.
Net income and unrealized gains and losses on investments are included in the
calculation to derive a total return. A five-year average is used to correspond
to our planning horizon and emphasize consistent long-term returns, not
intermediate fluctuations. At December 31, 1998, our five-year average return on
equity was 14.3% compared with 15.5% calculated at December 31, 1997 and 13.4%
at December 31, 1996.
HIGH/LOW MARKET PRICE PER SHARE
(IN DOLLARS)
High Low
1998 51 1/8 34 1/8
1997 50 3/4 34 3/8
1996 39 1/4 30 3/8
1995 39 28 1/4
1994 33 3/4 26 1/2
1993 35 7/8 28 13/16
1992 33 5/16 24 1/2
1991 25 1/8 20
1990 25 3/8 13 3/8
1989 26 1/4 17 3/4
PROPERTY AND CASUALTY
As described in more detail in Note 14, the Corporation purchased
substantially all of the Commercial Lines Division of Great American Insurance
Company on December 1, 1998. The acquisition has been treated as a purchase for
accounting purposes. The revenue and profit reported include the division from
the December 1, 1998 acquisition date forward.
33
34
ITEM 14. CONTINUED
The Corporation's strategy in purchasing substantially all of the
Commercial Lines Division of Great American includes broadening its product mix
and adding approximately 1,400 agents to the Corporation's existing agency
plant. From a geographic point of view, the Corporation will increase its
presence in areas where it already does business and add a presence in the
Northeast, a region in which the Corporation had hoped to expand. Finally, the
Corporation anticipates that it will achieve financial benefits through
cross-selling of products, economies of scale and reductions in expenses through
improved processes.
Property and casualty operating income was $74.9 million, $2.27 per
share, in 1998 compared with $97.4 million, $2.84 per share, in 1997 and $66.1
million, $1.88 per share in 1996. Catastrophe losses in 1998 totaled $44.6
million compared with $21.4 million in 1997 and $62.2 million in 1996. There
were 37 separate catastrophes in 1998 compared with 25 catastrophes in 1997 and
39 in 1996. Catastrophe losses added 3.6 points to the combined ratio in 1998
compared with 1.8 points in 1997 and 5.1 points in 1996. 1998 losses were
heavily impacted by wind and hail related losses in Kentucky, Minnesota and
Iowa. 1996 losses were largely due to winter and spring storms in the Midwest.
PERSONAL AUTO
The performance of our personal auto segment was one of the
Corporation's major successes of 1998. Written premiums increased 12.3% to
$521.8 million in 1998 compared to $464.7 million in 1997 and $456.4 million in
1996. The increase is attributable to aggressive advertising efforts aimed at
increasing brand recognition. In addition, the Corporation's key producer
program continues to generate impressive results. Key producers generated a
12.8% increase in written premiums in 1998 compared to 1997. Lastly, the
Corporation offers a number of unique service advantages including "quick
quotes" from our Website, monthly payment option, youthful drivers program,
direct claims reporting and a number of enhanced policy endorsements.
The combined ratio improved to 103.8% in 1998 from 105.4% in 1997 and
110.3% in 1996. This success comes in spite of a slightly higher impact from
catastrophe losses of 1.2% in 1998 compared to .5% in 1997 and .9% in 1996.
COMMERCIAL MULTI PERIL, FIRE & INLAND MARINE
Written premiums increased 9.5% to $225.7 million in 1998 compared to
$206.1 million in 1997 and $195.3 million in 1996. In 1998, $9 million or 4.3%
is attributable to the acquired business from Great American's Commercial
Division. The remaining increase is largely attributable to production from our
key agents, which increased approximately $7.3 million from 1997.
Competition in the commercial segment remains formidable. Consequently,
rates have remained flat while the combined ratio increased in 1998 to 113.5%
from 107.7% in 1997. The combined ratio in 1996 was 115.0%. The combined ratio
was impacted by catastrophe losses which were 4.9% in 1998, 2.5% in 1997 and
8.3% in 1996. Additionally, losses from our auto services products were higher
than anticipated in 1998. The Corporation continues to be selective in the
writing of new business and to reinforce the sound relationships with customers
who appreciate the stability, expertise and added value the Corporation
provides.
GENERAL LIABILITY
Excluding the impact of $2.0 million in written premiums from the Great
American acquisition, written premiums have decreased for the third consecutive
year to $93.1 million in 1998 from $96.7 million in 1997 and $101.8 million in
1996.
While premiums have declined, the combined ratio improved in 1998 to
101.6% compared to 103.0% in 1997. Market conditions remain intensely
competitive, making profitable premium growth difficult to achieve. During this
period of soft pricing the Corporation has maintained its rates, focusing on a
quality book of business. Consequently, the number of policies in force are down
4.2% in 1998 from 1997 while underwriting results have improved.
34
35
ITEM 14. CONTINUED
COMMERCIAL AUTO
In a market that continues to be exceptionally competitive, the
Corporation's written premium decreased in 1998 by $4.4 million when excluding
$3.2 million in premiums from the Great American acquisition. Although premiums
declined, excluding Great American, the number of insured vehicles increased
during the year and our business shifted from higher premium states to lower
premium states. The majority of the premium decline came in the states of
Pennsylvania and New Jersey.
While the Corporation's combined ratio improved 7.5 points, it was
higher than anticipated at 105.4%. Liability coverage accounted for 66% of the
Corporation's written premium and liability results were satisfactory. Uninsured
motorists and comprehensive claims, however, were $3.8 million above average of
the proceeding two years, accounting for almost 3 points of the combined ratio.
WORKERS' COMPENSATION
Excluding the impact of $8.3 million in written premiums from the Great
American acquisition, written premiums decreased in 1998 by 5.4% to $91.8
million compared to $97.2 million in 1997 and $115.4 million in 1996. The 1998
decrease primarily resulted from bureau-driven rate decreases, extremely
competitive market conditions.
The combined ratio increased 16.6 points in 1998 to 109.6% compared to
93.0% in 1997 and 94.3% in 1996. The increase primarily resulted from adverse
development in case reserves on older large claims.
HOMEOWNERS
Written premiums grew 7.5% to $180.7 million in 1998 compared to $168.2
million in 1997 and $166.5 million in 1996. This increase is led by our key
agents and corresponds with our increase in personal auto insurance. The
Corporation offers a "Fam-Pak" discount for customers combining automobile and
homeowners coverages.
The combined ratio increased to 118.4% from 111.2% in 1997. The
increase is primarily attributable to increased catastrophe losses of 15.2% in
1998 compared to 8.1% in 1997. In general, our homeowners products are offered
as ancillary to our personal auto products.
FIDELITY & SURETY
Written premiums increased 7.6% in 1998 to $37.0 million compared to
$34.4 million in 1997 and 34.5 million in 1996. The increase in 1998 is
primarily driven by contract surety products for construction contractors and is
fueled by a strong economy.
The combined ratio increased to 81.4% in 1998 from 76.5% in 1997 and
73.4% in 1996. Two large losses in 1998 contributed to the increase; however,
the Corporation's combined ratio remains below the industry average of
approximately 87.4%.
STATUTORY SURPLUS
Statutory surplus, a traditional insurance industry measure of strength
and underwriting capacity, was $1,027.1 million at December 31, 1998 compared
with $1,109.5 million at December 31, 1997 and $984.9 million at December 31,
1996. The decrease in 1998 was due to the statutory treatment of goodwill.
Increases in 1997 and 1996 were due primarily to the unrealized gains in our
investment portfolio and net income less dividends paid.
The ratio of premiums written to statutory surplus has not exceeded 1.7
to 1 for any property and casualty company in The Ohio Casualty Group in any of
the last three years. This ratio is one of the measures used by insurance
regulators to gauge the financial strength of an insurance company and indicates
the ability of the Corporation to grow by writing additional business.
Currently, the Corporation's ratio is 1.4 to 1. Ratios below 3 to 1 generally
indicate additional capacity and financial strength.
The National Association of Insurance Commissioners has developed a
"Risk Based Capital" formula for property and casualty insurers and life
insurers. The formulas are intended to measure the adequacy of an insurer's
capital given the asset structure and product mix of the company. Under the
current formulas, all insurance companies in The Ohio Casualty Group comfortably
exceed the necessary capital.
35
36
ITEM 14. CONTINUED
PREMIUM DISTRIBUTIONS BY TOP STATES
1998 1997 1996
- ------------------------------------------------
New Jersey 16.6% 17.9% 18.3%
Ohio 11.3% 10.7% 10.2%
Kentucky 9.1% 8.2% 7.2%
Pennsylvania 7.4% 8.3% 9.4%
Illinois 6.0% 5.2% 5.0%
- ------------------------------------------------
Premiums written increased in both Ohio and Kentucky for the third
consecutive year. This growth has primarily come from the auto and CMP lines of
business. Net written premiums in Ohio totaled $147.1 million in 1998, $129.8
million in 1997 and $123.8 million in 1996. Net written premiums in Kentucky
totaled $118.4 million in 1998, $99.1 million in 1997 and $86.5 million in 1996.
New Jersey has experienced a small decline in premiums written in each
of the last three years. Net premiums written were $215.8 million compared with
$216.0 million in 1997 and $221.2 million in 1996. The reduction in premium
growth is primarily due to a decline in the workers compensation, general
liability and commercial auto lines of business.
Premiums written in Pennsylvania declined during 1998 to $96.5 million
compared with $99.8 million in 1997 and $113.5 million in 1996. This decline
has primarily been driven by competitive pricing conditions in commercial lines.
COMBINED RATIOS
1998 1997 1996 1995 1994
===================================================================================================
Private Passenger Auto 103.8% 105.4% 110.0% 100.3% 100.2%
Commercial Multiple Peril, Fire
and Inland Marine 113.5% 107.7% 115.0% 105.7% 108.6%
General Liability 101.6% 103.0% 89.1% 105.3% 90.3%
Workers' Compensation 109.6% 93.0% 94.3% 93.7% 87.8%
Homeowners 118.4% 111.2% 135.9% 113.7% 135.7%
Fidelity and Surety 81.4% 76.5% 73.4% 84.5% 72.8%
- ---------------------------------- -------------- ------------ ------------ ----------- -----------
Total 107.2% 105.3% 109.5% 104.0% 103.8%
===================================================================================================
RESTRUCTURING
In December 1998, the Corporation finalized a restructuring and
reorganization plan. Under the plan, the Corporation will consolidate many of
its branch locations for underwriting and claims over the course of 1999.
Personal lines business centers will be reduced from five to three locations.
Commercial underwriting branches will be reduced from 17 to eight locations and
claims branches will be reduced from 38 to six locations. Workforce reductions
are anticipated to amount to approximately 250 positions. The plan is expected
to generate approximately $14 million in annual pretax savings upon full
implementation in late 1999.
Restructuring charges recorded in 1998 were comprised of expenses
associated with abandoned lease space totaling $10 million or $.30 per share
before-tax and $6.5 million or $.20 per share after-tax.
DISCONTINUED OPERATIONS
During 1995, the Corporation's life operations were discontinued. The
Corporation found it increasingly difficult to achieve our targeted 16% rate of
return in this segment of our business. After extensive analysis, it was
determined that a 16% return could not be achieved without substantial capital
contributions and a dramatic overhaul of the life operations. Since this was a
small segment of our overall business, it was decided that this would not be a
prudent use of our capital. Therefore, on October 2, 1995, the Corporation
signed the final documents to reinsure the existing blocks of business with
Great Southern Life Insurance Company. The existing blocks of business were
reinsured through a 100% coinsurance arrangement.
Great Southern Life Insurance Company legally replaced Ohio Life as the
primary insurer, subject to the 1995 reinsurance agreement with Ohio Life, on
approximately
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37
ITEM 14. CONTINUED
95% of the life insurance business as of the fourth quarter of 1998 and
approximately 76% as of the fourth quarter of 1997. As a result of the increased
assumption, the Corporation recognized additional amounts of unamortized ceding
commission of $1.1 million before tax in 1998 and $10.7 million in 1997. There
remains approximately $1.1 million in unamortized ceding commission. This will
continue to be amortized over the remaining life of the policies which have yet
to be assumed by Great Southern Life Insurance Company.
Net income from discontinued operations amounted to $1.9 million or
$.06 per share in 1998 compared with $8.7 million or $.25 per share in 1997 and
$5.2 million or $.15 per share in 1996.
REINSURANCE
In order to preserve capital and shareholder value, Ohio Casualty
Corporation purchases reinsurance to protect the Corporation against large or
catastrophic losses. As a result of the Corporation's acquisition of the
majority of the Commercial Lines Division of Great American Insurance Company,
the Corporation's reinsurance program was expanded to address the additional
concentrations of underwriting exposures. The Property Per Risk contract covers
Ohio Casualty in the event that an insured sustains a property loss in excess of
$1.0 million in a single insured event. Property reinsurance covers $29.0
million in excess of the retention. The Casualty Per Occurrence contract covers
the Corporation in the event an insured sustains a liability loss in excess of
$1.0 million in a single insured event. Workers' compensation, umbrella and
other casualty reinsurance covers $100.0 million, $50.0 million and $24.0
million respectively in excess of the retention. The Corporation also carries
various facultative reinsurance contracts protecting certain individual risks.
The catastrophe reinsurance contract protects the Corporation against
an accumulation of losses arising from one defined catastrophic occurrence or
series of events. The 1999 catastrophe program, similar to 1998, provides $150.0
million coverage in excess of the Corporation's $25.0 million retention. In
1998, a portion of the catastrophe program was again renewed with a multi-year
placement. The multi-year placements maintain rates, continuity, and each
reinsurers' overall share on the program. Over the last 20 years, there were two
events that triggered coverage under our catastrophe reinsurance contract.
Losses and loss adjustment expenses from the Oakland Fires in 1991 and Hurricane
Andrew in 1992 totaled $35.6 million and $29.8 million, respectively. Both of
these losses exceeded our prior retention amount of $13.0 million. The
Corporation recovered $33.9 million from reinsurers as a result of these events.
Our reinsurance limits are designed to cover exposure to a catastrophic event
expected to occur once every 300 years.
Reinsurance contracts do not relieve the Corporation of its obligation
to the policyholders. The collectibility of reinsurance is subject to the
solvency of the reinsurers. Since the Corporation's reinsurance protection is an
important component in our financial plan, we closely monitor the financial
health and claims settlement performance of each of our reinsurers. Annually,
financial statements are reviewed and various ratios calculated to identify
reinsurers who have ceased to meet our high standards of financial strength. If
any reinsurers fail these tests, they are removed from the program at renewal.
Currently, all domestic reinsurers have an AM Best rating of A or better and the
financial condition of all international reinsurers meet the Corporation's high
standards. Additionally, the Corporation utilizes a large base of reinsurers to
mitigate its concentration risk. In 1998 and 1997 no reinsurer accounted for
more than 10% of total ceded premiums. In 1996, only three reinsurers exceeded
10% of total ceded premiums. Everest Reinsurance Company, MidOcean Reinsurance
Company and Kemper Reinsurance Company accounted for 16.79%, 10.65% and 10.52%
of total ceded premiums respectively. As a result of the Corporation's controls
over reinsurance, uncollectible amounts have not been significant.
CATASTROPHE LOSSES
(IN MILLIONS)
1998 $45
1997 $21
1996 $62
1995 $27
1994 $37
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ITEM 14. CONTINUED
LOSS AND LOSS ADJUSTMENT EXPENSES
The Corporation's largest liabilities are the reserves for losses and
loss adjustment expenses. Loss and loss adjustment expense reserves are
established for all incurred claims and are carried on an undiscounted basis
before any credits for reinsurance recoverable. These reserves amounted to $2.0
billion at December 31, 1998, $1.5 billion at December 31, 1997 and $1.6 billion
at December 31, 1996.
In recent years, environmental liability claims have expanded greatly
in the insurance industry. Fortunately, Ohio Casualty has a substantially
different mix of business than the industry. We have historically written small
commercial accounts, and have not attracted significant manufacturing liability
coverage. As a result, our environmental liability claims are substantially
below the industry average. Our liability business reflected our current mix of
approximately 66% contractors, 16% building/premises, 12% mercantile and only 6%
manufacturers. Within the manufacturing category, we have concentrated on the
light manufacturers which further limits our exposure to environmental claims.
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, those reserves were $41.9
million, $40.1 million and $41.0 million. Asbestos reserves were $10.3 million,
$7.0 million and $5.2 million and environmental reserves were $31.5 million,
$33.2 million and $35.7 million for those respective years. These loss estimates
are based on currently available information. However, given the expansion of
coverage and liability by the courts and legislatures, there is some uncertainty
as to the ultimate liability. The Corporation's insurance subsidiaries changed
their pollution exclusion policy language between 1985 and 1987 to effectively
eliminate these coverages.
CALIFORNIA WITHDRAWAL
On June 15, 1992, the Corporation announced its intention to withdraw
its business operations from California due to the lack of profitability and the
difficult regulatory environment. In December 1992, the Corporation stopped
writing business in California and filed a withdrawal plan with the California
Department of Insurance.
Under the terms of the plan, The Ohio Casualty Insurance Company, Ohio
Security Insurance Company, and West American Insurance Company would withdraw
from California, leaving American Fire and Casualty Company licensed to wind
down the affairs of the Group. Also, the plan required the withdrawing companies
to transfer their California liabilities to American Fire and Casualty Company
along with assets to secure those liabilities. In April 1995, the California
Department of Insurance gave final approval for withdrawal and the Corporation
implemented the withdrawal plan.
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 would be considered "fair" by any reasonable standard.
During the fourth quarter of 1994, the State of California assessed the
Corporation $59.9 million for Proposition 103. In February 1995, California
revised this billing to $47.3 million 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 $42.1 million plus
interest. In December 1997, during Administrative Law hearings, the California
Department of Insurance filed two revised rollback calculations. These
calculations indicated roll back liabilities of either $35.9 million or $39.9
million plus interest.
In 1998, the Administrative Law Judge issued a proposed ruling with a
rollback liability of $24.4 million 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 general
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 $24.4 million to $61.1 million. The
Administrative Law Judge indicates clearly in
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39
ITEM 14. CONTINUED
her ruling that by her calculation the Corporation would have lost approximately
$1.0 million on 1989 operations if a rollback of $24.4 million were imposed.
Given that conclusion, it is clear that any assessment greater than $24.4
million 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 $24.4 million plus simple
interest at 10% from May 8, 1989. This brings the total reserve to $48.0 million
at December 31, 1998.
The Corporation will continue to challenge the validity of any
rollback. To date, the Corporation has paid $4.8 million in legal costs related
to the withdrawal, Proposition 103 and fair plan assessments.
INVESTMENTS
Consolidated pre-tax investment income from continuing operations
decreased 4.9% to $169.0 million in 1998 compared with $177.7 million in 1997
and $183.3 million in 1996. After-tax investment income totaled $125.8 million
in 1998 compared with $133.6 million in 1997 and $138.6 million in 1996. Pre-tax
and after-tax investment income comparisons are impacted by investments in
municipal bonds, which provide tax free investment income.
Cash flow from investment income has been impacted by our continued
share repurchase program. During 1998, Ohio Casualty Corporation purchased
2,362,900 shares of its common stock at a cost of $100.0 million compared with
1,544,688 shares for $64.9 million in 1997 and 264,600 shares for $9.2 million
in 1996. The Corporation is currently authorized to repurchase 1.1 million
additional shares of its common stock to be held as treasury shares for stock
options or other general corporate purposes. Since the beginning of 1987, we
have repurchased 14.6 million shares at an average cost of $27.43 per share. We
believe that when the market value of our stock fails to reflect the prospects
of our operations, repurchasing shares is a prudent use of our capital. In the
future, we intend to continue repurchasing shares when doing so makes economic
sense for the Corporation and its shareholders.
At year end 1998, consolidated investments had a carrying value of $3.6
billion. The excess of market value over cost was $787.9 million, compared with
a $697.6 million excess at year end 1997 and $508.8 million at year end 1996.
The increase in unrealized gains in 1998 and in 1997 was attributable to the
strong performance of our equity and fixed income portfolios. After-tax realized
investment gains from continuing operations amounted to $9.4 million in 1998
compared with $33.0 million in 1997 and $32.3 million in 1996.
The Corporation continues to have no exposure to futures, forwards,
caps, floors, or similar derivative instruments as defined by Statement of
Financial Accounting Standards No. 119. However, as noted in footnote number 17,
the Corporation has an interest rate swap with Chase Manhattan Bank covering a
portion of the outstanding balance of our line of credit. At year-end 1998 the
amount covered by the swap was $15.0 million. This swap is not classified as an
investment but rather as a hedge against a portion of the variable rate loan. As
of December 31, 1998, Ohio Casualty maintained a $375.4 million mortgage-backed
securities portfolio compared with $347.1 million at December 31, 1997 and
$446.9 million at December 31, 1996. The majority of our mortgage-backed
securities holdings are less volatile planned amortization class, sequential
structures and agency pass-through securities. $9.6, $5.8, $27.0 million of this
portfolio was invested in more volatile bond classes (e.g. interest-only,
super-floaters, inverses) in 1998, 1997 and 1996, respectively.
Ohio Casualty's fixed income strategy has been to maintain a portfolio
with a laddered maturity structure and an intermediate duration. We believe that
our portfolio composition and duration continue to be appropriate for our
insurance business. Further, we do not try to time the financial markets.
Instead, we believe it is prudent to remain fully invested at all times, subject
only to our liquidity needs.
Tax exempt bonds were 34.8% of the fixed income portfolio at year-end
1998 versus 39.4% at December 31, 1997 and 34.4% at December 31, 1996. This high
average exposure to municipals reflects our internal tax planning strategy as
well as our belief that municipals are attractive relative to taxable bond
alternatives.
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40
ITEM 14. CONTINUED
Our commitment to a diversified, growth-oriented equity portfolio
remains unchanged. Equity investments have increased as a percentage of our
consolidated portfolio from 23.5% in 1996 to 25.7% at year end 1998. This
increase is largely attributable to market appreciation of existing investments
as opposed to commitment of new funds.
MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
Market risk is the risk of loss resulting from adverse changes in
interest rates and market prices. In addition to market risk, the Corporation is
exposed to other risks, including the credit risk related to its financial
instruments and the underlying insurance risk relating to its core business. The
sensitivity analysis below summarizes only the exposure to market risk.
The Corporation's investments are held for purposes other than trading
with an objective of earning relative competitive returns by investing in a
diverse portfolio of high-quality, liquid securities. As a result, the
Corporation minimizes its credit risk.
Interest Rate Risk - The Corporation has exposure to losses resulting
from interest rate risk arising from potential volatility in interest rates. The
Corporation attempts to mitigate its exposure to interest rate risk through
active portfolio management including periodic reviews of our asset and
liability positions. Estimates of cash flows, as well as the impact of interest
rate fluctuations relating to the Corporation's investment portfolio and
revolving line of credit are modeled and reviewed quarterly.
Equity Price Risk - The Corporation's portfolio of marketable equity
securities has exposure to losses resulting from equity price risk arising from
potential volatility in equity market values. The Corporation attempts to
mitigate its exposure to equity price risk by maintaining a portfolio of
investments which are diversified across industries, and concentrations in any
one company or industry are limited by parameters established by senior
management. Market risk is actively managed by analysis of various portfolio
characteristics on a routine basis.
The following table illustrates the hypothetical effect of an increase
in interest rates of 100 basis points (1%) and a 10% decrease in equity values
at December 31, 1998. Prior period disclosures are not required in the initial
year of disclosure. The changes in market rates selected reflect the
Corporation's view of changes which are reasonably possible over a one-year
period. These rates should not be considered a prediction by the Corporation of
future events. This analysis is not intended to provide a precise forecast of
the effect of changes in interest rates and equity prices on the Corporation's
income, cash flow and shareholders' equity. In addition, the analysis does not
take into account any actions the Corporation may take to reduce its exposure in
response to market fluctuations.
Estimated Adjusted Market Value
December 31, 1998 Fair Value as indicated above
- ----------------------------------------------------------------
Interest Rate Risk:
Fixed maturities $2,416 $2,312
Short-term
investments 263 183
Equity Price Risk:
Equity securities 925 832
- ----------------------------------------------------------------
Totals $3,604 $3,327
================================================================
In addition to the above scheduled investments, the Corporation has a
revolving line of credit. An increase in interest rates of one basis point would
result in additional annual interest expense of $2.5 million.
Certain assumptions are inherent in the above analysis. The Corporation
assumes an instantaneous shift in interest rates and equity prices at December
31, 1998 and that the composition of its investment portfolio remains relatively
constant. Also, the Corporation assumes a change in interest rates is reflected
uniformly across all financial instruments even though interest rates on certain
types of instruments may fluctuate or lag behind other instruments.
YEAR 2000
The Corporation is proceeding on schedule in its phased approach to
convert its computer systems to be Year 2000 compliant. The four phases included
in this approach are: awareness, planning, execution/testing and compliance. Two
of the phases, awareness and planning, are complete and the execution/testing
and compliance phases are substantially complete with only one system left to be
tested.
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ITEM 14. CONTINUED
The Corporation began the awareness phase early in the 1990s,
recognizing that its systems and applications would need significant changes.
From that time forward all system development and major enhancements to existing
systems took Year 2000 processing requirements into consideration. This approach
resulted in some of our systems being converted and compliant long before there
was any business requirement or exposure to processing problems.
During 1995, the Information Systems Department (I/S) began the
planning phase. At that time Year 2000 compliance became a priority project with
Project Managers assigned specifically for converting our systems to be
compliant. A comprehensive inventory of our systems was completed, identifying
the critical date that each system must be compliant and an action plan was put
together to outline that the conversion was completed on time. The Corporation
is currently on schedule with this action plan.
As a result of the planning phase, dedicated staff and resources were
assigned to work on the Year 2000 project. This began our execution/testing
phase of the project which includes addressing the remediation of Year 2000
problems identified in the planning phase and logical partition (LPAR)
compliance testing. LPAR compliance testing requires an isolated partition
within the computer that runs independently. Essentially it can be considered an
entirely separate computer. The Corporation's LPAR has a dedicated processor,
disk and tape storage. In this environment, data can be migrated forward and
tested as the internal date in the computer is changed to critical dates in 1999
and 2000. This provides an excellent environment to test applications, system
software and hardware. This involves individual and integrated compliance
testing. The first step verifies that the systems are compliant when they run
independently. The second step verifies compliance when they are integrated with
all other systems with which they interface. Testing was performed throughout
1998 focusing initially on systems critical to the daily business operation and
followed by all others. The Corporation has six major system areas: commercial
lines, claims, auto, personal property, management/financial reporting and human
resources. All of these areas are required to undergo LPAR compliance testing.
At this time, the auto, commercial lines, claims, personal property and human
resource systems have completed the LPAR compliance testing. The Corporation's
management/ financial reporting system area has substantially completed LPAR
compliance testing with only one internal management reporting system left to be
tested. This is targeted for completion by the end of the first quarter 1999.
Following the completion of LPAR compliance testing, all systems will
undergo integrated testing of the production environment. Contingency plans
include compliance reverification of this integrated test early in the third
quarter of 1999 and again early in the fourth quarter of 1999.
As of December 31, 1998, the total amount spent to date for I/S related
costs on the Year 2000 project is $2.3 million and the Corporation anticipates
minimal additional I/S related expenses to complete our efforts. These amounts
do not include any costs associated with efforts made to contact third parties
or related to contingency planning. As a result of the Corporation's efforts
early in the 1990s to begin making changes to systems and existing hardware and
software, the Corporation to date has not had to make an expensive effort to
identify and remedy its Year 2000 issues and does not anticipate that it will be
required to make substantial expenditures to address Year 2000 compliance in the
future.
During 1997, the Corporation began the compliance phase. The Year 2000
team is currently in the process of identifying all significant vendors,
suppliers and agents of the Corporation and is completing the initial contact to
obtain written statements of their readiness and commitment to a date for their
Year 2000 compliance. The Corporation will continue to monitor the Year 2000
status of these entities and develop contingency plans to reduce the possible
disruption in business operations that may result from the failure of third
parties with which the Corporation has business relationships to address their
Year 2000 issues. Identification and initial contact for all significant
third-parties is expected to be complete by the first quarter of 1999 with
follow-up reviews scheduled throughout 1999. Should a third-party with whom the
Corporation transacts business have a system failure due to not being Year 2000
compliant, the Corporation believes this could result in a delay in processing
or reporting
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ITEM 14. CONTINUED
transactions of the Corporation, or a potential disruption in service to its
customers, notwithstanding the Corporation's intention to develop contingency
plans to respond to these potential system failures by such third parties.
The Corporation is also addressing non information technology (non-IT)
to ensure Year 2000 compliance. At December 31, 1998, the Year 2000 team had
completed a preliminary assessment of the non-IT assets. The team identified the
material items that have a risk involving the safety of individuals, or that may
cause damage to property or the environment, or affect revenues. The team
reported on the identified non-IT assets in December 1998 to the Corporation's
Executive Management Team. Remediation and contingency planning is scheduled
throughout 1999 with regular updates required to be given to the Executive
Management Team.
The Corporation is currently assessing the status of Year 2000
readiness of the business and assets that it acquired in the acquisition of
substantially all the Commercial Lines Division of Great American Insurance
Company on December 1, 1998. For a period of at least 24 months from the date of
the acquisition, GAI will provide computer processing and communication services
to the Corporation in connection with the acquired business pursuant to an
Information Systems Agreement. Thus, the Corporation will be dependent on GAI to
address and remediate Year 2000 issues with respect to the information
technology systems utilized for the business being acquired by the Corporation.
The failure of GAI to satisfactorily correct a material Year 2000 problem in the
computer processing systems being used to provide services to the Corporation in
connection with the acquired business could result in a material adverse effect
on the ability of the Corporation to integrate the acquired business and to
operate it on a profitable basis.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, the normal business operations of the
Corporation including the disruption or delay in premium or claim processing and
the disruption in service to its customers. Also the inability to be Year 2000
compliant of significant third-party providers of the Corporation could result
in an interruption in the normal business operations. Due to the general
uncertainty inherent in the Year 2000 problem, such failures could materially
and adversely affect the Corporation's financial position, results of operations
or liquidity.
The Year 2000 issue is also a concern from an underwriting standpoint
regarding the extent of liability for coverage under various general liability,
property and directors and officers liability products and policies. The
Corporation is managing this concern by directly providing educational
information on Year 2000 to insureds and agents; adding clarification and
exclusionary language to certain policies; and by adjusting underwriting
practices. The Corporation believes that minimal coverage may be interpreted to
exist under some current liability and product policies. The Corporation has
historically avoided manufacturing risks which produce computer or
computer-dependent products.
The Insurance Services Office (ISO) recently developed policy language
that clarifies that there is no coverage for certain Year 2000 occurrences. The
liability exclusion has been accepted in over 40 states and a companion filing
for property has been accepted in at least 20 states at this time. Several
states have not adopted or approved the property exclusion form citing
specifically that there is no coverage under the current property contracts and
therefore, there is no reason to accept a clarifying endorsement. The
Corporation is currently addressing the year 2000 issue by attaching the ISO
exclusionary language, where approved by regulators, to general liability
policies with a rating classification the Corporation believes could potentially
have Year 2000 losses. The ISO exclusionary language endorsement is included on
all property policies where approved by regulators. These actions should
minimize the Corporation's exposure to Year 2000 losses.
Directors and officers could be held liable if a company in their
control fails to take necessary actions to address any Year 2000 problems and
that failure results in a material financial loss to the Company. The
Corporation has written directors' and officers' liability policies since 1995,
with approximately $.5 million in premiums written in 1998. The Corporation is
managing its D&O Year 2000 exposure through a combination of underwriting
guidelines which address Year 2000 issues in the application process and
reinsurance policies which provide coverage for any loss in excess of $.3
million.
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ITEM 14. CONTINUED
Management of the Corporation believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. However, since it is
not possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be "worst-case scenarios" in which the
Corporation could experience interruptions in normal business operations. These
"worst-case scenarios" include: disruption or delay in premium and claim
processing; disruption in service to customers; litigation for Year 2000 related
claims and adverse affects on the Corporations ability to integrate the acquired
business from Great American. The amount of potential liability and lost revenue
cannot be reasonably estimated.
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards in Note 21.
FORWARD-LOOKING STATEMENTS
The Corporation publishes forward-looking statements relating to such
matters as anticipated financial performance, business prospects and plans,
regulatory developments and similar matters. The statements contained in this
report that are not historical information, are forward-looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor under
The Securities Act of 1933 and The Securities Exchange Act of 1934 for
forward-looking statements. The risks and uncertainties that may affect
operations, performance, development and results of the Corporation's business
and the results of the acquisition described herein, include the following:
changes in property and casualty reserves; catastrophe losses; premium and
investment growth; product pricing environment; availability of credit; changes
in government regulation; performance of financial markets; fluctuations in
interest rates; availability of pricing reinsurance; litigation and
administrative proceedings; Year 2000 issues, including the Corporation's
ability to successfully identify and remediate Year 2000 system issues with its
own IT and non-IT assets, the ability of third parties with which the
Corporation has business relationships to address and resolve their Year 2000
issues and the ability of the Corporation to identify these third party issues;
Year 2000 issues relating to the commercial lines business acquired from the
Great American Insurance Company and the ability of the Corporation to implement
appropriate contingency plans to address Year 2000 problems which are not
successfully remediated; ability of Ohio Casualty to integrate the acquired
business and to retain the acquired insurance business; and general economic and
market conditions.
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44
ITEM 14. CONTINUED
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
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ITEM 14. CONTINUED
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 costs 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
45
46
ITEM 14. CONTINUED
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
46
47
ITEM 14. CONTINUED
OHIO CASUALTY CORPORATION & SUBSIDIARIES
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 affect from 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
47
48
ITEM 14. CONTINUED
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 periodically 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.
48
49
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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
=========================================================================
49
50
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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:
50
51
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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 50,194 46,241 47,092
benefits
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:
51
52
Item 14. Continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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.
52
53
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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
year 380 $40.53 262 $37.38 173 $33.84
===== ====== ======
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:
53
54
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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 $ 2.58 $ 4.06 $ 2.91
As Reported:
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
Reserve for loss adjustment 25,518 34,148 280,002
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 market
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 compared 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 $1,421,804 $1,486,622 $1,557,065
$74,119
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.
54
55
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.
55
56
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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 losses 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 4.9% 2.5% 8.3%
ratio
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
56
57
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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 Revenues 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
underwriting gain/(loss)
(before tax) (Statutory
basis) $ (102,579) $ (65,237) $ (111,474)
Statutory to GAAP
adjustment 28,528 15,597 (706)
- ---------------------------------------------------------------
Property and casualty
underwriting 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
===============================================================
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
57
58
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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
58
59
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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 exercisable 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.
59
60
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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).
60
61
ITEM 14. CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
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
61
62
ITEM 14. CONTINUED
(b) REPORTS ON FORM 8-K OR 8-K/A SINCE OCTOBER 1, 1998.
On December 15, 1998, the Corporation filed Form 8-K announcing the
acquisition of substantially all the Commercial Lines Division of
Great American Insurance Company.
On February 16, 1999, the Corporation filed Form 8-K filing the
Corporation's Consolidated Financial Statements for the year ended
December 31, 1998 together with the Notes to the Consolidated
Financial Statements.
On February 16, 1999, the Corporation filed Form 8-K/A to amend the
8-K dated December 15, 1998 to include the Financial Statements and
Pro Forma Information pursuant to Items 7(a)(4) and 7(b)(2).
On March 26, 1999, the Corporation filed Form 8-K/A to amend Form
8-K filed on February 16, 1999.
On March 26, 1999, the Corporation filed Form 8-K/A to amend Form
8-K originally filed on December 15, 1998.
(c) EXHIBITS. (SEE INDEX TO EXHIBITS ATTACHED HERETO.)
62
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 30, 1999 By: /s/ Lauren N. Patch
-------------------
Lauren N. Patch, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 30, 1999 /s/ Joseph L. Marcum
---------------------------------------------------------
Joseph L. Marcum, Chairman of the Board
March 30, 1999 /s/ William L. Woodall
---------------------------------------------------------
William L. Woodall, Vice Chairman of the Board
March 30, 1999 /s/ Lauren N. Patch
---------------------------------------------------------
Lauren N. Patch, President and Chief Executive Officer
March 30, 1999 /s/ Arthur J. Bennert
---------------------------------------------------------
Arthur J. Bennert, Director
March 30, 1999 /s/ Jack E. Brown
---------------------------------------------------------
Jack E. Brown, Director
March 30, 1999 /s/ Catherine E. Dolan
---------------------------------------------------------
Catherine E. Dolan, Director
March 30, 1999 /s/ Wayne R. Embry
---------------------------------------------------------
Wayne R. Embry, Director
March 30, 1999 /s/ Vaden Fitton
---------------------------------------------------------
Vaden Fitton, Director
March 30, 1999 /s/ Jeffery D. Lowe
---------------------------------------------------------
Jeffery D. Lowe, Director
March 30, 1999 /s/ Stephen S. Marcum
---------------------------------------------------------
Stephen S. Marcum, Director
March 30, 1999 /s/ Stanley N. Pontius
---------------------------------------------------------
Stanley N. Pontius, Director
March 30, 1999 /s/ Howard L. Sloneker III
---------------------------------------------------------
Howard L. Sloneker III, Director
March 30, 1999 /s/ Barry S. Porter
---------------------------------------------------------
Barry S. Porter, Chief Financial Officer and Treasurer
March 30, 1999 /s/ Michael L. Evans
---------------------------------------------------------
Michael L. Evans, Vice President
63
64
FORM 10-K, ITEM 14
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
OHIO CASUALTY CORPORATION
The following statements are included herein as Item 14:
Page Number
in this Report
--------------
Consolidated Balance Sheet at December 31, 1998, 1997, 1996 44
Statement of Consolidated Income for the years ended
December 31, 1998, 1997 and 1996 45
Statement of Consolidated Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 46
Statement of Consolidated Cash Flow for the years ended
December 31, 1998, 1997 and 1996 47
Notes to Consolidated Financial Statements 48-60
Report of Independent Accountants 61
Page Number
in this Report
--------------
The following financial statement schedules are included herein:
Schedule I - Consolidated Summary of Investments Other Than
Investments in Related Parties at December 31, 1998 66
Schedule II - Condensed Financial Information of Registrant for
the years ended December 31, 1998, 1997 and 1996 67
Schedule III - Consolidated Supplementary Insurance Information
for the years ended December 31, 1998, 1997 and 1996 68-70
Schedule IV - Consolidated Reinsurance for the years ended
December 31, 1998, 1997 and 1996 71
Schedule V - Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1997 and 1996 72
Schedule VI - Consolidated Supplemental Information Concerning
Property and Casualty Insurance Operations for the
years ended December 31, 1998, 1997 and 1996 73
64
65
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Ohio Casualty Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 4, 1999 appearing on page 61 of the 1998 Annual Report to
Shareholders of Ohio Casualty Corporation (which report and consolidated
financial statements are included herein) also included an audit of the
Financial Statement Schedules listed in Item 14(a)(2) of this Form 10-K. In our
opinion, these Financial Statement Schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
February 4, 1999
Cincinnati, Ohio
65
66
Schedule I
Ohio Casualty Corporation and Subsidiaries
Consolidated Summary of Investments
Other than Investments in Related Parties
(In thousands)
December 31, 1998
Amount shown
Type of investment Cost Value in balance sheet
- ------------------ ---- ----- ----------------
Fixed maturities
Bonds:
United States govt. and
govt. agencies with auth. $ 74,534 $ 79,854 $ 79,854
States, municipalities and
political subdivisions 800,945 839,573 839,573
Debt securities issued by
foreign governments 3,000 3,636 3,636
Corporate securities 1,062,165 1,117,475 1,117,475
Mortgage-backed securities:
U.S. government guaranteed 6,130 6,275 6,275
Other 360,960 369,091 369,091
---------- ---------- ----------
Total fixed maturities 2,307,734 2,415,904 2,415,904
Equity securities:
Common stocks:
Banks, trust and insurance
companies 60,320 284,796 284,796
Industrial, miscellaneous and
all other 180,204 634,959 634,959
Preferred stocks:
Non-redeemable 105 133 133
Convertible 4,500 5,018 5,018
---------- ---------- ----------
Total equity securities 245,129 924,906 924,906
Short-term investments 262,939 262,863 262,863
---------- ---------- ----------
Total investments $2,815,802 $3,603,673 $3,603,673
========== ========== ==========
66
67
Schedule II
Ohio Casualty Corporation
Condensed Financial Information of Registrant
(In thousands)
1998 1997 1996
---- ---- ----
Condensed Balance Sheet:
Investment in wholly-owned
subsidiaries, at equity $ 1,482,064 $ 1,258,432 $ 1,167,237
Investment in bonds/stocks 76,687 85,742 57,233
Cash and other assets 31,066 13,000 5,706
----------- ----------- -----------
Total assets 1,589,817 1,357,174 1,230,176
Bank note payable 265,000 40,000 50,000
Other liabilities 3,836 2,345 5,076
----------- ----------- -----------
Total liabilities 268,836 42,345 55,076
Shareholders' equity $ 1,320,981 $ 1,314,829 $ 1,175,100
=========== =========== ===========
Condensed Statement of Income:
Dividends from subsidiaries $ 119,988 $ 169,988 $ 100,000
Equity in subsidiaries (33,929) (30,867) 3,957
Operating (expenses) (1,132) (74) (1,500)
----------- ----------- -----------
Net income $ 84,927 $ 139,047 $ 102,457
=========== =========== ===========
Condensed Statement of Cash Flows:
Cash flows from operations
Net distributed income $ 118,856 $ 169,914 $ 98,500
Other (2,562) (805) 4,879
----------- ----------- -----------
Net cash from operations 116,294 169,109 103,379
Investing
Purchase of bonds/stocks (200,740) (57,031) (34,458)
Sales of bonds/stocks 14,440 28,147 7,190
----------- ----------- -----------
Net cash from investing (186,300) (28,884) (27,268)
Financing
Note payable
Borrowing 230,000 (10,000) (10,000)
Repayment (5,000) 0 0
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 (3,103) 8,282 698
Cash, beginning of year 11,657 3,375 2,677
----------- ----------- -----------
Cash, end of year $ 8,554 $ 11,657 $ 3,375
=========== =========== ===========
67
68
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1998
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
------------ ------------- ----------- ------------ ------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 9,890 $ 189,817 $ 83,448 $ 139,114 $
Personal auto 35,562 418,570 143,543 500,227
Workers' compensation 7,627 591,527 95,839 100,336
Gen. liability, A&H 14,954 320,169 65,493 96,535
Homeowners 28,379 63,230 98,807 177,419
CMP, fire and allied lines,
inland marine 38,542 348,013 154,233 217,236
Fidelity, surety, burglary 11,342 14,532 27,019 36,403
Miscellaneous Income 334
Investment 164,812
Addition due to acquisition 31,402
Retro reinsurance assumed
from acquisition
------------ ------------- ----------- ------------ ------------
Total property and
casualty insurance 177,698 1,945,858 668,382 1,267,604 164,812
Life ins. (discontinued
operations) (1,092) 36,599 3,709 2,288
Premium finance 168 1,219 94
Corporation 4,118
------------ ------------- ----------- ------------ ------------
Total $ 176,606 $ 1,982,457 $ 668,550 $ 1,272,532 $ 171,312
============ ============= =========== ============ ============
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
----------- ------------ ------------ --------------
Segment
- -------
Property and
casualty insurance:
Underwriting
Commercial auto $ 97,077 $ 26,833 $ 18,309 $ 139,087
Personal auto 396,312 100,561 11,830 521,262
Workers' compensation 77,632 18,060 11,912 100,150
Gen. liability, A&H 47,908 33,875 14,653 95,144
Homeowners 145,500 46,448 17,497 180,697
CMP, fire and allied lines,
inland marine 153,575 67,125 24,541 225,749
Fidelity, surety, burglary 5,662 17,646 6,124 37,021
Miscellaneous Income
Investment
Addition due to acquisition 5,968
Retro reinsurance assumed
from acquisition 137,636
----------- ------------ ------------ --------------
Total property and
casualty insurance 923,666 316,516 104,866 1,436,746
Life ins. (discontinued
operations) (1) 2,524 456
Premium finance 1,529 1,170
Corporation 6,075
----------- ------------ ------------ --------------
Total $ 923,665 $ 319,040 $ 112,926 $ 1,437,916
=========== ============ ============ ==============
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses with
the remainder allocated based on premium volume.
68
69
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1997
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
------------ -------------- ------------ ------------- ------------
Segment
Property and
casualty insurance:
Underwriting
Commercial auto $ 8,835 $ 167,558 $ 64,350 $ 139,932
Personal auto 29,247 421,276 122,536 459,180
Workers' compensation 5,290 367,802 40,705 103,484
Gen. liability, A&H 14,036 254,159 43,030 98,971
Homeowners 26,582 64,681 94,752 166,474
CMP, fire and allied lines,
inland marine 33,537 193,885 103,751 200,330
Fidelity, surety, burglary 10,721 12,296 25,759 35,045
Miscellaneous Income 3,925
Investment $ 172,372
------------ -------------- ------------ ------------- ------------
Total property and
casualty insurance 128,248 1,481,657 494,883 1,207,341 172,372
Life ins. (discontinued
operations) (2,185) 36,298 23,865 3,954
Premium finance 193 1,632 65
Corporation 5,264
------------ -------------- ------------ ------------- ------------
Total $ 126,063 $ 1,517,955 $ 495,076 $ 1,232,838 $ 181,655
============ ============== ============ ============= ============
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
------------ ------------- ------------ -------------
Segment
Property and
casualty insurance:
Underwriting
Commercial auto $ 107,740 $ 28,242 $ 15,886 $ 140,295
Personal auto 375,431 93,488 9,047 463,933
Workers' compensation 65,762 21,313 9,979 97,176
Gen. liability, A&H 55,331 33,731 11,597 96,698
Homeowners 125,136 44,666 15,897 168,168
CMP, fire and allied lines,
inland marine 131,499 64,520 21,220 206,133
Fidelity, surety, burglary 3,743 17,534 5,220 34,418
Miscellaneous Income
Investment
------------ ------------- ------------ -------------
Total property and
casualty insurance 864,642 303,494 88,846 1,206,821
Life ins. (discontinued
operations) 268 15,049 819 6
Premium finance 1,655 1,511
Corporation 5,329
------------ ------------- ------------ -------------
Total $ 864,910 $ 318,543 $ 96,649 $ 1,208,338
============ ============= ============ =============
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses with
the remainder allocated based on policy counts.
69
70
Schedule III
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplementary Insurance Information
(In thousands)
December 31, 1996
Deferred Future policy
policy benefits Net
acquisition losses and Unearned Premium investment
costs loss expenses premiums revenue income
------------- -------------- ------------ ------------- ------------
Segment
Property and
casualty insurance:
Underwriting
Commercial auto $ 8,536 $ 167,288 $ 63,800 $ 142,445
Personal auto 27,789 428,843 118,034 455,894
Workers' compensation 7,990 387,951 47,012 124,157
Gen. liability, A&H 13,833 265,399 45,337 104,428
Homeowners 26,553 70,969 92,950 165,630
CMP, fire and allied lines,
inland marine 32,634 213,270 97,943 195,437
Fidelity, surety, burglary 10,835 13,867 26,312 34,135
Miscellaneous Income 2,410
Investment $ 179,407
------------- -------------- ------------ ------------- ------------
Total property and
casualty insurance 128,170 1,547,587 491,388 1,224,536 179,407
Life ins. (discontinued
operations) (11,486) 289,086 4,582 4,812
Premium finance 225 2,115 293
Corporation 3,608
------------- -------------- ------------ ------------- ------------
Total $ 116,684 $ 1,836,673 $ 491,613 $ 1,231,233 $ 188,120
============= ============== ============ ============= ============
Benefits, Amortization
losses and of deferred General
loss acquisition operating Premiums
expenses costs expenses written
------------ ------------- ------------ --------------
Segment
Property and
casualty insurance:
Underwriting
Commercial auto $ 100,944 $ 28,285 $ 18,440 $ 139,421
Personal auto 394,334 92,589 15,828 455,240
Workers' compensation 80,975 26,221 10,124 115,398
Gen. liability, A&H 43,799 34,829 14,081 101,793
Homeowners 167,302 46,149 12,641 166,457
CMP, fire and allied lines,
inland marine 141,331 62,688 20,364 195,290
Fidelity, surety, burglary 1,904 18,095 5,794 34,473
Miscellaneous Income
Investment
------------ ------------- ------------ --------------
Total property and
casualty insurance 930,589 308,856 97,272 1,208,072
Life ins. (discontinued
operations) 693 2,004 (193) 215
Premium finance 1,969 1,981
Corporation 5,907
------------ ------------- ------------ --------------
Total $ 931,282 $ 310,860 $ 104,955 $ 1,210,268
============ ============= ============ ==============
1. Net investment income has been allocated to principal business segments on
the basis of separately identifiable assets.
2. The principal portion of general operating expenses has been directly
attributed to business segment classifications incurring such expenses with
the remainder allocated based on policy counts.
70
71
Schedule IV
Ohio Casualty Corporation and Subsidiaries
Consolidated Reinsurance
(In thousands)
December, 1998, 1997 and 1996
Percent of
amount
Ceded to Assumed assumed
Gross other from other Net to net
amount companies companies amount amount
----------- ----------- ----------- ----------- ------------
Year Ended December 31, 1998
Life insurance in force $ 329 $ 329 $ 0 $ 0 0.0%
Premiums
Property and casualty insurance $ 1,289,837 $ 79,268 $ 226,177 $ 1,436,746 15.7%
Life insurance (Discontinued operations) 3,187 3,187 0 0 0.0%
Accident and health insurance 567 567 0 0 0.0%
----------- ----------- ----------- -----------
Total premiums 1,293,591 83,022 226,177 1,436,746 15.7%
Premium finance charges 1,170
Life insurance - FAS 97 adjustment 0
-----------
Total premiums and finance charges written 1,437,916
Change in unearned premiums and finance charges (31,790)
Retro reinsurance assumed from acquisition (137,636)
-----------
Total premiums and finance charges earned 1,268,490
Miscellaneous income 334
Discontinued operations - life insurance 0
-----------
Total premiums & finance charges earned -
continuing operations $ 1,268,824
===========
Year Ended December 31, 1997
Life insurance in force $ 547 $ 547 $ 0 $ 0 0.0%
=========== =========== =========== ===========
Premiums
Property and casualty insurance $ 1,225,813 $ 31,298 $ 12,306 $ 1,206,821 1.0%
Life insurance (Discontinued operations) 18,359 18,359 0 0 0.0%
Accident and health insurance 1,392 1,575 189 6 3150.0%
----------- ----------- ----------- -----------
Total premiums 1,245,564 51,232 12,495 1,206,827 1.0%
Premium finance charges 1,511
Life insurance - FAS 97 adjustment 0
-----------
Total premiums and finance charges written 1,208,338
Change in unearned premiums and finance charges (3,283)
-----------
Total premiums and finance charges earned 1,205,055
Miscellaneous income 3,925
Discontinued operations - life insurance (6)
-----------
Total premiums & finance charges earned -
continuing operations $ 1,208,974
===========
Year Ended December 31, 1996
Life insurance in force $ 4,623,435 $ 4,623,435 $ 0 $ 0 0.0%
=========== =========== =========== ===========
Premiums
Property and casualty insurance $ 1,211,695 $ 29,039 $ 25,416 $ 1,208,072 2.1%
Life insurance (Discontinued operations) 29,822 29,822 0 0 0.0%
Accident and health insurance 2,204 3,502 1,513 215 703.7%
----------- ----------- ----------- -----------
Total premiums 1,243,721 62,363 26,929 1,208,287 2.2%
Premium finance charges 1,981
-----------
Total premiums and finance charges written 1,210,268
Change in unearned premiums and finance charges 14,182
-----------
Total premiums and finance charges earned 1,224,450
Miscellaneous income 2,416
Discontinued operations - life insurance (215)
-----------
Total premiums & finance charges earned -
continuing operations $ 1,226,651
===========
71
72
Schedule V
Ohio Casualty Corporation and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
Balance at Addition Balance at
beginning Charged to due to end of
of period expenses Acquisition Deductions period
Year ended December 31, 1998
Reserve for bad debt 4,200 100 4,439 0 8,739
Year ended December 31, 1997
Reserve for bad debt 3,700 500 0 0 4,200
Year ended December 31, 1996
Reserve for bad debt 3,500 200 0 0 3,700
72
73
Schedule VI
Ohio Casualty Corporation and Subsidiaries
Consolidated Supplemental Information Concerning Property and Casualty
Insurance Operations
(IN THOUSANDS)
Reserves for
Deferred unpaid claims
policy and claim Discount Net
Affiliation with acquisition adjustment of Unearned Earned investment
registrant costs expenses reserves premiums premiums income
---------- ----------- ---------- ----------- ----------- ----------
Property and casualty
subsidiaries
Year ended December 31,
1998 $ 177,698 $ 1,945,858 $ 0 $ 668,382 $1,267,604 $ 164,812
========== =========== ========== =========== =========== ==========
Year ended December 31,
1997 $ 128,248 $ 1,481,657 $ 0 $ 494,883 $1,207,341 $ 172,372
========== =========== ========== =========== =========== ==========
Year ended December 31,
1996 $ 128,170 $ 1,547,587 $ 0 $ 491,388 $1,224,536 $ 179,407
========== =========== ========== =========== =========== ==========
Claims and claim
adjustment expenses Amortization Paid
incurred related to of deferred claims
--------------------- policy and claim
Affiliation with Current Prior acquisition adjustment Premiums
registrant year years costs expenses written
----------- ----------- ------------ ----------- -----------
Property and casualty
subsidiaries
Year ended December 31,
1998 $ 989,115 $ (66,119) $ 316,516 $ 963,094 $ 1,436,746
=========== =========== ============ =========== ===========
Year ended December 31,
1997 $ 921,818 $ (53,615) $ 303,494 $ 929,399 $ 1,206,821
=========== =========== ============ =========== ===========
Year ended December 31,
1996 $1,008,395 $ (76,920) $ 308,856 $1,001,706 $ 1,208,072
=========== =========== ============ =========== ===========
73
74
FORM 10-K
OHIO CASUALTY CORPORATION
INDEX TO EXHIBITS
Page
Number
------
Exhibit 21 Subsidiaries of Registrant 75
Exhibit 22 Proxy Statement of the Board of Directors for the fiscal year
ended December 31, 1998 76-95
Exhibit 23 Consent of Independent Accountants to incorporation of their
opinion by reference in Registration Statement on Form S-3 and
Form S-8 96
Exhibit 27 Financial Data Schedule 97
Exhibit 28 Information from Reports Furnished to State Insurance
Regulation Authorities 98-111
Exhibits incorporated by reference to previous filings:
Exhibit 2 Asset Purchase Agreement between Ohio Casualty Corporation
and Great American Insurance Company filed with Form 10Q on
November 13, 1998
Exhibit 3 Articles of Incorporation and By Laws amended 1986 and filed
with Form 8-K on January 15, 1987
Exhibit 3a Amendment to Amended Articles of Incorporation increasing
authorized number of shares to 150,000,000 common shares and
authorized 2,000,000 preferred shares, dated April 17, 1996
Exhibit 4 Amended and Restated Rights Agreement dated as of February 19,
1998 between Ohio Casualty Corporation and First Chicago Trust
Company of New York, as Rights Agent.
Exhibit 10 Credit Agreement dated as of October 25, 1994 between Ohio
Casualty Corporation and Chase Manhattan Bank, N.A., as agent,
filed with Form 10-Q on November 1, 1994
Exhibit 10a Ohio Casualty Corporation 1993 Stock Incentive Program
filed with Form 10-Q as Exhibit 10d on May 31, 1993
Exhibit 10a1 Ohio Casualty Corporation amended 1993 Stock Incentive
Program filed with Form 10-Q dated May 14, 1997
Exhibit 10b Coinsurance Life, Annuity and Disability Income Reinsurance
Agreement between Employer's Reassurance Corporation and
The Ohio Life Insurance Company dated as of October 2, 1995
Exhibit 10c Credit Agreement dated October 27, 1997 with Chase
Manhattan Bank, N.A. as agent, filed with Form 10-Q on
November 13, 1997
74